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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-7614
PMCC FINANCIAL CORP.
(Exact name of registrant as specified in its charter
Delaware 11-3404072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Expressway Plaza, Roslyn Heights, New York 11577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 625-3000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The number of shares of common stock outstanding at December 21, 1999
was 3,707,000. As of such date, which was the last trading date prior to the
suspension of trading by the American Stock Exchange (the "Amex") (see "Item 5.
Market for Registrant's Common Equity and Related Shareholder Matters"), the
aggregate market value of the voting stock held by non-affiliates, based upon
the closing price of these shares on the Amex, was approximately $4,526,250.
Forward Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The statements included in this
Annual Report on Form 10-K regarding future financial performance and results
and the other statements that are not historical facts are forward-looking
statements. These forward-looking statements reflect the Company's current views
with respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including those
identified below, which could cause actual results to differ materially from
historical results or those anticipated. The words "believe," "expect,"
"anticipate," "intend," "estimate," and other expressions which indicate future
events and trends identify forward-looking statements. Readers are cautioned not
to place undue reliance upon these forward-looking statements, which speak only
as of their dates. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as the result of new information,
future events or otherwise. The following factors among others, could cause
actual results to differ materially from historical results or those
anticipated: (1) the level of demand for mortgage credit, which is affected by
such external factors as the level of interest rates, the strength of various
segments of the economy and demographics of the Company's lending markets; (2)
the direction of interest rates; (3) the relationship between mortgage interest
rates and cost of funds; (4) federal and state regulation of the Company's
mortgage banking operations; (5) competition within the mortgage banking
industry; (6) the Company's management of cash flow and efforts to modify its
prior growth strategy; (7) the outcome of governmental investigations and the
effects thereof; (8) the Company's efforts to improve quality control; and other
risks and uncertainties described in this Annual Report on Form 10-K and in PMCC
Financial Corp.'s other filings with the Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual outcomes and events may vary
materially from those indicated.
PART I
ITEM 1. BUSINESS
General
PMCC Financial Corp. (the "Company") is a specialty consumer financial
services company providing a broad array of residential mortgage products to
primarily prime credit borrowers seeking "conventional" or FHA/VA loans.
Beginning in mid-1996, the Company had expanded and diversified its mortgage
banking activities by opening a fully-staffed wholesale division, increasing its
sub-prime mortgage originations, establishing a program to provide short-term
funding to independent real estate contractors for one to four family
residential rehabilitation properties, acquiring a wholesale origination company
in Florida and expanding its retail loan operations geographically throughout
the United States. Due to continuing adverse conditions in the sub-prime market,
the Company closed its sub-prime division during 1999.
The Company is a holding company that conducts all of its business through
its wholly owned subsidiary, PMCC Mortgage Corp. (formerly Premier Mortgage
Corp.) ("PMCC"). On February 18, 1998, the shareholders of PMCC exchanged all of
their outstanding common stock for shares of the Company, and the Company
completed an initial public offering of new shares of common stock.
The Company's primary mortgage banking business objectives are to stabilize
the Company's operations, to continue to offer a full range of mortgage products
to qualified borrowers and to generate positive cash flow by selling
substantially all originated loans for cash to institutional investors, usually
without recourse, within a short period after such loans are originated, thereby
reducing exposure to interest rate and credit risks.
In the five years prior to 1999, the Company experienced growth in its
mortgage banking activities, originating $47 million in mortgage loans in 1994,
$71 million in mortgage loans in 1995, $133 million in mortgage loans in 1996,
$315 million in mortgage loans in 1997 and $582 million in mortgage loans in
1998. In 1999, due to closing its sub-prime division and increasing mortgage
interest rates, PMCC experienced a decline in loan originations, originating
$561 million in mortgage loans. For its fiscal years ended December 31, 1997,
1998 and 1999, the Company had revenues from its mortgage banking activities of
$14.2 million, $22.9 million, and $16.7 million, respectively.
The Company originates residential first mortgages on a retail basis
primarily in New York and New Jersey by a staff of experienced retail loan
officers who obtain customers through referrals from local real estate agents,
builders, accountants, financial planners and attorneys, as well as from direct
customer contact via advertising, direct mail and promotional materials. The
Company's wholesale divisions in New Jersey and Florida originate mortgage loans
through independent mortgage bankers and brokers, who submit applications to the
Company on behalf of a borrower. For the year ended December 31, 1999,
approximately 50% of the Company's mortgage originations were derived from its
retail mortgage operations and approximately 50% were derived from its wholesale
operations.
The Company's revenues from mortgage banking activities are primarily
generated from the premiums it receives on the sale of mortgage loans it
originates, and from interest earned during the period the Company holds
mortgage loans for sale. The Company's mortgage loans, together with servicing
rights to these mortgages, are usually sold on a non-recourse basis to
institutional investors, in each case within approximately 7 to 30 days of the
date of origination of the mortgage. In general, when the Company establishes an
interest rate at the origination of a mortgage loan, it attempts to
contemporaneously lock in an interest yield to the institutional investor
purchasing that loan from the Company. By selling these mortgage loans at the
time of or shortly following origination, the Company limits its exposure to
interest rate fluctuations and credit risks. Furthermore, by selling its
mortgage loans on a "servicing-released" basis, the Company avoids the
administrative and collection expenses of managing and servicing a loan
portfolio and it avoids a risk of loss of anticipated future servicing revenue
due to mortgage prepayments in a declining interest rate environment.
The Company also generates income by charging fees for short-term funding
to independent real estate contractors ("rehab partners") for the purchase,
rehabilitation and resale of vacant one-to-four family residences primarily in
New York City and Long Island, New York. The Company provides this funding to
several rehab partners that specialize in the rehabilitation and marketing of
these properties. As security for providing the rehab partners with the funding
to accomplish the purchase, rehabilitation and resale of the property, the
Company holds title to the properties. The Company's income from this activity
is limited to the fees and interest charged in connection with providing the
funding and is not related to any gain or loss on the sale of the property.
Since the Company holds the title to these properties, for financial reporting
purposes the Company records as revenue the gross sales price of these
properties when the properties are sold to the ultimate purchasers and it
records cost of sales equal to the difference between such gross sales price and
the amount of its contracted income pursuant to its contracts with the rehab
partners. From the commencement of this activity on September 1, 1996 through
December 31, 1996, the Company completed 35 transactions and recorded revenues
of $5.1 million and cost of sales of $4.8 million. For the year ended December
31, 1997, the Company completed 169 such transactions. The Company's revenues
and costs of sales from this activity for the year ended December 31, 1997 were
$25.1 million and $23.6 million, respectively. For the year ended December 31,
1998, the Company completed 231 transactions and recorded revenues and costs of
sales of $35.7 million and $32.9 million, respectively. For the year ended
December 31, 1999, the Company completed 216 transactions and recorded revenues
and costs of sales of $36.0 million and $33.0 million, respectively. At December
31, 1999, the Company had 130 properties in various stages of rehabilitation
awaiting resale. Due to conditions described in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations. - Liquidity and
Capital Resources", the Company has accelerated efforts to cause the sale of
existing properties and has temporarily halted the purchase of new properties.
In April 1997, the Company established a sub-prime lending division to meet
increased customer demand for sub-prime mortgage products and the availability
of capital to the Company for these mortgage banking products. In many cases,
sub-prime credit borrowers have substantial equity in their residences and while
some of these sub-prime customers have impaired credit, such customers also
include individuals who seek an expedited mortgage process, and persons who are
self-employed or, due to other circumstances, have difficulty verifying their
income. The Company believed that the demand for loans by sub-prime credit
customers was less dependent on general levels of interest rates or home sales
and may be less cyclical than conventional mortgage originations. Such lending
is subject to other risks, however, including risks related to the significant
growth in the number of sub-prime lenders in recent years, risks related to
certain potential competition and risks related to credit-impaired borrowers.
High delinquencies and an oversaturation of lenders led to adverse conditions in
the sub-prime mortgage market beginning in late 1998 and continuing into 1999.
Because of this, the Company closed its Roslyn, New York sub-prime division
during the second quarter of 1999 and transferred its remaining operations to
the New Jersey sub-prime office. This office was likewise subsequently closed in
December 1999. While the Company's conservative posture on these loans has
reduced loss exposure to almost zero, originations of sub-prime loans were
reduced in 1999 by approximately 80% from the prior year.
Recent Developments
As previously announced, on December 21, 1999, the Company's then Chairman
of the Board, President and Chief Executive Officer, Ronald Friedman, and a loan
officer were charged in separate criminal complaints with one count each of
allowing false qualifications to be included in applications for FHA-backed
mortgage loans in connection with an investigation (the "Investigation") by the
U.S. Attorney's Office for the Eastern District of New York (the "U.S.
Attorney"). The Company, which has not been informed that it is a target of the
Investigation, has provided requested documents and cooperated with the
Investigation. See "Item 3 - Legal Proceedings." On December 22, 1999, the
American Stock Exchange suspended trading of the Company's Common Stock and
commenced a review of the listing status of the Common Stock. See "Item 5 -
Market For Registrant's Common Equity and Related Stockholder Matters." In
addition, on January 24, 2000 the Federal Home Loan Mortgage Corporation
("Freddie Mac") suspended the eligibility of the Company to use Freddie Mac's
automated underwriting system. As of the date of this Report, the trading
suspension and Freddie Mac suspension remained in effect. Following the events
of December 21, 1999, the following have also occurred:
o Reorganization of Management. On December 29, 1999, Mr. Friedman resigned
as a Director and Chairman of the Board and was granted a leave of absence
as President and Chief Executive Officer. In his place, Stanley Kreitman,
an outside director, was appointed Chairman of the Board, Andrew Soskin,
the Company's Executive Vice President of Operations and Sales, was
appointed interim President and Keith Haffner, the Company's Executive Vice
President and a Director, was appointed interim Chief Executive Officer.
Mr. Soskin was also elected to the Board to replace Mr. Friedman.
o Retention of Consultants and Internal Investigation. A committee of
independent directors consisting of Stanley Kreitman and Joel L. Gold was
formed to conduct an investigation into the business practices of the
Company and to retain counsel in connection therewith. Dorsey & Whitney LLP
was retained as counsel and conducted an investigation and prepared a
report for such committee and the entire Board concerning matters relating
to the Investigation. See "Item 3 - Legal Proceedings." Spectrum Financial
Consultants, Inc. was engaged to assist the Company in maintaining and
establishing new relationships with funding sources and seeking to maintain
its existing relationships with lenders.
o Staffing Changes and Streamlining of Operations. The loan officer
implicated in the Investigation was terminated. In the aftermath of the
events of December 1999, the Company's cash flow weakened as a result of
factors such as substantial professional fees incurred by the Company in
connection with the Investigation and related matters and additional
collateral and fees required by its warehouse lenders. The Company also was
faced with ongoing costs from the Company's expansion efforts in 1999 and
reductions in the mortgage origination market due to increasing interest
rates. In an effort to improve cash flow and operating efficiency, over the
course of the first two months of 2000, the Company streamlined its
operations to 86 employees, 27 of which were sales staff and 59 were
operation staff. At December 31, 1999, there were 185 employees, 78 of
which were sales staff and 107 were operations staff. As part of this
streamlining effort, the Company has shifted the focus of its business
primarily to wholesale mortgage banking, which relies upon mortgage loans
introduced through independent mortgage bankers and brokers, from retail
mortgage banking, which relies on mortgage loans placed by the Company's
own loan officers. In 1998 and 1999, respectively, wholesale loans
constituted approximately 43% and 50% of the dollar volume of loans
originated by the Company, respectively. During the first three months of
2000, the Company estimates that approximately 85% of the dollar volume of
loans it originated was attributable to wholesale business. To further
improve cash flow, the Company temporarily halted the acquisition of
residential rehabilitation properties and almost $9 million in
rehabilitation properties have been sold to date in 2000, generating over
$3 million in cash. The Company is seeking to sell approximately $7 million
of such properties in the near future. As a result of the Company's efforts
to streamline its operations and business focus, the Company has reduced
its annualized expenses by approximately $3.3 million. Such reduction has
assisted in maintaining adequate cash flow notwithstanding lower mortgage
origination and professional expenses being incurred which have contributed
to net losses expected to be reported for the first quarter of 2000. See
"Item 1 - Business - Business Strategy" and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
o Change in Warehouse Financing. The Company had credit lines (the "Existing
Credit Lines") available aggregating $140 million with Chase Bank of Texas
and PNC Bank and GMAC/RFC which lines were due to expire on December 24,
1999 and January 31, 2000, respectively. To replace the Existing Credit
Lines, on November 11, 1999 the Company entered into agreement with Bank
United to provide a total mortgage warehouse line of $120 million. Bank
United committed to $40 million and the remaining line was to be syndicated
to other banks. At December 21, 1999, the balances outstanding on mortgage
lines were approximately $23 million at Bank United and an aggregate of
approximately $25 million under the Existing Credit Lines. After the events
of December 21, 1999, two additional banks expected to join the Bank United
syndicate withdrew their verbal commitments. The events of December 21,
1999 constituted defaults under the Bank United credit line and the
Existing Credit Lines due to cross default provisions. The Credit Line with
Prudential was suspended and has since been paid in full. The Company
negotiated forbearance arrangements and short-term extensions with Bank
United and lenders of the other Existing Credit Lines. Such extensions are
currently set to expire on May 31, 2000 in the case of GMAC/RFC and May 15,
2000 in the case of Chase Bank of Texas and PNC Bank and Bank United. On
February 28, 2000 the Company entered into a $20 million warehouse line of
credit from IMPAC Warehouse Lending Group, one of the institutional
investors which purchases the Company's loans. The Company is seeking to
obtain a new credit line or lines of approximately $15 million in addition
to the $20 million IMPAC credit line. See "Item 1 - Business - Loan Funding
and Borrowing Arrangements" and "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Business Strategy
In the past year, PMCC's growth strategy included the following:
o increase the Company's wholesale mortgage origination business. This was
accomplished in July 1999 when PMCC completed its acquisition of the assets
of Prime Mortgage Investors, Inc. ("Prime") which provided the Company with
three wholesale origination offices in Florida;
o expand the Company's retail mortgage origination business into other
states. The Company had opened retail offices in Westchester, New York and
Staten Island, New York in 1998 and followed this by opening branches in
Phoenix, Arizona, Las Vegas, Nevada and Deerfield Beach, Florida in 1999.
o expand the Company's residential rehabilitation activities outside of New
York City and Long Island, New York. This was accomplished by adding
additional residential rehabilitation partners in New Jersey, Maryland and
Arizona; and
o compete more effectively by utilizing the Internet to reach consumers
directly, thereby substantially reducing sales and marketing expenses.
PMCC's in-house technology along with the Prime acquisition allowed the
Company to establish a web-site with a service and customer call center
located in Houston, Texas in November 1999.
Due to the recent developments described above, along with a significant
reduction in the mortgage origination market (particularly in the Northeast)
caused by increasing interest rates and a fall-off in mortgage refinancing, many
of the Company's growth initiatives were suspended or closed down completely in
early 2000. The following actions were taken:
o staffing at the Company's Roslyn retail office and administrative offices
was reduced from 86 employees to 45. In conjunction such reduction, the
Company is currently negotiating to significantly reduce its office space
in Roslyn by subleasing at least half its current premises. These
reductions, while costing an estimated $300,000 in termination costs, are
expected to result in annualized cost savings of almost $1.6 million;
o all retail branches opened during 1998 and 1999 were closed, along with one
wholesale office acquired from Prime, resulting in a staff reduction of 36
employees. This included retail branches in potential high growth areas
such as Las Vegas, Phoenix and Deerfield Beach which were in start-up
situations and were incurring high expenses in relation to their current
origination volume. It is expected that these actions will result in
annualized cost savings to the Company of approximately $800,000, while
closing these branches resulted in estimated closing and termination costs
of $75,000;
o staffing at the Company's New Jersey and remaining Florida wholesale
locations was reduced from 61 employees to 38, and the Florida locations
have moved to more cost-efficient office locations. These reductions are
expected to result to result in annualized cost savings of almost $600,000;
o the Company's web-site was temporary closed down as was the Internet call
center in Houston. As a start-up operation, this area was incurring high
expenses in relation to the current origination volume. It is expected that
this action will result in annual savings of over $300,000;
o the Company temporarily halted the acquisition of residential
rehabilitation properties and began an initiative to sell the completed
properties on hand as quickly as possible without incurring any losses on
the sales. Assuming successful completion of proposed sales, this process
is expected to bring into the Company a total of approximately $6 million
in cash by the end of June 2000.
It is anticipated that the Company will continue to incur significant
losses in the first quarter of 2000 primarily as a result of unusual
professional fees and bank charges along with expenses incurred in closing down
certain branches. Based on the above actions taken by the Company, PMCC
currently estimates that it must achieve a minimum of approximately $25 million
per month in new mortgage originations beginning in the second quarter of 2000
to achieve break-even profitability. Although the Company anticipates
maintaining at least that level of originations from its remaining wholesale and
retail operations, there can be no assurance that such origination volume will
be achieved, that expected cost savings will be realized or that such
originations will be sufficient to restore profitability.
At the same time the above actions are being taken, PMCC's business
strategy is to stabilize and strengthen its remaining areas of business. The
Company continues to believe that its broad range of mortgage alternatives for
borrowers and its ability to promptly make decisions provides it with the
opportunity to increase its business in the wholesale mortgage market. Prompt
and consistent service to independent mortgage loan brokers who are sources of
wholesale loan transactions is a key to the Company increasing its wholesale
mortgage originations and establishes the basis for repeat business and
referrals from these brokers. The Company plans to add new account executives in
both New Jersey and Florida. It is anticipated that more than 80% of PMCC's
mortgage originations in 2000 will be as a result of its wholesale operations.
The Company also expects to reopen and expand its web-site to allow
borrowers to directly match their credit profile to specific products and rates
offered by the Company. The previous and future investment in Internet
technology is anticipated to accelerate PMCC's move back into E-commerce and to
enable the Company to expand its consumer-direct market. The centerpiece of this
technology will be to the ability to allow consumers to process their own loans
on-line with the support of the Company's call center as needed.
The Company also expects to resume its residential rehabilitation
activities and is exploring new financing sources. The Company believes that
opportunities continue to exist to provide fee-based short-term funding for
residential rehabilitation properties. In some cases, this funding would be
provided to one of rehab partners with which the Company already does business,
while in other cases, the Company may elect to work with companies with which it
has not done business in the past. The Company views its residential
rehabilitation activities as important sources of fee business and follow-on
mortgage origination business.
There can be no assurance as to the specific time-frame concerning when the
Company will implement any elements of its business strategy, whether the
Company will be successful in implementing this strategy or whether the
implementation of this strategy will result in increased revenue or in net
income to the Company.
Operating Strategy
The Company's operating strategy includes the following elements:
o continue to provide quality service. The Company seeks to provide high
levels of service to its retail customers and the broker network that is a
source of wholesale loan originations. This service includes prompt
preliminary approval of loans, consistent application of the Company's
underwriting guidelines and prompt funding of loans. To provide this level
of service, each loan is handled by a team of professionals that includes
experienced loan sales personnel, processors and underwriters. The Company
believes that this commitment to service provides it with a competitive
advantage in establishing and maintaining a productive sales force and
satisfactory broker relationships;
o maintain underwriting standards. The Company's underwriting process is
designed to thoroughly, expeditiously and efficiently review and underwrite
each prospective loan and to insure that each loan can be sold to a
third-party investor by conforming to its requirements. The Company employs
six underwriters, with an average of twelve years of relevant mortgage loan
experience to ensure that all originated loans satisfy the Company's
underwriting criteria. Each loan is reviewed and approved by a senior
underwriter. The Company believes that its experienced underwriting staff
provides it with the infrastructure required to manage and sustain the
Company's growth rate while maintaining the quality of loans originated;
o broaden product offerings. The Company frequently reviews its pricing and
loan products relative to its competitors and introduces new loan products
in order to meet the needs of its customers who may be "retail" customers
and brokers who are sources of wholesale loan originations. The Company
successfully negotiates master commitments from its investors for special
niche products that are only offered to a limited number of companies
nationwide. The Company intends to continue to negotiate these specialized
master commitments to allow the Company to offer exceptional niche products
that are only offered to a limited amount of companies nationwide;
o continue delegated underwriting approval status. The Company seeks to
provide a high level of service to its retail and wholesale accounts, by
having internal authority to approve a large portion of the loans it sells.
In addition to FNMA, FHA and jumbo loans, the Company has been delegated
authority by certain institutional investors to approve many of the
Company's niche products. The Company has provided training for its
processors and underwriters to efficiently review each file for compliance
with investor guidelines. The Company believes that its delegated authority
to approve most loans provides it with a competitive advantage because it
allows the Company to provide additional services to its borrowers and
correspondents; and
o invest in information systems. In its continued effort to increase
efficiency, the Company plans to upgrade its information systems in 2000.
The Company intends to continue to look for ways to improve efficiencies
through automation.
The Company does not currently intend to engage in mortgage securitization
activities.
Mortgage Products Offered
The Company believes it is one of a small group of multi-state mortgage
bankers that offer on a direct (or retail) basis a broad array of mortgage
products to prime credit borrowers (i.e., a credit-rated borrower seeking a
conventional or FHA/VA insured loan), and borrowers who are unable to qualify
for conforming home mortgages. The Company's experience and expertise in
numerous types of mortgage products also gives it the ability to originate a
full range of mortgage products on a wholesale basis. This broad array of
products allow most prospective borrowers to obtain a mortgage through the
Company.
The following are examples of the more than 200 mortgage programs offered
to prime credit borrowers:
o Fixed interest rate mortgages with a fixed monthly payment. This loan is
fully amortizing over a given number of years (for example, 15 or 30
years); a portion of the monthly payment covers both interest and
principal.
o Fixed interest rate balloon mortgages with equal monthly payments based on
a long-term schedule (15 to 30 years), yet payment of the outstanding
balance is due in full at an earlier date (5 to 10 years).
o Adjustable interest rate mortgages ("ARMs") repayable over 7 to 30 years
with monthly payments adjusted on a periodic basis (i.e., 6 months or once
a year) based upon interest rate fluctuations.
o ARMs offer additional alternatives:
o Adjustment period -- This determines when the first interest rate and
payment changes will take place; an ARM could make its initial
adjustments after six months, one year, three years, five years or ten
years and subsequent adjustments take place either every six months or
one year thereafter.
o Caps -- "Caps" place limits on payments and interest rate changes per
adjustment period. For example, for an ARM that adjusts every year,
the maximum increase in the interest rate on the adjustment date is
typically 200 basis point per year (i.e., a mortgage would adjust from
7% to 9%) and 600 basis points for the life of the loan.
o Index -- The index is the basis upon which interest rate adjustments
are made; typically, the index is related to various Treasury bill
rates or another widely published rate such as LIBOR.
Mortgages are also offered with a variety of combinations of interest rates
and origination fees so that its customers may elect to "buy-down" the interest
rate by paying higher points at the closing or pay a higher interest rate and
reduce or eliminate points payable at closing. The Company's mortgage products
are further tailored, i.e., are offered with varying down payment requirements,
loan-to-value ratios and interest rates, to a borrower's profile based upon the
borrower's particular credit classification and the borrower's willingness or
ability to meet varying income documentation standards -- the full income
documentation program pursuant to which a prospective borrower's income is
evaluated based on tax returns, W-2 forms and pay stubs; the stated income
program pursuant to which a prospective borrower's employment, rather than
income, is verified; or the no ratio loan program pursuant to which a
prospective borrower's credit history and collateral values, rather than income
or employment, are verified. These loan variations give the Company the
flexibility to extend mortgages to a wider range of borrowers.
FHA/VA Mortgages. The Company has been designated by the United States
Department of Housing and Urban Development ("HUD") as a direct endorser of
loans insured by the Federal Housing Administration ("FHA") and as an automatic
endorser of loans partially guaranteed by the Veterans Administration ("VA"),
allowing the Company to offer so-called "FHA" or "VA" mortgages to qualified
borrowers. Generally speaking, FHA and VA mortgages are available to borrowers
with low/middle incomes and impaired credit classifications for properties
within a specific price range (generally less than $220,000 for one-family
residences or $281,000 for two-family residences located in the New York City
metropolitan area). FHA and VA mortgages must be underwritten within specific
governmental guidelines, which include income verification, borrower asset,
borrower credit worthiness, property value and property condition. Because these
guidelines require that borrowers seeking FHA or VA mortgages submit more
extensive documentation and the Company perform a more detailed underwriting of
the mortgage than prime credit mortgages, the Company's revenues from these
mortgages are generally higher than a comparable sized mortgage for a prime
credit borrower.
The following table sets forth the Company's mortgage loan production
volume by type of loan for each of the five years ended December 31, 1999.
Years Ended December 31,
($ in thousands)
1995 1996 1997 1998 1999
---- ---- ------- ---- ----
Conventional Loans:
Volume $51,300 $75,400 $177,825 $359,143 $379,462
Percentage of total volume 73% 57% 57% 62% 68%
FHA/VA Loans:
Volume $19,400 $57,700 $75,060 $146,628 $167,153
Percentage of total volume 27% 43% 24% 25% 30%
Sub-Prime Loans
Volume * * $61,675 $76,645 $14,083
Percentage of total volume * * 19% 13% 2%
Total Loans:
Volume $70,700 $133,100 $314,560 $582,416 $560,698
Number of Loans 470 890 2,160 3,793 3,662
Average Loan Size $150 $150 $146 $154 $153
- ------------
*For the referenced periods, sub-prime loans represented less than five percent
of the Company's loan originations and are included in the Company's
conventional loans.
Operations
Markets. The Company currently services mortgage customers in New York
State (particularly in New York City and throughout Long Island), New Jersey and
Florida through 4 offices. Additionally, the Company has mortgage banking
licenses in 44 additional states. These offices allow the Company to focus on
developing contacts with individual borrowers, local brokers and referral
sources such as accountants, attorneys and financial planners.
Retail Mortgage Originations. The Company's typical retail customer is
assigned to one of the Company's mortgage loan officers working at one of the
Company's offices who spends approximately one hour interviewing the applicant
about his/her mortgage borrowing needs and explaining the Company's mortgage
product alternatives. Following this interview, the mortgage loan officer
assists the customer in completing an application and gathering supporting
documentation (a "loan file"). Once the loan file is submitted, a sales manager
reviews the file to verify that the loan complies with a specific product that
the Company can resell to institutional investors. The Company assigns a loan
processor to review a loan file for completeness and requests missing
documentation from the borrower. The Company's review of a loan file and the
related underwriting process generally includes matters such as verification of
an applicant's sources of down payment, review of an applicant's credit report
from a credit reporting agency, receipt of a real estate appraisal, verification
of the accuracy of the applicant's income and other information, and compliance
with the Company's underwriting criteria and those of either FHA and/or
institutional investors. The Company's review/underwriting process allows it to
achieve efficiency and uniformity in processing, as well as quality control over
all loans. In the case of prime and FHA/VA mortgages, the underwriting process
occurs at the Company's offices in Roslyn Heights, New York and Union, New
Jersey.
When a loan reaches the underwriting department, the Company's goal is to
promptly evaluate the loan file to reach preliminary decisions within 24 to 48
hours of receipt. After a loan has been approved, the Company issues a written
loan commitment to the applicant which sets forth, among other things, the
principal amount of the loan, interest rate, origination and/or closing fees,
funding conditions and approval expiration dates.
Approved applicants have a choice of electing to "lock-in" their mortgage
interest rate as of the application date or thereafter or to accept a
"prevailing" interest rate. A "prevailing" interest rate is subject to change in
accordance with market interest rate fluctuations and is set by the Company
three to five days prior to closing. At the closing, a Company-retained attorney
or closing agent is responsible for completing the mortgage transaction in
accordance with applicable law and the Company's operating procedures and
completion of appropriate documentation.
As a retail mortgage originator, the Company performs all the tasks
required in the loan origination process, thereby eliminating any intermediaries
from the transaction. This permits the Company to maximize fee income and to be
a low cost provider of mortgage loans. The Company believes that this structure
provides it with a competitive advantage over mortgage brokers, who must
outsource a significant portion of the loan origination process, and over banks,
which usually have greater overhead expenses than the Company. In addition,
handling the entire loan origination process in-house leads to effective quality
control and better communication among the various personnel involved.
Wholesale Mortgage Operations. Wholesale mortgage originations are the
responsibility of the Company's wholesale division, which solicits referrals of
borrowers from a network of independent mortgage bankers and brokers located
throughout New York, New Jersey and Florida. In wholesale originations, these
mortgage bankers and brokers deal directly with the borrowers by assisting the
borrower in collecting all necessary documents and information for a complete
loan application, and serving as a liaison to the borrower throughout the
lending process. The mortgage banker or broker submits this fully processed loan
application to the Company for underwriting determination.
The Company reviews the application of a wholesale originated mortgage with
the same underwriting standards and procedures used for retail loans, issues a
written commitment, and upon satisfaction of all lending conditions, closes the
mortgage with a Company-retained attorney or closing agent who is responsible
for completing the transaction as if it were a retail originated loan. Mortgages
originated from the wholesale division are sold to institutional investors
similar to those that purchase loans originated from the Company's retail
operation.
Because mortgage brokers may submit individual loan files to several
prospective lenders simultaneously, the Company attempts to respond to an
application as quickly as possible. Since the Company has been delegated
authority from institutional investors to approve most loans, the Company
generally issues an underwriting decision within 24 to 48 hours of receipt of a
file.
The Company has approved approximately 650 independent mortgage bankers and
brokers and works with of these on a regular basis. The Company conducts due
diligence on potential mortgage bankers and brokers, including verifying
financial statements of the company and credit checks of principals, business
references provided by the bankers or brokers and verifying through the banking
department that the mortgage banker or broker is in good standing. Once
approved, the Company requires that each mortgage banker or broker sign an
agreement of purchase and sale in which the mortgage banker or broker makes
representations and warranties governing both the mechanics of doing business
with the Company and the quality of the loan submissions. In addition, the
Company regularly reviews the performance of loans originated through mortgage
bankers and brokers.
Through the wholesale division, the Company can increase its loan volume
without incurring the higher marketing, labor and other overhead costs
associated with increased retail originations because brokers conduct their own
marketing and employ their own personnel to attract customers, to assist the
borrower in completing the loan application and to maintain contact with
borrowers.
Residential Rehabilitation Activities. In September 1996, the Company
commenced a program of providing short-term fee-based funding to several rehab
partners with specialized expertise in the acquisition, rehabilitation and
resale of vacant one-to-four family residential properties in New York City and
Long Island, New York. These properties are generally offered to the rehab
partners by banks or other mortgage companies that have acquired title and
possession through a foreclosure proceeding. The Company's process of providing
this short-term funding commences when a rehab partner submits information about
a property to the Company which the rehab partner believes meets the Company's
rehabilitation financing criteria. If the Company agrees to fund the
rehabilitation of the property, it will advance the purchase of the property at
up to 70% of the appraised value. The Company generally does not fund properties
when the purchase price of the property is greater than 70% of the appraised
value. As security for providing these rehab partners with the funding to
accomplish the purchase, residential rehabilitation and resale of the property,
title to these properties is held by the Company. The Company's income from this
activity is limited to the fees and interest charged in connection with
providing the financing and not from any gain or loss on the sale of the
property. The terms of these financing agreements with the rehab partners (the
"Agent Agreement") provide that all risks relating to the ownership, marketing
and resale of the property are borne by the rehab partners, including obtaining
insurance on the property, maintaining the property and arranging for all
aspects of offering and selling the property to potential buyers and renovating
the property to the satisfaction of the buyer. The Agent Agreements also provide
that the Company's fee, which averaged approximately $15,000 per property sold
in 1999, is a priority payment after payment of the funds advanced by the
Company, over any monies paid to the rehab partners. The rehab partners and
their principals personally guaranty reimbursement of all costs and the total
fee payable to the Company. The properties funded by the Company through the
residential rehabilitation program are generally acquired at prices between
$60,000 and $150,000 each, and the renovation/rehabilitation expenses (which are
borne by the rehab partners) are usually between $10,000 and $30,000 per
property. The period during which these properties are financed generally ranges
from three to six months. For financial reporting purposes, because the Company
holds title to these properties, revenues are recorded at the gross sales price
of these properties when the properties are sold to the ultimate purchasers and
it records cost of sales equal to the difference between such gross sales price
and the amount of its contracted income pursuant to its contracts with the rehab
partners.
The Company's arrangement with these rehab partners is not exclusive,
although the Company does encourage the rehab partners to provide the Company
with a "first right" of funding each property that each rehab partner has
identified. The Company has investigated each rehab partner and is satisfied
that their financial condition and business reputation is acceptable. As the
Company opens additional retail offices, it will consider funding residential
rehabilitation properties in the areas served by such offices.
The Company believes that its residential rehabilitation program serves as
an additional source of mortgage originations since purchasers of such
properties typically seek mortgage financings and are encouraged to submit
applications to the Company. Approximately 90% of the buyers of such properties
obtained mortgages originated by the Company. The process by which these
mortgages were processed and underwritten was identical to the Company's
procedures for reviewing and underwriting mortgages originated from retail or
wholesale sources, and each of these mortgages was sold to third party investors
in the normal course of the Company's business.
As discussed above, the Company has temporarily halted the acquisition of
residential rehabilitation properties and has accelerated the sale of existing
properties to improve cash flow.
Loan Funding and Borrowing Arrangements
The Company funds its mortgage banking and residential rehabilitation
financing activities in large part through warehouse lines of credit, gestation
agreements and its ability to continue to originate mortgage loans and provide
residential rehabilitation financings is dependent on continued access to
capital on acceptable terms. The warehouse facilities require the Company to
repay the amount it borrows to fund a loan generally within 30 to 90 days after
the loan is closed or when the Company receives payment from the sale of the
funded loan, whichever occurs first. These borrowings are repaid with the
proceeds received by the Company from the sale of its originated loans to
institutional investors or, in the case of residential rehabilitation
activities, from the proceeds from the sale of the properties. Until the loan is
sold to an investor and repayment of the loan is made under the warehouse lines,
the warehouse line provides that the funded loan is pledged to secure the
Company's outstanding borrowings. The warehouse lines of credit contain certain
covenants limiting indebtedness, liens, mergers, changes in control and sales of
assets and requires the Company to maintain minimum net worth and other
financial ratios.
On August 7, 1998, the Company entered into a Senior Secured Credit
Agreement (the "Chase Line") with Chase Bank of Texas, National Association
("Chase") and PNC Bank ("PNC"). The Chase Line provided a warehouse line of
credit of $120 million ($90 million committed at August 11, 1998) for its
mortgage originations and residential rehabilitation purchases. The Chase Line
is secured by the mortgage loans and residential rehabilitation purchases funded
with the proceeds of such borrowings. The Company has also pledged the stock of
its residential rehabilitation subsidiaries as additional collateral. The
Company is required to comply with certain financial covenants and the
borrowings for residential rehabilitation properties are guaranteed by Ronald
Friedman and by Robert Friedman, the Company's former Chief Operating Officer,
Secretary, Treasurer and Chairman of the Board of Directors. The Chase Line
originally was set to expire in August 1999 but was extended through November 8,
1999. Chase and PNC informed the Company that they had decided to curtail their
involvement in mortgage warehouse lending and had decided not to renew the
facility for that reason. The Chase Line was further extended to December 24,
1999 on a declining basis in order to complete the funding of all loans and
properties on the line on November 8, 1999. No new loans or properties were
added to this line subsequent to November 8, 1999. Chase and PNC have agreed to
continue to extend the line on a specified declining basis through a series of
short term extensions. The banks and PMCC are in the process of extending the
Chase Line through May 15, 2000, at which time the Company anticipates paying
down the entire facility or renewing the extension under similar terms and
conditions as the extensions granted since December 24, 1999. The balance
outstanding on the Chase Line was $51.2 million on November 8, 1999, $10.7
million on December 31, 1999 and $4.4 million on April 13, 2000. Interest
payable on the Chase Line is variable based LIBOR plus 1.25% to 3.00% based upon
the underlying collateral. Minimal fees were paid for the extensions and there
was no change in the method of calculating interest.
The Company also maintained a warehouse line of credit with GMAC/RFC (the
"RFC Line") of $20 million that was used primarily for sub-prime loans and
residential rehabilitation properties. The RFC Line was set to expire on January
31, 2000. RFC had decided not to renew the warehouse line due to low usage as a
result of the Company's exiting the sub-prime business and RFC's curtailment of
their involvement in residential rehabilitation lending. RFC has agreed to
continue to extend the line on a declining basis through a series of short term
extensions, the most recent of which will expire on May 31, 2000, at which time
the Company anticipates paying down the entire facility or renewing the
extension under similar terms and conditions as the extensions granted since
January 31, 2000. The balance outstanding on the RFC Line was $2.2 million on
December 31, 1999, $1.3 million on January 31, 2000 and $0.7 million on April
13, 2000. Interest payable on the RFC Line is variable based on LIBOR plus 1.35%
to 2.25% based upon the underlying collateral. Minimal fees were paid for the
extensions and there was no change in the method of calculating interest.
To replace the expiring Chase Line, the Company entered into a one-year
Mortgage Warehousing Loan and Security Agreement (the "Bank United Line") with
Bank United, a federally chartered savings bank, as lending bank and agent. The
Bank United Line provided a warehouse line of credit of $120 million ($40
million of which was committed by Bank United and the remainder of which was not
committed) for its mortgage originations and residential rehabilitation
purchases. The Bank United Line is secured by the mortgage loans and residential
rehabilitation purchases funded with the proceeds of such borrowings. The
Company has also pledged the stock of its residential rehabilitation
subsidiaries as additional collateral. Interest payable on the Bank United Line
was variable based on LIBOR plus 1.50% to 3.00% based upon the underlying
collateral.
Due to the events relating to the Investigation, on December 22, 1999 Bank
United declared a default of the Bank United Line agreement and suspended
funding under the agreement. Bank United continued to fund new mortgage loans
only on a limited day to day basis and only with the personal guarantee of
Ronald Friedman and additional collateral in the form a $500,000 cash deposit by
the Company at Bank United. On January 18, 2000, Bank United agreed to a limited
extension of the warehouse agreement through January 28, 2000 and to waive the
existing default relating to the Investigation. In return for this, Bank United
required additional collateral pledged to the bank in the form of the $500,000
cash deposit previously noted and $1.5 million in marketable titles to
residential rehabilitation properties owned by PMCC, an additional 3% cash
reduction in the funding amount of all loans funded on the Bank United Line, the
continued personal guarantee of Ronald Friedman and an Amendment Fee of
$250,000. The Commitment amount of the line was reduced from $40 million to $33
million and the interest rate was increased to LIBOR plus 2.00% to 3.50% based
upon the underlying collateral. On February 1, 2000, for an additional Amendment
Fee of $100,000, Bank United agreed to an extension on similar terms through
February 28, 2000. On March 1, 2000, Bank United agreed to an extension through
March 31, 2000 on similar terms, with a reduction of the commitment from $20
million on March 13 to $13 million on March 31. Additional collateral held was
returned in proportion to the reduction of the amount committed. On April 1,
2000, Bank United agreed to an extension on similar terms with a reduction of
the commitment to $7 million through April 30, 2000. On April 25, 2000, Bank
United agreed to a verbal extension on similar terms through May 15, 2000, at
which time the Company anticipates paying down the entire facility or renewing
the extension under similar terms and conditions as the extensions granted since
January 2000. The balance outstanding on the Bank United Line was $22.9 million
on December 22, 1999, $31.0 million on December 31, 1999 and $5.5 million on
April 13, 2000.
To replace a portion of the Bank United Line, on February 28, 2000, the
Company entered into a Master Repurchase Agreement that provides the Company
with a warehouse facility (the"IMPAC Line") through IMPAC Warehouse Lending
Group ("IMPAC"). The IMPAC Line provides a committed warehouse line of credit of
$20 million for the Company's mortgage originations only. The IMPAC Line is
secured by the mortgage loans funded with the proceeds of such borrowings.
Interest payable on the IMPAC Line is variable based on the Prime Rate as posted
by Bank of America, N.A. plus 0.50%. The IMPAC Line has no stated expiration
date but is terminable by either party upon written notice. The balance
outstanding on the IMPAC Line was $6.9 million on April 13, 2000.
The Company supplemented its warehouse facilities through a gestation
agreement with Prudential Securities Corp. (the "Gestation Agreement"), which
for financial reporting was characterized by the Company as a borrowing
transaction. The Gestation Agreement provided the Company with up to $30 million
of additional funds for loan originations through the Company's sale to this
bank of originated mortgage loans previously funded under the warehouse
facilities and committed to be sold to institutional investors. The Gestation
Agreement does not have an expiration date but is terminable by either party
upon written notice. Interest payable under the Gestation Agreement was variable
based on LIBOR plus 0.0% to 1.00% based upon the underlying collateral. Due to
the events regarding the Investigation, on December 22, 1999 Prudential
suspended funding new loans under the agreement. At December 31, 1999, the
balance due was $4.3 million. As of March 21, 2000, all loans funded under the
Gestation Agreement have been sold to the final investors. The Company believes
that other financial institutions provide similar gestation lines of credit.
During 1999, the Company entered into revolving line of credit agreements
with total credit available of $3.1 million. The interest rate on these lines is
10% per annum. The lines are secured by mortgage loans held for investment by
the Company that are not pledged under the Company's warehouse facilities. The
total outstanding under these lines at December 31, 1999 was $2.3 million. These
funds were used primarily for the cash expenditure in removing the underlying
loans from the warehouse facilities and for general operating expenses.
From time to time, the Company had borrowed funds from a corporation owned
by Robert Friedman. As of December 31, 1998, $1.2 million remained outstanding,
all of which was secured by a mortgage against certain residential properties in
rehabilitation pursuant to a mortgage agreement. As the residential property was
sold, proceeds were used to repay the mortgage on the particular property.
Interest payable pursuant to this agreement is 10% per year. This loan was
repaid in full during February 1999 and no further borrowings were made or are
anticipated from this source.
Sale of Loans
The Company follows a strategy of selling all of its originated loans for
cash to institutional investors, usually on a non-recourse basis. This strategy
allows the Company to (i) generate near-term cash revenues, (ii) limit the
Company's exposure to interest rate fluctuations and (iii) substantially reduce
any potential expense or loss in the event the loan goes into default after the
first month of its origination. The non-recourse nature of the majority of the
Company's loan sales does not, however, entirely eliminate the Company's default
risk since the Company may be required to repurchase a loan from the investor or
indemnify an investor if the borrower fails to make its first mortgage payment
or if the loan goes into default and the Company is found to be negligent in
uncovering fraud in connection with the loan origination process.
Quality Control
In accordance with HUD regulations, the Company is required to perform
quality control reviews of its FHA mortgage originations. The Company's quality
control department examines branch offices and approximately 10% of all
conventional mortgage originations and 30% of all FHA mortgage originations for
compliance with federal and state lending standards, which may involve
reverifying employment and bank information and obtaining separate credit
reports and property appraisals. Quality control reports are submitted to senior
management monthly.
As a result of the Investigation and the subsequent internal investigation
by Dorsey & Whitney (See " Recent Developments" and "Item 3 - Legal
Proceedings"), PMCC has instituted additional quality control procedures to
bolster the integrity of its loan underwriting process. The cornerstone of these
new measures is a 100% review of all prospective loan applicants that are
underwritten under any government program prior to closing. PMCC's quality
control department "reunderwrites" each prospective loan application, which
entails a reverification of all the pertinent creditworthiness information
provided by the prospective borrower before the scheduled closing and a thorough
review of the Residential Appraiser Report. Reverification includes a thorough
review of all gifts received by the borrower that contribute to the down
payment, including documentation from the gift giver, an executed IRS Form 4506
to verify accuracy and validity of income stated on the application and
verification of employment 24 hours prior to closing the loan. Additionally, the
Board of Directors has decided that it will be necessary to create the office of
Vice President, Regulatory Compliance. This position will have dual reporting
responsibility to the Chief Executive Officer and the Audit Committee of the
Board of Directors. This position will be responsible for designing and
implementing a new quality control program and will be required to submit a
written compliance report bi-annually to the Audit Committee for review and
action as necessary.
Marketing and Sales
The Company has developed numerous marketing programs at both the corporate
and the branch office level. These programs include, among others, public
relations, promotional materials customized for consumers and real estate
professionals, collateral materials supporting particular product promotions,
educational seminars, trade shows, and sponsoring or promoting other special
events. The Company also conducts seminars in conjunction with other real estate
professionals targeting potential home buyers. The Company is active with local
boards of realtors, Better Business Bureaus and the Builders Association of
America. All of the Company's loan representatives support these activities with
extensive personal contact.
Competition
The mortgage banking industry is highly competitive in the states where the
Company conducts business. The Company's competitors include financial
institutions, such as other mortgage bankers, state and national commercial
banks, savings and loan associations, credit unions, insurance companies and
other finance companies. Many of these competitors are substantially larger and
have considerably greater financial, technical and marketing resources than the
Company.
Competition in the mortgage banking industry is based on many factors,
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan and interest rates. The
Company believes that its competitive strengths include providing prompt,
responsive service and flexible underwriting to independent mortgage bankers and
brokers. The Company's underwriters apply its underwriting guidelines on an
individual basis but have the flexibility to deviate from such guidelines when
an exception or upgrade is warranted by a particular loan applicant's situation,
such as evidence of a strong mortgage repayment history relative to a weaker
overall consumer-credit repayment history. This provides independent mortgage
bankers and brokers working with the Company the ability to offer loan programs
to a diversified class of borrowers.
Since there are significant costs involved in establishing retail mortgage
offices, there may be potential barriers to market entry for any company seeking
to provide a full range of mortgage banking services. No single lender or group
of lenders has, on a national level, achieved a dominant or even a significant
share of the market with respect to loan originations for first mortgages.
The Company believes that it is able to compete on the basis of providing
prompt and responsive service and offering competitive loan programs to
borrowers.
Information Systems
The Company continues to design and integrate into its operations the
ability to access critical information for management on a timely basis. The
Company uses various software programs designed specifically for the mortgage
lending industry. Each branch office provides senior management with mortgage
originations and other key data. The information system provides weekly and
monthly detailed information on loans in process, fees, commissions, closings,
financial statements and all other aspects of running and managing the business.
Year 2000 Compliance
PMCC had planned for and addressed the Year 2000 ("Y2000") issue to ensure
it would be able to continue to perform its critical functions. The Company's
information technology infrastructure was evaluated for the Y2000 compliance.
The Company has contacted the vendors of its information systems and has been
informed that these systems were Y2000 compliant. The Company's workstations and
fileservers were substantially Y2000 compliant and those workstations that were
not Y2000 compliant were replaced during 1999. The cost to modify the Company's
information technology infrastructure was not material to its financial
condition or results of operations. The Company also relies, directly and
indirectly, on other businesses such as third party service providers,
creditors, financial institutions and governmental entities. Even though the
Company's computer systems are not materially adversely affected by the Y2000
issue, the Company's business and operations could have been materially
adversely affected by disruptions in the operations of other entities with which
the Company interacts.
Upon the turn of the millennium and subsequent thereto, the Company did not
experience any significant systems malfunctions related to the Y2000 issue.
Additionally, the Company did not experience any Y2000 issues with any other
businesses that it relied upon to provide services to the Company. Although the
Company does not anticipate any future systems malfunctions related to the Y2000
issue, procedures are in place to continuously monitor all critical systems to
ensure that any potential Y2000 issue that arises is corrected with minimal or
no disruption to the Company's operation.
Regulation
The Company's business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local government
authorities. These rules and regulations impose obligations and restrictions on
the Company's loan originations and credit activities. In addition, these rules
limit the interest rates, finance charges and other fees the Company may assess,
mandate extensive disclosure to the Company's customers, prohibit discrimination
and impose qualification and licensing obligations on the Company. The Company's
loan origination activities are subject to the laws and regulations in each of
the states in which those activities are conducted. The Company's lending
activities are also subject to various federal laws, including the Federal
Truth-in-Lending Act and Regulation Z promulgated thereunder, the Homeownership
and Equity Protection Act of 1994, the Federal Equal Credit Opportunity Act and
Regulation B promulgated thereunder, the Fair Credit Reporting Act of 1970, the
Real Estate Settlement Procedures Act of 1974 and Regulation X promulgated
thereunder, the Fair Housing Act, the Home Mortgage Disclosure Act and
Regulation C promulgated thereunder and the Federal Debt Collection Practices
Act, as well as other federal and state statutes and regulations affecting the
Company's activities.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features,
mandate certain disclosures and notices to borrowers and, in some cases, fix
maximum interest rates, fees and mortgage loan amounts. Failure to comply with
these requirements can lead to loss of approved status by the banking regulators
of the various state governments where the Company operates, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions by
federal and state governmental agencies. As discussed elsewhere in this report,
on December 21, 1999 the Company's then President and a loan officer were
charged with allowing false qualifications to be included in applications for
FHA-backed mortgage loans in connection with the Investigation. See "- Recent
Developments" and "Item 3 - Legal Proceedings."
As described above, in connection with the Investigation, the Company has
implemented additional quality control procedures to safeguard against similar
occurrences in the future. Although the Company believes that it has systems and
procedures to insure compliance with these requirements and believes that it is
currently in compliance in all material respects with applicable federal, state
and local laws, rules and regulations, there can be no assurance of full
compliance with current laws, rules and regulations or that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance substantially more difficult or expensive. In the event that the
Company is unable to comply with such laws or regulations, its business,
prospects, financial condition and results of operations may be materially
adversely affected.
Members of Congress, government officials and political candidates have
from time to time suggested the elimination of the mortgage interest deduction
for federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans
are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantage of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for mortgage loans of the kind offered by the Company.
Seasonality
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect the general pattern of resales of homes, which sales
typically peak during the spring and summer seasons and decline from January
through March. Refinancings tend to be less seasonal and more closely related to
changes in interest rates.
Environmental Matters
In the course of its business, the Company takes title (for security
purposes) to residential properties intended for near term rehabilitation and
resale. Additionally, the Company may foreclose on properties securing its
mortgage loans. To date the Company has not been required to perform any
investigation or remediation activities, nor has it been subject to any
environmental claims relating to these activities. There can be no assurance,
however, that this will remain the case in the future. Although the Company
believes that the risk of an environmental claim arising from its ownership of a
residential property (whether through residential rehabilitation financing or
through foreclosure) is immaterial, the Company could be required to investigate
and clean up hazardous or toxic substances or chemical releases at a property,
and may be held liable to a governmental entity or to third parties for property
damage, personal injury and investigation and clean up costs incurred by such
parties in connection with the contamination, which costs may be substantial. In
addition, the Company, as the owner or former owner of a contaminated site, may
be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property.
Employees
As of April 13, 2000, the Company has 86 employees, substantially all of
whom are employed full-time. Of these, 41 are employed at the Company's Roslyn
Heights, New York headquarters, and 45 are employed at the Company's other
offices. None of the Company's employees are represented by a union. The Company
considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's executive and administrative offices are located at Three
Expressway Plaza, Roslyn Heights, New York, where the Company leases
approximately 23,000 square feet of office space at an annual rent of
approximately $475,000. The lease expires in April 2005. In conjunction with the
reduction of its operations, the Company is currently negotiating to
significantly reduce this office space by subleasing at least half its current
premises.
The Company leases office space in Union, New Jersey pursuant to a lease
that expires on February 28, 2002 with annual rent of $61,762.
The Company leases office space in Deerfield Beach, Florida pursuant to a
lease assignment that expires on October 31, 2002 with annual rent of $56,400.
The Company leases office space in Coral Gables, Florida pursuant to a month to
month lease with monthly rent of $9,300. The Company is presently negotiating a
permanent lease for less office space at that location and expects to enter into
a new lease agreement by June 1, 2000.
The Company leases office space in Houston, Texas pursuant to a lease that
expires on September 30, 2004 with annual rent of $34,000. The Company has
closed this branch and is seeking a sublease agreement for the entire space
through the end of the lease.
The Company leases 3,000 square feet of general office space in Hauppauge,
New York pursuant to a lease that expires on June 2002 at an average annual rent
of approximately $40,000. The Company has closed this branch and has obtained a
sublease agreement for the entire space through the end of the lease at the cost
of its annual commitment.
In all other locations where PMCC had opened and subsequently closed
branches, the Company did not enter into any long term lease commitments.
ITEM 3. LEGAL PROCEEDINGS
The U.S. Attorney's Office for the Eastern District of New York ("U.S.
Attorney") is conducting an investigation (the "Investigation") into the
allegations asserted in a criminal complaint against Ronald Friedman, the former
Chairman of the Board, President and Chief Executive Officer of the Company, and
a loan officer formerly employed by the Company. On December 21, 1999, agents of
the Office of Inspector General for HUD executed search and arrest warrants at
the Roslyn offices of the Company. The warrants were issued on the basis of a
federal criminal complaint ("Complaint"), which charged that Ronald Friedman and
the loan officer knowingly and intentionally made, uttered or published false
statements in connection with loans to be insured by HUD.
In response to the allegations against the loan officer and Friedman, the
Company engaged the legal services of Dorsey & Whitney LLP to conduct an
internal investigation into the alleged misconduct and to prepare a report
discussing the findings of the internal investigation. As part of this internal
investigation, the Company worked closely and in cooperation with HUD and the
U.S. Attorney. In addition, key employees, including loan officers, loan
processors, underwriters and managers, were interviewed. An audit also was
conducted of over one-third of all 1999 FHA loans in order to assess whether the
files comported with the HUD guidelines for FHA loans.
A preliminary report detailing Dorsey & Whitney's investigation and
findings was presented to the Company's Board of Directors on April 12, 2000. A
written report was issued on April 14, 2000. The report concludes that while
there appears to be support for the allegations leveled at the loan officer,
there is no evidence that the misconduct alleged in the complaint was systemic
at the Company. Rather, the findings support the conclusion that the alleged
misconduct was an isolated occurrence, not an institutional practice. The
available evidence did not permit Dorsey & Whitney to reach a definitive
conclusion concerning the charges pending against Ronald Friedman. The
investigation, comprised of interviews with PMCC employees and an extensive
review of mortgage loan files, revealed no independent evidence tending to
support the allegations against Friedman contained in the criminal complaint.
While the Company believes that it has not committed any wrongdoing, it
continues to cooperate fully with the U.S. Attorney's Office and HUD. However,
it cannot predict the duration of the Investigation or its potential outcome.
Although the Company does not anticipate being charged in connection with this
investigation, in the event that the Company was charged, it intends to
vigorously defend its position. While the Company does not anticipate its
occurrence, in the event that it was to lose its ability to originate and sell
FHA loans as result of the Investigation, the Company does not believe that the
financial effect on the Company would be material. The Company originates less
than 7% of its current loan volume through FHA products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 annual meeting of stockholders was held in Old Westbury, New York
on September 30, 1999. 2,497,127 shares of Common Stock, or 67% of outstanding
shares, were represented in person or by proxy. The following matters were voted
on:
1. The following two Class I directors were elected to three-year terms expiring
in 2002:
NUMBER OF SHARES
FOR AGAINST
--- -------
Joel L. Gold 2,497,127 0
Stanley Kreitman 2,497,127 0
2. The approval of KPMG, LLP as independent accountants for fiscal year 1999:
2,497,127 shares voted in favor; 0 shares voted against; and 0 shares abstained.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range Of Common Stock
Prior to February 18, 1998, the date of the Company's initial public
offering of its common stock (the "Common Stock"), there was no public market
for the Common Stock. The Common Stock is listed on the American Stock Exchange
(the "Amex") under the symbol "PFC". On December 22, 1999, following the
Company's announcement concerning the Investigation as described in "Item 1 -
Business - Recent Developments" of this Report, the Amex suspended trading in
the Common Stock. The Amex began reviewing the listing eligibility of the Common
Stock. Among the issues on which the Amex review has focused is whether the
Company's management has engaged in operations which in the opinion of the Amex
are contrary to the public interest, as well as the Company's financial
condition and ability to continue to originate and sell loans. The Company has
furnished requested information to the Amex and, in connection with the Amex
review process, the Company met with the Amex staff on March 7, 2000 to present
information in support of continued listing. Although the Company believes that
it meets the Amex listing criteria, there can be no assurance that the trading
suspension will be lifted or that the Common Stock will not be removed from
listing. Any delisting could have a material adverse effect upon the Company in
a number of ways, including its ability to raise additional capital. In
addition, a delisting could adversely affect the ability of broker-dealers to
sell the Common Stock, and consequently may limit the public market for such
stock and have a negative effect upon its trading price.
The following table sets forth the closing high and low bid prices for the
Common Stock for the fiscal period indicated.
1998 High Low
- ---- ---- ---
1st Quarter........................... $9.00 $7.00
2nd Quarter........................... 8.875 7.50
3rd Quarter........................... 7.75 5.75
4th Quarter........................... 8.125 6.125
1999 High Low
- ---- ---- ---
1st Quarter........................... $8.50 $6.375
2nd Quarter........................... 8.00 6.25
3rd Quarter........................... 9.25 6.75
4th Quarter (through December 21)..... 7.625 3.75
The closing per share bid price of the Common Stock as reported by the
American Stock Exchange on December 21, 1999, the last full day the Company's
stock was traded, was $3.75. As of December 21, 1999, the Company had 12
shareholders of record and approximately 1,100 beneficial shareholders.
On February 18, 1998, the Company completed an initial public offering of
1.25 million shares of Common Stock at a price of $9.00 per share. After paying
the costs of this offering of approximately $2.1 million, the Company received
approximately $9.2 million. The Company used these net proceeds (a) to increase
its warehouse lines of credit, (b) to increase its purchase and rehabilitation
of residential rehabilitation properties, (c) to fund an S Corp distribution of
$1 million to existing shareholders, (d) to purchase computers and equipment,
(e) to increase its mortgage originations, and (f) for general working capital
purposes.
Dividend Policy
To date, the Company has not paid a dividend on its Common Stock. The Company's
ability to pay dividends in the future is dependent upon the Company's earnings,
capital requirements and other factors. The Company currently intends to retain
future earnings for use in the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statement of Operations Data:
At or for the Years Ended December 31,
----------------- -------------- ---------------- -------------- --------------
1995 1996 1997 1998 1999
----------------- -------------- ---------------- -------------- --------------
($ in thousands, except per share data)
Revenues $3,315 $11,676 $39,364 $58,646 $52,577
Net income 196 1,034 3,701 1,938 (1,914)
Pro forma net income1 517 2,150 2,709
Pro forma net income per share -
diluted2 0.21 0.84 0.75 (0.51)
Operating Data:
Mortgage loans originated:
Conventional 51,300 75,400 177,825 359,143 379,462
FHA/VA 19,400 57,700 75,060 146,628 167,153
Sub Prime3 - - 61,675 76,645 14,083
------------------------------------------------------------------------------
70,700 133,100 314,560 582,416 560,698
==============================================================================
Number of loans originated 470 890 2,160 3,793 3,662
Average principal balance per loan $150 $150 $146 $154 $153
originated
Consolidated Balance Sheet Data:
Receivable from sales of loans $1,357 $9,038 $35,131 $20,789 $ 4,300
Mortgage loans held for sale, net 5,537 2,875 18,610 67,677 36,666
Residential rehabilitation properties - 3,246 11,584 16,492 15,190
Total assets 8,232 17,153 68,427 112,809 63,798
Borrowings 6,476 14,198 59,410 94,674 50,584
Shareholders' equity 1,114 1,878 4,809 13,033 11,293
- ----------------------------
1 The pro forma presentation of statement of operations data reflects the
provision for income taxes as if the Company had been a C corporation at assumed
effective tax rates ranging from 41%. The pro forma statement of operations data
for 1997 also reflects an increase in officer compensation expense pursuant to
proposed employee contracts.
2 Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of common shares and share
equivalents outstanding.
3 For the years ended December 31, 1995 and 1996, the Company estimates that the
sub-prime loans accounted for less than 5% of the Company's total originals for
those years and are included in conventional loans for those years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Years Ended December 31, 1999 and 1998
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Years Ended December 31,
---------------------- ----- ----------------------
1999 1998
---------------------- ----------------------
Sales of residential rehabilitation properties $35,960,124 $35,731,990
Gains on sales of mortgage loans, net 11,949,550 17,233,729
Interest earned 4,666,844 5,680,700
---------------------- ----------------------
Total revenues $52,576,518 $58,646,419
====================== ======================
Revenue from the sale of residential rehabilitation properties increased
$0.3 million, or 1%, to $36.0 million for the year ended December 31, 1999 from
$35.7 million for the year ended December 31, 1998. This increase was primarily
the result of the increase in the average sales price for properties sold,
partly offset by a decrease in the number of residential rehabilitation
properties sold. 216 properties were sold at an average price of $168 thousand
for the year ended December 31, 1999 compared to 231 properties sold at an
average price of $155 thousand for the year ended December 31, 1998. The revenue
for the year ended December 31, 1999 was further reduced by a valuation reserve
of $0.4 million on properties in hand at December 31, 1999 that were
subsequently sold at losses as a result of the Company's need to raise cash in
the first quarter of 2000.
Gains on sales of mortgage loans decreased $5.3 million, or 31%, to $11.9
million for the year ended December 31, 1999 from $17.2 million for the year
ended December 31, 1998. This decrease was due to a number of significant
factors. An 81.6% decrease in sub-prime loan originations was partly offset by
an 8.1% increase in conventional and FHA/VA loan originations. Overall mortgage
loan originations were $561 million and $582 million for the years ended
December 31, 1999 and 1998, respectively. In past years, sub-prime loans were
generally sold at a higher per loan margin than conventional loans. Replacing
the sub-prime loan volume with conventional loans reduced gains by approximately
$1.8 million for the year ended December 31, 1999 compared to the year ended
December 31, 1998. Also, due to a decrease in the mortgage loans outstanding and
the pipeline of loans in process at December 31, 1999 compared to December 31,
1998, there was a decrease in deferred origination costs and an offsetting
reduction of origination revenue of $1.4 million during the year ended December
31, 1999. This is compared to an increase in deferred costs of $1.6 million
during the year ended December 31, 1998. The Company also contracted to sell
delinquent and non-performing loans in the first quarter of 2000 in order to
raise cash and pay down certain warehouse lines rather than continue to service
these loans. This resulted in an increase in the reserve for the valuation of
such loans of $0.5 million at December 31, 1999. Additionally, the events of
December 1999 in relation to the Investigation caused the impairment of certain
amounts due from some of the Company's institutional investors and other
individuals, resulting in a reduction of over $0.5 million in gains on sales in
the last quarter of 1999. The Company expects mortgage originations to decrease
in 2000 and therefore believes its gains on sales of mortgage loans will also
decrease in 2000.
Interest earned decreased $1.0 million, or 18%, to $4.7 million for the
year ended December 31, 1999 from $5.7 million for the year ended December 31,
1998. This decrease was primarily due to decreased mortgage originations for the
year ended December 31, 1999 and a decrease in the amount of sub-prime mortgage
originations that generally are at higher rates and are held for sale longer
than conventional mortgage originations.
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
Years Ended December 31,
---------------------- ----- ------------------
1999 1998
---------------------- ------------------
Cost of sales-residential rehabilitation properties $33,084,179 $32,936,131
Compensation and benefits 11,826,434 11,035,625
Interest expense 4,818,304 5,831,811
Other general and administrative 5,969,821 4,252,127
---------------------- ------------------
Total expenses $55,698,738 $54,055,694
====================== ==================
Cost of sales - residential rehabilitation properties increased $0.2
million, or 0%, to $33.1 million for the year ended December 31, 1999 from $32.9
million for the year ended December 31, 1998. This change was the result of a
higher cost per property sold partly offset by a fewer number of properties
sold.
Compensation and benefits increased $0.8 million, or 7%, to $11.8 million
for the year ended December 31, 1999 from $11.0 million for the year ended
December 31, 1998. This increase was primarily due to the expansion of the
Company into new markets resulting in an increase in staff of over 60 employees,
partly offset by a decrease in commissions resulting from decreased loan
originations.
Interest expense decreased $1.0 million, or 17%, to $4.8 million for the
year ended December 31, 1999 from $5.8 million for the year ended December 31,
1998. This decrease was primarily attributable to the decrease in mortgage
originations and the decrease in the amount of sub-prime mortgage originations
that generally are held for on the warehouse lines longer than conventional
mortgage originations, partly offset by an increase in residential
rehabilitation properties funded through the Company's warehouse facility.
Other general and administrative expense increased $1.7 million, or 40%, to
$6.0 million for the year ended December 31, 1999 from $4.3 million for the year
ended December 31, 1998. This increase was primarily due to increased expenses
incurred in connection with the growth in the operations of the Company due to
the Prime acquisition, geographic expansion and developing and opening the
Company's web-site and related call center. This led to increases especially in
rent and facilities expense, telephone and marketing expenses and increased
professional fees. Professional fees also increased as the result of SEC
reporting requirements, new and amended warehouse facility agreements, the
expansion of the Company's technological capabilities, the winding down of the
sub-prime division and the events of December 1999 in relation to the
Investigation and change of auditors.
Although there can be no assurance thereof, the Company believes that, as a
result of certain cost cutting initiatives and contraction of business expansion
in the first quarter of 2000, total expenses for the year ended December 31,
2000 will decrease as compared to 1999 expenses. However, any such decrease is
expected to be offset in part by professional fees and other expenses such as
the amendment fees to warehouse lenders incurred particularly in the first
quarter of 2000 as a result of the Investigation and related events.
Years Ended December 31, 1998 and 1997
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Years Ended December 31,
---------------------------------------------------
1998 1997
---------------------- ----------------------
Sales of residential rehabilitation properties $35,731,990 $25,136,099
Gains of sales of mortgage loans, net 17,233,729 11,844,108
Interest earned 5,680,700 2,383,660
---------------------- ----------------------
Total revenues $58,646,419 $39,363,867
====================== ======================
Revenue from the sale of residential rehabilitation properties increased
$10.6 million, or 42%, to $35.7 million for the year ended December 31, 1998
from $25.1 million for the year ended December 31, 1997. This increase was
primarily the result of the increase in the number of residential rehabilitation
properties sold to 231 for the year ended December 31, 1998 from 169 for the
year ended December 31, 1997.
Gains on sales of mortgage loans increased $5.4 million, or 46%, to $17.2
million for the year ended December 31, 1998 from $11.8 million for the year
ended December 31, 1997. This increase was primarily due to (a) increased loan
originations and loan sales from the Company's existing retail offices, and (b)
loan originations and sales by the Company's wholesale division and subprime
divisions. During the fourth quarter of 1998 the Company incurred lower margins
on sub-prime and other mortgages due to the liquidity crisis that occurred in
the capital markets. Mortgage loan originations were $582 million and $315
million for the years ended December 31, 1998 and 1997, respectively.
Interest earned increased $3.3 million, or 138%, to $5.7 million for the
year ended December 31, 1998 from $2.4 million for the year ended December 31,
1997. This increase was primarily due to increased mortgage originations for the
year ended December 31, 1998 and an increase in the amount of sub-prime mortgage
originations, which generally are, held for sale longer than conventional
mortgage originations.
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
Years Ended December 31,
-----------------------------------------------
1998 1997
---------------------- ------------------
Cost of sales-residential rehabilitation properties $32,936,131 $23,621,193
Compensation and benefits 11,035,625 6,995,104
Interest expense 5,831,811 2,745,610
Other general and administrative 4,252,127 2,260,485
---------------------- ------------------
Total expenses $54,055,694 $35,622,392
====================== ==================
Cost of sales - residential rehabilitation properties increased $9.3
million, or 39%, to $32.9 million for the year ended December 31, 1998 from
$23.6 million for the year ended December 31, 1997. This increase was primarily
due to the increase in the number of properties purchased, rehabilitated and
sold.
Compensation and benefits increased $4.0 million, or 58%, to $11.0 million
for the year ended December 31, 1998 from $7.0 million for the year ended
December 31, 1997. This increase was primarily due to increased sales' salaries
and commission that are based substantially on mortgage loan originations.
Interest expense increased $3.1 million, or 112%, to $5.8 million for the
year ended December 31, 1998 from $2.7 million for the year ended December 31,
1997. This increase was primarily attributable to the increase in mortgage
originations and residential rehabilitation properties funded through the
Company's warehouse facility.
Other general and administrative expense increased $2.0 million, or 88%, to
$4.3 million for the year ended December 31, 1998 from $2.3 million for the year
ended December 31, 1997. This increase was primarily due to increased expenses
incurred in connection with the growth in the operations of the Company
including rent and facilities expense, telephone and marketing.
Liquidity and Capital Resources
The Company's principal financing needs consist of funding mortgage loan
originations and residential rehabilitation properties. To meet these needs, the
Company currently relies on borrowings under its warehouse facilities, bank
lines of credit and cash flow from operations. The amount of outstanding
borrowings under the warehouse facilities at December 31, 1999 was $48.1
million. Such borrowings declined to $17.5 million at April 13, 2000. The
warehouse facilities are secured by the mortgage loans and residential
rehabilitation properties funded with the proceeds of such borrowings.
On August 7, 1998, the Company entered into a Senior Secured Credit
Agreement (the "Chase Line") with Chase Bank of Texas, National Association
("Chase") and PNC Bank ("PNC"). The Chase Line provided a warehouse line of
credit of $120 million ($90 million committed at August 11, 1998) for its
mortgage originations and residential rehabilitation purchases. The Chase Line
is secured by the mortgage loans and residential rehabilitation purchases funded
with the proceeds of such borrowings. The Company has also pledged the stock of
its residential rehabilitation subsidiaries as additional collateral. The
Company is required to comply with certain financial covenants and the
borrowings for residential rehabilitation properties are guaranteed by Ronald
Friedman and Robert Friedman. The Chase Line originally was set to expire in
August 1999 but was extended through November 8, 1999. Chase and PNC both had
decided to curtail their involvement in mortgage warehouse lending and had
decided not to renew the facility for that reason. The Chase Line was further
extended to December 24, 1999 on a declining basis in order to complete the
funding of all loans and properties on the line on November 8, 1999. No new
loans or properties were added to this line subsequent to November 8, 1999.
Chase and PNC have agreed to continue to extend the line on a specified
declining basis through a series of short term extensions. The banks and PMCC
are in the process of extending the Chase Line through May 15, 2000, at which
time the Company anticipates paying down the entire facility or renewing the
extension under similar terms and conditions as the extensions granted since
December 24, 1999. The balance outstanding on the Chase Line was $51.2 million
on November 8, 1999, $10.7 million on December 31, 1999 and $4.4 million on
April 13, 2000. Interest payable on the Chase Line is variable based on LIBOR
plus 1.25% to 2.25% based upon the underlying collateral. Minimal fees were paid
for the extensions and there was no change in the method of calculating
interest.
The Company also maintained a warehouse line of credit with GMAC/RFC (the
"RFC Line") of $20 million that was used primarily for sub-prime loans and
residential rehabilitation properties. The RFC Line was set to expire on January
31, 2000. RFC had decided not to renew the warehouse line due to low usage as a
result of the Company's exiting the sub-prime business and RFC's curtailment of
their involvement in residential rehabilitation lending. RFC has agreed to
continue to extend the line on a declining basis through a series of short term
extensions, the most recent of which will expire on May 31, 2000, at which time
the Company anticipates paying down the entire facility or renewing the
extension under similar terms and conditions as the extensions granted since
January 31, 2000. The balance outstanding on the RFC Line was $2.2 million on
December 31, 1999, $1.3 million on January 31, 2000 and $0.7 million on April
13, 2000. Interest payable on the RFC Line is variable based on LIBOR plus 1.35%
to 2.25% based upon the underlying collateral. Minimal fees were paid for the
extensions and there was no change in the method of calculating interest.
To replace the expiring Chase Line, the Company entered into a one-year
Mortgage Warehousing Loan and Security Agreement (the "Bank United Line") with
Bank United, a federally chartered savings bank, as lending bank and agent. The
Bank United Line provided a warehouse line of credit of $120 million ($40
million of which was committed by Bank United and the remainder of which was not
committed) for its mortgage originations and residential rehabilitation
purchases. The Bank United Line is secured by the mortgage loans and residential
rehabilitation purchases funded with the proceeds of such borrowings. The
Company has also pledged the stock of its residential rehabilitation
subsidiaries as additional collateral. Interest payable on the Bank United Line
was variable based on LIBOR plus 1.50% to 2.50% based upon the underlying
collateral.
Due to the events relating to the Investigation, on December 22, 1999, Bank
United declared a default of the Bank United Line agreement and suspended
funding under the agreement. Bank United continued to fund new mortgage loans
only on a limited day to day basis and only with the personal guarantee of
Ronald Friedman and additional collateral in the form a $500,000 cash deposit by
the Company at Bank United. On January 18, 2000, Bank United agreed to a limited
extension of the warehouse agreement through January 28, 2000 and to waive the
existing default relating to the Investigation. In return for this, Bank United
required additional collateral pledged to the bank in the form of the $500,000
cash deposit previously noted and $1.5 million in marketable titles to
residential rehabilitation properties owned by PMCC, an additional 3% cash
reduction in the funding amount of all loans funded on the Bank United Line, the
continued personal guarantee of Ronald Friedman and an Amendment Fee of
$250,000. The Commitment amount of the line was reduced from $40 million to $33
million and the interest rate was increased to LIBOR plus 2.00% to 3.50% based
upon the underlying collateral. On February 1, 2000, for an additional Amendment
Fee of $100,000, Bank United agreed to an extension on similar terms through
February 28, 2000. On March 1, 2000, Bank United agreed to an extension through
March 31, 2000 on similar terms, with a reduction of the commitment from $20
million on March 13 to $13 million on March 31. Additional collateral held was
returned in proportion to the reduction in the amount committed. On April 1,
2000, Bank United agreed to an extension on similar terms with a reduction of
the commitment to $7 million through April 30, 2000. On April 25, 2000, Bank
United agreed to a verbal extension on similar terms through May 15, 2000, at
which time the Company anticipates paying down the entire facility or renewing
the extension under similar terms and conditions as the extensions granted since
January 2000. The balance outstanding on the Bank United Line was $22.9 million
on December 22, 1999, $31.0 million on December 31, 1999 and $5.5 million on
April 13, 2000.
To replace a portion of the Bank United Line, on February 28, 2000, the
Company entered into a Master Repurchase Agreement that provides the Company
with a warehouse facility (the"IMPAC Line") through IMPAC Warehouse Lending
Group ("IMPAC"). The IMPAC Line provides a committed warehouse line of credit of
$20 million for the Company's mortgage originations only. The IMPAC Line is
secured by the mortgage loans funded with the proceeds of such borrowings.
Interest payable on the IMPAC Line is variable based on the Prime Rate as posted
by Bank of America, N.A. plus 0.50%. The IMPAC Line has no stated expiration
date but is terminable by either party upon written notice. The balance
outstanding on the IMPAC Line was $6.9 million on April 13, 2000.
To supplement the IMPAC Line, in March 2000, the Company applied for
additional warehouse lines of credit totaling $15 million with two other
financial institutions. There can be no assurance that such applications will be
approved.
The Company currently expects that the existing IMPAC Line will be
sufficient to fund all anticipated loan originations for the current year
provided all new loans are sold to investors on a loan by loan basis. In order
to maximize profits through hedging strategies, the additional lines applied for
would be required.
The Company supplemented its warehouse facilities through a gestation
agreement with Prudential Securities Corp. (the "Gestation Agreement"), which
for financial reporting was characterized by the Company as a borrowing
transaction. The Gestation Agreement provided the Company with up to $30 million
of additional funds for loan originations through the Company's sale to this
bank of originated mortgage loans previously funded under the Warehouse
Facilities and committed to be sold to institutional investors. The Gestation
Agreement does not have an expiration date but is terminable by either party
upon written notice. Due to the events regarding the Investigation, on December
22, 1999 Prudential suspended funding new loans under the agreement. At December
31, 1999, the balance due was $4.3 million. As of March 21, 2000, all loans
funded under the Gestation Agreement have been sold to the final investors. The
Company believes that other financial institutions provide similar gestation
lines of credit, although there can be no assurance that the Company will obtain
a new gestation line of credit.
During 1999, the Company entered into revolving line of credit agreements
with total credit available of $3.1 million. The interest rate on these lines is
10% per annum. The lines are secured by mortgage loans held for investment by
the Company that are not pledged under the Company's warehouse facilities. The
total outstanding under these lines at December 31, 1999 was $2.3 million. These
funds were used primarily for the cash expenditure in removing the underlying
loans from the warehouse facilities and for general operating expenses.
From time to time, the Company had borrowed funds from a corporation owned
by Robert Friedman. As of December 31, 1998, $1.2 million remained outstanding,
all of which was secured by a mortgage against certain residential properties in
rehabilitation pursuant to a mortgage agreement. As the residential property was
sold, proceeds were used to repay the mortgage on the particular property.
Interest payable pursuant to this agreement is 10% per year. This loan was
repaid in full during February 1999 and no further borrowings were made or are
anticipated from this source.
The Company sells its loans to various institutional investors. The terms
of these purchase arrangements vary according to each investor's purchasing
requirements; however, the Company believes that the loss of any one or group of
such investors would not have a material adverse effect on the Company. After
the events of December 21, 1999 and the Investigation, all except two of the
Company's primary institutional investors continued to purchase loans originated
by the Company. The two investors who declined to continue have both indicated
that this was a temporary suspension and had funded loans closed but not sold at
the time of the suspensions. Conventional and government mortgage products
normally sold to those investors continue to be offered by PMCC and have been
sold to other investors offering the same products.
Net cash provided by operations for the year ended December 31, 1999, was
$42.2 million. The Company received cash from the $29.6 million decrease in
mortgage loans held for sale and investment and $1.3 million net decrease in
residential rehabilitation properties along with a $16.5 million decrease in
receivables from sales of loans. The decrease in these assets allowed the
Company to decrease borrowings under the warehouse facilities and the Gestation
Agreement by $44.1 million.
The Company had additional cash requirements in the first quarter of 2000
imposed by the increased capital requirements and Amendment Fees for it
warehouse lines, the reduced warehouse commitments and additional professional
fees (legal, consulting and audit) that were incurred as a result of the
Investigation. In order to raise cash expediently, the Company sold residential
rehabilitation properties in its portfolio at prices that reduced the
contractual fees the Company normally received from the sales of those
properties and in certain instances at a price less than the cost to PMCC. The
Company also sold at discounted prices delinquent and non-performing loans that
it would normally maintain in its portfolio to eventually work out and recover
its investment through foreclosure procedures or refinancing. Additionally, the
Company closed new "start-up" retail branches opened in 1998 and 1999, closed
the newly opened internet call center in Houston and reduced staffing at all
remaining locations, resulting in estimated annualized cost savings of
approximately $3.3 million. The Company believes that a greater emphasis on
wholesale lending presents the Company with the ability to continue to offer
consumers a broad range of products by the most cost-effective means. The
Company's existing capital resources, including the funds from its $20 million
committed warehouse facility with IMPAC and cash flow from its remaining
operations, are expected be sufficient to fund its current mortgage banking
operation during 2000. The Company believes that, if such applications are
approved, the additional $15 million of warehouse lines for which the Company
has applied would enable PMCC to hold loans in the warehouse longer, thereby
permitting the Company to sell loans in bulk and to hedge its inventory of
loans, resulting in potentially higher margins on loan sales.
On February 18, 1998, the Company had completed an initial public offering
of 1.25 million shares of Common Stock at a price of $9.00 per share. After
paying the costs of this offering of approximately $2.1 million, the Company
received approximately $9.2 million. The Company had used these net proceeds (a)
to increase its warehouse lines of credit, (b) to increase its purchase and
rehabilitation of residential rehabilitation properties, (c) to fund a
distribution of $1 million to existing shareholders, (d) to purchase computers
and equipment, (e) to increase its mortgage originations, and (f) for general
working capital purposes.
Recent Accounting Pronouncements - SFAS 133 and SFAS 137
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999, which has been deferred to June 30, 2000 by the publishing of
SFAS No. 137. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognizes all derivatives as either assets or liabilities in the statement of
financial condition and measures those instruments at fair value. The accounting
for changes in the fair value of a derivative (that is, gain and losses) depends
on the intended use of the derivative and the resulting designation. SFAS No.
133 does not require restatement of prior periods. Management is currently
assessing the impact of SFAS No. 133 on its financial condition and results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest rate movements significantly impact PMCC's volume of closed loans.
Interest rate movements represent the primary component of market risk to the
Company. In a higher interest rate environment, borrower demand for mortgage
loans, particularly refinancing of existing mortgages, declines. Interest rate
movements affect the interest income earned on loans held for sale in the
secondary market, interest expense on our warehouse lines, the value of mortgage
loans held for sale in the secondary market and ultimately the gain on the sale
of those mortgage loans. In addition, in an increasing interest rate
environment, the volume of mortgage loans that the Company originates declines.
The Company originates mortgage loans and manages the market risk related
to these loans by pre-selling them on a best efforts basis to the anticipated
secondary market investors at the same time that the borrowers' interest rates
are established. If the Company delivers mortgage loans within the time frames
established by the secondary market investors, there is no interest rate risk
exposure on those loans. However, if the loan closes but cannot be delivered
within those time frames, and if interest rates increase, the Company may
experience a reduced gain or may even incur a loss on the sale of the loan. In
many of these cases, however, the cost can be passed on to the borrower in the
form of an extension fee.
Management uses hedging strategies to protect against the risk incurred
with sales of mortgage loans in the secondary market when interest rates rise
and fall. Hedging strategies involve buying and selling mortgage-backed
securities so that if interest rates increase or decrease sharply and the
Company expects to suffer a loss on the sale of those loans, the buying and
selling of mortgage-backed securities will offset the loss. The Company analyzes
the probability that a group of loans that have been originated will not close,
and try to match purchases and sales of mortgage-backed securities to the amount
expected will close.
An effective hedging strategy is complex and no hedging strategy can
completely eliminate risk. Part of this is because the prices of mortgage-backed
securities do not necessarily move in tandem with the prices of loans originated
and closed. To the extent the two prices do not move in tandem, the hedging
strategy may not work, and the Company may experience losses on sales of
mortgage loans in the secondary market. The other key factor is whether the
probability analysis properly estimates the number of loans that will actually
close. To the extent that the Company's hedging strategy is unable to
effectively match purchases and sales of mortgage-backed securities with the
sale of the closed loans originated, the Company's gains on sales of mortgage
loans will be reduced, or the Company will experience a net loss on those sales.
During 1999, PMCC sold more than 70% of the loans closed through best
effort commitments, which means there is no penalty if the loans do not close.
Some loans, including sub-prime loans, are sold on a mandatory delivery basis.
Selling on a mandatory delivery basis means the Company is required to sell the
loans to a secondary market investor at an agreed upon price. This potentially
generates greater revenue because secondary market investors are willing to pay
more for a mandatory delivery commitment. However, it also exposes the Company
to greater losses if the loans do not close. Generally, PMCC does not sell loans
on a mandatory basis until the loans are closed, eliminating the risk of not
closing the loan.
The Company does not currently maintain a trading portfolio. As a result,
there is no exposure to market risk as it relates to trading activities. The
Company's loan portfolio is primarily held for sale. Accordingly, the Company
must perform market valuations of the pipeline, the mortgage portfolio held for
sale and the related sale commitments in order to properly record the portfolio
and the pipeline at the lower of cost or market. Therefore, the interest rates
of the Company's loan portfolio are measured against prevailing interest rates
in the market.
Because PMCC pre-sells mortgage loan commitments, the Company believes that
a 1% increase or decrease in long-term interest rates would not have a
significant adverse effect on earnings from interest rate sensitive assets. The
Company pays off warehouse lines when the loans are sold in the secondary
market. Because the loans are held in the warehouse lines for a short period of
time, the Company does not expect to incur significant losses from an increase
in interest rates on the warehouse lines.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is set forth at the end of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Information responsive to this item concerning Registrant's recent change
in independent auditors was previously reported in the Company's Current Report
on Form 8-K dated February 28, 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company are as follows:
Name Age Position
- --------------------------------------------------------------------------------------------
Ronald Friedman 35 President, Chief Executive Officer(leave of absence)
Stanley Kreitman 68 Chairman of the Board of Directors
Andrew Soskin 35 Interim President, Director
Keith S. Haffner 52 Interim Chief Executive Officer,Secretary,Director
Stephen J. Mayer 47 Executive Vice President & Chief Financial Officer
Joel L. Gold 58 Director
- ------------------------
In connection with the Investigation (See "Item 1 - Business - Recent
Developments"), on December 29, 1999, Mr. Ronald Friedman resigned as a Director
and Chairman of the Board and was granted a leave of absence as President and
Chief Executive Officer. In his place, Stanley Kreitman, an outside director,
was appointed Chairman of the Board, Andrew Soskin, the Company's Executive Vice
President of Operations and Sales, was appointed interim President and Keith
Haffner, the Company's Executive Vice President and a Director, was appointed
interim Chief Executive Officer. Mr. Soskin was also elected to the Board to
replace Mr. Friedman.
Stanley Kreitman has been the Chairman of the Board of Directors since
December 29, 1999 and a Director of the Company since February 23, 1998. Mr.
Kreitman is a member of the Audit and Compensation Committees of the Board of
Directors. Since March 1994, Mr. Kreitman has been Vice Chairman at Manhattan
Associates, a merchant banking firm. From September 1975 through February 1994,
Mr. Kreitman was President of United States Bancnote Corporation. Mr. Kreitman
is Chairman of the Board of Trustees of New York Institute of Technology. He is
currently a member of the Board of Directors of Porta Systems Corp., Medallion
Funding Corp., and CCA Industries, Inc.
Ronald Friedman, who has been the President and Chief Executive Officer of
the Company since its inception, has taken a leave of absence from such
positions commencing December 29,1999. He had been a Director of the Company
since its inception and Chairman of the Board of Directors since September 7,
1999 until his resignation from the Board on December 29, 1999. From 1989
through 1991, Mr. Friedman was a senior mortgage consultant at ICI Mortgage
Corporation. From 1987 through 1989, Mr. Friedman was a senior accountant at
Touche Ross & Co., an accounting firm. He received a B.A. in Accounting from The
George Washington University. Mr. Friedman has been a certified public
accountant since 1989.
Andrew Soskin has been interim President and a Director of PMCC since
December 29, 1999 and Executive Vice President of Operations and Sales of PMCC
Mortgage Corp. since its inception in 1989. He previously held sales positions
at other mortgage banking institutions. Mr. Soskin is a graduate of the
University of Maryland.
Keith S. Haffner has been interim Chief Executive Officer of the Company
since December 29,1999 and an Executive Vice President of the Company since
1996. Mr. Haffner has been a Director of the Company since September 7, 1999 and
is member of the Compensation Committee of the Board of Directors. From 1994
through 1995, Mr. Haffner was Executive Vice President of Exchange Mortgage
Corp. From 1986 through 1994, Mr. Haffner was Senior Vice President of Mortgage
Production Administration at Midcoast Mortgage Corp. Prior to 1986, Mr. Haffner
was employed at various positions with the Mortgage Bankers Association and with
the Department of Housing and Urban Development. Mr. Haffner received his B.A.
in Political Science in 1969 and a Masters in Public Administration in Urban
Studies and Real Estate Finance in 1972 from American University.
Stephen J. Mayer has been the Chief Financial Officer of the Company since
September 1999 and Executive Vice President since December 1999. Prior to PMCC,
Mr. Mayer was Vice President and Controller at Franklin Capital Corp., a
publicly held investment company. From 1992 to 1994, he was the Vice President
and Controller at MidCoast Mortgage Corporation, overseeing the accounting, cash
management and reporting functions. From 1987 to 1992, Mr. Mayer was at Arbor
National Mortgage, originally as Vice President - Finance, which included
overseeing accounting, reporting and administration, and later as Vice President
of Strategic Planning, which included acquisitions, expansion and business
planning. From 1980 to 1987, Mr. Mayer held various financial management
positions at Eastern States, a credit card processor. From 1974 to 1980, he was
an auditor at Touche Ross & Co. Mr. Mayer received his BBA in Accounting from
the University of Notre Dame in 1974 and is a Certified Public Accountant.
Joel L. Gold has been a Director of the Company since February 23, 1998.
Mr. Gold is a member of the Audit and Compensation Committees of the Board of
Directors. Since December 1999, Mr. Gold has been Executive Vice President-
Investment Banking at Berry-Shino Securities, Inc. From September 1997 to
December 1999, Mr. Gold was Vice Chairman of Coleman and Company Securities,
Inc. From April 1996 through September 1997, Mr. Gold was Executive Vice
President and head of investment banking at L.T. Lawrence Co., an investment
banking firm. From April 1995 to April 1996, Mr. Gold was a managing director
and head of investment banking at Fechtor & Detwiler. From 1993 to 1995, Mr.
Gold was a managing director at Furman Selz Incorporated, an investment banking
firm. Prior to joining Furman Selz, from 1991 to 1993, Mr. Gold was a managing
director at Bear Stearns & Co., an investment banking firm. Previously, Mr. Gold
was a managing director at Drexel Burnham Lambert for nineteen years. He is
currently a member of the Board of Directors of Concord Camera, Sterling Vision,
Inc., and Life Medical Sciences. Mr. Gold has a law degree from New York
University and an MBA from Columbia Business School.
Compliance with Section 16 (a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and persons who own more than ten percent of a registered
class of the Company's equity securities (collectively "the Reporting Persons")
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission and to furnish the Company with copies of these reports.
Based solely on the Company's review of the copies of such forms received by it
during the fiscal year ended December 31, 1999, the Company believes that all
filing requirements applicable to the Reporting Persons were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following table shows all the cash compensation paid or to be paid by
the Company, as well as certain other compensation paid or accrued, during the
fiscal years indicated, to the Chief Executive Officer ("CEO") and the most
highly compensated executive officers whose aggregate cash compensation exceeded
$100,000 during the last fiscal year (the "named executive officers"):
Summary Compensation Table
Name of Individual Annual Compensation Other Annual Long Term Compensation
and Principal Position Year Salary Bonus Compensation (5) Options Awarded
- -----------------------------------------------------------------------------------------------------------------------------------
Ronald Friedman (1) 1999 $ 315,192 $ 88,181 - 200,000
On leave as Chief Executive 1998 $ 252,834 $ 103,247 - -
Officer and President
Former Director 1997 $ 223,855 - - -
Robert Friedman (2) 1999 $ 185,969 $ 25,000 - -
Former Chairman of the 1998 $ 259,615 $ 25,000 - -
Board, Chief Operating Officer,
Secretary and Treasurer 1997 $ 165,475 - - -
Keith Haffner (3) 1999 $ 123,723 $ 65,250 - -
Interim Chief Executive 1998 $ 115,850 $ 59,500 - -
Officer, Executive Vice
President, Secretary, Director 1997 $ 126,811 $ 51,000 - 31,250
Andrew Soskin (4) 1999 $ 129,301 - $304,526(6) 31,250
Interim President and Executive
Vice President of Operations
And Sales of PMCC Mortgage
Corp., Director
------------------------------
(1) Mr. Ronald Friedman resigned from the Board of Directors and was granted a
leave of absence as Chief Executive Officer and President on December 29,
1999.
(2) Mr. Robert Friedman, the father of Ronald Friedman, resigned as an officer
and director of the Company on September 7, 1999.
(3) On December 29, 1999, Mr. Haffner became interim CEO upon the leave of
absence by Mr. Ronald Friedman and assumed the vacancy on the Company's
Board of Directors created by the resignation of Mr. Robert Friedman on
September 7, 1999.
(4) Mr. Soskin became interim President on December 29, 1999 upon the leave of
absence by Mr. Ronald Friedman and assumed the vacancy on the Company's
Board of Directors created by the resignation of Mr. Ronald Friedman.
(5) Does not include S corporation distributions to shareholders described
below.
(6) Consists of $304,526 paid to Mr. Soskin for commissions for loan
origination volume.
Stock Options
The following table contains information concerning options granted to the
named executive officers:
Option Grants in 1999
- --------------------- --------------- ------------- ----------- ------------- ---------------------------------
Number of % of Total Potential Realizable Value at
Shares Options to Assumed Annual Rates of Stock
Underlying Employees Price Appreciation for Option
Name Options in Fiscal Exercise Expiration Terms (2)
---- ---------
Granted (1) Year Price Date
- --------------------- --------------- ------------- ----------- ------------- -------------- ------------------
5% 10%
-- ---
- --------------------- --------------- ------------- ----------- ------------- -------------- ------------------
Ronald Friedman 200,000 57.3% $7.625 5/04 $421,329 $931,028
- --------------------- --------------- ------------- ----------- ------------- -------------- ------------------
Robert Friedman - - - - - -
- --------------------- --------------- ------------- ----------- ------------- -------------- ------------------
Andrew Soskin 31,250 9.0% $7.625 5/09 $149,854 $379,759
- --------------------- --------------- ------------- ----------- ------------- -------------- ------------------
Keith Haffner - - - - - -
- --------------------- --------------- ------------- ----------- ------------- -------------- ------------------
- --------------
(1) Each option is exercisable for one (1) share of Common Stock
(2) The potential realizable value set forth under the columns represent the
difference between the stated option exercise price and the market value of
the Common Stock based on certain assumed rates of stock price appreciation
assuming that the options were exercised on their stated expiration date;
the potential realizable values set forth do not take into account
applicable tax and expense payments which may be associated with such
option exercises. Actual realizable value, if any, will be dependent on the
future price of the Common Stock on the actual date of exercise, which may
be earlier than the stated expiration date. The 5% and 10% assumed
annualized rates of stock price appreciation over the exercise period of
the options used in the table above are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future price of the Common Stock on any date.
There is no representation either expressed or implied that the stock price
appreciation rates for the Common Stock assumed for purposes of this table
will actually be achieved.
Fiscal Year-End Option Values (1)
- ------------------------- ---------------------------------------------- ---------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year-End (#) At Fiscal Year-End
- ------------------------- ---------------------------------------------- ---------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Ronald Friedman - 200,000 $0 $0
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Robert Friedman - - $0 $0
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Andrew Soskin - 31,250 $0 $0
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Keith Haffner 10,417 20,833 $0 $0
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ------------------
(1)The Fiscal Year-End Option Value is based on the closing per share bid price
of $3.75 per share for the Company's Common Stock as reported by the
American Stock Exchange on December 21, 1999, the last full day the
Company's stock was traded prior to suspension of trading.
Distributions of Interest
During each of the years ended December 31, 1997, 1998, and 1999, PMCC made
S corporation distributions to stockholders in the aggregate amounts of,
$769,000, $2.5 million and $277,000, respectively.
Director Compensation
Directors who are employees of the Company receive no compensation, as
such, for services as members of the Board. In 1999, directors who were not
employees of the Company received options to purchase 5,000 shares of Common
Stock and reimbursement of expenses incurred in connection with attending such
meetings. Beginning January 1, 2000, Mr. Kreitman received $5,000 per month for
service as Chairman of the Board and Mr. Gold received $1,000 for each meeting
attended. In 2000, Mr. Kreitman and Mr. Gold are expected to be granted options
to purchase 50,000 shares and 30,000 shares, respectively, of Common Stock of
the Company.
Employment Agreements
The Company has entered into an Employment Agreement with Ronald Friedman.
The Employment Agreement's original term was to expire on December 31, 1999,
unless sooner terminated for death, physical or mental incapacity or cause or
terminated by either party with thirty (30) days' written notice. The Employment
Agreement is automatically renewed for consecutive terms, unless cancelled at
least one year prior to expiration of the existing term. Due to automatic
renewals, the Employment Agreement is currently scheduled to expire on December
31, 2001, unless sooner terminated as provided above. Mr. Friedman was granted a
paid leave of absence on December 29, 1999.
The Employment Agreement provides that all of Ronald Friedman's business
time be devoted to the Company. In addition, the Employment Agreement also
contains: (i) non-competition provisions that preclude Ronald Friedman from
competing with the Company for a period of two years from the date of the
termination of his employment with the Company; (ii) non-disclosure and
confidentiality provisions that all confidential information developed or made
known during the term of employment shall be exclusive property of the Company;
and (iii) non-interference provisions whereby, for a period of two years after
his termination of employment with the Company, Ronald Friedman shall not
interfere with the Company's relationship with its customers or employees.
The Employment Agreement includes compensation plans for fiscal year 1999
whereby Ronald Friedman was to receive a salary of $250,000, and a cash bonus
determined by the Board of Directors at its discretion. On June 2, 1999, Ronald
Friedman's annual salary was increased by the Board of Directors to $350,000.
The Company had an employment agreement with Mr. Robert Friedman on similar
terms as Mr. Ronald Friedman's, except that Mr. Robert Friedman received an
annual salary of $250,000. This employment agreement was terminated as of
September 7, 1999 when Mr. Robert Friedman resigned as an officer and director
of the Company.
Limitation of Liability and Indemnification of Directors and Officers
The Certificate of Incorporation of the Company (the "Certificate")
provides that a director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except: (i) for any breach of the director's duty of loyalty to the Company or
its stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (iii) for liability under
Section 174 of the Delaware General Corporation Law (relating to certain
unlawful dividends, stock repurchases or stock redemptions); or (iv) for any
transaction from which the director derived any improper personal benefit. The
effect of this provision in the Certificate is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in certain limited situations.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws.
The Company's By-Laws provide that the Company shall indemnify each
director and such of the Company's officers, employees and agents as the Board
of Directors shall determine from time to time to the fullest extent provided by
the laws of the State of Delaware.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of the Company
consists of Messrs. Kreitman, Gold and Haffner. Prior to formation of such
committee during 1999, the entire Board of Directors participated in
deliberations concerning executive officer compensation. None of the members of
the Compensation Committee or directors serving prior to the formation of such
committee was, during fiscal 1999, an officer or employee of the Company or its
subsidiary or had any relationship with the Company other than serving as a
Director of the Company except for Ronald Friedman, Robert Friedman and Keith
Haffner, who were also officers of the Company. As described in Item 13 below,
Ronald Friedman's brother has an interest in a rehab partner with a subsidiary
of the Company in the purchase and sale of rehabilitation properties. During the
1999 fiscal year, no executive officer of the Company served as a director or
member of the compensation committee of another entity, one of whose executive
officers served as a Director or on the Compensation Committee of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership as of April 13,
2000 of the Common Stock of (i) each person known by the Company to own
beneficially five (5%) percent or more of the outstanding Common Stock; (ii)
each director of the Company; (iii) each named executive officer of the Company;
and (iv) all directors and executive officers of the Company as a group.
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1) Percentage
- -----------------------------------------------------------------------------------------------------------------
Ronald Friedman (3)
c/o PMCC Financial Corp 1,955,667 52.2%
3 Expressway Plaza
Roslyn Heights, NY 11577
Robert Friedman (2) 585,000 16.67%
c/o PMCC Financial Corp
3 Expressway Plaza
Roslyn Heights, NY 11577
Andrew Soskin (5) 10,417 *
c/o PMCC Financial Corp
3 Expressway Plaza
Roslyn Heights, NY 11577
Keith S. Haffner (6) 22,033 *
c/o PMCC Financial Corp
3 Expressway Plaza
Roslyn Heights, NY 11577
Joel L. Gold (4) 19,667 *
c/o Berry-Shino Securities, Inc.
425 Park Avenue,
New York, NY 10022
Stanley Kreitman (7) 1,667 *
c/o PMCC Financial Corp
3 Expressway Plaza
Roslyn Heights, NY 11577
All Directors and Officers as group 2,009,451 53.2%
(6 Persons) (8)
- -------------
* Less than 1% of outstanding shares of Common Stock.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934 and generally includes voting and investment
power with respect to securities, subject to community property laws, where
applicable. A person is deemed to be the beneficial owner of securities that can
be acquired by such person within sixty (60) days from the date of this
Prospectus upon exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants that are
held by such person, (but not those held by any other person), and that are
exercisable within sixty (60) days from the date of this Prospectus have been
exercised. Unless otherwise noted, the Company believes that all persons named
in the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) Excludes an aggregate of 40,000 shares owned by Robert Friedman's daughters,
Donna Joyce and Suzanne Gordon, to which he disclaims beneficial ownership; and
includes 287,500 shares held in the name of The Robert Friedman 1998 Grantor
Retained Annuity Trust, of which Robert Friedman is the Trustee.
(3) Includes 600,000 shares held in the name of The Ronald Friedman 1997 Grantor
Retained Annuity Trust, of which Ronald Friedman is the Trustee, and shares
underlying options to purchase 66,667 shares of the Company's Common Stock.
(4) Includes shares underlying options to purchase 1,667 shares of the Company's
Common Stock. Excludes 36,200 shares owned by Mr. Gold's spouse, Miriam Gold, to
which he disclaims beneficial ownership.
(5) Includes shares underlying options to purchase 10,417 shares of the
Company's Common Stock.
(6) Includes shares underlying options to purchase 20,833 shares of the
Company's Common Stock.
(7) Includes shares underlying options to purchase 1,667 shares of the Company's
Common Stock.
(8) Includes the 1,955,667 shares owned by Ronald Friedman who resigned as a
director and Chairman of the Board of the Company and was granted a leave of
absence as President and CEO of the Company on December 29, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1998, the Company borrowed from three affiliated corporations owned
by Robert Friedman. The maximum borrowings from these affiliates were
approximately $3.3 million. As of December 31, 1998 approximately $1.2 million
remained outstanding, all of which is secured by mortgages against the
residential properties in rehabilitation pursuant to a mortgage agreement. As
the residential property is sold, the proceeds are used to repay the mortgage on
the particular property. Interest payable pursuant to this agreement is 10% per
year. This borrowing was repaid in full in March 1999.
The Company has a note receivable in the amount of $216,329 due from Andrew
Soskin, Interim President of PMCC. This note was made when Mr. Soskin was
Executive Vice President of Sales and Operations for PMCC Mortgage Corp. and
prior to his becoming an officer of the Company on December 29,1999. This note
is non-interest bearing and has undefined repayment terms.
Andrew Friedman, brother of Ronald Friedman, has an economic interest in a
rehab partner for the purchase and sale of rehabilitation properties through a
subsidiary of PMCC. At December 31, 1999, the subsidiary owned $1.973 million of
properties with outstanding borrowings on the Company's warehouse lines of $973
thousand relating to these properties.
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page No.
(a) The following documents are filed as part of this Report:
1. Index to Consolidated Financial Statements
Report of Independent Public Accountants
Report of Prior Independent Public Accountants
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998
Consolidated Statements of Operations for the years ended December 21,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Notesto Consolidated Financial Statements for the years ended
December 31, 1999, 1998 and 1997
2. Index to Financial Statement Schedules
Schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
3. Exhibits
The Exhibits required by Item 601 of Regulation S-K filed as part of,
or incorporated by reference in this report are listed in (c)
below.
(b) Reports on Form 8-K:
On December 22, 1999, the Company filed a report on Form 8-K
dated December 21, 1999 attaching a press release relating to
matters including an investigation by the U.S. Department of
Housing and Urban Development and on January 3, 2000 the
Company filed a Report on Form 8-K dated December 29, 1999
attaching a press release relating to matters including
interim management changes. On March 6, 2000, the Company
filed a Report on Form 8-K dated February 28, 2000 relating to
a change in the Company's independent auditors.
(c) The following exhibits are included in this report:
Exhibit
Number Description
------ -----------
3.1 -- Form of Certificate of Incorporation (1)
3.2 -- Form of By-Laws (1)
4.1 -- Form of Common Stock Certificate (1)
4.2 -- Form of Representatives' Warrant (1)
10.1 -- 1997 Stock Option Plan (1)
10.2 -- Premier Stock Option Plan (1)
10.3 -- Form of Employment Agreement between the Company and Ronald Friedman (1)
10.4 -- Form of Employment Agreement between the Company and Robert Friedman (1)
10.5 -- Form of Contribution Agreement (1)
10.6 -- Form of Tax Indemnification Agreement (1)
10.8 -- Warehousing Credit and Security Agreement and Notes, dated June 17, 1997, by
and among Premier Mortgage Corp. and RF Properties, PNC Mortgage Bank, N.A.
and LaSalle National Bank (1)
10.9 -- Second Amendment to Warehouse Credit and Security Agreement and Notes, dated
September 30, 1997 (1)
10.10 -- Mortgage Loan Purchase Agreement between Premier Mortgage Corp. and PNC
Mortgage Securities Corp. (1)
10.11 -- Mortgage and Loan Agreement by and among RF Capital Corp., Min Capital Corp.,
and Hanover Hill Holsteins, Inc. and Premier Mortgage Corp. (1)
10.12 -- Form of Contractors Agreement (1)
10.13 -- Form of Stockholders' Agreement (1)
10.14 -- Fourth Amendment to Warehousing Credit and Security Agreement, dated December
29, 1997. (1)
10.15 -- Fifth Amendment to Warehousing Credit and Security Agreement, dated December
29, 1997. (1)
10.16 -- Third Amendment to Warehousing Credit and Security Agreement, dated December
29, 1997. (1)
10.17 -- Sixth Amendment to Warehousing Credit and Security Agreement, dated December
29, 1997. (1)
10.18 -- Financial Advisory Agreement (1)
10.19 -- Seventh Amendment to Warehousing Credit and Security Agreement, dated February
2, 1998. (2)
10.20 -- Eighth Amendment to Warehousing Credit and Security Agreement, dated February
20, 1998. (2)
10.21 -- Senior Secured Credit Agreement with Chase Bank of Texas, National
Association. (3)
10.22 -- Mortgage Loan Purchase and Sale Agreement with Prudential Securities Realty
Funding Corporation. (3)
10.23 -- August 1998 Amended and Restated Senior Secured Credit Agreement with Chase
Bank of Texas, National Association and PNC Bank, N.A. (the "Chase/PNC Credit
Agreement" (4)
10.24* -- Mortgage Warehousing Loan and Security Agreement dated as of November 11, 1999
among the Company the Banks named therein and Bank United, as Agent (the "Bank
United Agreement").
10.25* -- Amendment No. 1, dated as of January 19, 2000, to the Bank United Agreement.
10.26* -- Amendment No. 2, dated as of March1, 2000, to the Bank United
Agreement.
10.27* -- Amendment No. 3, dated as of April 1, 2000, to the Bank United
Agreement.
10.28* -- 12/29 Amendment, dated as of December 24, 1999, to the Chase/PNC
Credit Agreement.
10.29* -- 02/00 Amendment, dated as of February 29, 2000, to the Chase/PNC
Credit Agreement.
10.30* -- Warehousing Credit and Security Agreement dated as of October 30,
1998 between Residential funding Corporation ("RFC") and the Company (the
"RFC Credit Agreement").
10.31* -- Letter Agreements regarding extensions to RFC Credit Agreement dated
October 10, 1999 and November 29, 1999.
10.32* -- Letter Agreements regarding forbearance dated December 31, 1999,
February 1, 2000, February 29, 2000 and April 10, 2000 between RFC and the
Company relating to the RFC Credit Management
16.1 -- Letter re: Change in Certifying Accountants (5)
21.1 -- Subsidiaries of Registrant (1)
27.1 -- Financial Statement Schedule
(d) Financial Statement Schedules: See (a) 2 above
- ------------------
* To be filed by Amendment.
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement on Form S-1 (File No. 333-38783)
(2) Incorporated by reference to the same numbered Exhibit to Registrant's
Report on Form 10-K for the year ended December 31, 1997 filed on April 1,
1998
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Report on Form 10-Q for the Quarter ended March 31, 1998 filed on May 15,
1998
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Report on Form 10-Q for the Quarter ended June 30, 1998 filed on August 13,
1998
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Report on Form 8-K dated February 28, 2000 and filed on March 6, 2000
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: April 27, 2000
PMCC FINANCIAL CORP.
By:/s/ Andrew Soskin
-----------------
Andrew Soskin, Interim President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dated indicated.
Signature Title Date
- ----------------------------------------- ------------------------------------------------------- ---------------------
Interim President, Executive Vice President April 27, 2000
/s/ Andrew Soskin and Director
- -----------------------------------------
Andrew Soskin
/s/Stanley Kreitman Chairman of the Board of Directors April 27, 2000
- -----------------------------------------
Stanley Kreitman
Interim Chief Executive Officer, Executive Vice April 27, 2000
/s/Keith Haffner President, Secretary and Director
- -----------------------------------------
Keith Haffner
Executive Vice President and Chief Financial April 27, 2000
/s/ Stephen J. Mayer Officer (Principal Accounting Officer)
- -----------------------------------------
Stephen J. Mayer
/s/ Joel L. Gold Director April 27, 2000
- -----------------------------------------
Joel L. Gold
PMCC FINANCIAL CORP. AND SUBSIDIARIES
INDEX
Page No.
--------
Reports of Independent Auditors......................................................... 1,2
Consolidated Financial Statements:
Balance Sheets at December 31, 1999 and 1998...................................... 3
Statements of Operations for the Years Ended December 31, 1999, 1998
and 1997.......................................................................... 4
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.................................................. 5
Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997.......................................................................... 6
Notes to Consolidated Financial Statements.............................................. 8
PMCC FINANCIAL CORP.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Reports Thereon)
Independent Auditors' Report
The Board of Directors
PMCC Financial Corp.:
We have audited the accompanying consolidated statement of financial condition
of PMCC Financial Corp. and subsidiary as of December 31, 1999 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the year ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of PMCC
Financial Corp. and subsidiary as of December 31, 1998 and for each of the years
in the two-year period then ended were audited by other auditors whose report
dated March 23, 1999 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PMCC Financial Corp.
and subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Marcum & Kliegman LLP
Woodbury, New York
April 26, 2000
2
Independent Auditors' Report
The Board of Directors
PMCC Financial Corp.:
We have audited the accompanying consolidated statement of financial condition
of PMCC Financial Corp. and subsidiary as of December 31, 1998, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PMCC Financial Corp.
and subsidiary as of December 31, 1998, and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Melville, New York
March 23, 1999
3
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
Assets 1999 1998
------ ---- ----
Cash and cash equivalents $ 214,957 $ 3,596,002
Restricted cash 500,000 -
Receivable from sales of loans 4,300,279 20,789,470
Mortgage loans held for sale, net 36,666,397 67,676,679
Mortgage loans held for investment, net 3,112,179 1,717,228
Accrued interest receivable 125,000 323,940
Other receivables, net 1,396,756 884,514
Residential rehabilitation properties, net 15,189,753 16,491,514
Furniture, fixtures and equipment, net 1,169,327 828,226
Prepaid expenses and other assets 870,875 501,587
---------------- ----------------
Total assets $ 63,545,523 $ 112,809,160
================ ================
Liabilities and Shareholders' Equity
Liabilities:
Notes payable-principally warehouse lines of credit $ 50,584,370 $ 94,673,739
Due to affiliates - 1,187,998
Accrued expenses and other liabilities 1,531,374 2,363,149
Deferred income taxes 333,000 1,274,000
Distribution payable - 277,700
--------------- ----------------
Total liabilities 52,448,744 99,776,586
--------------- ----------------
Commitments & contingencies - notes 9 and 11
Shareholders' equity:
Common stock, $.01 par value; 40,000,000 shares
authorized; 3,750,000 shares issued 37,500 37,500
Additional paid-in capital 10,917,283 10,846,033
Retained earnings 396,467 2,310,687
Treasury stock, 43,000 and 25,200 shares, at cost (254,471) (161,646)
--------------- ----------------
Total shareholders' equity 11,096,779 13,032,574
--------------- ----------------
Total liabilities and shareholders' equity $ 63,545,523 $ 112,809,160
=============== ================
See accompanying notes to consolidated financial statements.
4
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Revenues:
Sales of residential rehabilitation properties $ 35,960,124 $ 35,731,990 $ 25,136,099
Gains on sales of mortgage loans, net 11,949,550 17,233,729 11,844,108
Interest earned 4,666,844 5,680,700 2,383,660
------------- ------------- -------------
52,576,518 58,646,419 39,363,867
------------- ------------- -------------
Expenses:
Cost of sales, residential rehabilitation properties 33,084,179 32,936,131 23,621,193
Compensation and benefits 11,826,434 11,035,625 6,995,104
Interest expense 4,818,304 5,831,811 2,745,610
Other general and administrative 5,969,821 4,252,127 2,260,485
------------- ------------- -------------
55,698,738 54,055,694 35,622,392
------------- ------------- -------------
(Loss) income before income tax (benefit) expense (3,122,220) 4,590,725 3,741,475
Income tax (benefit) expense (1,208,000) 2,653,000 40,736
------------- ------------- -------------
Net (loss) income $ (1,914,220) $ 1,937,725 $ 3,700,739
============= ============= =============
Net (loss) per share of common stock-basic and diluted $ (0.51)
=============
Weighted average number of shares and
share equivalents outstanding - basic and diluted 3,723,965
=============
Unaudited pro forma information:
Historical income before
income tax expense 4,590,725 3,741,475
Adjustment to compensation expense for
contractual increase in officers' salary - (97,000)
------------- -------------
Pro forma net income before
income tax expense 4,590,725 3,644,475
Provision for pro forma income taxes (1,882,000) (1,494,000)
------------- -------------
Pro forma net income 2,708,725 2,150,475
============= =============
Pro forma net income per share
of common stock - basic $ 0.76 $ 0.86
============= =============
Pro forma net income per share
of common stock - diluted $ 0.75 $ 0.84
============= =============
Pro forma weighted average number of shares and
share equivalents outstanding - basic 3,580,199 2,500,000
============= =============
Pro forma weighted average number of shares and
share equivalents outstanding - diluted 3,624,872 2,570,377
============= =============
See accompanying notes to consolidated financial statements.
5
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
Additional
Number of Common paid-in Retained Treasury
shares stock capital earnings stock Total
------ ----- ------- -------- ----- -----
Balance at December 31, 1996 2,500,000 $ 25,000 $ 693,025 $1,159,529 - $ 1,877,554
Net income - - - 3,700,739 - 3,700,739
Distributions - - - (769,084) - (769,084)
---------------------------------------------------------------------
Balance at December 31, 1997 2,500,000 25,000 693,025 4,091,184 - 4,809,209
Issuance of common stock 1,250,000 12,500 9,170,825 - - 9,183,325
Net income - - - 1,937,725 - 1,937,725
Reclassification of undistributed
S corporation earnings - - 982,183 (982,183) - -
Treasury stock purchases - - - - (161,646) (161,646)
Distributions of S corporation
earnings - - - (2,736,039) - (2,736,039)
--------------------------------------------------------------------
Balance at December 31, 1998 3,750,000 37,500 10,846,033 2,310,687 (161,646) 13,032,574
--------------------------------------------------------------------
Net (loss) - - - (1,914,220) - (1,914,220)
Treasury stock purchases - - - - (92,825) (92,825)
Amortization of warrants - - 71,250 - - 71,250
-------------------------------------------- -----------------------
Balance at December 31, 1999 3,750,000 $ 37,500 $10,917,283 $ 396,467 $(254,471) $ 11,096,779
====================================================================
See accompanying notes to consolidated financial statements.
6
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net (loss) income $ (1,914,220) $ 1,937,725 $ 3,700,739
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Residential rehabilitation properties (exclusive
of cash paid directly to/by independent
contractors):
Contractual fees received (2,875,945) (2,795,859) (1,514,906)
Proceeds from sales of properties 35,960,124 35,731,990 25,136,099
Cost of properties acquired (31,782,418) (37,843,372) (31,959,105)
Depreciation and amortization 291,075 114,960 59,690
Decrease (increase) in accrued interest receivable 198,940 (11,168) (259,611)
Decrease (increase) in receivable from sales
of loans 16,489,191 14,341,387 (25,293,020)
Decrease (increase) in mortgage loans
held for sale and investment, net 29,615,331 (50,784,338) (15,734,669)
Increase in other receivables (512,242) (486,070) (189,675)
Increase in prepaid expenses and other assets (338,324) (110,288) (216,878)
(Decrease) increase in due to affiliates (1,187,998) (1,896,505) 2,322,842
(Decrease) increase in accrued expenses
and other liabilities (831,775) 1,239,201 808,000
(Decrease) increase in deferred taxes payable (941,000) 1,274,000 -
----------- ----------- ------------
Net cash provided by (used in)
operating activities 42,170,739 (39,288,337) (43,140,494)
---------- ------------ ------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment,
net of dispositions (341,890) (656,473) (136,466)
Acquisition of Prime Mortgage assets (250,000) - -
Principal repayments on mortgage loans
held for investment - - 138,052
--------- --------- ---------
Net cash (used in) provided by
investing activities (591,890) (656,473) 1,586
--------- --------- ---------
(Continued)
7
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from financing activities:
Distributions to shareholders, net of distribution
payable $ (277,700) $ (2,458,339) $ (769,084)
Net (decrease) increase in notes payable-
shareholder - (293,163) 18,163
Proceeds from issuance of common stock - 9,183,325 -
Net (decrease) increase in notes payable-
principally warehouse lines of credit (44,089,369) 35,557,230 45,193,446
Increase in restricted cash (500,000) - -
Treasury stock purchased (92,825) (161,646) -
--------------- -------------- -------------
Net cash (used in) provided by
financing activities (44,959,894) 41,827,407 44,442,525
Net (decrease) increase in cash and cash equivalents (3,381,045) 1,882,597 1,303,617
Cash and cash equivalents at beginning of year 3,596,002 1,713,405 409,788
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 214,957 $ 3,596,002 $ 1,713,405
=============== ============== ==============
Supplemental information:
Cash paid during the year for:
Interest $ 4,318,000 $ 6,006,203 $ 2,632,270
=============== ============== ==============
Income taxes $ 504,647 $ 542,188 $ 52,736
=============== ============== ==============
Loans transferred from held for sale to held for
investment $ 1,394,951 $ 1,717,228 $ -
============== ============= ==============
See accompanying notes to consolidated financial statements.
8
(1) Organization and Summary of Significant Accounting Policies
PMCC Financial Corp. (the "Company"), a Delaware corporation, was organized
in 1998 to own the stock of PMCC Mortgage Corp. ("PMCC") (formerly Premier
Mortgage Corp.) and its subsidiaries. On February 17, 1998, the Company
completed an initial public offering ("IPO") of common stock through the
issuance of 1,250,000 shares at an initial offering price of $9 per share.
Prior to the IPO, the existing shareholders of PMCC contributed their stock
to the Company in exchange for 2,500,000 shares of common stock of the
Company (the "Reorganization"). Accordingly, the accompanying financial
statements reflect the effect of the Reorganization retroactively to the
beginning of 1996. The Reorganization was accounted for as a reorganization
of entities under common control and, accordingly, retained earnings at the
time of the Reorganization (representing undistributed S corporation
earnings) were reclassified to additional paid-in capital.
The Company is a mortgage banker operating primarily in New York, New
Jersey and Florida. The Company's principal business activities are (i) the
origination of residential mortgage loans and the sale of such loans in the
secondary market on a servicing released basis and (ii) the funding of the
purchase, rehabilitation and resale of vacant residential real estate
properties. Residential mortgage loans are sold on a non-recourse basis
except for indemnifications or buybacks required for certain early payment
defaults or other defects.
(a) Basis of Presentation
The financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP).
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and results
of operations for the periods then ended. Actual results could differ
from those estimates.
(b) Consolidation
The consolidated financial statements of the Company include the
accounts of the Company, PMCC, and its subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
For the purposes of reporting cash flows, cash includes cash on hand
and money market accounts with an original maturity of three months or
less.
(d) Receivables from Sales of Loans
Receivables from the sales of loans represents proceeds due from
investors for loan sales under the Gestation Line and transactions
which closed on or prior to the statement of financial condition date.
(e) Mortgage Loans Held for Sale
Mortgage loans held for sale, net of any deferred loan origination
fees or costs, are carried at the lower of cost or market value as
determined by outstanding commitments from investors. Gains resulting
from sales of mortgage loans are recognized as of the date the loans
are sold to permanent investors. Losses are recognized when the market
value is determined to be lower than cost.
(f) Mortgage Loans Held for Investment
Mortgage loans held for investment are stated at their principal
amount outstanding, net of an allowance for loan losses of $685,000 at
December 31, 1999 and $175,000 at December 31, 1998. Loans are
generally placed on a non-accrual basis when principal or interest is
past due 90 days or more and when, in the opinion of management, full
collection of principal and interest is unlikely. Income on such loans
is then recognized only to the extent that cash is received and where
future collection of principal is probable. Loan origination fees and
certain direct loan origination costs are deferred and recognized over
the lives of the related loans as an adjustment of the yield.
(g) Residential Rehabilitation Properties
PMCC's subsidiaries serve as conduits for funding the acquisition of
residential rehabilitation properties. The properties are acquired and
marketed by various independent contractors ("rehab partners"), but
funded by, and titled in the name of, one of the subsidiaries. The
properties are generally offered to the rehab partners by banks, other
mortgage companies, and government agencies that have acquired title
and possession through a foreclosure proceeding. Upon sale, the
subsidiaries receive an agreed upon fee plus reimbursement for any
acquisition and renovation costs advanced. In the event the properties
are not sold within an agreed-upon time period, generally within three
to five months of acquisition, the subsidiaries are also entitled to
receive an additional interest cost-to-carry. The Company records as
revenue the gross sales price of these properties at such time the
properties are sold to the ultimate purchasers and the Company records
cost of sales equal to the difference between the gross sales price
and the amount of its contracted income pursuant to its agreements
with the rehab partners. The residential rehabilitation properties are
carried at the lower of cost or fair value less cost to sell (as
determined by independent appraisals of the properties). The
agreements with the rehab partners contain cross collateralization
provisions and personal guarantees that minimize the risks associated
with changing economic conditions and failure of the rehab partners to
perform.
(h) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. The Company provides for depreciation utilizing the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are stated at cost less accumulated
amortization. The Company provides for amortization utilizing the
straight-line method over the life of the lease or the estimated
useful lives of the assets, whichever is shorter.
(i) Commitment Fees
Commitment fees received, which arise from agreements with borrowers
that obligate the Company to make a loan or to satisfy an obligation
under a specified condition, are initially deferred and recognized as
income as loans are delivered to investors, or when it is evident that
the commitment will not be utilized.
(j) Loan Origination Fees
Loan origination fees received and direct costs of originating loans
are deferred and recognized as income or expense when the loans are
sold to investors. Net deferred origination costs were $1,105,000 and
$2,504,000 at December 31, 1999 and 1998, respectively.
(k) Income Taxes
The Company accounts for income taxes under the liability method as
required by SFAS No. 109. Prior to February 18, 1998, certain of
PMCC's subsidiaries had elected to be treated as S corporations for
both federal and state income tax purposes. As a result, the income of
the subsidiaries through February 18, 1998 was taxed directly to the
individual shareholders. On February 18, 1998, in conjunction with the
Company's Reorganization and IPO, the S corporation elections were
terminated and PMCC's subsidiaries became C corporations for federal
and state income tax purposes and, as such, became subject to federal
and state income taxes on their taxable income for periods after
February 18, 1998. The provision for income taxes for the year ended
December 31, 1998 includes a provision for deferred income taxes of
$1,003,000 related to the temporary differences existing at the
termination of the S corporation elections. Pro forma net income for
the years ended December 31, 1998 and 1997 include pro forma income
tax, as if the Company had been taxed as a C corporation throughout
the periods.
(l) Earnings Per Share Of Common Stock
Basic earnings per share (EPS) is determined by dividing net income
for the period by the weighted average number of common shares
outstanding during the same period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted
in the issuance of common stock which would then share in the earnings
of the Company. There were no outstanding dilutive stock options or
warrants at December 31, 1999. The additional number of shares
included in the calculation of pro forma diluted EPS arising from
outstanding dilutive stock options and warrants was 44,673 shares and
70,377 shares, respectively, for the years ended December 31, 1998 and
1997.
Actual earnings per share data for periods prior to February 18, 1998
have not been presented in the accompanying consolidated statements of
operations because the Company was not a public company. Actual
earnings per share data for the period February 18, 1998 to December
31, 1998 has not been presented in the accompanying consolidated
statements of operations because management believes that such data
would not be meaningful given the less than full time period and the
impact of the recognition of a deferred tax liability in connection
with the change in tax status.
(m) Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years
beginning after June 15, 1999, which has been deferred to June 30,
2000 by the publishing of SFAS No. 137. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of
financial condition and measures those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is,
gain and losses) depends on the intended use of the derivative and the
resulting designation. SFAS No. 133 does not require restatement of
prior periods. Management is currently assessing the impact of SFAS
No. 133 on its financial condition and results of operations.
(2) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment and their related useful lives are summarized
as follows at December 31:
1999 1998 Life in years
------------ --------- -------------
Furniture and fixtures $ 627,633 $ 599,023 7
Office equipment 871,790 363,276 5
Leasehold improvements 189,442 172,303 7
------------ ---------
1,688,865 1,134,602
Accumulated depreciation and amortization (519,538) (306,376)
------------ ---------
Furniture, fixtures and equipment, net $1,169,327 $ 828,226
============ =========
Depreciation and amortization expense related to furniture, fixtures and office
equipment, included in other general and administrative expense in the
consolidated statements of operations, amounted to $219,825, $114,960 and
$59,690 in 1999, 1998 and 1997, respectively.
(3) Notes Payable
Notes payable consisted of the following at December 31:
1999 1998
-------------- --------------
Warehouse lines of credit $ 48,143,331 $ 94,447,506
Revolving lines of credit 2,294,420 -
Installment loan payable 146,619 226,233
--------------- --------------
$ 50,584,370 $ 94,673,739
=============== ==============
At December 31, 1999 and 1998, substantially all of the mortgage loans held for
sale and investment, receivable from sales of loans and certain residential
rehabilitation properties were pledged to secure notes payable under warehouse
lines of credit agreements. The notes are repaid as the related mortgage loans
or residential rehabilitation properties are sold or collected.
In August 1998, the Company entered into a one-year Senior Secured Credit
Agreement (the "Chase Line") with Chase Bank of Texas, National Association
("Chase") and PNC Bank ("PNC") that provided a warehouse line of credit of $120
million ($90 million committed) to the Company, of which $10.7 million was
outstanding at December 31, 1999. The borrowings for residential rehabilitation
properties under this line are guaranteed by Ronald Friedman and by Robert
Friedman. After the line expired in August 1999, Chase and PNC have agreed to
continue to extend the line on a specified declining basis through a series of
short term extensions. The banks and PMCC are in the process of extending the
Chase Line through May 15, 2000. Interest payable is variable based on LIBOR
plus 1.25% to 3.00% based upon the underlying collateral. Interest rates ranged
from 7.66% to 8.91% at December 31, 1999. The Company also maintained a
warehouse line of credit with GMAC/RFC (the "RFC Line") of $20 million that was
used primarily for sub-prime loans and residential rehabilitation properties, of
which $2.2 million was outstanding at December 31, 1999. After the line expired
in January 2000, RFC agreed to continue to extend the line on a declining basis
through a series of short term extensions, the most recent of which will expire
on May 31, 2000. Interest payable is variable based on LIBOR plus 1.35% to 2.25%
depending upon the underlying collateral. Interest rates ranged from 7.84% to
8.74% at December 31, 1999.
In November 1999, the Company entered into a one-year Mortgage Warehousing Loan
and Security Agreement (the "Bank United Line") with Bank United, a federally
chartered savings bank, that provided a warehouse line of credit of $120 million
($40 million of which was committed by Bank United and the remainder of which
was not committed) to the Company, of which $31.0 million was outstanding at
December 31, 1999. Due to the events relating to the Investigation (see Note
11), on December 22, 1999 Bank United declared a default and suspended funding
under the agreement. Bank United continued to fund new mortgage loans on a
limited day to day basis with the personal guarantee of Ronald Friedman and
additional cash collateral of $500,000. The interest rate was increased to LIBOR
plus 2.00% to 3.50% based upon the underlying collateral. Interest rates ranged
from 7.91% to 9.41% at December 31, 1999. On January 18, 2000, Bank United
agreed to a limited extension of the warehouse agreement through January 28,
2000 and to waive the existing default relating to the Investigations. In return
for this, Bank United required additional collateral pledged to the bank in the
form of the $500,000 cash deposit previously noted and $1.5 million in
marketable titles to residential rehabilitation properties owned by PMCC, an
additional 3% cash reduction in the funding amount of all loans funded on the
Bank United Line, the continued personal guarantee of Ronald Friedman and an
Amendment Fee of $250,000. Bank United has agreed to a series of one month
extensions under similar terms and for an additional fee of $100,000 at
declining commitment amounts. The most recent extension will expire on May 15,
2000.
On February 28, 2000, the Company entered into a Master Repurchase Agreement
that provides the Company with a warehouse facility (the "IMPAC Line") through
IMPAC Warehouse Lending Group ("IMPAC"). The IMPAC Line provides a committed
warehouse line of credit of $20 million for the Company's mortgage originations
only. The IMPAC Line is secured by the mortgage loans funded with the proceeds
of such borrowings. Interest payable is variable based on the Prime Rate as
posted by Bank of America, N.A. plus 0.50%. The IMPAC Line has no stated
expiration date but is terminable by either party upon written notice.
The Company supplemented its Warehouse Facilities through a gestation agreement
(the "Gestation Agreement") that had a maximum limit of $30 million, of which
$4.3 million was outstanding at December 31, 1999. The Gestation Agreement does
not have an expiration date but is terminable by either party upon written
notice. Interest payable under the Gestation Agreement was variable based on
LIBOR plus 0% to 1.00% based upon the underlying collateral. Interest rates
ranged from 6.40% to 7.47% at December 31, 1999. Due to the events regarding the
Investigation, on December 22, 1999, funding of new loans under the agreement
was suspended. As of March 21, 2000, all loans funded under the Gestation
Agreement have been sold to the final investors.
During 1999, the Company entered into revolving line of credit agreements with
total credit available of $3.1 million of which $2.3 million was outstanding at
December 31, 1999. $1.2 million of this balance is guaranteed by Ronald
Friedman. The credit lines have three year terms and the interest rate on these
lines is 10% per annum. The lines are secured by mortgage loans held for
investment by the Company that are not pledged under the Company's warehouse
facilities.
The installment loan is secured by certain furniture and equipment and is
payable in monthly installments of $8,219, maturing in July 2001 with interest
at 9.125%.
The Company had borrowed funds from a corporation owned by Robert Friedman, all
of which was secured by a mortgage against certain residential properties in
rehabilitation pursuant to a mortgage agreement. Interest payable pursuant to
this agreement was 10% per year. This loan was repaid in full during February
1999.
(4) Income Taxes
The following summarizes the actual and unaudited pro forma (benefit) provisions
for income taxes. Pro forma provisions are adjusted for income taxes that would
have been paid had the Company filed income tax returns as taxable C corporation
for the years ended December 31, 1998 and 1997.
Years ended December 31
1999 1998 1997
------------- ------------- ----------
Actual income tax (benefit) provision:
Current:
Federal $ (249,000) $ 1,117,000 $ -
State and local (18,000) 262,000 40,736
Deferred (per note 1(k)) (941,000) 1,274,000 -
-------------- ------------- ---------
$ (1,208,000) $ 2,653,000 $ 40,736
=================== ------------- ---------
Pro forma income tax adjustments:
Federal (771,000) 1,239,000
State and local - 214,264
--------- ---------
(771,000) 1,453,264
Pro forma income tax provision $1,882,000 $1,494,000
========== ==========
The Company records a deferred tax liability for the tax effect of temporary
differences between financial reporting and tax reporting. The tax effect of
such temporary differences at December 31, 1999 consists of:
1999 1998
--------- -----------
Deferred origination costs $ 534,000 $ 1,193,000
Reserves (628,000) (176,000)
Conversion of accounting method 236,000 -
Other, net 191,000 257,000
--------- -----------
$ 333,000 $ 1,274,000
========= ==========
The (benefit) for income taxes for 1999 and the pro forma provision for income
taxes for 1998 and 1997 differ from the amounts computed by applying federal
statutory rates due to:
Years ended December 31
1999 1998 1997
------------- ------------- ------------
Federal statutory rate of 34% $ (1,062,000) $ 1,561,000 $ 1,272,000
State income taxes, net of
federal benefit (219,000) 321,000 222,000
Other, net 73,000 - -
------------- ------------ -----------
$ (1,208,000) $ 1,882,000 $ 1,494,000
============== ============ ===========
(5) Non-cancelable Operating Leases
The Company is obligated under various operating lease agreements
relating to branch and executive offices. Lease terms expire during the
years 2000 to 2005, subject to renewal options. Management expects that
in the normal course of business, leases will be renewed or replaced by
other leases.
The following schedule represents future minimum rental payments required
under noncancelable operating leases for office space and equipment as of
December 31, 1999:
Year ending December 31:
2000 $ 876,000
2001 846,000
2002 746,000
2003 698,000
2004 699,000
Thereafter 167,000
-------------
Total minimum payments required $ 4,032,000
=============
Total rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $710,000, $379,000 and $200,000, respectively.
(6) Employee Benefits
The Company maintains a 401(k) Profit Sharing Plan (the 401(k) Plan)
which was created effective January 1, 1994 for all employees who have
completed three months of continuous service. The Company matches 50% of
the first 2.5% of each employee's contribution. The Company's 401(k) Plan
expense was approximately $71,000, $79,800 and $35,400 in 1999, 1998 and
1997, respectively.
(7) Stock Option Plans
The Company has two stock option plans under which 750,000 common shares
have been reserved for issuance. Under the plans, the exercise price of
any incentive stock option will not be less than the fair market value of
the common shares on the date of grant. The term of any option may not
exceed ten years from the date of grant.
Option activity since the first plan was adopted in 1997 was as follows:
Number Weighted average
of shares exercise price
--------- --------------
Options outstanding at December 31, 1996 - $ -
Activity during 1997:
Granted 375,000 6.00
Expired - -
-------
Options outstanding at December 31, 1997 375,000 6.00
Activity during 1998:
Granted 337,600 7.68
Expired - -
Forfeited (238,750) 6.37
--------
Options outstanding at December 31, 1998 473,850 7.01
=========== =======
Activity during 1999:
Granted 348,750 7.65
Expired - -
Forfeited (204,250) 7.09
-------
Options outstanding at December 31, 1999 618,350 7.35
=========== =======
Options exercisable at December 31, 1999 103,533 7.36
========== ====
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company applied the intrinsic value method of accounting, as described
in "Accounting Principles Board Opinion No. 25", Accounting for Stock
Issued to Employees, to its stock-based compensation. Accordingly, no
compensation expense has been charged against income for stock option
grants. Had compensation expense been determined based on the fair value at
the 1997, 1998 and 1999 grant dates, consistent with the fair value
methodology of SFAS No. 123, the Company's net income (loss) would have
been $2,083,021, $2,460,421 and $(2,086,044), respectively, basic EPS would
have been $0.69, $0.83 and $(0.56) for the years ended December 31, 1997,
1998 and 1999, respectively, and diluted EPS would have been $0.68 and
$0.81 for the years ended December 31, 1997 and 1998, respectively.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model. The fair value of options
granted in 1999 and 1998 are approximately $3.64 and $2.86 per share,
respectively. The weighted average assumptions used in valuing the option
grants for the years ended December 31, 1999 and 1998 are expected life of
5 years, interest rate of approximately 5.5% and 5.7%, respectively, and
volatility (the measure by which the stock price has fluctuated and will be
expected to fluctuate during the period) of 50% and 30%, respectively.
(8) Related-Party Transactions
In the normal course of business, advances were made by and to the Company
with affiliates. At December 31, 1998, the Company had a net payable of
$1,187,998, respectively, due to affiliates. In February 1999, the Company
repaid the amount due in full. Such transactions are made on substantially
the same terms and conditions, including interest rate and collateral, as
those prevailing at the same time for comparable transactions with
unrelated third parties. The interest rate on such transactions is 10% per
annum.
In conjunction with the Company's Reorganization and initial public
offering, a portion of the undistributed S corporation earnings were
distributed to the existing shareholders in the form of cash and the 10%
promissory note payable in four equal quarterly installments, with the
final installment due February 1999.
The Company has a note receivable in the amount of $216,329 due from an
officer of the Company. This note is non-interest bearing and has undefined
repayment terms.
A relative of Ronald Friedman, the Company's President and CEO currently on
a leave of absence, has an economic interest in a rehab partner for the
purchase and sale of rehabilitation properties with a subsidiary of PMCC.
At December 31, 1999, the subsidiary owned $1.973 million of properties
with outstanding borrowings on the Company's warehouse lines of $973,000
relating to these properties.
(9) Financial Instruments With Off-Balance Sheet Risk and Concentrations of
Credit Risk
In the normal course of the Company's business, there are various financial
instruments which are appropriately not recorded in the financial
statements. The Company's risk of accounting loss, due to the credit risks
and market risks associated with these off-balance sheet instruments,
varies with the type of financial instrument and principal amounts, and are
not necessarily indicative of the degree of exposure involved. Credit risk
represents the possibility of a loss occurring from the failure of another
party to perform in accordance with the terms of a contract. Market risk
represents the possibility that future changes in market prices may make a
financial instrument less valuable or more onerous.
In the ordinary course of business, the Company had issued commitments to
borrowers to fund approximately $47.1 million and $143.4 million of
mortgage loans at December 31, 1999 and 1998, respectively. Of these
commitments to fund, $9.9 million and $22.6 million, respectively relate to
commitments to fund at locked-in rates and $37.2 million and $120.8
million, respectively relate to commitments to fund at floating rates. At
December 31, 1999, the Company had $10 million of outstanding commitments
to sell mortgage backed securities as a hedge against the locked-in rate
commitments to borrowers.
In the normal course of its mortgage banking activities, the Company enters
into optional commitments to sell the mortgage loans that it originates.
The Company commits to sell the loans at specified prices in future
periods, generally ranging from 30 to 120 days from date of commitment
directly to permanent investors. Market risk is associated with these
financial instruments which results from movements in interest rates and is
reflected by gains or losses on the sale of the mortgage loans determined
by the difference between the price of the loans and the price guaranteed
in the commitment.
The Company may be exposed to a concentration of credit risk from a
regional economic standpoint as loans were primarily originated in the New
York Metropolitan area and Florida.
(10) Disclosures About Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments",
requires the Company to disclose the fair value of its on-and off-balance
sheet financial instruments. A financial instrument is defined in SFAS
No.107 as cash, evidence of an ownership interest in an entity, or a
contract that creates a contractual obligation or right to deliver or
receive cash or another financial instrument from a second entity on
potentially favorable or unfavorable terms. SFAS No.107 defines the fair
value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
The estimated fair value of all of the Company's financial assets and
financial liabilities is the same as the carrying amount.
The following summarizes the major methods and assumptions used in
estimating the fair values of the financial instruments:
Financial Assets
Cash and cash equivalents - The carrying amounts for cash and cash
equivalents approximate fair value as they mature in 30 days or less and do
not present unanticipated credit concerns.
Receivable from sales of loans and mortgage loans held for sale, net - Fair
value is estimated based on current prices established in the secondary
market or, for those loans committed to be sold, based upon the price
established in the commitment.
Mortgage loans held for investment - Fair value is based on management's
analysis of estimated cash flows discounted at rates commensurate with the
credit risk involved, or on sales price if committed to be sold.
Accrued Interest Receivable - The fair value of the accrued interest
receivable balance is estimated to be the carrying value.
Financial Liabilities
Notes payable-warehouse and installment - The fair value of the notes
payable is based on discounting the anticipated cash flows using rates
which approximate the rates offered for borrowings with similar terms.
Note payable-shareholder - The fair value of the note payable-shareholder
is estimated by management to be the carrying value.
Due to affiliates - The fair value of the due to affiliates balance is
estimated to be the carrying value.
Limitations - SFAS No.107 requires disclosures of the estimated fair value
of financial instruments. Fair value estimates are made at a specific point
in time, based on relevant market information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument nor the resultant tax
ramifications or transaction costs. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(11) Commitments and Contingencies
Litigation
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the Company will not be affected materially by the outcome of such
proceedings.
The U.S. Attorney's Office for the Eastern District of New York ("U.S.
Attorney") is conducting an investigation (the "Investigation") into the
allegations asserted in a criminal complaint against Ronald Friedman, the
former Chairman of the Board, President and Chief Executive Officer of the
Company, and a loan officer formerly employed by the Company. On December
21, 1999, agents of the Office of the Inspector General for the United
States Department of Housing and Urban Development ("HUD") executed search
and arrest warrants at the Roslyn offices of the Company. The warrants were
issued on the basis of a federal criminal complaint ("Complaint"), which
charged that Ronald Friedman and the loan officer knowingly and
intentionally made, uttered or published false statements in connection
with loans to be insured by HUD.
In response to the allegations against the loan officer and Friedman, the
Company engaged the legal services of Dorsey & Whitney LLP to conduct an
internal investigation into the alleged misconduct and to prepare a report
discussing the findings of the internal investigation. As part of this
internal investigation, the Company worked closely and in cooperation with
HUD and the U.S. Attorney. In addition, key employees, including loan
officers, loan processors, underwriters and managers, were interviewed. An
audit also was conducted of over one-third of all 1999 FHA loans in order
to assess whether the files comported with the HUD guidelines for FHA
loans.
A preliminary report detailing Dorsey & Whitney's investigation and
findings was presented to the Company's Board of Directors on April 12,
2000. A written report was issued on April 14, 2000. The report concludes
that while there appears to be support for the allegations leveled at the
former loan officer, there is no evidence that the misconduct alleged in
the complaint was systemic at the Company. Rather, the findings support the
conclusion that the alleged misconduct was an isolated occurrence, not an
institutional practice. The available evidence did not permit Dorsey &
Whitney to reach a definitive conclusion concerning the charges pending
against Ronald Friedman. The investigation, comprised of interviews with
PMCC employees and an extensive review of mortgage loan files revealed no
independent evidence tending to support the allegations against Friedman
contained in the criminal complaint.
While the Company believes that it has not committed any wrongdoing, it
continues to cooperate fully with the U.S. Attorney's Office and HUD.
However, it cannot predict the duration of the Investigation or its
potential outcome. Although the Company does not anticipate being charged
in connection with this investigation, in the event that the Company was
charged, it intends to vigorously defend its position. While the Company
does not anticipate its occurrence, in the event that it was to lose its
ability to originate and sell FHA loans as result of the Investigation, the
Company does not believe that the financial effect on the Company would be
material. The Company originates less than 7% of its current loan volume
through FHA products.
Employment Agreement
The Company has entered into an Employment Agreement with Ronald Friedman.
The Employment Agreement's original term was to expire on December 31,
1999, unless sooner terminated for death, physical or mental incapacity or
cause or terminated by either party with thirty (30) days' written notice.
The Employment Agreement is automatically renewed for consecutive terms,
unless cancelled at least one year prior to expiration of the existing
term. The Employment Agreement includes compensation plans for fiscal year
1999 whereby Mr. Friedman was to receive a salary of $250,000, and a cash
bonus determined by the Board of Directors at its discretion. On June 2,
1999, Ronald Friedman's annual salary was increased by the Board of
Directors to $350,000. Due to automatic renewals, Mr. Friedman's Employment
Agreement is currently scheduled to expire on December 31, 2001, unless
sooner terminated as provided above. Mr. Friedman was granted a paid leave
of absence on December 29, 1999.
(12) Segment Information
The Company's operations consist of two principal activities (a) mortgage
banking and (b) funding the purchase, rehabilitation and resale of
residential real estate. The following table sets forth certain information
concerning these activities (in thousands):
Years Ended December 31,
1999 1998 1997
--------- ---------- -------
Revenues:
Residential rehabilitation properties $ 35,960 $ 35,732 $ 25,136
Mortgage banking 16,617 22,914 14,228
---------- --------- --------
$ 52,577 $ 58,646 $ 39,364
========== ========= =========
Less: (1)
Expenses allocable to residential rehabilitation
properties (cost of sales, interest expense and
compensation and benefits) 35,386 34,718 24,331
Expenses allocable to mortgage banking (all other) 20,313 19,338 11,292
---------- ------- -------
$ 55,699 $ 54,056 $ 35,623
========== ======== =======
Operating profit:
Residential rehabilitation properties 574 1,014 805
Mortgage banking (3,696) 3,576 2,936
----------- --------- ---------
$ (3,122) $ 4,590 $ 3,741
=========== ========= =========
Identifiable assets:
Residential rehabilitation properties 15,190 16,492 11,584
Mortgage banking 48,356 96,317 56,843
----------- --------- ---------
$ 63,546 $ 112,809 $ 68,427
=========== ========= =========
(1) In managing its business, the Company does not allocate
corporate expenses other than interest and compensation and
benefits to its various activities.
(13) Shareholders' Equity
In connection with the IPO, the Company granted to the underwriters an
option exercisable within 45 days after the IPO, to purchase an additional
187,500 shares of common stock at the IPO price. The option expired unused.
The Company also sold to the underwriters' representatives, for nominal
consideration, warrants to purchase up to an aggregate of 125,000 shares of
common stock exercisable at a price of $12.60 per share for a period of
four years commencing at the beginning of the second year after February
18, 1998.
In December 1998 the Company entered into a Financial Advisory and
Investment Banking Agreement with an investment bank under which the
investment bank is to provide regular and customary consulting advice to
the Company over an agreed period of time. In connection with this
agreement, the Company sold to the investment bank, for a nominal
consideration, warrants to purchase 125,000 shares of common stock at a
price of $6.75 per share. These warrants are exercisable over a five-year
period commencing December 1, 1999. The fair value of each warrant was
estimated at the date of grant using the Black-Scholes option-pricing model
at $1.14. Such fair value is being expensed by the Company over the agreed
period of service of two years.
(14) Quarterly Financial Data (Unaudited)
The following table is a summary of unaudited financial data by quarter for
the years ended December 31, 1999 and 1998:
1999
------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
(in thousands, except per share data)
Revenues $ 13,672 $ 15,153 $ 15,775 $ 7,977
Expenses 12,870 14,252 15,761 12,816
Net income (loss) 473 532 8 (2,927)
Net income (loss)
per share 0.13 0.14 0.00 (0.78)
1998
------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
(in thousands, except per share data)
Revenues $ 12,158 $ 13,673 $ 15,848 $ 16,967
Expenses 11,399 12,532 14,238 15,887
Pro forma net income (1) 448 673 950 637
Pro forma net income per
share (1) 0.14 0.18 0.25 0.17
(1) Pro forma income and pro forma income per share based on
pro forma provision for taxes.