10-Q 1 pmcc10q033101.txt QUARTERLY REPORT F/P/E 3/31/01 Form 10-Q Quarterly Report FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 Commission File Number: 1-7614 ----------------------------- PMCC FINANCIAL CORP. (Exact Name of Registrant as Specified in its Charter) Delaware 11-3404072 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 1767 Morris Avenue Union, N.J. 07083 (Address of Principal Executive Offices and Zip Code) (908) 687-2000 (Registrant's telephone number, including area code) 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 ________ ------------ Number of shares outstanding of the issuer's Common Stock, par value $.01 per share, as of May 11, 2001: 3,707,000 shares. PMCC FINANCIAL CORP. FORM 10-Q TABLE OF CONTENTS -----------------

Part I - FINANCIAL INFORMATION Item 1. Condensed Financial Statements PMCC FINANCIAL CORP. and SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements. PMCC FINANCIAL CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition

See accompanying notes to unaudited condensed consolidated financial statements PMCC FINANCIAL CORP. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements PMCC FINANCIAL CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2001 (Unaudited) 1. Business PMCC Financial Corp. (the "Company"), a Delaware corporation, was organized in 1998 to own the stock of PMCC Mortgage Corp. ("PMCC") (formerly Premier Mortgage Corp.) and its subsidiaries. The Company is a mortgage banker operating primarily in New York, New Jersey and Florida. The Company's principal business activities are (i) the origination of residential mortgage loans and the sale of such loans in the secondary market on a servicing released basis and (ii) the funding of the purchase, rehabilitation and resale of vacant residential real estate properties. Residential mortgage loans are sold on a non-recourse basis except for indemnifications or buybacks required for certain early payment defaults or other defects. 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. 2. Basis of Presentation The unaudited condensed consolidated financial statements included herein reflect all adjustments, which are, in the opinion of management necessary for a fair presentation of the Company's financial condition as of the dates indicated and the results of operations for the periods shown. All such adjustments are of a normal recurring nature. In preparing the accompanying condensed consolidated financial statements, management is required to make estimates and assumptions that reflect the reported amounts of assets and liabilities as of the date of the condensed consolidated statements of financial condition and of income and expenses for the periods presented in the condensed consolidated statements of operations. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results of operations to be expected for the remainder of the year. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2000. 3. Income Taxes The Company accounts for income taxes under the liability method as required by SFAS No. 109. 4. Earnings Per Share of Common Stock Basic EPS is determined by dividing net income for the period by the weighted average number of common shares outstanding during the same period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which would then share in the earnings of the Company. There were no outstanding dilutive stock options or warrants for the quarters ended March 31, 2001 and 2000. 5. Notes Payable At March 31, 2001 and 2000, substantially all of the mortgage loans held for sale and investment, receivable from sales of loans and certain residential rehabilitation properties were pledged to secure notes payable under warehouse lines of credit agreements. The notes are repaid as the related mortgage loans or residential rehabilitation properties are sold or collected. On February 28, 2000, the Company entered into a Master Repurchase Agreement that provides the Company with a warehouse facility (the "IMPAC Line") through IMPAC Warehouse Lending Group ("IMPAC"). The IMPAC Line provides a committed warehouse line of credit of $20 million for the Company's mortgage originations only. The IMPAC Line is secured by the mortgage loans funded with the proceeds of such borrowings. Interest payable is variable based on the Prime Rate as posted by Bank of America, N.A. plus 0.50%. The IMPAC Line has no stated expiration date but is terminable by either party upon written notice. The Company's warehouse line of credit with Chase Bank of Texas, National Association ("Chase") and PNC Bank ("PNC") is expected to be paid in full no later than May 31, 2001. The balance outstanding on this line at March 31, 2001 and May 14, 2001 is approximately $161,000 and $53,000, respectively. 6. Concentrations The Company may be exposed to a concentration of credit risk from a regional economic standpoint as loans were primarily originated in the New York Metropolitan area and Florida. The Company currently finances its mortgage banking operations with a single warehouse facility (the IMPAC Line - see Note 5). The IMPAC Line has no stated expiration date, but is terminable by either party upon written notice. Management believes that there are other financial institutions that could provide the Company with a similar facility on comparable terms. However, a termination of the current warehouse facility without an immediate replacement could cause an interruption to the Company's operations and possible loss of revenue, which would affect operating results adversely. 7. Related-Party Transactions On June 8, 2000, the Company borrowed $275,000 from a company wholly-owned by Robert Friedman, owner of 17% of the Company's outstanding stock and the father of Ronald Friedman, the Company's former President and CEO currently a consultant to the Company. This loan is evidenced by a promissory note due and payable on demand with a maturity of one year. The interest rate on the note is 16% per annum payable monthly. The note is secured by properties and a mortgage which the Company owns. Under the same note, the Company borrowed an additional $50,000 in July 2000. The Company repaid $80,000 in August 2000 and $175,000 in October 2000 when a portion of the underlying collateral was sold by the Company. The balance due on the note at March 31, 2001 and May 11, 2001 is $70,000. The Company has amounts receivable due from an officer of the Company in the amount of $227,782 and $267,782 at March 31, 2001 and December 31, 2000, respectively. These amounts consist of general advances and a non-interest bearing note that have undefined repayment terms. A relative of Ronald Friedman has an economic interest in a rehab partner for the purchase and sale of rehabilitation properties with a subsidiary of PMCC. At March 31, 2001, the subsidiary owned no remaining properties. At March 31, 2001, the Company has an outstanding receivable from this rehab partner of approximately $344,000, substantially all of which has been reserved. 8. Litigation The U.S. Attorney's Office for the Eastern District of New York ("U.S. Attorney") is conducting an investigation (the "Investigation") into the allegations asserted in a criminal complaint against Ronald Friedman, the former Chairman of the Board, President and Chief Executive Officer of the Company, and a loan officer formerly employed by the Company. On December 21, 1999, agents of the Office of Inspector General for HUD executed search and arrest warrants at the Roslyn offices of the Company. The warrants were issued on the basis of a federal criminal complaint ("Complaint"), which charged that Ronald Friedman and the loan officer knowingly and intentionally made, uttered or published false statements in connection with loans to be insured by HUD. In response to the allegations against the loan officer and Friedman, the Company engaged the legal services of Dorsey & Whitney LLP in 2000 to conduct an internal investigation into the alleged misconduct and to prepare a report discussing the findings of the internal investigation. As part of this internal investigation, the Company worked closely and in cooperation with HUD and the U.S. Attorney. In addition, key employees, including loan officers, loan processors, underwriters and managers, were interviewed. An audit also was conducted of over one-third of all 1999 FHA loans in order to assess whether the files comported with the HUD guidelines for FHA loans. A preliminary report detailing Dorsey & Whitney's investigation and findings was presented to the Company's Board of Directors on April 12, 2000. A written report was issued on April 14, 2000. The report concludes that while there appears to be support for the allegations leveled at the loan officer, there is no evidence that the misconduct alleged in the complaint was systemic at the Company. Rather, the findings support the conclusion that the alleged misconduct was an isolated occurrence, not an institutional practice. The available evidence did not permit Dorsey & Whitney to reach a definitive conclusion concerning the charges pending against Ronald Friedman. The investigation, comprised of interviews with PMCC employees and an extensive review of mortgage loan files, revealed no independent evidence tending to support the allegations against Friedman contained in the criminal complaint. While the Company believes that it has not committed any wrongdoing, it continues to cooperate fully with the U.S. Attorney's Office and HUD. However, it cannot predict the duration of the Investigation or its potential outcome. Although the Company does not anticipate being charged in connection with this investigation, in the event that the Company was charged, it intends to vigorously defend its position. While the Company does not anticipate its occurrence, in the event that it was to lose its ability to originate and sell FHA loans as result of the Investigation, the Company does not believe that the financial effect on the Company would be material. Since July 2000, the Company has originated less than 1% of its loan volume through FHA products. As a result of this investigation, the Company incurred approximately $15,000 and $1.145 million of direct expenses for the three months ended March 31, 2001 and March 31, 2000, respectively, and in the aggregate over $1.7 million since January 2000. These expenses include legal and professional fees incurred in connection with the internal investigation of the Company, criminal defense attorneys and negotiations of warehouse lines of credit amendments. Also included in these expenses in 2000 are bank fees relating to granting amendments to the Bank United line of credit and bonuses paid to the Company's officers and employees. One of the Company's warehouse banks has indicated that the Company owes such bank a total of $250,000 in penalties and fees in relation to its line of credit with the bank. The Company vigorously disputes this claim and believes it is without merit. The Company is unable to predict the outcome of this claim and, accordingly, no adjustments regarding this matter have been made in the accompanying consolidated financial statements. 9. Change of Control Effective July 28, 2000, PMCC Financial Corp. announced that Internet Business's International, Inc. ("IBUI") purchased the 2,460,000 shares of the Company held by Ronald Friedman, Robert Friedman and the Ronald Friedman 1997 Guarantor Retained Annuity Trust (collectively, the "Sellers") in a private transaction (the "Transaction"). This purchase represents 66.36% of the 3,707,000 shares of common stock of the Company outstanding. IBUI is a holding company with a variety of Internet subsidiaries that trades publicly under the symbol IBUI on the NASDAQ Bulletin Board. According to provisions of the Transaction agreement, the purchase price was reduced because the Company's common stock was not trading on either the Amex or NASDAQ and there was no merger of the Company with IBUI or any of its affiliates within time periods specified by the agreement. At the closing, all shares purchased by IBUI from the Sellers were deposited in escrow with the Sellers' attorney. These shares will be released to IBUI upon receipt of the scheduled installment payments. The Company has been informed by the Sellers that certain payments due under the agreement by IBUI to purchase shares of the Company's stock from the Sellers were not made and that an event of default has been declared against IBUI under this purchase agreement and the shares held in escrow have been returned to the Sellers. At this time, negotiations and discussions are being held among the involved parties, however, no definitive revised agreement has been reached that would cure the default. At March 31, 2001, the transfer agent has indicated that IBUI owns 269,230 shares of PMCC stock or 7.26% of the total shares outstanding. 10. American Stock Exchange On December 22, 1999, the American Stock Exchange (the "Amex") suspended trading of the Company's Common Stock and commenced a review of the listing status of the Common Stock. In connection with the Amex review process, the Company met with the Amex staff on March 7, 2000 to present information in support of continued listing. On September 22, 2000, PMCC was advised by the Amex that it was its intention to proceed with the filing of an application with the Securities and Exchange Commission to strike the Company's common stock from listing and registration on the Exchange. The Company exercised its right to appeal the decision of the Exchange. On December 15, 2000, PMCC was advised by the Amex that, after the appeal hearing to its Committee on Securities by Company management and outside counsel held on November 6, 2000, the Amex Adjudicatory Council agreed with and affirmed the Amex's staff decision to strike the Company's common stock from listing and registration on the Exchange. On December 22, 2000, Amex filed an application with the Securities and Exchange Commission to do so effective with the opening of the trading session on January 4, 2001. The Company's common stock is currently trading on the Pink Sheets under the symbol "PMCF". 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):

12. Management Plans In 2001, the Company's management has and will continue to take numerous steps to create a positive cash flow for the Company. These include selling the remaining rehabilitation properties on hand at March 31, 2001, changing the methodology whereby the Company prices its loans so that a higher per loan gain is recognized and further reducing and consolidating operations as required. Certain expense reductions have been made in the first quarter of 2001 including reducing management salaries and consolidating the entire wholesale operation in the Florida office. This resulted in a reduction in the number of staff employees processing loans as well as other cost reductions. The Company has been approved for listing on "lendingtree.com" to provide additional leads to potential borrowers utilizing the Internet. Additional commission-only loan officers have been hired in 2001 in the retail and wholesale areas to increase the Company's volume of loan applications and to take advantage of current low interest rates. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This Quarterly Report on Form 10-Q may contain forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. These forward-looking statements reflect the Company's current views with respect to future events and financial performance. The words "believe," "expect," "anticipate," "intend," "estimate," and other expressions which indicate future events and trends identify forward-looking statements. Readers are cautioned not to place undue reliance upon these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as the result of new information, future events or otherwise. The following factors among others, could cause actual results to differ materially from historical results or those anticipated: (1) the level of demand for mortgage credit, which is affected by such external factors as the level of interest rates, the strength of various segments of the economy and demographics of the Company's lending markets; (2) the direction of interest rates; (3) the relationship between mortgage interest rates and cost of funds; (4) federal and state regulation of the Company's mortgage banking operations; (5) competition within the mortgage banking industry; (6) the Company's management of cash flow and efforts to modify its prior growth strategy; (7) the outcome of governmental investigations and the effects thereof; (8) the Company's efforts to improve quality control; and other risks and uncertainties described in the Company's Annual Report on Form 10-K and in PMCC Financial Corp.'s other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes and events may vary materially from those indicated. Results of Operations Quarter Ended March 31, 2001 Compared to Quarter Ended March 31, 2000 Revenues. The following table sets forth the components of the Company's revenues for the periods indicated: Quarters Ended March 31, ------------------------ 2001 2000 ---- ---- Sales of residential rehabilitation properties $ -- $ 9,922,201 Gains of sales of mortgage loans, net 761,525 1,048,985 Interest earned 200,009 570,886 ---------- ----------- Total revenues $ 961,534 $11,542,072 ========== =========== Revenues from the sale of residential rehabilitation properties decreased $9.9 million, or 100%, for the quarter ended March 31, 2001 as compared to the quarter ended March 31, 2000. There were no residential rehab properties sold for the quarter ended March 31, 2001 compared to 52 for the quarter ended March 31, 2000. This decrease was a result of the Company's initiative to liquidate its properties on hand as quickly as practicable during the year ended December 31, 2000. At March 31, 2001, the Company owned nine remaining properties, substantially all of which are expected to be sold by June 30, 2001. Gains on sales of mortgage loans decreased $287,000, or 27%, to $762,000 for the quarter ended March 31, 2001 from $1,049,000 for the quarter ended March 31, 2000. This decrease was primarily due to a decrease in mortgage loan origination volume, partly offset by an increase in the per loan margin for loans sold into the secondary market. Mortgage loan originations were $43.5 million and $59.5 million for the quarters ended March 31, 2001 and 2000, respectively. This 27% decrease was primarily the result of the consolidations made by the Company during 2000. For the quarter ended March 31, 2001, approximately 11% of the Company's mortgage originations were derived from its retail mortgage operations and approximately 89% from its wholesale operations. The following table summarizes the Company's mortgage originations (in thousands): Quarters Ended March 31, ------------------------ 2001 2000 Conventional $43,533 $48,118 FHA/VA -- 11,373 ------- ------- Total $43,533 $59,491 ======= ======= 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 decreased $371,000, or 65%, to $200,000 for the quarter ended March 31, 2001 from $571,000 for the quarter ended March 31, 2000. This decrease was primarily due to lower mortgage interest rates, a change in the methodology of shipping loans so that loans are held on the warehouse line for a shorter period of time before they are sold to the secondary market and decreased mortgage originations for the quarter ended March 31, 2001 as compared to the quarter ended March 31, 2000. Expenses. The following table sets forth the Company's expenses for the periods indicated: Quarters Ended March 31, ------------------------ 2001 2000 ------------------------- Cost of sales - residential rehabilitation properties $ -- $ 9,472,931 Compensation and benefits 675,852 1,891,804 Interest expense 277,827 693,854 Expenses resulting from Investigation 14,595 1,145,256 Other general and administrative 487,104 1,035,058 ----------- ----------- Total expenses $ 1,455,378 $14,238,903 =========== =========== Cost of sales - residential rehabilitation properties decreased $9.5 million, or 100%, for the quarter ended March 31, 2001 as compared to the quarter ended March 31, 2000. This decrease was the result of the decrease in the number of properties sold in the quarter ended March 31, 2001 compared to the quarter ended March 31, 2000. Compensation and benefits decreased $1.2 million, or 64%, to $676,000 for the quarter ended March 31, 2001 from $1.9 million for the quarter ended March 31,2000. This decrease was primarily due to decreased sales salaries and commission, which are based substantially on mortgage loan originations, and the reductions in staff at the Company's Roslyn and New Jersey locations. Total personnel decreased to 43 employees at March 31, 2001 from 86 at March 31, 2000. Interest expense decreased $417,000, or 34%, to $277,000 for the quarter ended March 31, 2001 from $694,000 for the quarter ended March 31, 2000. This decrease was primarily attributable to a change in the methodology of shipping loans so that loans are held on the warehouse line for a shorter period of time before they are sold to the secondary market and decreased mortgage originations for the quarter ended March 31, 2001 as compared to the quarter ended March 31, 2000, along with the decrease in residential rehabilitation properties funded through the Company's warehouse facility. Expenses resulting from the Investigation decreased $1.13 million or 99%, to $15,000 for the quarter ended March 31, 2001 from $1.145 million for the quarter ended March 31, 2000. This decrease was the result of large expenses incurred immediately after the beginning of the Investigation, primarily in the first and second quarters of 2000, as well as the current status of the Investigation. Other general and administrative expense decreased $548,000, or 53%, to $487,000 for the quarter ended March 31, 2001 from $1.035 million for the quarter ended March 31, 2000. This decrease was primarily due to decreased expenses in connection with the contraction in the operations of the Company. Although there can be no assurance thereof, the Company believes that, as a result of additional cost cutting initiatives in the first two quarters of 2001, expenses will further decrease. The net loss of $494,000 for the quarter ended March 31, 2001 was a decrease of $1.1 million or 69%, from the net loss of $1.6 million for the quarter ended March 31, 2000. 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 warehouse lines of credit and cash flow from operations. The amount of outstanding borrowings under the warehouse lines of credit at March 31, 2001 was $6.5 million. The mortgage loans and residential rehabilitation properties funded with the proceeds from such borrowings secure the warehouse lines of credit On August 7, 1998, the Company entered into a Senior Secured Credit Agreement (the "Chase Line") with Chase Bank of Texas, National Association ("Chase") and PNC Bank ("PNC"). The Chase Line provided a warehouse line of credit of $120 million ($90 million committed at August 11, 1998) for its mortgage originations and residential rehabilitation purchases. The Chase Line is secured by the mortgage loans and residential rehabilitation purchases funded with the proceeds of such borrowings. The Company has also pledged the stock of its residential rehabilitation subsidiaries as additional collateral. The Company is required to comply with certain financial covenants and the borrowings for residential rehabilitation properties are guaranteed by Ronald Friedman and Robert Friedman. No new loans or properties were added to this line subsequent to November 8, 1999, when the line was set to expire. Chase and PNC have agreed to continue to extend the line on a specified declining basis through a series of short term extensions. The Company anticipates paying down the entire facility no later than May 31, 2001. The balance outstanding on the Chase Line at March 31, 2001 and May 14, 2001 was approximately $161,000 and $53,000, respectively. Interest payable on the Chase Line is variable based LIBOR plus 1.25% to 3.00% based upon the underlying collateral. On February 28, 2000, the Company entered into a Master Repurchase Agreement that provides the Company with a warehouse facility (the"IMPAC Line") through IMPAC Warehouse Lending Group ("IMPAC"). The IMPAC Line provides a committed warehouse line of credit of $20 million for the Company's mortgage originations only. The IMPAC Line is secured by the mortgage loans funded with the proceeds of such borrowings. Interest payable on the IMPAC Line is variable based on the Prime Rate as posted by Bank of America, N.A. plus 0.50%. The IMPAC Line has no stated expiration date but is terminable by either party upon written notice. The balance outstanding on the IMPAC Line was $6.3 million on March 31, 2001 and $8.1 million on May 10, 2001. The Company currently expects that the existing IMPAC Line will be sufficient to fund all anticipated loan originations for the current year provided all new loans are sold to investors on a loan by loan basis. In order to maximize potential profits through hedging strategies, additional lines would be required. On June 8, 2000, the Company borrowed $275,000 from a company wholly owned by Robert Friedman. This loan is evidenced by a promissory note due and payable in one year. The interest rate on the note is 16% per annum payable monthly. The note is secured by properties and a mortgage, which the Company owns. Under the same note, the Company borrowed an additional $50,000 in July 2000. The Company repaid $80,000 in August 2000 and $175,000 in October 2000 when a portion of the underlying collateral was sold by the Company. The balance due on the note was $70,000 at March 31, 2001 and May 11, 2001. Net cash provided by operations for the quarter ended March 31, 2001 was $5.7 million. The Company generated cash from the $5.7 million decrease in mortgage loans held for sale and receivable from sales of loans. The Company used cash to reduce borrowings under its warehouse lines of credit by $5.6 million. Management Plans - See Note 12 to the Unaudited Condensed Consolidated Financial Statements Impact of New Accounting Standards None. Item 3. Quantitative And Qualitative Disclosures About Market Risk. None. PART II-OTHER INFORMATION Item 1. Legal Proceedings The Registrant is a defendant in certain litigation arising in the normal course of its business. In the opinion of the Registrant, any potential liability with respect to such legal actions will not, individually or in the aggregate, be material to the Registrant's financial position, liquidity or future results of operations. See Note 8 to the Unaudited Condensed Consolidated Financial Statements for additional information. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PMCC FINANCIAL CORP. (Registrant) By: /s/ --------------------------------------------- Andrew Soskin Interim President and Chief Executive Officer By: /s/ --------------------------------------------- Stephen J. Mayer Chief Financial Officer (Principal Accounting Officer) Dated: May 18, 2001

PMCC FINANCIAL CORP 10-Q