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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, 2000
[ ] 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.)
1767 Morris Avenue, Union, NJ 07083
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 687-2000
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. [ ]
The number of shares of common stock outstanding at March 30, 2001 was
3,707,000. As of such date, the aggregate market value of the voting stock held
by non-affiliates, based upon the closing price of these shares on the pink
sheets, was approximately $181,050.
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. In 2000, as a result of reductions in the
mortgage origination market due to increasing interest rates along with the
Investigation described in "Item 3 - Legal Proceedings", PMCC experienced a
further significant decline in loan originations, originating $207 million in
mortgage loans. For its fiscal years ended December 31, 1998, 1999 and 2000, the
Company had revenues from its mortgage banking activities of $22.9 million,
$16.7 million, and $2.7 million, respectively.
The Company's wholesale divisions in Florida and New Jersey originate
mortgage loans through independent mortgage bankers and brokers, who submit
applications to the Company on behalf of a borrower. 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. For the year ended December
31, 2000, approximately 24% of the Company's mortgage originations were derived
from its retail mortgage operations and approximately 76% 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. For the
year ended December 31, 2000, the Company completed 120 transactions and
recorded revenues and costs of sales of $17.0 million and $16.6 million,
respectively. At December 31, 2000, the Company had 9 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 halted the purchase of
new properties.
See Note 12 in the consolidated financial statements for additional segment
information.
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 has provided requested documents and cooperated with the
Investigation. See "Item 3 - Legal Proceedings."
On December 22, 1999, the American Stock Exchange (the "Amex") 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. The Freddie Mac
suspension was rescinded in the third quarter of 2000. 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. On September 22, 2000, PMCC
was advised by the "Amex" that it was its intention to proceed with the filing
of an application with the Securities and Exchange Commission to strike the
Company's common stock from listing and registration on the Exchange. The
Company exercised its right to appeal the decision of the Exchange. On December
15, 2000, PMCC was advised by the Amex that, after the appeal hearing to its
Committee on Securities by Company management and outside counsel held on
November 6, 2000, the Amex Adjudicatory Council agreed with and affirmed the
Amex's staff decision to strike the Company's common stock from listing and
registration on the Exchange. On December 22, 2000, Amex filed an application
with the Securities and Exchange Commission to do so effective with the opening
of the trading session on January 4, 2001. The Company's common stock is
currently trading on the Pink Sheets under the symbol "PMCF".
Effective July 28, 2000, PMCC Financial Corp. announced that Internet
Business's International, Inc. ("IBUI") purchased the 2,460,000 shares of the
Company held by Ronald Friedman, Robert Friedman and the Ronald Friedman 1997
Guarantor Retained Annuity Trust (collectively, the "Sellers") in a private
transaction (the "Transaction"). This purchase represents 66.36% of the
3,707,000 shares of common stock of the Company outstanding. IBUI is a holding
company with a variety of internet subsidiaries that trades publicly under the
symbol IBUI on the NASDAQ Bulletin Board. The aggregate purchase price of
$3,198,000 was to be paid in cash to the Sellers by IBUI over a period of nine
months from the date of closing. According to provisions of the Transaction
agreement, the purchase price was reduced because the Company's common stock was
not trading on either the Amex or NASDAQ and there was no merger of the Company
with IBUI or any of its affiliates within time periods specified by the
agreement. At the closing, all shares purchased by IBUI from the Sellers were
deposited in escrow with the Sellers' attorney. These shares will be released to
IBUI upon receipt of the scheduled installment payments.
Simultaneous with the Transaction, the Company's Board of Directors passed
a resolution to amend the Company's By-laws to provide for an increase in the
number of directors from four to seven. Keith Haffner, the Company's then
Executive Vice President and Interim Chief Executive Officer, resigned from the
Board. Albert Reda, IBUI's Chief Executive Officer, Louis Cherry, IBUI's
President and David Flyer, a consultant to IBUI, were elected to the Company's
Board. The seventh Board member, Carl Carstensen, President IBM Solutions,
European Divisions, is be elected to the Board effective at the earliest time
such election is permitted pursuant to Rule 14f-1 of the Rules and Regulations
under the Securities Exchange Act of 1934.
The Company has been informed by the Sellers that certain payments due
under the agreement by IBUI to purchase shares of the Company's stock from the
Sellers were not made and that an event of default has been declared against
IBUI under this purchase agreement and the shares held in escrow have been
returned to the sellers. At this time, negotiations and discussions are being
held among the involved parties, however, no definitive revised agreement has
been reached that would cure the default.
Following the events of December 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. Mr. Friedman's Employment
Agreement was terminated in May 2000 and he continues to serve the
Company as a general business consultant under a Consulting Agreement
that began at that time. In September 2000, as part of the "Staffing
Changes and Streamlining of Operations" discussed below, Mr. Haffner's
employment was terminated and Mr. Soskin was appointed interim Chief
Executive Officer while keeping the position of interim President.
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 along with 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 2000,
the Company streamlined its operations including permanently closing
its office in Roslyn Heights, NY. At December 31, 2000, there were 43
employees, 16 of which were sales staff and 27 were operations 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. In 2000, approximately
74% of the dollar volume of loans it originated was attributable to
wholesale business. To further improve cash flow, the Company halted
the acquisition of residential rehabilitation properties. During 2000,
the Company sold $14.5 million of the $15.2 million of properties on
hand at December 31, 1999. All the remaining properties are expected
to be sold before June 30, 2001. Such reductions and sales of
properties have assisted in maintaining adequate cash flow
notwithstanding lower mortgage originations and professional expenses
being incurred which have contributed to net losses reported for 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."
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. As of June 2000, the
lines with GMAC/RFC and Bank United were paid in full. The total amount
outstanding on the Chase Line at December 31, 2000 was approximately
$161,000, all of which was related to remaining residential rehabilitation
properties. This line is expected to be paid in full no later than June 30,
2001. 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. 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
Due to developments regarding the Investigation referred to in "Item 3 - Legal
Proceedings", 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 from
prior year's were suspended or closed down completely in the year ended December
31, 2000. The following actions were taken:
o In a continuing effort to reduce the Company's overhead and expenses
and achieve profitability, PMCC Mortgage Corp. at its Board of
Directors meeting on September 18, 2000 determined that on October 1,
2000, the Company would permanently close its office in Roslyn
Heights, NY. PMCC Mortgage Corp. and PMCC Financial Corp. have
relocated their corporate offices to the location of the existing
branch office and former corporate office at 1767 Morris Avenue,
Union, NJ 07083. In conjunction with this closing, the Company has
negotiated with its landlord at 3 Expressway Plaza to terminate the
remaining 4.5 years of its lease at that location. Certain
post-closing and administrative functions were absorbed by the
existing personnel in the Company's New Jersey and Florida locations.
Remaining New York staff was relocated to a 1,000 square foot office
in Rockville Centre, NY. The cost for terminating employees and the
lease in Roslyn is approximately $875,000. After all reductions noted
herein, it is anticipated that the Company will experience annualized
cost savings of approximately $1.5 million. The Company's Roslyn
retail office and administrative offices had previously been reduced
in January 2000 from 86 employees to 45 and again in June 2000 to 17.
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.
o staffing at the Company's New Jersey and remaining Florida wholesale
locations was reduced from 61 employees to 38 in January 2000 and to
36 in December 2000. The Florida locations have moved to more
cost-efficient office locations. In 2001, the New Jersey wholesale
operation was absorbed into the Florida wholesale operation.
o the Company's web-site was 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.
o the Company halted the acquisition of residential rehabilitation
properties and began an initiative to sell the completed properties on
hand as quickly as practicable.
At the same time the above actions were taken, PMCC's business strategy is
to stabilize and strengthen its remaining areas of business. The Company added
new account executives in its Florida wholesale office. More than 90% of
mortgage loan applications taken by the Company in the 4th quarter of 2000 were
as a result of its wholesale operations. Although the Company does not expect to
reopen its own web site in the near future, it has made application to be listed
on "lendingtree.com" to provide additional leads to potential borrowers.
Additional loan officers have been hired in 2001 in the retail and wholesale
areas to increase the Company's volume of loan applications and to take
advantage of current low interest rates.
It is anticipated that the Company will incur only small losses in the
first quarter of 2001 primarily as the Company sees the full results of its cost
cutting initiatives. PMCC currently estimates that it must achieve a minimum of
approximately $16 million per month in new mortgage originations beginning in
the second quarter of 2001 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.
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; and
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.
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).
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 $281,000 for two-family residences located in the New York City
metropolitan area). FHA and VA mortgages must be underwritten within specific
governmental guidelines, which include income verification, borrower asset,
borrower credit worthiness, property value and property condition. Because these
guidelines require that borrowers seeking FHA or VA mortgages submit more
extensive documentation and the Company perform a more detailed underwriting of
the mortgage than prime credit mortgages, the Company's revenues from these
mortgages are generally higher than a comparable sized mortgage for a prime
credit borrower.
The following table sets forth the Company's mortgage loan production
volume by type of loan for each of the five years ended December 31, 2000.
Years Ended December 31,
($ in thousands)
-------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Conventional Loans:
Volume ................... $ 75,400 $177,825 $359,143 $379,462 $191,312
Percentage of total volume 57% 57% 62% 68% 92%
FHA/VA Loans:
Volume ................... $ 57,700 $ 75,060 $146,628 $167,153 $ 15,788
Percentage of total volume 43% 24% 25% 30% 8%
Sub-Prime Loans
Volume ................... * $ 61,675 $ 76,645 $ 14,083 $ --
Percentage of total volume * 19% 13% 2% 0%
Total Loans:
Volume ................... $133,100 $314,560 $582,416 $560,698 $207,100
Number of Loans .......... 890 2,160 3,793 3,662 1,437
Average Loan Size ........ $ 150 $ 146 $ 154 $ 153 $ 144
- ------------
*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.
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 Florida, New York and New Jersey. 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.
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 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.
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 discussed above, during 2000, the Company 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. 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 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 $11.9 million on
December 31, 2000 and $8.4 million on April 4, 2001.
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
was secured by the mortgage loans and residential rehabilitation purchases
funded with the proceeds of such borrowings. The Company had 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 Company anticipates paying down the entire facility
no later than May 31, 2001. The balance outstanding on the Chase Line was
$161,000 on December 31, 2000 and April 4, 2001. 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. Prior to the line expiring 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 RFC Line was paid in full in June 2000. Interest payable on the
RFC Line was 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, 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, 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 was secured by the mortgage loans
and residential rehabilitation purchases funded with the proceeds of such
borrowings. The Company had 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. The
Bank United Line was paid in full in June 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 did not have an expiration date but was 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. 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. The interest rate on these lines
was 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, 2000 was $155,000. These
funds were used primarily for the cash expenditure in removing the underlying
loans from the warehouse facilities and for general operating expenses. These
lines of credit have been terminated and the outstanding balance is expected to
be paid in full in 2001.
On June 8, 2000, the Company borrowed $275,000 from a company wholly owned
by Robert Friedman. This loan is evidenced by a promissory note due and payable
in one year. The interest rate on the note is 16% per annum payable monthly. The
note is secured by properties and a mortgage, which the Company owns. Under the
same note, the Company borrowed an additional $50,000 in July 2000. The Company
repaid $80,000 in August 2000 and $175,000 in October 2000 when a portion of the
underlying collateral was sold by the Company. The balance due on the note at
December 31, 2000 is $70,000.
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 outsources
these reviews to a third party with expertise in performing such reviews. They
examine 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 reviewer "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.
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.
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 4, 2001, the Company has 43 employees, combined at all
locations, substantially all of whom are employed full-time. 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 offices are located at 1767 Morris Avenue, Union,
NJ 07083, where the Company leases office space at an annual rent of
approximately $70,000. The lease expires on February 28, 2002. In conjunction
with the reduction of its operations, the Company is currently negotiating to
significantly reduce this office space.
The Company leases office space in Deerfield Beach, Florida pursuant to a
lease assignment that expires on October 31, 2002 with annual rent of $56,000.
At December 31, 2000, the Company leased office space in Coral Gables, Florida
pursuant to a month to month lease with monthly rent of $2,100. As of April 1,
2001, the Company entered into a new lease agreement for space in Coral Gables
that expires on March 31, 2004 with an annual rent of $19,000.
The Company leases office space in Rockville Centre, NY pursuant to a lease
that expires on November 30, 2003 with annual rent of $20,000.
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. Since July 2000, the Company
has originated less than 1% of its loan volume through FHA products.
As a result of this investigation, the Company incurred $1.7 million of
direct expenses for the year ended December 31, 2000. These expenses include
legal and professional fees incurred in connection with the internal
investigation of the Company, criminal defense attorneys and negotiations of
warehouse lines of credit amendments. Also included in these expenses are bank
fees relating to granting amendments to the Bank United line of credit and
bonuses paid to the Company's officers and employees.
One of the Company's warehouse banks has indicated that the Company owes
such bank a total of $250,000 in penalities and fees in relation to its line of
credit with the bank. The Company vigorously disputes this claim and believes it
is without merit. The Company is unable to predict the outcome of this claim
and, accordingly, no adjustments regarding this matter have been made in the
accompanying consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 was 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. On September 22, 2000, PMCC was
advised by the Amex that it was its intention to proceed with the filing of an
application with the Securities and Exchange Commission to strike the Company's
common stock from listing and registration on the Exchange. The Company
exercised its right to appeal the decision of the Exchange. On December 15,
2000, PMCC was advised by the Amex that, after the appeal hearing to its
Committee on Securities by Company management and outside counsel held on
November 6, 2000, the Amex Adjudicatory Council agreed with and affirmed the
Amex's staff decision to strike the Company's common stock from listing and
registration on the Exchange. On December 22, 2000, Amex filed an application
with the Securities and Exchange Commission to do so effective with the opening
of the trading session on January 4, 2001. The Company's common stock is
currently trading on the Pink Sheets under the symbol "PMCF". The delisting
could have a material adverse effect upon the Company in a number of ways,
including its ability to raise additional capital. In addition, the 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.
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*
2000 High Low
- ---- ---- ---
1st Quarter.......................... N/A* N/A*
2nd Quarter.......................... N/A* N/A*
3rd Quarter.......................... N/A* N/A*
4th Quarter.......................... N/A* N/A*
2001 High Low
- ---- ---- ---
1st Quarter.......................... $3.75* $0.13
* - Trading of the Company's common stock was suspended on December 22, 1999 and
was suspended throughout the year ended December 31, 2000, and commenced trading
on the pink sheets in January 2001.
The closing per share bid price of the Common Stock as reported by the Pink
Sheets on April 4, 2001, was $0.15. As of December 31, 2000, the Company had 12
shareholders of record and approximately 1,100 beneficial shareholders.
Dividend Policy
To date, the Company has not paid a dividend on its Common Stock. The Company's
ability to pay dividends in the future is dependent upon the Company's earnings,
capital requirements and other factors. The Company currently intends to retain
future earnings for use in the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
Consolidated Statement of Operations Data:
At or for the Years Ended December 31,
------------------------------------------------------------
1996 1997 1998 1999 2000
------------------------------------------------------------
($ in thousands, except per share data)
Revenues $ 11,676 $ 39,364 $ 58,646 $ 52,577 $ 19,665
Net income (loss) 1,034 3,701 1,938 (1,914) (9,002)
Pro forma net income1 517 2,150 2,709 -- --
Pro forma net income (loss)
per share - diluted2 0.21 0.84 0.75 (0.51) (2.43)
Operating Data:
Mortgage loans originated:
Conventional 75,400 177,825 359,143 379,462 191,312
FHA/VA 57,700 75,060 146,628 167,153 15,788
Sub Prime3 -- 61,675 76,645 14,083 --
----------------------------------------------------------
133,100 314,560 582,416 560,698 207,100
==========================================================
Number of loans originated 890 2,160 3,793 3,662 1,437
Average principal balance per loan
originated $ 150 $ 146 $ 154 $ 153 $ 144
Consolidated Balance Sheet Data:
Receivable from sales of loans $ 9,038 $ 35,131 $ 20,789 $ 4,300 $ --
Mortgage loans held for sale, net ... 2,875 18,610 67,677 36,666 12,590
Residential rehabilitation properties 3,246 11,584 16,492 15,190 670
Total assets 17,153 68,427 112,809 63,546 15,800
Borrowings 14,198 59,410 94,674 50,584 12,374
Shareholders' equity 1,878 4,809 13,033 11,097 2,216
- ----------------------------------
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 year ended December 31, 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 that year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Years Ended December 31, 2000 and 1999
General
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Years Ended December 31,
----------------------------
2000 1999
------------- -------------
Sales of residential rehabilitation properties $16,967,508 $35,960,124
Gains on sales of mortgage loans, net 2,451,462 12,634,550
Loss on sales of delinquent loans (975,000) (685,000)
Interest earned 1,221,312 4,666,844
------------- -------------
Total revenues $19,665,282 $52,576,518
============= =============
Revenues from the sale of residential rehabilitation properties decreased
$19.0 million, or 53%, to $17.0 million for the year ended December 31, 2000
from $36.0 million for the year ended December 31, 1999. The number of
residential rehabilitation properties sold was 120 for the year ended December
31, 2000 compared to 216 for the year ended December 31, 1999. This decrease was
a result of the Company's discontinuance of the acquisition of residential
rehabilitation properties partly offset by the initiative to sell the completed
properties on hand as quickly as practicable. Additionally, on certain
properties sold, a discount was given from the original contract pricing in
order to expedite the sale due to cash requirements.
Gains on sales of mortgage loans decreased $10.1 million, or 80%, to $2.5
million for the year ended December 31, 2000 from $12.6 million for the year
ended December 31, 1999. This decrease was due to a number of significant
factors. Mortgage loan originations were $207.1 million and $560.7 million for
the years ended December 31, 2000 and 1999, respectively. This 63% decrease was
primarily the result of a decline in retail originations arising from the
decrease in the number of retail loan officers, 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. For
the year ended December 31, 2000, approximately 24% of the Company's mortgage
originations were derived from its retail mortgage operations and approximately
76% from its wholesale operations, compared to 56% retail and 44% wholesale for
the year ended December 31, 1999. Wholesale loans result in lower revenues due
to broker fees paid of approximately 1% being deducted directly from the gain on
sale, whereas retail loan commissions are shown on the statement of operations
as expenses. Costs per loan for wholesale loans are generally lower overall than
retail. Replacing the retail loan volume with wholesale loans reduced gains by
approximately $663,000 for the year ended December 31, 2000 compared to the year
ended December 31, 1999. In 1999, the Company was able to optimize the margins
received on the sales of loans by hedging positions in future sales of Mortgage
Backed Securities. This activity was halted due to the Investigation and
subsequent suspension of trading of the Company's stock. For the year ended
December 31, 2000, this resulted in approximately a 0.75% loss in revenue per
loan or $1.6 million in total compared to the year ended December 31, 1999.
Additionally, in past years, sub-prime loans were generally sold at a higher per
loan margin than conventional loans. Discontinuing the sub-prime loan
originations reduced gains by approximately $1.2 million for the year ended
December 31, 2000 compared to the year ended December 31, 1999.
Although there can be no assurance thereof, the Company expects mortgage
originations to increase along with the revenue margin per loan and therefore
believes its gains on sales of mortgage loans will increase.
The loss on sale of delinquent loans for the year ended December 31, 2000
was the result of the Company selling 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. In prior years, PMCC had warehouse lines where they could hold
these loans throughout the foreclosure process. Bank United terminated this
portion of their line immediately after the Investigation began in December
1999. In order to fulfill agreements with its lenders, the Company needed to
sell the loans to pay off the warehouse lines as well as to meet the Company's
additional cash requirements in the first nine months of 2000. These were
imposed by increased capital requirements and Amendment Fees for warehouse
lines, reduced warehouse commitments and additional professional fees (legal,
consulting and audit) that were incurred as a result of the Investigation. The
loss on sale of delinquent loans for the year ended December 31, 1999
represented the reserve booked anticipating the sale of loans on hand at
December 31, 1999 that were subsequently sold at a discount.
Interest earned decreased $3.5 million, or 74%, to $1.2 million for the
year ended December 31, 2000 from $4.7 million for the year ended December 31,
1999. This decrease was primarily due to decreased mortgage originations for the
year ended December 31, 2000 as compared to the year ended December 31, 1999 and
the elimination of sub prime mortgage originations which generally are at higher
rates and are held for sale longer than conventional mortgage originations.
Additionally, there was a decrease in the amount of time a loan is held before
being sold to the final investor. This more rapid turnover allows the Company to
utilize a lower warehouse line but results in less interest earned by the
Company before the loan is sold.
Expenses. The following table sets forth the Company's expenses for the periods
indicated:
Years Ended December 31,
---------------------------
2000 1999
------------ -----------
Cost of sales-residential rehabilitation properties $16,580,076 $33,084,179
Compensation and benefits 5,018,448 11,826,434
Interest expense 1,983,774 4,818,304
Expenses resulting from Investigation 1,669,900 --
Expenses relating to closing Roslyn office 875,065 --
Other general and administrative 3,523,357 5,969,821
----------- -----------
Total expenses $29,650,620 $55,698,738
=========== ===========
Cost of sales - residential rehabilitation properties decreased $16.5
million, or 50%, to $16.6 million for the year ended December 31, 2000 from
$33.1 million for the year ended December 31, 1999. This decrease was the result
of the decrease in the number of properties sold in the year ended December 31,
2000 compared to the year ended December 31, 1999.
Compensation and benefits decreased $6.8 million, or 58%, to $5.0 million
for the year ended December 31, 2000 from $11.8 million for the year ended
December 31,1999. This decrease was primarily due to decreased sales salaries
and commission, which are based substantially on mortgage loan originations, and
the reductions in staff at the Company's Roslyn and New Jersey locations, partly
offset by the personnel added in Florida as part of the Prime Mortgage Corp.
acquisition in July 1999. Total personnel decreased to 43 employees at December
31, 2000 from 185 at December 31, 1999.
Interest expense decreased $2.8 million, or 58%, to $2.0 million for the
year ended December 31, 2000 from $4.8 million for the year ended December 31,
1999. 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 on the warehouse lines longer than conventional mortgage
originations along with the decrease in residential rehabilitation properties
funded through the Company's warehouse facility and a decrease in the amount of
time a loan is held before being sold to the final investor.
As a result of the Investigation, the Company incurred direct expenses of
$1.7 million in the year ended December 31, 2000. These expenses include legal
and professional fees incurred in connection with the internal investigation of
the Company, criminal defense attorneys and negotiations of warehouse lines of
credit amendments. Also included in these expenses are bank fees relating to
granting amendments to the Bank United line of credit and bonuses paid to the
Company's officers and employees.
As a result of the closing the Roslyn office, the Company incurred direct
expenses of $875,000 in the year ended December 31, 2000. These expenses include
termination and broker costs for the settlement with the landlord to terminate
the lease, write-offs of leasehold improvements and capitalized costs in
relation to the office space, losses on sales of furniture and equipment and
severance costs for terminated employees.
Other general and administrative expense decreased $2.5 million, or 42%, to
$3.5 million for the year ended December 31, 2000 from $6.0 million for the year
ended December 31, 1999. This decrease was primarily due to decreased expenses
in connection with the contraction in the operations of the Company, partly
offset by increases incurred in connection with the expansion in Florida from
the Prime acquisition, including rent and facilities expense, telephone and
marketing.
The Company believes that, as a result of certain cost cutting initiatives
and contraction of business expansion, expenses will decrease.
The net loss of $9.0 million for the year ended December 31, 2000 was an
increase of $7.1 million or 374%, from the net loss of $1.9 million for the year
ended December 31, 1999. In addition to the above changes in revenues and
expenses, for the year ended December 31, 2000 the Company did not record a tax
benefit of $2.5 million for net operating losses generated due to the
uncertainty of the realization of this benefit in future periods. The Company
has a net operating loss carry forward of $6.7 million at December 31, 2000.
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 2001, total expenses for the year ended December 31,
2001 will decrease as compared to 2000 expenses.
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.
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, 2000 was $12.3
million. Such borrowings declined to $8.6 million at April 4, 2001. The
warehouse facilities are secured by the mortgage loans and residential
rehabilitation properties funded with the proceeds of such borrowings.
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 $8.3 million on
April 4, 2001.
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 balance
outstanding on the Chase Line was $160,000 on December 31, 2000 and on April 4,
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. 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.
The RFC line was paid in full in June 2000.
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. The
Bank United Line was paid in full in June 2000.
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, additional lines 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. 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. 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, 2000 was $150,000. These
funds were used primarily for the cash expenditure in removing the underlying
loans from the warehouse facilities and for general operating expenses. These
lines of credit have been terminated and the outstanding balance is expected to
be paid in full in 2001.
On June 8, 2000, the Company borrowed $275,000 from a company wholly owned
by Robert Friedman. This loan is evidenced by a promissory note due and payable
in one year. The interest rate on the note is 16% per annum payable monthly. The
note is secured by properties and a mortgage, which the Company owns. Under the
same note, the Company borrowed an additional $50,000 in July 2000. The Company
repaid $80,000 in August 2000 and $175,000 in October 2000 when a portion of the
underlying collateral was sold by the Company. The balance due on the note was
$70,000 at December 31, 2000 and April 4, 2001.
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, 2000, was
$37.4 million. The Company received cash from the $26.9 million decrease in
mortgage loans held for sale and investment and $14.5 million net decrease in
residential rehabilitation properties along with a $4.3 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 $38.2 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. In 2001,
the Company's management has and will take numerous steps to create a positive
cash flow for the Company. These include selling the remaining rehab properties
on hand at December 31, 2000, changing the methodology whereby the Company
prices its loans so that a higher per loan gain is recognized and further
reducing and consolidating operations as required. Certain expense reductions
have been made in the first quarter of 2001 including reducing management
salaries and consolidating the entire wholesale operation in the Florida office.
This resulted in a reduction in the number of staff employees processing loans
as well as other cost reductions. Although the Company does not expect to reopen
its own web site, it has made application to be listed on "lendingtree.com" to
provide additional leads to potential borrowers. Additional commission-only loan
officers have been hired in 2001 in the retail and wholesale areas to increase
the Company's volume of loan applications and to take advantage of current low
interest rates. 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 2001.
The Company currently finances its mortgage banking operations with a
single warehouse facility (the IMPAC Line). The IMPAC Line has no stated
expiration date, but is terminable by either party upon written notice.
Management believes that there are other financial institutions that could
provide the Company with a similar facility on comparable terms. However, a
termination of the current warehouse facility without an immediate replacment
could cause an interruption to the Company's operations and possible loss of
revenue, which would affect operating results adversely.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and related pronouncements, as
well as SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," became effective for the Company during 2000. The provisions of
this interpretation that are applicable to the Company were implemented on a
prospective basis as of July 1, 2000.
Financial Accounting Standards Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation" became effective for the Company
during 2000. The provision of this interpretation that is applicable to the
Company was implemented on a prospective basis as of July 1, 2000.
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.
In past years, management used 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.
Due to the amount of warehouse lines available and the time constraints to
remove loans from the lines, during 2000 PMCC sold all loans closed through best
effort commitments, which means there is no penalty if the loans do not close.
Some 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.
None.
PART III
ITEMS 10, 11,12 and 13.
The information required by this Part III is incorporated by reference to
the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days from the end of the period covered by this
report.
PART IV
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 35
Report of Independent Public Accountants F-1
Report of Prior Independent Public Accountants F-2
Consolidated Statements of Financial Condition as of
December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years
ended December 21, 2000, 1999 and 1998 F-4
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements for the years
ended December 31, 2000, 1999 and 1998 F-8
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 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. On August 21, 2000, the Company filed a
report on Form 8-K dated July 28, 2000 relating to the purchase
of the Company stock by Internet Business's International, Inc.
Ronald Friedman, Robert Friedman and the Ronald Friedman 1997
Guarantor Retained Annuity Trust. On September 29, 2000, the
Company filed a report on Form 8-K dated September 18, 2000
regarding the closing of the Roslyn office, the termination of
Keith Haffner, and the intention of the American Stock Exchange
to proceed with the filing of an application with the Securities
and Exchange Commission to strike the Company's common stock from
listing and registration on the Exchange. On January 3, 2001, the
Company filed a report on Form 8-K dated December 15, 2000
relating to the final decision of the Amex to de-list the
Company's common stock.
(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
- ------------------
(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 12, 2000
PMCC FINANCIAL CORP.
By /s/ Andrew Soskin
----------------------------------
Andrew Soskin, Interim President &
Chief Executive Officer
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 & Chief Executive Officer April 12, 2000
/s/ Andrew Soskin Executive Vice President and Director
- -------------------
Andrew Soskin
/s/Stanley Kreitman Chairman of the Board of Directors April 12, 2000
- -------------------
Stanley Kreitman
Executive Vice President, Chief Financial April 12, 2000
Officer and Secretary (Principal Accounting
/s/ Stephen J. Mayer Officer)
- --------------------
Stephen J. Mayer
/s/ Louis Cherry Director April 12, 2000
- --------------------
Louis Cherry
/s/ David Flyer Director April 12, 2000
- --------------------
David Flyer
/s/ Joel L. Gold Director April 12, 2000
- --------------------
Joel L. Gold
/s/ Albert Reda Director April 12, 2000
- --------------------
Albert Reda
PMCC FINANCIAL CORP. AND SUBSIDIARIES
INDEX
Page No.
-------
Reports of Independent Auditors......................................................... F-1 to F-2
Consolidated Financial Statements:
Balance Sheets at December 31, 2000 and 1999...................................... F-3
Statements of Operations for the Years Ended December 31, 2000, 1999
and 1998.......................................................................... F-4
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998.................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 2000, 1999
and 1998.......................................................................... F-6
Notes to Consolidated Financial Statements.............................................. F-8
PMCC FINANCIAL CORP.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 2000 and 1999
(With Independent Auditors' Reports Thereon)
Independent Auditors' Report
The Board of Directors
PMCC Financial Corp.:
We have audited the accompanying consolidated statements of financial condition
of PMCC Financial Corp. and Subsidiary as of December 31, 2000 and 1999 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the two years ended December 31, 2000 and 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 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, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Marcum & Kliegman LLP
Woodbury, New York
April 9, 2001
Independent Auditors' Report
The Board of Directors
PMCC Financial Corp.:
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity and cash flows of PMCC Financial Corporation and
Subsidiary for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 results of operations and cash flows of
PMCC Financial Corporation and Subsidiary for the year ended December 31, 1998,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
--------------------
Melville, New York
March 23, 1999
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 2000 and 1999
Assets 2000 1999
------------ -----------
Cash and cash equivalents $ 21,988 $ 214,957
Restricted cash -- 500,000
Receivables from sales of loans -- 4,300,279
Mortgage loans held for sale, net 12,590,415 36,666,397
Mortgage loans held for investment, net 226,650 3,112,179
Accrued interest receivable 150,000 125,000
Other receivables, net 1,417,611 1,396,756
Residential rehabilitation properties, net 670,395 15,189,753
Furniture, fixtures and equipment, net 512,718 1,169,327
Prepaid expenses and other assets 210,428 870,875
------------ -----------
Total assets $ 15,800,205 $63,545,523
============ ===========
Liabilities and Shareholders' Equity
Liabilities:
Notes payable - principally warehouse lines of credit $ 12,374,111 $50,584,370
Accrued expenses and other liabilities 1,210,451 1,531,374
Deferred income taxes -- 333,000
------------- -----------
Total liabilities 13,584,562 52,448,744
------------- -----------
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 11,038,538 10,917,283
Retained (deficit) earnings (8,605,924) 396,467
Treasury stock, 43,000 shares, at cost (254,471) (254,471)
------------- -----------
Total shareholders' equity 2,215,643 11,096,779
------------- -----------
Total liabilities and shareholders' equity $ 15,800,205 $63,545,523
============= ===========
See accompanying notes to consolidated financial statements.
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Revenues:
Sales of residential rehabilitation properties $ 16,967,508 $ 35,960,124 $ 35,731,990
Gains on sales of mortgage loans, net 2,451,462 12,634,550 17,233,729
Loss on sales of delinquent loans (975,000) (685,000) --
Interest earned 1,221,312 4,666,844 5,680,700
------------ ------------ ------------
19,665,282 52,576,518 58,646,419
------------ ------------ ------------
Expenses:
Cost of sales, residential rehabilitation properties 16,580,076 33,084,179 32,936,131
Compensation and benefits 5,018,448 11,826,434 11,035,625
Interest expense 1,983,774 4,818,304 5,831,811
Expenses resulting from Investigation (Note 11) 1,669,900
Expenses relating to closing Roslyn office 875,065
Other general and administrative 3,523,357 5,969,821 4,252,127
------------ ------------ ------------
29,650,620 55,698,738 54,055,694
------------ ------------ ------------
(Loss) income before income tax (benefit) expense (9,985,338) (3,122,220) 4,590,725
Income tax (benefit) expense (982,947) (1,208,000) 2,653,000
------------ ------------ ------------
Net (loss) income $ (9,002,391) $ (1,914,220) $ 1,937,725
============ ============ ============
Net (loss) per share of common stock - basic and diluted $ (2.43) $ (0.51)
============ ============
Weighted average number of shares
outstanding - basic and diluted 3,707,000 3,723,965
============ ============
Unaudited pro forma information:
Historical income before
income tax expense $ 4,590,725
Provision for pro forma income taxes (1,882,000)
-------------
Pro forma net income $ 2,708,725
=============
Pro forma net income per share
of common stock - basic $ 0.76
=============
Pro forma net income per share
of common stock - diluted $ 0.75
=============
Pro forma weighted average number of
shares outstanding - basic 3,580,199
=============
Pro forma weighted average number of shares and
share equivalents outstanding - diluted 3,624,872
=============
See accompanying notes to consolidated financial statements.
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 2000, 1999 and 1998
Number of Additional Retained
shares Common paid-in (deficit) Treasury
outstanding stock capital earnings stock Total
----------- ------------ ------------ ------------ ----------- ------------
Balance at January 1, 1998 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 (25,200) -- -- -- (161,646) (161,646)
Distributions of S corporation earnings -- -- -- (2,736,039) -- (2,736,039)
----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 3,724,800 37,500 10,846,033 2,310,687 (161,646) 13,032,574
Net (loss) -- -- -- (1,914,220) -- (1,914,220)
Treasury stock purchases (17,800) -- -- -- (92,825) (92,825)
Amortization of warrants -- -- 71,250 -- -- 71,250
----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 3,707,000 37,500 10,917,283 396,467 (254,471) 11,096,779
Net (loss) -- -- -- (9,002,391) -- (9,002,391)
Amortization and issuance of warrants -- -- 121,255 -- -- 121,255
----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 3,707,000 $ 37,500 $ 11,038,538 $ (8,605,924) $ (254,471) $ 2,215,643
========== ============ ============ ============ ============ ===========
See accompanying notes to consolidated financial statements.
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------- ------------ -------------
Cash flows from operating activities:
Net (loss) income $ (9,002,391) $ (1,914,220) $ 1,937,725
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 (387,432) (2,875,945) (2,795,859)
Proceeds from sales of properties 16,967,508 35,960,124 35,731,990
Cost of properties acquired and other related cost (2,060,718) (31,782,418) (37,843,372)
Warrants issued for services 121,255 71,250 --
Loss on sale and disposal of furniture, fixtures,
equipment and leasehold improvements 322,730 23,808 --
Deferred income tax (benefit) expense (333,000) (941,000) 1,274,000
Depreciation and amortization 280,679 219,825 114,960
(Increase) decrease in accrued interest receivable (25,000) 198,940 (11,168)
Decrease in receivable from sales of loans 4,300,279 16,489,191 14,341,387
Decrease (increase) in mortgage loans
held for sale and investment, net 26,961,511 29,615,331 (50,784,338)
Increase in other receivables, net (20,855) (512,242) (486,070)
Decrease (increase) in prepaid expenses and other assets 660,447 (338,324) (110,288)
Decrease in due to affiliates -- (1,187,998) (1,896,505)
(Decrease) increase in accrued expenses
and other liabilities (320,923) (831,775) 1,239,201
------------- ------------ -------------
Net cash provided by (used in)
operating activities 37,464,090 42,194,547 (39,288,337)
------------- ------------ -------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment (57,165) (365,698) (656,473)
Proceeds received on sale of furniture fixtures and equipment 110,365 -- --
Acquisition of Prime Mortgage assets -- (250,000) --
------------- ------------ -------------
Net cash provided by (used in)
investing activities 53,200 (615,698) (656,473)
------------- ------------ -------------
(Continued)
PMCC FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------- ------------ -------------
Cash flows from financing activities:
Distributions to shareholders, net of distribution payable $ -- $ (277,700) $ (2,458,339)
Net decrease in notes payable-shareholder -- -- (293,163)
Proceeds from issuance of common stock -- -- 9,183,325
Net (decrease) increase in notes payable-
principally warehouse lines of credit (38,280,259) (44,089,369) 35,557,230
Proceeds from notes payable-related party 325,000 -- --
Repayment of notes payable - related party (255,000) -- --
Decrease (increase) in restricted cash 500,000 (500,000) --
Treasury stock purchased -- (92,825) (161,646)
------------- ------------ ------------
Net cash (used in) provided by
financing activities (37,710,259) (44,959,894) 41,827,407
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (192,969) (3,381,045) 1,882,597
Cash and cash equivalents at beginning of year 214,957 3,596,002 1,713,405
------------- ------------ ------------
Cash and cash equivalents at end of year $ 21,988 $ 214,957 $ 3,596,002
============= =========== ============
Supplemental information:
Cash paid during the year for:
Interest $ 2,125,867 $ 4,318,000 $ 6,006,203
============= =========== ============
Income taxes $ 11,190 $ 504,647 $ 542,188
============= =========== ============
Loans transferred from held for sale to held for
investment $ 787,621 $ 1,394,951 $ 1,717,228
============= =========== ============
See accompanying notes to consolidated financial statements.
(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 1998. 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 and cash equivalents
include cash on hand, money market accounts and other short-term
liquid investments 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. The Company follows a
strategy of selling all of its originated loans 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. Reserves for recourse
mortgage sales were $114,000 and $170,000 at December 31, 2000 and
1999, respectively.
(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. There was no allowance at December 31, 2000. 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) Other Receivables
Other receivables consist primarily of a tax refund due the Company
for net operating loss carrybacks, notes and other amounts due from
officers of the Company, draw advances to loan officers on commission
and escrows held and shortages on sales of mortgage loans and
residential rehab properties sold. Advances and notes due from former
employees are retained on the books but are fully reserved. Reserves
for uncollectibles were $1,797,000 and $647,000 at December 31, 2000
and 1999, respectively.
(h) 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. In 2000, the Company halted the acquisition of residential
rehabilitation properties and began an initiative to sell the
completed properties on hand as quickly as practicable. There was no
reserve for property valuations at December 31, 2000. Reserves at
December 31, 1999 were $400,000.
(i) 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.
(j) 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.
(k) 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 $620,000 and
$1,105,000 at December 31, 2000 and 1999, respectively, and are
included in "Mortgage loans held for sale, net" in the accompanying
consolidated statements of financial condition.
(l) Income Taxes
The Company accounts for income taxes under the liability method as
required by Statement of Financial Accounting Standard ("SFAS") No.
109 "Accounting for Income Taxes". 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 year ended December 31, 1998 includes pro forma income tax, as if
the Company had been taxed as a C corporation throughout the period.
(m) Earnings Per Share Of Common Stock
Basic earnings per share (EPS) is determined by dividing net income
(loss) 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 for the years ended December 31, 2000 and 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 for the year ended December 31, 1998.
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.
(n) Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and related pronouncements, as well as SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," became effective for the Company during 2000. The
provisions of this interpretation that are applicable to the Company
were implemented on a prospective basis as of July 1, 2000, which had
no material effect on the Company's financial statements.
Financial Accounting Standards Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation" became effective
for the Company during 2000. The provisions of this interpretation
that are applicable to the Company were implemented on a prospective
basis as of July 1, 2000, which had no material effect on the
Company's financial statements.
(2) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment and their related useful lives are
summarized as follows at December 31:
2000 1999 Life in years
----------- ----------- -------------
Furniture and fixtures $ 202,169 $ 627,633 7
Office equipment 826,311 871,790 5
Leasehold improvements - 189,442 7
----------- -----------
1,028,480 1,688,865
Accumulated depreciation and amortization (515,762) (519,538)
----------- -----------
Furniture, fixtures and equipment, net $ 512,718 1,169,327
=========== =========
During the year ended December 31, 2000, the Company closed its office in
Roslyn Heights, New York, along with other branch locations. In relation to
these closings, the Company sold furniture and fixtures and office
equipment with a net book value of $254,530 for total proceeds of $110,366,
resulting in a net loss of $144,164. Additionally, in conjunction with the
Roslyn Heights closing and the termination of the lease thereon, the
Company wrote off leasehold improvements with a net book value of $178,566.
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 $280,679, $219,825
and $114,960 in 2000, 1999 and 1998, respectively.
(3) Notes Payable
Notes payable consisted of the following at December 31:
2000 1999
----------- -----------
Warehouse lines of credit $12,091,824 $48,143,331
Revolving lines of credit 154,640 2,294,420
Note payable - related party 70,000 --
Installment loan payable 57,647
146,619
----------- -----------
$12,374,111 $50,584,370
=========== ===========
At December 31, 2000 and 1999, 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.
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 (9.5% at December 31, 2000) 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
total amount outstanding on the IMPAC Line at December 31, 2000 was
$11,931,038.
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. The borrowings for
residential rehabilitation properties under this line are guaranteed by
Ronald Friedman, the Company's former President and CEO currently a
consultant to the Company, and by Robert Friedman, owner of 17% of the
Company's outstanding stock and the father of Ronald Friedman. Interest
payable is variable based on LIBOR plus 1.25% to 3.00% based upon the
underlying collateral. After the line expired in August 1999, Chase and PNC
agreed to continue to extend the line on a specified declining basis
through a series of short-term extensions. The total amount outstanding on
the Chase Line at December 31, 2000 was $160,786, all of which was related
to remaining residential rehabilitation properties. The interest rate was
9.64% at December 31, 2000. This line is expected to be paid in full no
later than June 30, 2001.
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. Interest payable was variable based
on LIBOR plus 1.35% to 2.25% depending upon the underlying collateral.
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. As
of June 2000, the RFC Line was paid in full.
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. 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 had agreed to a
series of one month extensions under similar terms and for an additional
fee of $100,000 at declining commitment amounts. As of June 2000, this
warehouse line of credit was paid in full.
The Company supplemented its Warehouse Facilities through a gestation
agreement (the "Gestation Agreement") that had a maximum limit of $30
million. The Gestation Agreement did not have an expiration date but was
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. 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 had 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. The interest rate on these
lines was 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. These funds were used primarily for the cash
expenditure in removing the underlying loans from the warehouse facilities
and for general operating expenses. The total outstanding under these lines
was $154,640 and $2,294,420 at December 31, 2000 and 1999, respectively.
These lines of credit have been terminated and the outstanding balance is
expected to be paid in full in 2001.
On June 8, 2000, the Company borrowed $275,000 from a company wholly-owned
by Robert Friedman. This loan is evidenced by a promissory note due and
payable on demand with a maturity of one year. The interest rate on the
note is 16% per annum payable monthly. The note is secured by properties
and a mortgage which the Company owns. Under the same note, the Company
borrowed an additional $50,000 in July 2000. The Company repaid $80,000 in
August 2000 and $175,000 in October 2000 when a portion of the underlying
collateral was sold by the Company. The balance due on the note at December
31, 2000 is $70,000.
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%.
(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 year ended December 31, 1998.
Year ended December 31,
-------------------------------------------
2000 1999 1998
------------- ------------- -----------
Actual income tax (benefit) provision:
Current:
Federal $ (631,947) $ (249,000) $ 1,117,000
State and local (18,000) (18,000) 262,000
Deferred (per note 1(l)) (333,000) (941,000) 1,274,000
------------- ------------- -----------
$ (982,947) $ (1,208,000) 2,653,000
============ ============ -----------
Pro forma income tax adjustments:
Federal (771,000)
State and local --
-----------
(771,000)
-----------
Pro forma income tax provision $ 1,882,000
===========
The Company's net operating losses expire through 2020. The Company records
a deferred tax asset or (liability) for the tax effect of temporary
differences between financial reporting and tax reporting. The tax effect
of such temporary differences at December 31, 2000 and 1999 consists of:
2000 1999
----------- ----------
Net operating loss carryforward $ 3,088,000 $ --
Deferred origination costs (254,000) (534,000)
Reserves 251,000 628,000
Conversion of accounting method (118,000) (236,000)
Other, net ( 4,000) (191,000)
----------- ----------
2,963,000 (333,000)
Valuation allowance (2,963,000) --
----------- -----------
Net deferred tax asset (liability) $ -- $ (333,000)
=========== ==========
The (benefit) for income taxes for 2000 and 1999 and the pro forma
provision for income taxes for 1998 differ from the amounts computed by
applying federal statutory rates due to:
Year ended December 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Federal statutory rate of 34% $(3,395,000) $(1,062,000) $ 1,561,000
State income taxes, net of
Federal benefit (699,000) (219,000) 321,000
Valuation allowance 2,963,000 --
Adjustment of prior deferred 102,000 -- --
Other, net 46,053 73,000
----------- ----------- -----------
$ (982,947) $(1,208,000) $ 1,882,000
=========== =========== ===========
(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 2003, 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, 2000:
Year ending December 31:
2001 $226,740
2002 117,028
2003 28,176
Thereafter --
--------
Total minimum payments required $371,944
========
Total rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $909,000, $710,000 and $379,000, respectively. In addition,
in the year ended December 31, 2000, the Company incurred $129,000 for a
settlement with the landlord at the Roslyn Heights office in order to
terminate the remaining 4.5 years of the lease. This cost is included in
Expenses relating to closing Roslyn Office.
(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 $54,000, $71,000 and $79,800 in 2000, 1999 and 1998,
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.
The first plan was adopted in 1997. Option activity is as follows:
Number Weighted average
of shares exercise price
--------- ----------------
Options outstanding at January 1, 1998 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
Activity during 2000:
Granted -- --
Expired -- --
Forfeited (277,600) 6.95
-------
Options outstanding at December 31, 2000 340,750 7.68
=======
Options exercisable at December 31, 2000 142,750 7.70
=======
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 to employees. Accordingly,
no compensation expense has been charged to operations for stock option
grants. Had compensation expense been determined based on the fair value at
the 1998, 1999 and 2000 grant dates, consistent with the fair value
methodology of SFAS No. 123, the Company's net income (loss) would have
been $2,460,421, $(2,086,044) and $(9,182,411), respectively, basic and
diluted EPS would have been $(0.56) and $(2.48) for the years ended
December 31, 1999 and 2000, respectively. Basic and diluted EPS would have
been $0.83 and $0.81 for the year ended December 31, 1998. Pro forma basic
and diluted EPS would have been $0.69 and $0.68 for the year ended December
31, 1998.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model. No options were granted in
2000. 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
On June 8, 2000, the Company borrowed $275,000 from a company wholly-owned
by Robert Friedman, owner of 17% of the Company's outstanding stock and the
father of Ronald Friedman, the Company's former President and CEO currently
a consultant to the Company. The balance due on the note at December 31,
2000 is $70,000 - see Note 3.
The Company has amounts receivable due from an officer of the Company in
the amount of $267,782 and $302,014 at December 31, 2000 and 1999,
respectively. These amounts consist of general advances and a non-interest
bearing note that have undefined repayment terms.
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 paid in February 1999.
A relative of Ronald Friedman has an economic interest in a rehab partner
for the purchase and sale of rehabilitation properties with a subsidiary of
PMCC. At December 31, 2000, the subsidiary owned no remaining properties.
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. At December 31, 2000, the Company has an
outstanding receivable from this rehab partner of approximately $344,000,
substantially all of which has been reserved.
(9) Financial Instruments With Off-Balance Sheet Risk and Concentrations
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 $ 13.0 million and $47.1 million of
mortgage loans at December 31, 2000 and 1999, respectively. At December 31,
2000, all commitments to fund were at locked-in rates. At December 31,
1999, $9.9 million relate to commitments to fund at locked-in rates and
$37.2 million 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. There were no such commitments at December 31,
2000.
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 30 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.
The Company currently finances its mortgage banking operations with a
single warehouse facility (the IMPAC Line, Note 3). The IMPAC Line has no
stated expiration date, but is terminable by either party upon written
notice. Management believes that there are other financial institutions
that could provide the Company with a similar facility on comparable terms.
However, a termination of the current warehouse facility without an
immediate replacement could cause an interruption to the Company's
operations and possible loss of revenue, which would affect operating
results adversely.
(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.
Receivables 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-related party - The fair value of the note payable-related
party is estimated by management 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. Since July 1, 2000, the Company originated less than 1% of its
loan volume through FHA products.
As a result of the Investigation, the Company incurred direct expenses of
approximately $1.7 million in the year ended December 31, 2000. These
expenses include legal and professional fees incurred in connection with
the internal investigation of the Company, criminal defense attorneys and
negotiations of warehouse lines of credit amendments. Also included in
these expenses are bank fees relating to granting amendments to the Bank
United line of credit and bonuses paid to the Company's officers and
employees.
One of the Company's warehouse banks has indicated that the Company owes
such bank a total of $250,000 in penalties and fees in relation to its line
of credit with the bank. The Company vigorously disputes this claim and
believes it is without merit. The Company is unable to predict the outcome
of this claim and, accordingly, no adjustments regarding this matter have
been made in the accompanying consolidated financial statements.
Employment/ Consulting Agreements
The Company had entered into an Employment Agreement with Ronald Friedman.
The Employment Agreement's original term was to expire on December 31,
2000. In June 1999, Ronald Friedman's annual salary was increased by the
Board of Directors from $250,000 to $350,000. In May 2000, Ronald
Friedman's Employment Agreement was terminated by the Company's Board of
Directors. The Company simultaneously entered into a Consulting Agreement
with Friedman to provide general business services to the Company as
mutually agreed upon by the Company and Friedman. The Consulting
Agreement's original term is for one year, unless sooner terminated for
death, physical or mental incapacity or cause or terminated by either party
with one hundred twenty (120) days written notice from the Company or
thirty (30) days' written notice from Friedman. The Consulting Agreement is
automatically renewed for consecutive one-year terms unless terminated as
indicated. The Agreement includes annual compensation for Friedman of a
salary of $240,000, and commissions of 6 basis points on all loans closed
by the Company. Subsequent to December 31, 2000, Friedman's salary was
reduced to $120,000.
(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):
Year Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Revenues:
Residential rehabilitation properties $ 16,968 $ 35,960 $ 35,732
Mortgage banking 2,697 16,617 22,914
--------- --------- ---------
$ 19,665 $ 52,577 $ 58,646
========= ========= =========
Less: (1)
Expenses allocable to residential rehabilitation
properties (cost of sales, interest expense and
compensation and benefits) $ 17,859 $ 35,386 $ 34,718
Expenses allocable to mortgage banking (all other) 11,791 20,313 19,338
--------- --------- ---------
$ 29,650 $ 55,699 $ 54,056
========= ========= =========
Operating profit:
Residential rehabilitation properties $ (891) $ 574 $ 1,014
Mortgage banking (9,094) (3,696) 3,576
--------- --------- ---------
$ (9,985) $ (3,122) $ 4,590
========= ========= =========
Identifiable assets:
Residential rehabilitation properties $ 1,070 $ 15,851 $ 16,492
Mortgage banking 14,730 47,695 96,317
--------- --------- ---------
$ 15,800 $ 63,546 $ 112,809
========= ========= =========
(1) In managing its business, the Company specifically allocates compensation
and benefits to its residential rehabilitation segment. All other expenses,
including corporate overhead, are included in the mortgage banking segment.
(13) Shareholders' Equity
Effective July 28, 2000, PMCC Financial Corp. announced that Internet
Business's International, Inc. ("IBUI") is purchasing the 2,460,000 shares
of the Company held by Ronald Friedman, Robert Friedman and the Ronald
Friedman 1997 Guarantor Retained Annuity Trust (collectively, the
"Sellers") in a private transaction (the "Transaction"). This purchase
represents 66.36% of the 3,707,000 shares of common stock of the Company
outstanding. IBUI is a holding company with a variety of internet
subsidiaries that trades publicly under the symbol IBUI on the NASDAQ
Bulletin Board. According to provisions of the Transaction agreement, the
purchase price was reduced because the Company's common stock was not
trading on either the Amex or NASDAQ and there was no merger of the Company
with IBUI or any of its affiliates within time periods specified by the
agreement. At the closing, all shares purchased by IBUI from the Sellers
were deposited in escrow with the Sellers' attorney. These shares are
released to IBUI upon receipt of the scheduled installment payments. The
Company has been informed by the Sellers that certain payments due under
the agreement by IBUI to purchase shares of the Company's stock from the
Sellers were not made and that an event of default has been declared
against IBUI under this purchase agreement. At this time, negotiations and
discussions are being held among the involved parties, however, no
definitive revised agreement has been reached that would cure the default.
It is not possible to predict the ultimate outcome of these matters.
On September 22, 2000, PMCC was advised by the American Stock Exchange that
it is the intention of the Exchange to proceed with the filing of an
application with the Securities and Exchange Commission to strike the
Company's common stock from listing and registration on the Exchange. The
Company exercised its right to appeal the decision of the Exchange. On
December 15, 2000, PMCC was advised by the American Stock Exchange that,
after the appeal hearing to its Committee on Securities by Company
management and outside counsel held on November 6, 2000, the AMEX
Adjudicatory Council agreed with and affirmed the AMEX's staff decision to
strike the Company's common stock from listing and registration on the
Exchange. On December 22, 2000, AMEX filed an application with the
Securities and Exchange Commission to do so effective with the opening of
the trading session on January 4, 2001. The Company's common stock is
currently trading on the Pink Sheets.
In a continuing effort to reduce the Company's overhead and expenses and
achieve profitability, the Company permanently closed its office in Roslyn
Heights, NY. In conjunction with this closing, the Company has negotiated
with its landlord to terminate the remaining 4.5 years of its lease at that
location. This settlement includes the issuance of 200,000 warrants to
purchase PMCC Common Stock at a price to be determined at such time the
Company's stock actively begins trading. An expense of $50,000 was
estimated for these warrants was included in Expenses relating to closing
the Roslyn office in the accompanying financial statements for the year
ended December 31, 2000. The estimated fair value of the warrants will be
adjusted when the exercise becomes determinable.
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) Management Plans
In 2001, the Company's management has and will take numerous steps to
create a positive cash flow for the Company. These include selling the
remaining rehabilitation properties on hand at December 31, 2000, changing
the methodology whereby the Company prices its loans so that a higher per
loan gain is recognized and further reducing and consolidating operations
as required. Certain expense reductions have been made in the first quarter
of 2001 including reducing management salaries and consolidating the entire
wholesale operation in the Florida office. This resulted in a reduction in
the number of staff employees processing loans as well as other cost
reductions. Although the Company does not expect to reopen its own web
site, it has made application to be listed on "lendingtree.com" to provide
additional leads to potential borrowers. Additional commission-only loan
officers have been hired in 2001 in the retail and wholesale areas to
increase the Company's volume of loan applications and to take advantage of
current low interest rates.
(15) Quarterly Financial Data (Unaudited)
The following table is a summary of unaudited financial data by quarter for
the year ended December 31, 2000:
2000
-------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
Revenues $ 11,542 $ 4,659 $ 2,686 $ 778
Expenses 14,239 7,947 4,536 2,928
Net (loss) (1,588) (3,236) (1,850) (2,328)
Net (loss) per share (0.43) (0.87) (0.50) (0.63)