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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, 1997
[ ] 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) Indentification No.)
66 Powerhouse Road, Roslyn Heights, New York 11577
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 625-3000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of common stock outstanding at March 24, 1998 was
3,750,000. 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 American
Stock Exchange, was approximately $9,687,500.
Forward Looking Information
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. The words "expect," "project,"
"estimate," "predict," "anticipate," "believes" and similar expressions are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions, natural disasters and
other catastrophes, 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 may vary materially from those indicated.
PART I
Item 1. Business
General
PMCC Financial Corp. ("PMCC" or the "Company") is a specialty consumer
financial services company providing a broad array of residential mortgage
products to customers ranging from prime credit borrowers seeking "conventional"
or FHA/VA loans to persons who cannot so qualify, i.e., so-called "B," "C" and
"D" or "sub-prime" credit borrowers, seeking "non-conventional" loans. Since
mid-1996, the Company has expanded and diversified its mortgage banking
activities by opening a fully-staffed wholesale division, significantly
increasing its "B," "C" and "D" mortgage originations and establishing a program
to provide short-term funding to independent real estate agencies for one to
four family residential rehabilitation properties.
PMCC is a newly formed holding company that conducts all of its business
through its wholly-owned subsidiary, Premier Mortgage Corp. ("Premier"). On
February 18, 1998, the shareholders of Premier exchanged all of their
outstanding common stock for shares of PMCC, and PMCC completed an initial
public offering of new shares of common stock (see note 12 of notes to
consolidated financial statements).
The Company's primary mortgage banking business objectives are to enhance
its growth, to continue to offer a full range of mortgage products to all types
of 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.
The Company has experienced growth in its mortgage banking activities in
recent years, originating $47 million in mortgage loans in 1994, $71 million in
mortgage loans in 1995, $133 million in mortgage loans in 1996 and $315 million
in mortgage loans in 1997. For its fiscal years ended December 31, 1995, 1996
and 1997, the Company had revenues from its mortgage banking activities of $3.3
million, $6.6 million and $14.2 million, respectively.
The Company originates residential first mortgages in New York and New
Jersey by a staff of experienced retail loan officers who obtain customers
through referrals from local real estate agents, builders, accountants,
financial planners and attorneys, as well as from direct customer contact via
advertising, direct mail and promotional materials. The Company's wholesale
division originates mortgage loans through independent mortgage bankers and
brokers, who submit applications to the Company on behalf of a borrower. For the
year ended December 31, 1997, approximately 59% of the Company's mortgage
originations were derived from its retail mortgage operations and approximately
41% 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 seven to 30 days of
the date of origination of the mortgage (30-90 days for sub prime originations).
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, 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 agencies for the purchase, rehabilitation and resale
of vacant one-to-four family residences in New York City and Long Island, New
York. The Company provides this funding to several independent real estate
agencies who specialize in the rehabilitation and marketing of these properties.
As security for providing the independent real estate agencies with the funding
to accomplish the purchase, rehabilitation and resale of the property, title to
the 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
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
independent real estate agents. 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. At December 31, 1996, the Company had 43 properties in various stages
of rehabilitation and awaiting resale. For the year ended December 31, 1997, the
Company completed 169 such transactions and at December 31, 1997, the Company
had 125 properties in various stages of rehabilitation and awaiting resale. 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. Although
the Company expects to continue this activity in its markets, there can be no
assurance that the Company's historical rate of growth of this activity will
continue in future periods.
The growth of the Company's mortgage lending to "B," "C" and "D" credit
borrowers reflects the establishment, in April 1997, of the Company's sub-prime
lending division, increased customer demand for sub-prime mortgage products and
the availability of capital to the Company for these mortgage banking products.
In most cases, "B," "C" and "D" credit borrowers have substantial equity in
their residences and while some of these sub-prime customers have impaired
credit, such customers also include individuals who seek an expedited mortgage
process, and persons who are self-employed or, due to other circumstances, have
difficulty verifying their income. The Company believes that the demand for
loans by "B," "C" and "D" credit customers is less dependent on general levels
of interest rates or home sales and therefore may be less cyclical than
conventional mortgage lending. The Company's sub-prime mortgage lending activity
is subject to certain risks, including risks related to the significant growth
in the number of sub-prime lenders in recent years, risks related to certain
potential competition and risks related to credit-impaired borrowers.
Growth Strategy
The Company's growth strategy includes the following elements:
increase the Company's "B," "C" and "D" mortgage originations through
recruitment of experienced salespersons and acquisitions of mortgage brokers or
mortgage banks in the Northeast that specialize in mortgage products for this
target market. The Company believes that acquisitions of mortgage brokers and
bankers who specialize in sub-prime mortgage products in particular local
markets is a cost-effective way of reaching new customers. The Company has no
present plans, agreements or arrangements with respect to any acquisition, but
intends to pursue one or more of such acquisitions during 1998;
increase the Company's wholesale mortgage origination business in New York
and expand into other states. The Company believes that its broad range of
mortgage alternatives for most classifications of borrowers and its ability to
promptly make decisions provides it with the opportunity to increase this aspect
of its business in the New York and New Jersey markets and in other markets in
to which it intends to expand. Prompt and consistent service to independent
mortgage loan brokers who are sources of wholesale loan transactions is a key to
the Company increasing its wholesale mortgage originations and establishes the
basis for repeat business and referrals from these brokers;
expand the Company's retail mortgage origination business into Connecticut,
Pennsylvania, Florida and Maryland. During 1998, the Company intends to open at
least four "retail" sales offices (i.e., offices intended to deal directly with
potential borrowers) in these states, although it has not yet identified the
exact locations of these additional offices. This expansion activity will be
based on the Company's ability to recruit experienced loan officers and other
qualified personnel in particular markets. The expansion costs for new sales
offices are generally mitigated by leasing short-term executive suite space
until revenues are generated by the office, at which time the Company will lease
permanent space. Controlling the costs of expansion permits the Company to enter
and, if necessary, exit new geographic markets quickly with limited financial
impact. The Company's goal is for each office to achieve break-even operations
within six months after opening;
expand the Company's residential rehabilitation activities outside of New
York City and Long Island, New York. The Company believes that opportunities
exist in other locations within New Jersey and the New York metropolitan area to
provide fee-based short-term funding for residential rehabilitation properties.
In some cases, this funding would be provided to one of the specialized real
estate companies with which the Company already does business, while in other
cases, the Company may elect to work with companies with which it has not done
business in the past. The Company views its residential rehabilitation
activities as important sources of fee business and follow-on mortgage
origination business; and
recruit additional key personnel. The Company continues to seek to hire
experienced mortgage loan and operations personnel, particularly with experience
in sub-prime mortgage originations. The Company views its employees as key to
its growth, and believes it offers compensation packages that will both attract
new employees and retain existing ones.
There can be no assurance as to the specific time-frame concerning when the
Company will implement any elements of its growth strategy, whether the Company
will be successful in implementing this strategy or whether the implementation
of this strategy will result in increased revenue or income to the Company.
Operating Strategy
The Company's operating strategy includes the following elements:
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;
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 seven
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;
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
which 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;
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, FHLMC, FHA and jumbo loans, the Company has been delegated authority by
certain institutional investors to approve many of the Company's niche products.
The Company has provided training for its processors and underwriters to
efficiently review each file for compliance with investor guidelines. The
Company believes that its delegated authority to approve most loans provides it
with a competitive advantage because it allows the Company to provide additional
services to its borrowers and correspondents; and
invest in information systems. In its continued effort to increase
efficiency, the Company plans to upgrade its information systems in 1998. The
Company intends to continually look for ways to improve efficiencies through
automation.
The Company does not currently intend to engage in mortgage securitization
activities.
Mortgage Products Offered
The Company believes it is one of a small group of multi-state mortgage
bankers that offer on a direct (or "retail") basis a broad array of mortgage
products to prime credit borrowers (i.e., a credit-rated borrower seeking a
conventional or FHA/VA insured loan), and borrowers who are unable to qualify
for conforming home mortgages (i.e., the "B," "C" and "D" credit-rated, or
sub-prime borrower). 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 and sub-prime credit borrowers:
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.
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).
Adjustable interest rate mortgages ("ARMs") repayable over seven to 30
years with monthly payments adjusted on a periodic basis (i.e., six months or
once a year) based upon interest rate fluctuations.
ARMs offer additional alternatives:
Adjustment period -- This determines when the first interest rate and
payment changes will take place; an ARM could make its initial adjustments after
six months, one year, three years, five years or ten years and subsequent
adjustments take place either every six months or one year thereafter.
Caps -- "Caps" place limits on payments and interest rate changes per
adjustment period. For example, for an ARM that adjusts every year, the maximum
increase in the interest rate on the adjustment date is typically 200 basis
point per year (i.e., a mortgage would adjust from 7% to 9%) and 600 basis
points for the life of the loan.
Index -- The index is the basis upon which interest rate adjustments are
made; typically it is related to various Treasury bill rates or another widely
published rate such as LIBOR.
Mortgages are also offered with a variety of combinations of interest rates
and origination fees so that its customers may elect to "buy-down" the interest
rate by paying higher points at the closing or pay a higher interest rate and
reduce or eliminate points payable at closing. The Company's mortgage products
are further tailored, i.e., are offered with varying down payment requirements,
loan-to-value ratios and interest rates, to a borrower's profile based upon the
borrower's particular credit classification and the borrower's willingness or
ability to meet varying income documentation standards -- the full income
documentation program pursuant to which a prospective borrower's income is
evaluated based on tax returns, W-2 forms and pay stubs; the limited income
documentation program pursuant to which a prospective borrower's income is
evaluated based on bank statements and profit and loss statements; 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 U.S. 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 $160,950 for one-family residences or $205,912
for two-family residences located in the New York City metropolitan area). FHA
and VA mortgages must be underwritten within specific governmental guidelines,
which include income verification, borrower asset, borrower credit worthiness,
property value and property condition. Because these guidelines require that
borrowers seeking FHA or VA mortgages submit more extensive documentation and
the Company perform a more detailed underwriting of the mortgage than prime
credit mortgages, the Company's revenues from these mortgages are generally
higher than a comparable sized mortgage for a prime credit borrower.
Credit Classifications for Sub-Prime Borrowers
The Company has established credit classifications for sub-prime borrowers
"B+" through "D" -- including subratings within those categories -- based on the
credit profiles of the applicant and a credit scoring model. These
classifications are determined by factors that include the applicant's credit
history, the loan-to-value ratio, the applicant's employment status, the
applicant's income (and verification thereof), and the applicant's debt/income
ratio. The Company believes its classifications are generally consistent with
established industry-wide practices utilized by third-party investors to create
and maintain a substantial liquid secondary market for these mortgages. The
significance of these classifications is that mortgages for sub-prime borrowers
typically carry higher origination fees and higher interest charges than
conventional mortgages, and are, therefore, significantly more profitable to the
Company than conventional and/or FHA/VA mortgages.
The following table sets forth the Company's mortgage loan production
volume by type of loan for each of the four years ended December 31, 1997.
Years Ended December 31,
($ in thousands)
1994 1995 1996 1997
---- ---- ---- ----
Conventional Loans:
Volume $46,700 $51,300 $75,400 $177,825
Percentage of total volume 100% 72.6% 56.6% 56.5%
FHA/VA Loans:
Volume -- $19,400 $57,700 $75,060
Percentage of total volume -- 27.4% 43.4% 23.9%
Sub-Prime Loans
Volume * * * $61,675
Percentage of total volume * * * 19.6%
Total Loans:
Volume $46,700 $70,700 $133,100 $314,560
Number of Loans 273 470 890 2,160
Average Loan Size $171 $150 $150 $146
- ------------
*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) and New Jersey
through three offices. Additionally, the Company has mortgage banking licenses
in Connecticut and Florida. During 1998, the Company intends to open four
additional retail offices in New York, Pennsylvania and Maryland and will open
other retail offices as opportunities present themselves. These offices will
allow the Company to focus on developing contacts with individual borrowers,
local brokers and referral sources such as accountants, attorneys and financial
planners. The Company will seek to increase its wholesale mortgage originations
through its existing offices and by obtaining licenses in approximately 10
additional states within the next year. The Company intends to expand its
residential rehabilitation activities through its existing and future agency
relations.
The Company also expects to expand into selected geographic markets through
acquisitions of mortgage banking/mortgage broker businesses that have
established niches in such areas. The Company believes these acquisitions are a
cost-effective strategy for increasing mortgage originations, and is
particularly interested in businesses in the Northeast and mid-Atlantic Region
that specialize in mortgage products for "B," "C" and "D" customers.
Retail Mortgage Originations. The Company's typical retail customer is
assigned to one of the Company's mortgage loan officers working at one of the
Company's offices who spends approximately one hour interviewing the applicant
about his/her mortgage borrowing needs and explaining the Company's mortgage
product alternatives. Following this interview, the mortgage loan officer
assists the customer in completing an application and gathering supporting
documentation (a "loan file"). Once the loan file is submitted, a sales manager
reviews the file to verify that the loan complies with a specific product that
the Company can resell to institutional investors. The Company assigns a loan
processor to review a loan file for completeness and requests missing
documentation from the borrower. The Company's review of a loan file and the
related underwriting process generally includes matters such as verification of
an applicant's sources of down payment, review of an applicant's credit report
from a credit reporting agency, receipt of a real estate appraisal, verification
of the accuracy of the applicant's income and other information, and compliance
with the Company's underwriting criteria and those of either FHA and/or
institutional investors. The Company's review/underwriting process allows it to
achieve efficiency and uniformity in processing, as well as quality control over
all loans. In the case of prime and FHA/VA mortgages, the underwriting process
occurs at the Company's offices in Roslyn Heights, New York and Union, New
Jersey, while sub-prime loans are separately processed and underwritten at the
Company's office in Roslyn Heights, New York.
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. This structure provides the Company with
a competitive advantage over mortgage brokers, who must outsource a significant
portion of the loan origination process, and over banks, which usually have
greater overhead expenses than the Company. In addition, handling the entire
loan origination process in-house leads to effective quality control and better
communication among the various personnel involved.
Wholesale Mortgage Operations. Wholesale mortgage originations are the
responsibility of the Company's wholesale division, which solicits referrals of
borrowers from a network of approximately 125 independent mortgage bankers and
brokers located throughout 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 works with approximately 125 mortgage bankers and brokers on a
regular basis. The Company conducts due diligence on potential mortgage bankers
and brokers, including verifying financial statements of the company and credit
checks of principals, business references provided by the bankers or brokers and
verifying through the banking department that the mortgage banker or broker is
in good standing. Once approved, the Company requires that each mortgage banker
or broker sign an agreement of purchase and sale in which the mortgage banker or
broker makes representations and warranties governing both the mechanics of
doing business with the Company and the quality of the loan submissions. In
addition, the Company regularly reviews the performance of loans originated
through mortgage bankers and brokers.
Through the wholesale division, the Company can increase its loan volume
without incurring the higher marketing, labor and other overhead costs
associated with increased retail originations because brokers conduct their own
marketing and employ their own personnel to attract customers, to assist the
borrower in completing the loan application and to maintain contact with
borrowers.
Residential Rehabilitation Activities. In September 1996, the Company
commenced a program of providing short-term fee-based funding to several real
estate agencies 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
agencies 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 an agency submits information about a
property to the Company which the agency 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 independent real estate agencies 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 agencies (the "Agent
Agreement") provide that all risks relating to the ownership, marketing and
resale of the property are borne by the agencies, 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 averages approximately $9,000, is a priority
payment after payment of the funds advanced by the Company, over any monies paid
to the agencies. The agencies 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 $100,000 each, and the
renovation/rehabilitation expenses (which are borne by the agencies) are usually
between $10,000 and $20,000 per property. The period during which these
properties are financed generally ranges from three to five months. Because the
Company holds 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 independent real estate
agents.
The Company's arrangement with these agencies is not exclusive, although
the Company does encourage the agencies to provide the Company with a "first
right" of funding each property that each agency has identified. The Company has
investigated each agency and is satisfied that their financial condition and
business reputation is acceptable. As the Company opens additional retail
offices, it will consider funding residential rehabilitation properties in the
areas served by such offices.
The Company believes that its residential rehabilitation program serves as
an additional source of mortgage originations since purchasers of such
properties seek mortgage financings and are encouraged to submit applications to
the Company. Approximately 90% of the buyers of such properties obtained
mortgages originated by the Company. The process by which these mortgages were
processed and underwritten was identical to the Company's procedures for
reviewing and underwriting mortgages originated from retail or wholesale
sources, and each of these mortgages was sold to third party investors in the
normal course of the Company's business.
Loan Funding and Borrowing Arrangements
The Company funds its mortgage banking and residential rehabilitation
financing activities in large part through a warehouse line of credit and its
ability to continue to originate mortgage loans and provide residential
rehabilitation financings is dependent on continued access to capital on
acceptable terms.
The Company's warehouse line of credit (the "Warehouse Facility"), as
amended, with two commercial banks (PNC Mortgage Bank and LaSalle National Bank)
commenced in July 1997, and currently allows the Company to borrow up to $66.1
million through April 1, 1998 and $60 million until expiration on May 31, 1998.
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. The Company is required to comply with certain financial covenants
and the borrowings are guaranteed by Ronald Friedman, the Company's President,
Chief Executive Officer and a director and Robert Friedman, the Company's Chief
Operating Officer, Secretary, Treasurer and Chairman of the Board of Directors.
The Company's Warehouse Facility with these two banks expires on May 31, 1998,
and is terminable by the banks at any time without cause, upon 60 days notice to
the Company.
The Warehouse Facility requires the Company to repay the amount it borrows
to fund a loan generally within 60 to 90 days after the loan is closed or when
the Company receives payment from the sale of the funded loan, whichever occurs
first. Until the loan is sold to an investor and repayment of the loan is made
under the Warehouse Facility, the Warehouse Facility provides that the funded
loan is pledged to secure the Company's outstanding borrowings. Interest payable
on fixed loans is LIBOR plus 2.25% per year, while interest payable on
adjustable rate mortgages is LIBOR plus 2% per year.
From August 1996 through November 1997, one of the commercial banks that
provides the Warehouse Facility supplemented this lending facility through a
gestation agreement (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 $20 million of additional funds for
loan originations through the Company's sale to this bank of originated mortgage
loans previously funded under the Borrowing Agreement and committed to be sold
to institutional investors. Under the Gestation Agreement, the Company was
required to arrange for institutional investors to take delivery of the loans
within 20 days of their sale to the bank; otherwise the Company was required to
repurchase the loans. On November 15, 1997 the Gestation Agreement expired. The
bank providing the Gestation Agreement exited the business of providing
gestation lines of credit, but has allowed the Company to continue to utilize
the line of credit until February 20, 1998. On February 28, 1998, the
outstanding balance under the Gestation Agreement, was consolidated with the
Warehouse Facility. The Company believes that other financial institutions will
provide it with a gestation line of credit, but no assurance can be made that
the Company will find such financial institution or that the line of credit will
be available on reasonable terms or at all.
From time to time, the Company has borrowed from three affiliated
corporations owned by Ronald Friedman and Robert Friedman. As of December 31,
1997, $3.1 million remained outstanding, all of which is secured by a mortgage
against certain residential properties in rehabilitation pursuant to a mortgage
agreement. As the residential property is sold, proceeds are used to repay the
mortgage on the particular property. Interest payable pursuant to this agreement
is 10% per year.
In November 1996, Ronald Friedman loaned the Company $275,000, evidenced by
a promissory note, due in full on January 1, 1998, bearing an interest rate of
8% per year. In addition, the Company purchased the minority interest in RF
Properties Corp. from Ronald Friedman for $18,163, evidenced by a promissory
note. The note bears an interest rate of 8% per year. These loans were repaid as
of January 1, 1998.
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.
The Company's mortgage loan sales are made to a select number of
institutional investors. From June 1997 through September 30, 1997, the Company
had an agreement with IMC to sell up to $32 million of "B," "C" and "D" loans
which assured the Company's sale of these loans in bulk, at favorable prices.
Although the Company's agreement with IMC expired on September 30, 1997, IMC,
and other investors, continue to purchase loans from the Company. During 1996
and 1997, the Company sold substantially all of its prime and FHA/VA loans to
three other institutional investors. The Company, consistent with industry
custom, has, from time to time, made arrangements with these and other
institutional investors that allow the Company to sell mortgage loans at
favorable prices if targeted loan volumes are achieved.
Quality Control
In accordance with HUD regulations, the Company is required to perform
quality control reviews of its FHA mortgage originations. The Company's quality
control department examines branch offices and approximately 10% of all 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.
Marketing and Sales
The Company has developed numerous marketing programs at both the corporate
and the branch office level. These programs include, among others,
market-sensitive advertising in key newspapers and other publications, public
relations, promotional materials customized for consumers and real estate
professionals, collateral materials supporting particular product promotions,
educational seminars, trade shows, telemarketing, 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 and in the states into which it seeks to expand. The
Company's competitors include financial institutions, such as other mortgage
bankers (e.g. Countrywide Credit Industries, Inc. and Delta Financial Corp.),
state and national commercial banks, savings and loan associations (e.g. Long
Island Savings Bank and Dime Savings Bank), 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 headquarters and senior management
with productivity and other key data. The information system provides weekly and
monthly detailed information on loans in process, fees, commissions, closings,
detailed monthly financial statements and all other aspects of running and
managing the business. The Company anticipates using a portion of the proceeds
from its recent initial public offering (the "IPO") for upgrades and
improvements to its information system. The cost of doing so is estimated to be
$1 million, including software, hardware and telephone equipment for all
locations.
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.
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 March 9, 1998, the Company had 106 employees, substantially all of
whom were employed full-time. Of these, 72 were employed at the Company's Roslyn
Heights, New York headquarters, and 34 were employed at the Company's other
offices. None of the Company's employees are represented by a union. The Company
considers its relations with its employees to be satisfactory.
Item 2. Properties
The Company's executive and administrative offices are located at 66
Powerhouse Road, Roslyn Heights, New York, where the Company leases
approximately 6,395 square feet of office space at an annual rent of
approximately $150,000. The lease expires in August 2000.
The Company leases 1,562 square feet of general office space in Hauppauge,
New York pursuant to a lease that expires on December 31, 1999 at an average
annual rent of approximately $20,000. The Company leases office space in Union,
New Jersey pursuant to a lease that expires on February 28, 2002 with annual
rent of $61,762. The Company also leases 1,670 square feet of office space in
Roslyn Heights, New York pursuant to a lease that expired on January 31, 1998
with annual rent payments of $40,500. On March 17, 1998 the Company entered into
a new lease at 3 Expressway Plaza, Roslyn Heights, New York for approximately
23,000 square feet with annual first year rental payments of $464,000. The
Company will consolidate its existing Roslyn Heights operations into this new
facility in the second quarter of 1998.
Item 3. Legal Proceedings
In the ordinary course of its business, the Company is from time to time
subject to various legal proceedings. The Company does not believe that any
routine legal proceedings, individually or in the aggregate, will have a
material adverse affect on the operations or financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holder
None.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder
Matters
PMCC's common stock was listed on the American Stock Exchange effective
February 18, 1998 under the symbol "PFC."
The initial public offering price was $9.00 per share for the 1,250,000
shares sold by the Company.
Item 6. Selected Financial Data
Consolidated Statement of Operations Data:
At or for the Years Ended December 31,
1993 1994 1995 1996 1997
($ in thousands, except per share data)
---------------------------------------
Revenues $1,464 $1,187 $3,315 $11,676 $39,364
Net income 303 62 196 1,034 3,701
Pro forma net income1 517 2,150
Pro forma net income per share -
diluted2 0.21 0.84
Operating Data:
Mortgage loans originated:
Conventional 46,700 51,300 75,400 177,825
FHA/VA - 19,400 57,700 75,060
Sub Prime (B,C,D)3 - - - 61,675
------ ------ ------- -------
46,700 70,700 133,100 314,560
====== ====== ======= =======
Number of loans originated 273 470 890 2,160
Average principal balance per
loan originated $171 $150 $150 $146
Consolidated Balance Sheet Data:
Receivable from sales of loans - - $1,357 $9,838 $35,131
Mortgage loans held for sale, $32 $582 5,537 2,875 18,610
Residential rehabilitation properties - - - 3,246 11,584
Total assets 574 1,098 8,232 17,153 68,427
Borrowings - 557 6,476 14,198 59,410
Shareholders' equity 505 465 1,114 1,878 4,809
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 41-42%. The pro forma statement of operations
data also reflects an increase in officer compensation expense pursuant to
proposed employee contracts.
2 Pro forma net income per share has been computed by dividing pro forma
net income by the pro forma weighted average number of common shares and share
equivalents outstanding.
3 For the years ended December 31, 1995 and 1996, the Company estimates
that the sub-prime loans accounted for less than 5% of the Company's total
originals for those years and are included in conventional loans for those
years.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Years Ended December 31, 1997 and 1996
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Years Ended December 31,
1997 1996
---- ----
Sales of residential rehabilitation properties $25,136,099 $5,073,253
Gains of sales of mortgage loans, net 11,844,108 5,867,250
Interest earned 2,383,660 735,802
----------- -----------
Total revenues $39,363,867 $11,676,305
=========== ===========
Revenue from the sale of residential rehabilitation properties increased
$20.1 million, or 395%, to $25.1 million for the year ended December 31, 1997
from $5.1 million for the year ended December 31, 1996. This increase was
primarily the result of the increase in the number of residential rehabilitation
properties sold to 169 for the year ended December 31, 1997 from 35 for the year
ended December 31, 1996.
Gains on sales of mortgage loans increased $6.0 million, or 102%, to $11.8
million for the year ended December 31, 1997 from $5.9 million for the year
ended December 31, 1996. This increase was primarily due to (a) increased loan
originations and loan sales from the Company's existing retail offices, and (b)
loan originations and sales by the Company's wholesale division and B-C-D
division which commenced operations in January 1997 and April 1997,
respectively. Mortgage loan originations were $315 million and $133 million for
the years ended December 31, 1997 and 1996, respectively. Although there can be
no assurance thereof, the Company expects mortgage originations to increase and
therefore believes its gains on sales of mortgage loans will increase.
Interest earned increased $1.6 million, or 224%, to $2.4 million for the
year ended December 31, 1997 from $736,000 for the year ended December 31, 1996.
This increase was primarily due to increased mortgage originations for the year
ended December 31, 1997 and an increase in the amount of B-C-D mortgage
originations which generally are held for sale longer than conventional mortgage
originations.
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
Years Ended December 31,
1997 1996
---- ----
Cost of sales-residential rehabilitation properties $23,621,193 $4,788,944
Compensation and benefits 6,995,104 3,674,490
Interest expense 2,745,610 839,284O
Other general and administrative 2,260,485 1,326,265
----------- -----------
Total expenses $35,622,392 $10,628,983
=========== ===========
Although there can be no assurance thereof, the Company believes that the
expected increase in mortgage origination volume and residential rehabilitation
activities will result in increased expenses.
Cost of sales - residential rehabilitation properties increased $18.8
million, or 393%, to $23.6 million for the year ended December 31, 1997 from
$4.8 million for the year ended December 31, 1996. This increase was primarily
due to the increase in the number of properties purchased, rehabilitated and
sold.
Compensation and benefits increased $3.3 million, or 90%, for the year
ended December 31, 1997 from $3.7 million for the year ended December 31, 1996.
This increase was primarily due to increased sales' salaries and commission
which are based substantially on mortgage loan originations. Administrative and
support personnel increased from 33 employees at December 31, 1996 to 68 at
December 31, 1997.
Interest expense increased $1.9 million, or 227%, for the year ended
December 31, 1997 from $839,000 for the year ended December 31, 1996.
Approximately $333,000 of this increase was attributable to the funding of
residential rehabilitation properties. The remainder of the increase was
attributable to the increase in mortgage originations funded through the
Company's warehouse facility.
Other general and administrative expense increased $934,000, or 70%, to
$2.3 million for the year ended December 31, 1997 from $1.3 million for the year
ended December 31, 1996. This increase was primarily due to increased expenses
incurred in connection with the growth in the operations of the Company
including rent and facilities expense, telephone and marketing.
Years Ended December 31, 1996 and 1995
Revenues. The following table sets for the components of the Company's
revenues for the periods indicated:
Years Ended December 31,
1996 1995
---- ----
Sales of residential rehabilitation properties $5,073,253 ----
Gains of sales of mortgage loans, net 5,867,250 3,083,010
Interest earned 735,802 231,916
----------- ----------
Total revenues $11,676,305 $3,314,926
=========== ==========
Revenue from the sale of residential rehabilitation properties increased
$5.1 million for the year ended December 31, 1996 from $0 for the year ended
December 31, 1995. This activity commenced in September 1996.
Gains on sales of mortgage loans increased by $2.8 million, or 90%, to $5.9
million for the year ended December 31, 1996 from $3.1 million for the year
ended December 31, 1995. This increase was primarily due to increased loan
originations and loan sales from the Company's existing retail offices.
Interest earned increased $504,000, or 217%, to $736,000 for the year ended
December 31, 1996 from $232,000 for the year ended December 31, 1995. This
increase was primarily attributable to the increase in mortgage originations for
1996 as compared to 1995 and to the Company utilizing its Warehouse Facility to
a greater degree in 1996. During 1995, a portion of its mortgage originations
were funded directly by institutional investors at closing.
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
Years Ended December 31,
1996 1995
---- ----
Cost of sales-residential rehabilitation properties $4,788,944 ----
Compensation and benefits 3,674,490 2,069,443
Interest expense 839,284 245,281
Other general and administrative 1,326,265 797,042
---------- ----------
Total expenses $10,628,983 $3,111,766
=========== ==========
Cost of sales - residential rehabilitation properties increased to $4.8
million for the year ended December 31, 1996 from $0 for the year ended December
31, 1995. This activity commenced in September 1996.
Compensation and benefits increased $1.6 million, or 78%, to $3.7 million
for the year ended December 31, 1996 from $2.1 million for the year ended
December 31, 1995. This increase was primarily attributable to increased sales'
salaries and commissions, which are based substantially on loan production.
Administrative and support personnel increased from 17 employees at December 31,
1995 to 33 employees at December 31, 1996.
Interest expense increased by $594,000, or 242%, to $839,000 for the year
ended December 31, 1996 from $245,000 for the year ended December 31, 1995. This
increase was primarily attributable to the increase in the volume of loans,
substantially all of which were funded through the Company's Warehouse Facility.
Approximately $77,000 of this increase related to residential rehabilitation
financing during the period.
Other general administrative expenses increased by $529,000, or 66%, to
$1.3 million for the year ended December 31, 1996 from $797,000 for the year
ended December 31, 1995. This increase was primarily attributable to the
Company's increased volume of loan originations.
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 the Warehouse Facility, borrowings
from affiliates and cash flow from operations. The amount of outstanding
borrowings under the Warehouse Facility at December 31, 1997 was $58.5 million.
The Warehouse Facility is secured by the mortgage loans and residential
rehabilitation properties funded with the proceeds of such borrowings.
Borrowings from affiliates are secured by mortgages on the residential
rehabilitation properties for which monies were borrowed.
Under the Warehouse Facility, the interest rate charged for borrowings is
LIBOR plus 21/4% on fixed rate loans and LIBOR plus 2% on adjustable rate
mortgages. The Warehouse Facility expires on May 31, 1998 and is funded by two
commercial banks. The Warehouse Facility contains certain covenants limiting
indebtedness, liens, mergers, changes in control and sale of assets, and
requires the Company to maintain minimum net worth and other financial ratios.
The Company expects to be able to renew or replace the Warehouse Facility when
its current term expires.
The Company's Warehouse Facility with two commercial banks (PNC Mortgage
Bank and LaSalle National Bank) commenced in July 1997 and, as amended, allows
the Company to borrow $66.1 million through April 1, 1998 and $60 million until
expiration. These borrowings are to be 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. The Warehouse Facility requires the Company to comply
with certain financial covenants, including maintaining a minimum tangible net
worth, levels and ratios of indebtedness, restrictions on the sale or pledge of
any future retained servicing rights, restrictions on the payments of dividends
and distributions and provisions with respect to merger, sale of assets,
acquisitions, change of control and change in senior management. The Warehouse
Facility contains a cross default provision in the event that the Company is in
default of other loan agreements whereby the Company owes, in the aggregate,
more than $100,000. In addition, borrowings are guaranteed by Ronald Friedman,
President, Chief Executive Officer and a Director of the Company and Robert
Friedman, Chairman of the Board of Directors, Chief Operating Officer, Secretary
and Treasurer of the Company. The Company's Warehouse Facility with these two
banks expires is terminable by the banks at any time without cause, upon 60 days
notice to the Company.
From August 1996 through November 1997, one of the commercial banks that
provides the Warehouse Facility supplemented this lending facility through 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 $20 million of additional funds for loan originations through the
Company's sale to this bank of originated mortgage loans previously funded under
the Warehouse Facility and committed to be sold to institutional investors.
Under the Gestation Agreement, the Company was required to arrange for
institutional investors to take delivery of the loans within 20 days of their
sale to the bank; otherwise the Company was required to repurchase the loans. On
November 15, 1997 the Gestation Agreement expired. The bank providing the
Gestation Agreement exited the business of providing gestation lines of credit,
but allowed the Company to continue to utilize the line of credit until February
20, 1998. On February 28, 1998, the Company's outstanding balance under the
Gestation Agreement was consolidated with the Warehouse Facility. The Company
believes that other financial institutions will provide it with a gestation line
of credit, but no assurance can be made that the Company will find such
financial institution or that the line of credit will be available on reasonable
terms or at all.
Since September 1, 1996, the Company has borrowed funds from three
corporations owned by Ronald Friedman, the President, Chief Executive Officer
and a Director of the Company, and Robert Friedman, the Chairman of the Board of
Directors, Chief Operating Officer, Secretary and Treasurer of the Company, to
provide funding for residential rehabilitation properties and for working
capital purposes. At December 31, 1997 borrowings from affiliates totaled $3.1
million. At December 31, 1996 borrowings from affiliates totaled $762,000.
Interest on borrowings from affiliates is 10% per annum and the borrowings are
secured by certain of the Company's residential rehabilitation properties.
In November 1996, Ronald Friedman loaned the Company $275,000, evidenced by
a promissory note, due in full on January 1, 1998, bearing an interest rate of
8% per year. In addition, the Company purchased the minority interest in RF
Properties Corp. from Ronald Friedman giving the Company full ownership interest
in RF Properties Corp. for $18,163, evidenced by a promissory note due the
earlier of October 1, 1998, or the date of the consummation of the IPO, bearing
an interest rate of 8% per year. These loans have been repaid as of January 1,
1998.
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.
Net cash used in operations for the year ended December 31, 1997 was $43.1
million. The Company used cash to fund the $41.0 million increase in mortgage
loans held for sale and receivable from sales of loans and $8.3 million net
increase in residential rehabilitation properties. The increase in these assets
was financed by increased borrowings under the Warehouse Facility, net income
and borrowings from affiliates.
On February 18, 1998 the Company completed an initial public offering of
new shares of common stock at a price of $9 per share. The Company received
gross proceeds of $11,250,000 and net proceeds of approximately $9,300,000. The
Company expects to increase its production of mortgage originations through
greater emphasis on B-C-D loans, expansion of wholesale operations and expansion
into new geographic markets. The Company believes that wholesale lending
represents a cost-effective means by which the Company may expand into, and
develop a presence in new market areas. This anticipated increase in production
of mortgage originations is expected to be funded by additional borrowings under
the Warehouse Facility, increased capital resulting from the IPO and funds
provided from operations. To the extent that additional borrowings under the
Warehouse Facility are not available on satisfactory terms, the Company will
explore alternative means of financing, including raising capital through
additional offerings of securities. The net proceeds of the IPO, together with
the Company's existing capital resources, including the funds from its Warehouse
Facility, are expected to enable the Company to fund its current mortgage
banking and residential rehabilitation operations.
Recent Accounting Pronouncements - SFAS 130 and SFAS 131
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), Reporting Comprehensive Income." SFAS 130 is effective for
years beginning after December 15, 1997 and requires reclassification of
financial statements for earlier periods provided for comparative purposes. The
statement establishes standards for reporting and display of comprehensive
income and its components. This statement requires that all items that are
required to be recognized as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The Company is currently evaluating the impact SFAS 130
will have on its financial statements but does not believe it will have a
material impact on its financial condition or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No.131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information." SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. The statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. The Company has not yet
determined the impact SFAS 131 will have on its financial statements. The
Company is currently evaluating the impact SFAS 131 will have on its financial
statements but does not believe it will have a material impact on its financial
condition or results of operations.
Item 8. Financial Statements and Supplementary Data.
The response to this item is set forth at the end of this report, on Pages
F-1 to F-19.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
In 1996, the Company determined to change accountants from Freeberg &
Freeberg ("F&F") to KPMG Peat Marwick LLP ("KPMG"). F&F's report on the
Financial Statements for the Company's fiscal year ended December 31, 1995
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. The decision
to change accountants was determined by the Board of Directors of the Company.
There were no disagreements with F&F on any matter of accounting principles or
practices, financial statement disclosures, auditing scope or procedure, which,
if not resolved to the satisfaction of F&F, would have caused F&F to make
reference to the matter in their reports.
In 1996, the Company engaged KPMG as its independent auditors to audit the
Company's Consolidated Financial Statements. Prior to engaging KPMG, the Company
(or someone on its behalf) did not consult KPMG regarding either (i) the
application of accounting principles to a specified transaction, either
contemplated or proposed or the type of audit opinion that might be rendered on
the Company's financial statements; or (ii) any matter that was either the
subject of a disagreement with its former accountant or a reportable event.
- -------- 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 41-42%. The pro forma statement of
operations data also reflects an increase in officer compensation expense
pursuant to proposed employee contracts. 2 Pro forma net income per share has
been computed by dividing pro forma net income by the pro forma weighted average
number of common shares and share equivalents outstanding. 3 For the years ended
December 31, 1995 and 1996, the Company estimates that the sub-prime loans
accounted for less than 5% of the Company's total originals for those years and
are included in conventional loans for those years.
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are as follows:
Name Age Position
- -----------------------------------------------------------------------------
Ronald Friedman (1) 33 President, Chief Executive Officer and Director
Robert Friedman (1) 59 Chairman of the Board of Directors, Chief
Operating Officer, Secretary, and Treasurer
Timothy J. Mayette 37 Chief Financial Officer
Keith S. Haffner 50 Executive Vice President
Joel L. Gold 56 Director
Stanley Kreitman 66 Director
______________________
(1) Ronald Friedman is the son of Robert Friedman
Ronald Friedman has been the President and Chief Executive Officer and a
Director of the Company since its inception. From 1989 through 1991, Ronald
Friedman was a senior mortgage consultant at ICI Mortgage Corporation. From 1987
through 1989, Ronald Friedman was a senior accountant at Touche Ross & Co., an
accounting firm. Ronald Friedman received a B.A. in Accounting from The George
Washington University. Ronald Friedman has been a certified public accountant
since 1989.
Robert Friedman has been the Chairman of the Board of Directors, Chief
Operating Officer, Secretary and Treasurer of the Company since its inception.
Robert Friedman was also the Company's Chief Financial Officer until October
1997. Prior to forming the Company, Robert Friedman was senior partner
specializing in real estate and mortgages at Bernstein & Friedman, P.C., an
accounting firm. Robert Friedman received his BBA in accounting from the City
College of New York in 1963. Robert Friedman has been a certified public
accountant since 1964.
Timothy J. Mayette joined the Company in October 1997 as the Company's
Chief Financial Officer. Prior to joining the Company, Mr. Mayette was Chief
Financial Officer at Mortgage Plus Equity and Loan Holdings Corp. from September
1996 through October 1997 and Vice President and Controller of BankAmerica
Mortgage Corporation (formerly Arbor National Holdings, Inc.) from August 1991
through September 1996. Mr. Mayette received an MBA degree from Hofstra
University in 1989 and is a certified public accountant. Mr. Mayette is
currently a member of the Board of Directors of Leak-X Environmental Corp.
Keith S. Haffner has been an Executive Vice President of the Company since
1996. From 1994 through 1995, Mr. Haffner was Executive Vice President of
Exchange Mortgage Corp. From 1986 through 1994, Mr. Haffner was Senior Vice
President of Mortgage Production Administration at Midcoast Mortgage Corp. Prior
to 1986, Mr. Haffner was employed at various positions with the Mortgage Bankers
Association and with the Department of Housing and Urban Development. Mr.
Haffner received his B.A. in Political Science in 1969 and a Masters in Public
Administration in Urban Studies and Real Estate Finance in 1972 from American
University.
Joel L. Gold has been a Director of the Company since February 23, 1998. In
September 1997, Mr. Gold became Vice Chairman of Coleman and Company Securities,
Inc. From April 1996 through September 1997, Mr. Gold was Executive Vice
President and head of investment banking at L.T. Lawrence Co., an investment
banking firm. From April 1995 to April 1996, Mr. Gold was a managing director
and head of investment banking at Fechtor & Detwiler. From 1993 to 1995, Mr.
Gold was a managing director at Furman Selz Incorporated, an investment banking
firm. Prior to joining Furman Selz, from 1991 to 1993, Mr. Gold was a managing
director at Bear Stearns & Co., an investment banking firm. Previously, Mr. Gold
was a managing director at Drexel Burnham Lambert for nineteen years. He is
currently a member of the Board of Directors of Concord Camera, Sterling Vision,
Inc., Life Medical Sciences and BCAM International, Inc. Mr. Gold has a law
degree from New York University and an MBA from Columbia Business School.
Stanley Kreitman has been a Director of the Company since February 23,
1998. Since March 1994, Mr. Kreitman has been Vice Chairman at Manhattan
Associates, a merchant banking firm. From September 1975 through February 1994,
Mr. Kreitman was President of United States Bancnote Corporation. Mr. Kreitman
is Chairman of the Board of Trustees of New York Institute of Technology. He is
currently a member of the Board of Directors of Porta Systems Corp., Medallion
Funding Corp., and CCA Industries, Inc.
Board of Directors
The Board of Directors currently consists of four (4) members, who are as
follows: Robert Friedman, Ronald Friedman, Joel L. Gold and Stanley Kreitman.
The Company's Board of Directors is divided into three (3) classes with
each class consisting of, as nearly as may be possible, one-third of the total
number of directors constituting the entire Board. The Company's Board of
Directors presently consists of four (4) members with one (1) member in Class
II, one (1) member in Class III, and two (2) members in Class I. Class I
consists of Joel L. Gold and Stanley Kreitman, whose terms will expire at the
1998 annual meeting of stockholders, Class III consists of Ronald Friedman,
whose term will expire at the 2000 annual meeting of stockholders, and Class II
consists of Robert Friedman, whose term will expire at the 1999 annual meeting
of stockholders. After the initial term, each Class is elected for a term of
three (3) years. At each annual meeting, directors are elected to succeed those
in the Class whose term expires at that annual meeting, such newly elected
directors to hold office until the third succeeding annual meeting and the
election and qualification of their respective successors.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Board Committees
The Board of Directors will establish an Audit Committee. The Audit
Committee will make annual recommendations to the Board of Directors concerning
the appointment of the independent public accountants of the Company and will
review the results and scope of the audit and other services provided by the
Company's independent auditors. The Audit Committee will be comprised of Joel L.
Gold and Stanley Kreitman.
Compensation Committee
The Board of Directors has established a Compensation Committee. The
Compensation Committee will make annual recommendations to the Board of
Directors concerning the compensation of executive officers and key employees.
The Compensation Committee consists of Ronald Friedman, Robert Friedman, Joel L.
Gold and Stanley Kreitman.
Director Compensation
Directors who are employees of the Company receive no compensation, as
such, for services as members of the Board. It is expected that directors who
are not employees of the Company will receive options to purchase 5,000 shares
of Common Stock for each year served on the Board and reimbursement of expenses
incurred in connection with attending such meetings.
Item 11. Executive Compensation.
The following table shows all the cash compensation paid or to be paid by
the Company, as well as certain other compensation paid or accrued, during the
fiscal years indicated, to the Chief Executive Officer ("CEO") and the most
highly compensated executive officers whose aggregate cash compensation exceeded
$100,000 during the last three fiscal years.
Summary Compensation Table
Name of Individual Annual Compensation Long Term Compensation
and Principal Position Year Salary Bonus ------------------------
- ---------------------------------------------------
Ronald Friedman 1997 $223,855 - -
Chief Executive Officer, 1996 $208,000 $46,538 -
President, Director 1995 $126,800 - -
Robert Friedman 1997 $165,475 - -
Chairman of the Board, 1996 $107,093 - -
Chief Operating Officer,
Secretary and Treasurer 1995 - - -
Keith Haffner 1997 $126,811 $51,000 -
Executive Vice President 1996 - - -
1995 - - -
Distributions of Interest
During each of the years ended December 31, 1994, 1995, 1996 and 1997,
Premier made S corporation distributions to stockholders in the aggregate
amounts of $102,000, $150,000, $267,000 and $769,000, respectively. In February
1998, prior to the IPO, Premier declared a distribution to the stockholders in
an amount equal to a portion of its undistributed S corporation earnings that
resulted in the Company's shareholders equity equaling $1.7 million at the date
of the IPO. Such distribution was approximately $2.0 million.
Employment Agreements
The Company has entered into employment agreements with Ronald Friedman and
Robert Friedman. Each of the employment agreements expire on December 31, 1999,
unless sooner terminated for death, physical or mental incapacity or cause
(which is defined as the uncured refusal to perform, or habitual neglect of, the
performance of his duties, willful misconduct, dishonesty or breach of trust
which causes the Company to suffer any loss, fine, civil penalty, judgment,
claim, damage or expense, a material breach of the employment agreement, or a
felony conviction), or terminated by either party with thirty (30) days' written
notice, and are automatically renewed for consecutive terms, unless cancelled at
least one year prior to expiration of the existing term. Each Employment
Agreement provides that all of such executive's business time be devoted to the
Company. In addition, each of the Employment Agreements also contain: (i)
non-competition provisions that preclude each employee from competing with the
Company for a period of two years from the date of the termination of his
employment with the Company; (ii) non-disclosure and confidentiality provisions
that all confidential information developed or made known during the term of
employment shall be exclusive property of the Company; and (iii)
non-interference provisions whereby, for a period of two years after his
termination of employment with the Company, the executive shall not interfere
with the Company's relationship with its customers or employees.
The employment agreements include compensation plans for fiscal year 1998
whereby Ronald Friedman and Robert Friedman will each receive a salary of
$250,000, and cash bonuses, if any, as determined by the Board of Directors at
its discretion.
Key Man Life Insurance
The Company owns, maintains and is the sole beneficiary of key man term
life insurance policies on the lives of Ronald Friedman and Robert Friedman in
the amounts of $3,000,000 and $750,000, respectively, on which the Company is
named as beneficiary.
Limitation of Liability and Indemnification of Directors and Officers
The Certificate of Incorporation of the Company (the "Certificate")
provides that a director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except: (i) for any breach of the director's duty of loyalty to the Company or
its stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (iii) for liability under
Section 174 of the Delaware General Corporation Law (relating to certain
unlawful dividends, stock repurchases or stock redemptions); or (iv) for any
transaction from which the director derived any improper personal benefit. The
effect of this provision in the Certificate is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of the
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in certain limited situations.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws.
The Company's By-Laws provide that the Company shall indemnify each
director and such of the Company's officers, employees and agents as the Board
of Directors shall determine from time to time to the fullest extent provided by
the laws of the State of Delaware.
Premier Stock Option Plan
On April 1, 1997, the stockholders of Premier approved the Premier Plan. In
connection with the Premier Plan, 375,000 shares (as adjusted) of Common Stock
are reserved for issuance pursuant to options that have been granted under such
plan through March 30, 2007. To date, no options have been exercised. The
options vest over a three year period following the date of the grant. As of
March 24, 1998, 262,500 shares remained outstanding under this plan.
The purpose of the Premier Plan is to encourage stock ownership by
employees of the Company, its divisions and subsidiary corporations and to give
them a greater personal interest in the success of the Company. The Premier Plan
is administered by the Board of Directors. The Board of Directors has the
authority, in its discretion, subject to and not inconsistent with the express
provisions of the Premier Plan, to administer the Premier Plan and to exercise
all the powers and authorities either specifically granted to it under the
Premier Plan or necessary or advisable in the administration of the Premier
Plan, including, without limitation, the authority to grant options; to
determine which options shall constitute incentive stock options ("ISO") and
which options shall constitute non-qualified stock options; to determine which
options (if any) shall be accompanied by rights or limited rights; to determine
the purchase price of the shares of Common Stock covered by each Option (the
"Option Price"); to determine the persons to who, and the time or times at
which, options shall be granted; to determine the number of shares to be covered
by each option; to interpret the Premier Plan; to prescribe, amend and rescind
rules and regulations relating to the Premier Plan; and to make all other
determinations deemed necessary or advisable for the administration of the
Premier Plan. The Board of Directors may delegate to one or more of its members
or to one or more agents such administrative duties as it may deem advisable,
and the Board of Directors or any person to whom it has delegated duties as
aforesaid may employ one or more persons to render advice with respect to any
responsibility the Board of Directors or such person may have under the Premier
Plan.
Options granted under the Premier Plan may not be granted at a price less
than the fair market value of the Common Stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the voting stock
of the Company). The aggregate fair market value of shares for which ISOs
granted to any employee are exercisable for the first time by such employee
during any calendar year (under all stock option plans of the Company and any
related corporation) may not exceed $100,000. Options granted under the Premier
Plan will expire not more than ten years from the date of grant (five years in
the case of ISOs granted to persons holding 10% or more of the voting stock of
the Company). Options granted under the Premier Plan are not transferable during
an optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution.
The Premier Plan has been converted to a plan that has been adopted by the
Company's shareholders. There are currently options to purchase 262,500 shares
of the Company's Common Stock outstanding at an exercise price of $6.00.
1997 Stock Option Plan
In October, 1997, the Board of Directors of the Company adopted, and the
stockholders approved, the 1997 Plan. The 1997 Plan has 375,000 shares of Common
Stock reserved for issuance upon the exercise of options designated as either
(i) an ISO or (ii) non-qualified options. ISOs may be granted under the 1997
Plan to employees and officers of the Company. Non-qualified options may be
granted to consultants, directors (whether or not they are employees), employees
or officers of the Company.
The purpose of the 1997 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and to give them a greater personal
interest in the success of the Company. The 1997 Plan is administered by the
Board of Directors. The Board of Directors, within the limitations of the 1997
Plan, determines, with the approval of the Chief Executive Officer of the
Company, the persons to whom options will be granted, the number of shares to be
covered by each option, whether the options granted are intended to be ISOs, the
option purchase price per share, the manner and time of exercise, the manner and
form of payment upon exercise of an option, and restrictions such as repurchase
rights or obligations of the Company. Options granted under the 1997 Plan may
not be granted at a price less than the fair market value of the Common Stock on
the date of grant (or 110% of fair market value in the case of persons holding
10% or more of the voting stock of the Company). The aggregate fair market value
of shares for which ISOs granted to any employee are exercisable for the first
time by such employee during any calendar year (under all stock option plans of
the Company and any related corporation) may not exceed $100,000. Options
granted under the 1997 Plan will expire not more than ten years from the date of
grant (five years in the case of ISOs granted to persons holding 10% or more of
the voting stock of the Company). Options granted under the 1997 Plan are
generally not transferable during an optionee's lifetime but are transferable at
death by will or by the laws of descent and distribution.
On March 9, 1998, the Company granted options to purchase shares of Common
Stock under the 1997 Plan for 148,000 shares to 91 employees at an exercise
price of $7.75 per share.
Options
To date, options have not been granted to either Ronald Friedman or Robert
Friedman.
To date, options to purchase an aggregate of 262,500 shares at an exercise
price of $6.00 per share have been granted to employees under the Premier Plan
and 148,000 shares at an exercise price of $7.75 per share have been granted to
91 employees under the 1997 Plan. To date no options have been exercised.
The following table sets forth certain information with respect to
individual grants of stock options made to date to the named executive officers
and directors:
Option Grants
Potential Realizable Value
at Assumed Annual Rates
Date Options Exercise Expiration of Stock price Appreciation
Name Granted Granted (1) Price Date for Option Terms (2)
- -----------------------------------------------------------------------------------------------------------
5% 10%
Ronald Friedman - - - - - -
Robert Friedman - - - - - -
Timothy J. Mayette - - - - - -
Keith Haffner 4/1/97 31,250 $ 6.00 3/30/07 $117,918 $298,827
- ------------
(1) Each option is exercisable for one (1) share of Common Stock.
(2) The potential realizable value set forth under the columns represent
the difference between the stated option exercise price and the market value of
the Common Stock based on certain assumed rates of stock price appreciation from
the initial public offering price of $9.00 per share and assuming that the
options were exercised on their stated expiration date; the potential realizable
values set forth do not take into account applicable tax and expense payments
which may be associated with such option exercises. Actual realizable value, if
any, will be dependent on the future price of the Common Stock on the actual
date of exercise, which may be earlier than the stated expiration date. The 5%
and 10% assumed annualized rates of stock price appreciation over the exercise
period of the options used in the table above are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's estimate
or projection of the future price of the Common Stock on any date. There is no
representation either express or implied that the stock price appreciation rates
for the Common Stock assumed for purposes of this table will actually be
achieved.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the beneficial ownership of the Common Stock
of (i) each person known by the Company to own beneficially five (5%) percent or
more of the outstanding Common Stock; (ii) each director of the Company; (iii)
each executive officer of the Company; and (iv) all directors and executive
officers of the Company as a group.
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (1) Percentage
- ------------------------------------------------------------------------------------------
Ronald Friedman (3) 1,875,000 50%
c/o PMCC Financial Corp
66 Powerhouse Road
Roslyn Heights, NY 11577
Robert Friedman (2) 625,000 16.67%
c/o PMCC Financial Corp
66 Powerhouse Road
Roslyn Heights, NY 11577
Timothy J. Mayette ---- *
c/o PMCC Financial Corp
66 Powerhouse Road
Roslyn Heights, NY 11577
Keith S. Haffner ----
c/o PMCC Financial Corp
66 Powerhouse Road
Roslyn Heights, NY 11577
Joel L. Gold ---- *
c/o Coleman and Company Securities, Inc.
717 Fifth Avenue,
New York, NY 10022
Stanley Kreitman ---- *
c/o PMCC Financial Corp.
66 Powerhouse Road
Roslyn Heights, NY 11577
All Directors and Officers as group
(6 Persons) 2,500,000 66.7%
- ------------
* Less than 1% of outstanding shares of Common Stock.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934 and generally includes voting and investment
power with respect to securities, subject to community property laws, where
applicable. A person is deemed to be the beneficial owner of securities that can
be acquired by such person within sixty (60) days from the date of this
Prospectus upon exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants that are
held by such person, (but not those held by any other person), and that are
exercisable within sixty (60) days from the date of this Prospectus have been
exercised. Unless otherwise noted, the Company believes that all persons named
in the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
(2) Includes an aggregate of 40,000 shares owned by Robert Friedman's
daughters, Donna Joyce and Suzanne Gordon, as to which he claims beneficial
ownership; and 287,500 shares held in the name of The Robert Friedman 1998
Grantor Retained Annuity Trust, of which Robert Friedman is the Trustee.
(3) Includes 600,000 shares held in the name of The Ronald Friedman 1997
Grantor Retained Annuity Trust, of which Ronald Friedman is the Trustee.
Item 13. Certain Relationships and Related Transactions.
Item 14. Exhibits and Reports on Form 8-K
(a) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form S-1 under Commission File
#333 - 38783:
Exhibit
Number Description
1.1 -- Form of Underwriting Agreement
3.1 -- Form of Certificate of Incorporation
3.2 -- Form of By-Laws
4.1 -- Form of Common Stock Certificate
4.2 -- Form of Representatives' Warrant
10.1 -- 1997 Stock Option Plan
10.2 -- Premier Stock Option Plan
10.3 -- Form of Employment Agreement between the Company and Ronald
Friedman
10.4 -- Form of Employment Agreement between the Company and Robert
Friedman
10.5 -- Form of Contribution Agreement
10.6 -- Form of Tax Indemnification Agreement
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
10.9 -- Second Amendment to Warehouse Credit and Security Agreement and
Notes, dated September 30, 1997
10.10 -- Mortgage Loan Purchase Agreement between Premier Mortgage Corp.
and PNC Mortgage Securities Corp.
10.11 -- Mortgage and Loan Agreement by and among RF Capital Corp., Min
Capital Corp., and Hanover Hill Holsteins, Inc. and Premier Mortgage Corp.
10.12 -- Form of Contractors Agreement
10.13 -- Form of Stockholders' Agreement
10.14 -- Fourth Amendment to Warehousing Credit and Security Agreement,
dated December 29, 1997.
10.15 -- Fifth Amendment to Warehousing Credit and Security Agreement,
dated December 29, 1997.
10.16 -- Third Amendment to Warehousing Credit and Security Agreement,
dated December 29, 1997.
10.17 -- Sixth Amendment to Warehousing Credit and Security Agreement,
dated December 29, 1997.
10.18 -- Financial Advisory Agreement
*10.19 -- Seventh Amendment to Warehousing Credit and Security Agreement,
dated February 2, 1998.
*10.20 -- Eighth Amendment to Warehousing Credit and Security Agreement,
dated February 20, 1998.
16.1 -- Letter re: Change in Certifying Accountants
21.1 -- Subsidiaries of Registrant
*27.1 -- Financial Statement Schedule
----------- *Filed herewith.
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: March 31, 1998
PMCC FINANCIAL CORP.
By /s/ Ronald Friedman
-----------------------
Ronald Friedman, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dated indicated.
Signature Title Date
/s/ Ronald Friedman President, Chief Executive Officer and Director March 31, 1998
- -------------------
Ronald Friedman
/s/ Robert Friedman Chairman of the Board of Directors, Chief March 31, 1998
- ------------------- Operating Officer, Secretary and Treasurer
Robert Friedman
/s/ Timothy J. Mayette Chief Financial Officer (Principal March 31, 1998
- ---------------------- Accounting Officer)
Timothy J. Mayette
/s/ Joel L. Gold Director March 31, 1998
- ----------------
Joel L. Gold
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2) and (d)
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
PMCC FINANCIAL CORP.
Form 10K - Item 14(a) (1) and (2) PMCC
Financial Corp.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements are included in Item 8:
Page
Independent Auditors' Report F-2
Financial Statements
Consolidated Statements of Financial Condition at
December 31, 1997 and December 31, 1996 F-4
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1997, 1996
and 1995 F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
The financial statements of PMCC Financial Corp. have not been presented
because at December 31, 1997 PMCC Financial Corp. had not yet issued any stock,
had no assets or liabilities and had not yet conducted any business other than
of an organizational nature. On February 18, 1998 PMCC completed an initial
public offering of new common stock (see note 12 of notes to consolidated
financial statements).
F-1
Independent Auditors' Report
The Board of Directors
Premier Mortgage Corp.:
We have audited the accompanying consolidated statements of financial
condition of Premier Mortgage Corp. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the years then ended. 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 Premier
Mortgage Corp. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Jericho, New York
March 13, 1998
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
F-2
Independent Auditors' Report
The Board of Directors
Premier Mortgage Corp.:
We have audited the statements of operation, changes in shareholders'
equity and cash flows of Premier Mortgage Corp. for the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of
Premier Mortgage Corp. for the year ended December 1995, in conformity with
generally accepted accounting principles.
Westbury, New York
April 2, 1996
/s/ Freeberg & Freeberg
-----------------------
Freeberg & Freeberg
F-3
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
Assets 1997 1996
---- ----
Cash and cash equivalents $ 1,713,405 409,788
Debt and equity securities available-for-sale 37,500 75,000
Receivable from sales of loans 35,130,857 9,837,837
Mortgage loans held for sale, net 18,609,569 2,874,900
Mortgage loans held for investment - 138,052
Accrued interest receivable 312,772 53,161
Other receivables, net of allowance for indemnity
losses of $70,470 and $28,500, respectively 398,444 208,769
Residential rehabilitation properties 11,584,273 3,246,361
Furniture, fixtures and equipment, net 286,713 209,937
Prepaid expenses and other assets 353,799 99,421
-------------- ---------------
Total assets $ 68,427,332 17,153,226
============== ===============
Liabilities and Shareholders' Equity
Liabilities:
Notes payable - principally warehouse lines of credit 59,116,509 13,923,063
Note payable - shareholder 293,163 275,000
Due to affiliates 3,084,503 761,661
Accrued expenses and other liabilities 1,123,948 315,948
--------- ---------------
Total liabilities 63,618,123 15,275,672
-------------- ----------------
Shareholders' equity:
Common stock, Class A, no par value; 2,500 shares
authorized; 100 shares issued and outstanding 5,000 5,000
Common stock, Class B, no par value; 1,000 shares
authorized; 25 shares issued and outstanding 1,250 1,250
Additional paid-in capital 711,775 711,775
Retained earnings 4,091,184 1,159,529
-------------- ---------------
Total shareholders' equity 4,809,209 1,877,554
-------------- ----------------
Total liabilities and shareholders' equity $ 68,427,332 17,153,226
============= ==========
See accompanying notes to consolidated financial statements.
F-4
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Revenues:
Sales of residential rehabilitation properties $25,136,099 5,073,253 -
Gains on sales of mortgage loans, net 11,844,108 5,867,250 3,083,010
Interest earned 2,383,660 735,802 231,916
--------- ------------- -------------
39,363,867 11,676,305 3,314,926
---------- ------------- -------------
Expenses:
Cost of sales, residential rehabilitation properties 23,621,193 4,788,944
Compensation and benefits 6,995,104 3,674,490 2,069,443
Interest expense 2,745,610 839,284 245,281
Other general and administrative 2,260,485 1,326,265 797,042
------------- ------------- -------------
35,622,392 10,628,983 3,111,766
---------- ---------- -------------
Income before income tax expense 3,741,475 1,047,322 203,160
Income tax expense 40,736 13,790 7,631
------------- ------------- ------------
Net Income $3,700,739 1,033,532 195,529
============= ============= ============
Unaudited pro forma information:
Historical income before income tax expense 3,741,475 1,047,322
Adjustment to compensation expense for contractual
increase in officers' salary (97,000) (139,000)
------------- -------------
Pro forma net income before income tax expense 3,644,475 908,322
Provision for pro forma income taxes (1,494,000) (391,000)
---------- -------------
Pro forma net income $2,150,475 517,322
============= =============
Pro forma net income per share of common stock - diluted $ 0.84 0.21
============== =============
Pro forma weighted average number of shares and
share equivalents outstanding 2,570,377 2,500,000
============= =============
See accompanying notes to consolidated financial statements.
F-5
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
Unrealized
Capital gains on
stock Additional securities
(Class paid-in Retained available-
A and B) capital earnings for-sale, net Total
-------- --------- -------- ------------- -----
Balance at December 31, 1994 $ 5,000 113,025 347,006 - 465,031
Issuance of capital stock 1,250 - - - 1,250
Net income - - 195,529 - 195,529
Capital contribution - 598,750 - - 598,750
Distributions - - (149,777) - (149,777)
Unrealized gain on securities
available-for-sale, net - - - 3,575 3,575
------ --------- ------------ -------- ------------
Balance at December 31, 1995 6,250 711,775 392,758 3,575 1,114,358
Net income - - 1,033,532 - 1,033,532
Decrease in unrealized gain on
securities available-for-sale, net - - - (3,575)
Distributions - - (266,761) - (266,761)
-------- ---------- ------------ -------- ------------
Balance at December 31, 1996 6,250 711,775 1,159,529 - 1,877,554
Net income - - 3,700,739 - 3,700,739
Distributions - - (769,084) (769,084)
--------- ---------- ------------ -------- ------------
Balance at December 31, 1997 $ 6,250 711,775 4,091,184 - 4,809,209
========= ========== ============ ======== ============
See accompanying notes to consolidated financial statements.
F-6
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 3,700,739 1,033,532 195,529
Adjustments to reconcile net income to net cash
used in operating activities:
Residential rehabilitation properties (exclusive of cash paid directly
to/by independent contractors):
Contractual fees received (1,514,906) (284,309) -
Proceeds from sales of properties 25,136,099 5,073,253 -
Cost of properties acquired (31,959,105) (8,035,305) -
Depreciation and amortization 59,690 47,431 35,875
Increase in accrued interest receivable (259,611) (43,047) (10,114)
Increase in receivable from sales of loans 25,293,020) (8,481,035) (1,356,802)
(Increase) decrease in mortgage loans
held for sale, net (15,734,669) 2,662,400 (4,955,473)
Provision for indemnity losses 41,970 28,500 -
Loss (gain) on securities available-for-sale 37,500 (29,605) -
Increase in other receivables (231,645) (104,645) (143,414)
(Increase) decrease in prepaid expenses
and other assets (254,378) (6,005) 1,458
Increase in due to affiliates 2,322,842 296,303 457,535
Increase in accrued expenses and other liabilities 808,000 140,132 106,462
----------- ------------ ---------
Net cash used in operating activities 43,140,494) (7,702,400) (5,668,944)
----------- ------------ ----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment,
net of dispositions (136,466) (50,477) (121,397)
Purchases of securities available-for-sale - (75,000) (350,920)
Proceeds from sales of securities available-for-sale - 380,525 -
Principal repayments on mortgage loans
held for investment 138,052 2,240 1,961
------------ ------------ ----------
Net cash provided by (used in)
investing activities 1,586 257,288 (470,356)
------------ ------------ -----------
Cash flows from financing activities:
Distributions to shareholders $ (769,084) (266,761) (149,777)
Net increase in notes payable-shareholder 18,163 275,000 -
Proceeds from issuance of common stock and
capital contribution - - 600,000
Net increase in notes payable- principally warehouse
lines of credit 45,193,446 7,446,704 5,919,832
--------------- ----------- ----------
Net cash provided by financing activities 44,442,525 7,454,943 6,370,055
--------------- ----------- -----------
Net increase in cash and cash equivalents 1,303,617 9,831 230,755
Cash and cash equivalents at beginning of year 409,788 399,957 169,202
--------------- ----------- -----------
Cash and cash equivalents at end of year $ 1,713,405 409,788 399,957
============== =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the yearfor:
Interest $ 2,632,270 754,284 188,616
============== ============ ============
Income taxes $ 52,736 8,222 2,357
============== ============ ============
See accompanying notes to consolidated financial statements.
F-7
PREMIER MORTGAGE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Premier Mortgage Corp. (the Company) was incorporated in 1989, under the
laws of the State of New Jersey and is licensed as a mortgage banker operating
primarily in New York and New Jersey. Its principal business activities are (i)
the origination of mortgage loans and the sale of such loans in the secondary
market on a servicing released basis and (ii) beginning in August 1996, the
funding of the purchase, rehabilitation and resale of residential real estate
conducted through its wholly-owned subsidiaries, Jericho Properties Corp., 66
Properties Corp., JSF Properties Corp. and RF Properties Corp. At December 31,
1996, the Company owned 77% of RF Properties Corp. As of January 1, 1997, RF
Properties Corp. became a wholly-owned subsidiary of the Company.
In April 1997, the Company opened its BCD division which originates and
pools for sale BCD (or sub-prime) mortgage loans. The pools are put out to bid
based upon a weighted average coupon price and sold on a servicing released
basis.
At December 31, 1997, all of the shares of the Company were beneficially
owned by two individuals, one of which also owned the minority interest in RF
Properties Corp. On February 18, 1998, in conjunction with an initial public
offering (IPO), the Company was reorganized - see Note 12.
(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.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
(b) Consolidation
The consolidated financial statements of the Company include the accounts
of the Company and its subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
F-8
(c) Cash and Cash Equivalents
For the purposes of reporting cash flows, cash includes cash on hand and
money market accounts with a maturity of three months or less.
(d) Securities
At December 31, 1997 and 1996, the Company classified its holdings of debt
securities and readily marketable equity securities as "available for sale",
which are reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity. At the
time of new securities purchases, a determination will be made as to the
appropriate classification pursuant to Statement of Financial Accounting
Standards (SFAS) No.115, Accounting for Certain Investments in Debt and Equity
Securities.
Premiums and discounts on debt securities, if any, are amortized to expense
and accreted to income over the estimate life of the respective security using
the interest method. Gains and losses on the sales of securities are recognized
on realization, using the specific identification method, and shown separately
in the consolidated statements of operations.
(e) Receivables from Sales of Loans
Receivables from the sales of loans represents proceeds due from investors
for loan sales and transactions which closed on or prior to the balance sheet
date.
(f) 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 shipped to permanent
investors. Losses are recognized in the period when market value is less than
cost.
(g) Mortgage Loans Held for Investment
Mortgage loans held for investment were carried at cost and consisted of
mortgages on residential real estate. Contractual maturities were after ten
years. During 1997, the mortgage loans held for investment were repaid by the
mortgagees. There were no gains or losses recorded on this repayment.
(h) Residential Rehabilitation Properties
The Company's subsidiaries serve as conduits for funding the acquisition of
residential rehabilitation properties. The properties are acquired and marketed
by various independent contractors, but funded by, and titled in the name of,
one of the subsidiaries. The properties are generally offered to the independent
contractors 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 independent contractors. The residential rehabilitation properties are
carried at the lower of cost (generally at up to 70% of the property's appraised
value) or fair value less cost to sell (as determined by independent appraisals
of the properties). The agreements with the independent contractors contain
cross collateralization provisions and personal guarantees that minimize the
risks associated with changing economic conditions and failure of the
contractors to perform.
(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.
(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. Deferred origination costs were $953,000 and $310,000 at December 31,
1997 and 1996, respectively.
(l) Income Taxes
The Company has elected to be treated as an S corporation for both federal
and state income tax purposes as of and for the years ended December 31, 1997,
1996, and 1995. As a result, the income of the Company is taxed directly to the
individual shareholders.
Certain of the Company's subsidiaries were taxed as a regular C corporation
for certain periods prior to December 31, 1997. During 1997, all of the
Company's subsidiaries were generally treated for tax purposes as S
corporations.
(2) Debt and Equity Securities Available-for-Sale
The amortized cost and estimated fair values of securities are summarized
as follows:
December 31, 1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Available-for-sale:
Equity security:
Common stock $ 37,500 - - 37,500
========= ========== =========== =========
December 31, 1996
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Available-for-sale:
Debt security:
12% convertible note $ 75,000 - - 75,000
========= ========== =========== =========
In 1996, the Company purchased a 12% convertible note from an investment
company. The convertible note matured the earlier of December 31, 1999, or the
initial public offering of the investment company. The investment company became
a public company in March 1997, upon which the note was converted to shares of
common stock. In December 1997, the $75,000 equity security declined in fair
value, and management determined this decline to be other than temporary. In
accordance with SFAS No.115, the Company wrote down the cost basis of the
security to fair value and recognized a loss of $37,500 in operations for the
year ended December 31, 1997.
The Company realized a gross gain of approximately $30,000 for the year
ended December 31, 1996 on the sale of its equity securities available-for-sale.
Gross proceeds from the sale of securities available-for-sale were $380,525 for
the year ended December 31, 1996.
(3) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment and their related useful lives are
summarized as follows at December 31:
1997 1996 Life in years
---- ---- -------------
Furniture and fixtures $ 229,045 220,543 7
Office machinery and equipment 249,084 121,120 5
----------- -----------
478,129 341,663
Accumulated depreciation and amortization (191,416) (131,726)
------------ ------------
Furniture, fixtures and equipment, net $ 286,713 209,937
============ =============
Depreciation and amortization expense, included in other general and
administrative expense in the consolidated statements of operations, amounted to
$59,690, $47,431, and $35,875 in 1997, 1996, and 1995, respectively.
(4) Notes Payable
Notes payable consisted of the following at December 31:
1997 1996
---- ----
Warehouse lines of credit $ 58,460,259 13,923,063
Notes payable - other 656,250 -
Note payable - shareholder 293,163 275,000
-------------- -------------
$ 59,409,672 14,198,063
========== =============
At December 31, 1997 and 1996, substantially all of the mortgage loans held
for sale, 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.
The total lines of credit at December 31, 1997 and 1996, were $70,000,000
and $15,000,000 respectively. The Company may generally borrow up to 96% - 98%
of the face value of the closed mortgage loans and up to 70% of the appraised
value of the residential rehabilitation properties. At December 31, 1997, the
terms of the warehouse lines of credit provide for interest based on the one
month London Interbank Offered Rate (LIBOR) plus 2% for adjustable rate
mortgages and plus 2.25% for fixed rate mortgages and residential rehabilitation
properties. The warehouse lines of credit expire on May 31, 1998.
The notes payable - other is secured by certain residential rehabilitation
properties. The notes are repaid as the related properties are sold. The
interest rate on such notes is 16% per annum.
The note payable to shareholder bore interest at an annual rate of 8% and
was paid in full in January 1998.
(5) Noncancelable Operating Leases
The Company is obligated under various operating lease agreements relating
to branch and executive offices. Lease terms expire during the years 1998 to
2002, 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, 1997:
Year ending December 31:
1998 $ 231,000
1999 236,000
2000 165,000
2001 62,000
2002 10,000
----------
Total minimum payments required $ 704,000
==========
Total rent expense for the years ended December 31, 1997, 1996, and 1995
was approximately $200,000, $109,000, and $64,000, respectively.
(6) Employee Benefits
The Company maintains a 401(k) Profit Sharing Plan (the 401(k) Plan) which
was created effective January 1, 1994 for all employees who have completed three
months of continuous service. The Company matches 50% of the first 2.5% of each
employee's contribution. The Company's 401(k) Plan expense was approximately
$35,400, $18,600, and $12,000 in 1997, 1996, and 1995, respectively.
In April 1997, the Company adopted and its Board of Directors ratified a
qualified stock option plan that allows certain personnel employed by the
Company to be given an opportunity to acquire a stake in the growth of the
Company via the granting of stock options. Options to purchase 18.75 common
shares were granted at an exercise price of $120,000 per share. To date, no such
options were exercised. Subsequent to December 31, 1997, options to purchase
5.625 common shares were forfeited. Upon the exchange of shares discussed in
Note 12, the Company exchanged the remaining outstanding options for options to
purchase 262,500 common shares of PMCC Financial Corp. at an exercise price of
$6 per share.
(7) Related-Party Transactions
In the normal course of business, advances are made by and to the Company
with affiliates. At December 31, 1997 and 1996, the Company had a net payable of
$3,084,503 and $761,661, respectively, due to affiliates. Such transactions are
made on substantially the same terms and conditions, including interest rate and
collateral, as those prevailing at the same time for comparable transactions
with unrelated third-parties. The interest rate on such transactions is 10% per
annum.
On August 25, 1997, the Company subordinated $1,000,000 of its "due to
affiliates" to its warehouse line of credit.
(8) Financial Instruments With Off-Balance Sheet Risk and Concentrations of
Credit Risk
In the normal course of the Company's business, there are various financial
instruments which are appropriately not recorded in the financial statements.
The Company's risk of accounting loss, due to the credit risks and market risks
associated with these off-balance sheet instruments, varies with the type of
financial instrument and principal amounts, and are not necessarily indicative
of the degree of exposure involved. Credit risk represents the possibility of a
loss occurring from the failure of another party to perform in accordance with
the terms of a contract. Market risk represents the possibility that future
changes in market prices may make a financial instrument less valuable or more
onerous.
In the ordinary course of business, the Company had issued commitments to
borrowers to fund approximately $48,900,000 and $16,500,000 of mortgage loans at
December 31, 1997 and 1996, respectively. Of these commitments to fund,
$2,900,000 and $3,748,000, respectively relate to commitments to fund at
locked-in rates and $46,000,000 and $12,752,000, respectively relate to
commitments to fund at floating rates.
In the normal course of its mortgage banking activities, the Company enters
into optional commitments to sell the mortgage loans that it originates. The
Company commits to sell the loans at specified prices in future periods,
generally ranging from 30 to 120 days from date of commitment directly to
permanent investors. Market risk is associated with these financial instruments
which results from movements in interest rates and is reflected by gains or
losses on the sale of the mortgage loans determined by the difference between
the price of the loans and the price guaranteed in the commitment.
The Company may be exposed to a concentration of credit risk from a
regional economic standpoint as loans were primarily originated in the New York
Metropolitan area.
(9) 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.
Securities available-for-sale - Fair value is estimated based on current
market prices, if available, and on estimates made by management.
Receivable from sales of loans and mortgage loans held for sale, net - Fair
value is estimated based on current prices established in the secondary market
or, for those loans committed to be sold, based upon the price established in
the commitment.
Mortgage loans held for investment - Fair value is based on management's
analysis of estimated cash flows discounted at rates commensurate with the
credit risk involved.
Accrued Interest Receivable - The fair value of the accrued interest
receivable balance is estimated to be the carrying value.
Financial Liabilities
Notes payable-warehouse - The fair value of the notes payable is based on
discounting the anticipated cash flows using rates which approximate the rates
offered for borrowings with similar terms.
Note payable-shareholder - The fair value of the note payable-shareholder
is estimated by management to be the carrying value.
Due to affiliates - The fair value of the due to affiliates balance is
estimated to be the carrying value.
Limitations - SFAS No.107 requires disclosures of the estimated fair value
of financial instruments. Fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument nor the resultant tax ramifications or transaction costs. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
(10) 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.
(11) Supplemental Information
The Company's operations consist of two principal activities (a) mortgage
banking and (b) funding the purchase, rehabilitation and resale of residential
real estate. The following table sets forth certain information concerning these
activities (in thousands):
Years Ended December 31,
1997 1996 1995
---- ---- ----
Revenues:
Residential rehabilitation properties $ 25,136 5,073 -
Mortgage banking 14,228 6,603 3,315
------ -------- --------
$ 39,364 11,676 3,315
======== ======== ========
Less: (1)
Expenses allocable to residential rehabilitation
properties (cost of sales, interest expense and
compensation and benefits) 24,331 4,896 -
Expenses allocable to mortgage banking (all other) 11,292 5,733 3,112
-------- -------- --------
$ 35,623 10,629 3,112
====== ======== ========
Years Ended December 31,
1997 1996 1995
---- ---- ----
Operating profit:
Residential rehabilitation properties 805 177 -
Mortgage banking 2,936 870 203
-------- -------- --------
$ 3,741 1,047 203
======== ======== ========
Identifiable assets:
Residential rehabilitation properties 11,584 3,246 -
Mortgage banking 56,843 13,907 8,232
------ -------- --------
$ 68,427 17,153 8,232
======== ======== ========
(1) In managing its business, the Company does not allocate corporate
expenses other than interest and compensation and benefits to its various
activities.
(12) Subsequent Events (Unaudited)
On February 18, 1998 the shareholders of the Company exchanged all of their
outstanding shares of common stock of the Company for 2,500,000 shares of PMCC
Financial Corp., a newly formed Delaware holding company. Following this
exchange, PMCC Financial Corp. completed an IPO of 1,250,000 new shares of
common stock at a price of $9 per share. The Company received gross proceeds of
$11,250,000 and net proceeds of approximately $9,300,000. At December 31, 1997,
the Company had capitalized $186,000 of related offering expenses.
Upon the exchange of shares, the Company terminated its S corporation
status and became fully subject to federal and state income taxes. As a result,
a deferred tax liability, which is subject to final calculation but is not
expected to exceed $900,000, will be established based upon the temporary
differences between tax and book accounting at the termination date. The
principal component of this deferred tax liability relates to the recognition of
income on the cash basis for tax purposes.
In addition, upon the exchange, the Company declared a distribution to the
existing shareholders in an amount equal to a portion of its undistributed S
corporation earnings that resulted in the Company's shareholders' equity
equaling $1.7 million at the date of the IPO. Such distribution is subject to
final calculation but is not expected to be less than $2,000,000 and is payable
as follows: (i) $1 million was paid out of the proceeds of the IPO and (ii) the
balance is payable in a promissory note bearing an interest rate of 10% per
annum, payable in four equal quarterly installments. The final payment is due by
February 18, 1999. The remaining undistributed S corporation earnings were
reclassified from retained earnings to additional paid-in capital.
The Company granted to the underwriters of the IPO an option, exercisable
within 45 days after February 18, 1998, to purchase up to an additional 187,500
shares of common stock at the $9 per share IPO price solely to cover
over-allotments. In addition, the Company 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.
On March 17, 1998, the Company entered into a new lease agreement for a
period of seven years for approximately 23,000 square feet of office space with
a first year rental cost of $464,000.
(13) Unaudited Pro Forma Information
The pro forma financial information has been presented to show what the
significant effects on the historical results of operations might have been had
the Company not been treated as an S corporation for income tax purposes for the
years ended December 31, 1997 and 1996. In addition, the historical results of
operations have been adjusted to reflect a pro forma increase in officer
compensation expense pursuant to certain proposed employment contracts that took
effect with the IPO.
Pro forma net income per share - diluted has been computed pursuant to SFAS
No.128, Earnings per Share, which was adopted effective December 31, 1997, by
dividing pro forma net income by the 2.5 million shares of PMCC Financial Corp.
common stock to be received in exchange for the Company's shares adjusted for
70,377 common stock equivalents. Pro forma net income per share - basic would be
$.86.
In accordance with SFAS No.123, Accounting for Stock-Based Compensation,
the Company has elected to account for stock-based compensation arrangements
with employees under Accounting Principles Board Opinion No.25, Accounting for
Stock Issued to Employees. However, if SFAS No.123 had been adopted, pro forma
net income, pro forma net income per share of common stock - diluted, and pro
forma net income per share of common stock - basic would have been $2,079,209,
$.81, and $.83, respectively for the year ended December 31, 1997. To value the
options granted, the Company assumed an expected option life of three years, a
risk-free interest rate of 6%, volatility of zero, and a dividend yield of zero.
F-10