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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [Fee Required]
For the fiscal year ended March 31, 1997
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[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from to
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Commission file number
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PIONEER COMMERCIAL FUNDING CORP.
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(Name of small business issuer in its charter)
New York 13-3763437
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6650 Reseda Blvd., Reseda, California 91335
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(Address of principal executive (Zip Code)
offices)
Issuer's telephone number (818) 776-0590
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock NASDAQ
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Warrants NASDAQ
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Securities registered under Section 12(g) of the Exchange Act:
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(Title of class)
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
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POTENTIAL PERSONS WHO ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM
DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. ________
State issuer's revenues for its most recent fiscal year. $329,425
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As of June 25, 1997, there were 5,442,272 shares of the Issuer common
stock, $.01 par value, issued and outstanding of which 2,423,069 held by
non-affiliates of the Issuer. Based on the closing price for shares of common
stock on that date, the aggregate market value of the common stock held by
non-affiliates of the Issuer was approximately $4.5 million. For purposes of the
foregoing calculation only, all directors and executive officers of the Issuers
have been deemed affiliates.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ______ No ______
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
5,442,272
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PART I
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ITEM 1. DESCRIPTION OF THE BUSINESS.
BACKGROUND
Pioneer Commercial Funding Corp. ("Pioneer" or the "Company") is a mortgage
warehouse lender providing short-term financing to mortgage bankers who need to
hold the mortgage loans they originate pending the nonrecourse sale of such
loans to institutional investors in the secondary mortgage market.
The Company was incorporated under the laws of the State of New York in
1994 under the name PCF Acquisition Corp. ("PCF"). The Company's predecessor,
which was incorporated in 1980 under the name Pioneer Commercial Funding Corp.
(the "Predecessor"), emerged from the protection of Chapter 11 of the Bankruptcy
Code in April 1993. Although the Predecessor was engaged in substantial
business operations from 1980 until January 1990, the nature and extent of the
business that it has conducted since April 1993 are different from the business
which it conducted prior to commencement of such bankruptcy proceedings in
January 1990.
In November 1994, PCF and the Predecessor consummated a merger (the
"Merger") pursuant to an agreement and plan of merger (the "Merger Plan") which
provided, among other things that (a) the Predecessor would merge with and into
PCF; (b) PCF, as the surviving entity of the merger, would change its name from
PCF to Pioneer Commercial Funding Corp.; (c) upon consummation of the Merger,
the persons who were serving as the directors and officers of the Predecessor
continued to serve in the same capacities as the directors and officers of the
Company; and (d) the Merger would be effected by issuing one share of the
Company's common stock in exchange for and extinguishment of each share of the
Predecessor's common and preferred stock then held by its shareholders. Upon
consummation of the Merger, the Company exchanged, on a share for share basis,
814,126 shares of its Common Stock for the 318,017 shares of the Predecessor's
Class A common stock, the 333,311 shares of the Predecessor's Class B common
stock and the 162,798 shares of the Predecessor's Class A preferred stock which
had been issued and outstanding immediately prior to the Merger.
In accordance with the Merger Plan, all property, rights, privileges,
powers, contracts, and franchises and every other interest possessed by the
Predecessor in any capacity became the property of the Company, all rights of
creditors and all liens
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upon any property of the Predecessor were preserved unimpaired and all debts,
liabilities and duties of the Predecessor attached to the Company and became
enforceable against it to the same extent as if said debts, liabilities, and
duties had been incurred or contracted by the Company.
In August 1996, the Company consummated its initial public offering (the
"IPO") pursuant to which the Company issued and sold 600,000 shares of its
common stock, par value $.01 per share (the "Common Stock"), and 690,000
warrants (including warrants sold upon exercise of the underwriters' over-
allotment option) exercisable into 690,000 shares of Common Stock at a price to
the public of $5.00 per share and $.10 per warrant, which yielded to the Company
net proceeds of approximately $2 million. The exercise price of the warrants is
$5.50 per share exercisable during the four year period commencing August 13,
1996 and ending August 12, 2000. On February 28, 1997, the Company completed a
private placement of securities (the "Private Placement") with eight investors
who invested an aggregate of $4 million in the Company in consideration for 2.2
million shares of Common Stock and $1.8 million principal amount of convertible
promissory notes of the Company (the "Convertible Notes"). The Convertible
Notes were converted into 1.8 million shares of Common Stock on May 9, 1997.
. GENERAL
The Company is a mortgage warehouse lender providing short-term (generally
10-60 days with an average of 21 days per loan) financing to small to medium
sized mortgage bankers who hold ("warehouse") mortgage loans which they
originate pending the nonrecourse sale of such loans to institutional investor
agencies in the secondary mortgage market such as the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"; each one
referred to herein as an "Agency") and/or accredited financial institutions such
as banks, thrifts, insurance carriers and large mortgage bankers (each one and
each Agency referred to herein as a "Financial Institution").
. THE COMPANY'S MORTGAGE LENDING OPERATIONS
The Company provides mortgage warehouse lines of credit for small to medium
sized mortgage bankers who have satisfied the Company's financial, business and
creditworthiness standards. The mortgage loans for which the Company provides
mortgage warehouse lending are primarily used to fund purchases of single family
residences and other owner-occupied residential properties, including one to
four unit properties in which the owner is the occupant of at least one of such
units.
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In a mortgage warehouse loan transaction, the Company's mortgage banking
customer will first obtain a funding commitment from a Financial Institution for
a fee, which is usually a fraction of a percent of the commitment amount. The
Company's customer will then seek to fill the commitment through the submission
of one or more loans to the Financial Institution which conform not only to the
Financial Institution's established loan criteria, but also to the commitment's
rate and delivery date. These commitments can take three forms: individual
loan, small pool, or standard pool. An individual loan commitment is an
agreement by a Financial Institution, with a usual term of no longer than two
weeks, to purchase a single whole loan of a specified amount on or before a
specified date (the "Commitment Date") at a specified rate. A small pool
commitment is an agreement by a Financial Institution, with a usual term of no
longer than three weeks, to purchase an unrestricted number of whole loans of a
specified total amount on or before a specified date at a specified rate. A
standard pool commitment is an agreement by a Financial Institution, with a
usual term of no longer than 90 days, to purchase an unrestricted number of
whole loans of a specified total amount of no less than $1 million on or before
a specified date at a specified rate. Generally, the Company's customers do not
possess sufficient capital or bank lines of credit to fully fund loans they
originate during the period of time that transpires between the date on which a
loan is closed and the Commitment Date. Accordingly, the Company provides its
customer with a line of credit that is collateralized by each loan that the
Company funds for its customer, which enables the customer to hold (warehouse)
the loan for the period of approximately 10 to 60 days that typically occurs
from the closing of the loan until the Commitment Date. During this period, the
Company holds the loan documents (generally, the promissory note and an
assignment of the first deed of trust or mortgage securing the note), and upon
its delivery of the loan documents to the Financial Institution, the Company
receives the full amount of the loan and all other amounts payable to the
mortgage banking company. The Company applies such funds against amounts due
from its customer to repay the principal of the Company's warehouse loan to the
customer and then remits the excess funds to the customer.
The Company derives its revenues from both the transaction-based fees that
it charges its customers in connection with the loans it funds on their behalf
and the interest rate spread between the yield paid by the Company to its
financing sources for its borrowed funds, when applicable, and the interest rate
charged by the Company for mortgage loans that it funds on behalf of its
mortgage banking company customers. During the fiscal years ended March 31,
1996 and 1997 (the "1995 fiscal year" and "1996 fiscal year", respectively),
such interest rate spread was generally 0.50%. Since April 1, 1997, the
interest rate spread
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increased to a range of 1.625% to 1.875% based on the type of loan, due to the
lower interest rate that the Company pays on advances made by Bank One compared
to the UMB (as defined below) interest rate.
Transaction fees are determined pursuant to a schedule based upon the
length of time between the funding of a loan by the Company and reimbursement of
same by the Financial Institution. During the 1995 and 1996 fiscal years, the
Company's customers were charged an initial fee of $60 to $190 upon funding of a
loan. If the loan was repaid within 30 days of the funding date, additional
fees were typically not earned by the Company on such loan. If such loan was
not repaid within said period, the customer paid an additional fee of $150.
Since April 1, 1997, such fee schedule has been revised and the Company's
customers are charged fees which range from $125 to $250 upon funding of a loan
and, in addition, a yearly facility fee ranges from 25 to 37.5 basis points
based on the approved line of credit to such customer. In the event that the
Company disburses funds to a title company in preparation for closing of a loan
which thereafter does not close, only the initial fee, plus interest for the one
to three days that it normally takes before such funds are returned by the title
company to the Company, are charged by the Company to its customer.
Generally, the Company's mortgage warehouse loan customers paid interest
for the funds they borrowed during the 1995 and 1996 fiscal years at a rate that
ranged from one quarter of one percentage point to one percentage point over the
UMB Prime Rate (as defined below).
. THE COMPANY'S BANK ONE, TEXAS, N.A. LINE OF CREDIT.
As of March 31, 1997, the Company entered into a one year credit agreement
(the "Credit Agreement") with Bank One, Texas, N.A. ("Bank One"). Pursuant to
the Credit Agreement, Bank One provides the Company with a $25,000,000 revolving
line of credit (the "Bank One Credit Line") and the Company pays fees ranging
from $17.50 to $12.50 per loan based on monthly loan volume. In addition, based
on the type of the loan, the Company pays interest on advances made by Bank One
at a variable rate ranging from 1/8% below to 1/8% above Bank One's prime rate
of interest (the "Bank One Prime Rate"). The Bank One Prime Rate is the rate
quoted from time to time by the Wall Street Journal as the base rate on
corporate loans at large U.S. money center commercial banks . As collateral
security for its indebtedness to Bank One under the Credit Agreement, the
Company has granted to Bank One a security interest in various assets including,
but not limited to, all promissory notes acquired by the Company with respect to
any loan funded by the Company with proceeds of the Bank One
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Credit Line and all mortgages or other forms of collateral securing the funding
of such loans.
. THE COMPANY'S UNITED MIZRAHI BANK LINE OF CREDIT.
During the 1995 and 1996 fiscal years, the Company utilized a revolving
line of credit provided by United Mizrahi Bank ("UMB") under a revolving line of
credit and security agreement between the Company and UMB, as amended (the "UMB
Agreement"), which was increased over the course of the 1995 fiscal year from $1
million to $4 million. Pursuant to the UMB Agreement, the Company paid a fee of
$30.00 per loan plus interest on advances made under its credit line at one
percent above the highest "prime rate" of interest quoted from time to time by
the Wall Street Journal as the base rate on corporate loans at large U.S. money
center commercial banks (the "UMB Prime Rate"). As collateral security for its
indebtedness to UMB under the UMB Agreement, the Company granted to UMB a
security interest in various assets including, but not limited to, all
promissory notes acquired by the Company with respect to any loan funded by it
with proceeds of the UMB credit line and all mortgages or other forms of
collateral securing the funding of such loans. The UMB credit line was paid in
full by the Company in February 1997.
. THE COMPANY'S MORTGAGE BANKING COMPANY CUSTOMERS
During the fiscal year ended March 31, 1995 (the "1994 fiscal year"), the
Company had three customers; however, 82.5% of its fundings were with one
customer, Premium Mortgage Company ("Premium").
In the first quarter of the 1995 fiscal year, the Company suspended its
customer relationship with Premium due to Premium's failure to comply with the
Company's underwriting criteria. During the second and third quarters of the
1995 fiscal year, the Company commenced business operations with three new
customers. The Company funded 81, 70 and 49 loans with those three customers,
totalling $7,249,533, $9,599,530 and $3,529,393, respectively, which accounted
for 35.4%, 46.8% and 17.2%, respectively, of the Company's warehouse lending
business during the 1995 fiscal year.
During the 1996 fiscal year, the Company funded 643 loans aggregating $51.4
million with the three largest customers, which accounted for 84% of its total
fundings. The Company funded 297 loans aggregating $24.7 million for one
customer, which accounted for 40.6% of the Company's fundings; 174 loans
aggregating $12.6 million for the second customer, which accounted for 20.7% of
the Company's fundings; and 172 loans aggregating $14.1 million
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funded for the third customer, which accounted for 23.2% of the Company's
fundings.
From April 1 through May 31, 1997, the Company had 21 mortgage banking
company customers, of which 12 were active. During this period the Company
funded 379 mortgage warehouse loans for an aggregate dollar volume of $28.4
million.
. THE MORTGAGE LOAN PROCESS
In order to be approved as a customer, a mortgage banking company must
satisfy a set of standards that have been established by the Company.
All of the Company's customers are Financial Institution-approved mortgage
banks that generally originate three categories of mortgage loans which are
purchased by such Financial Institutions, i.e., (i) residential mortgage loans
which either have been insured by the Federal Housing Administration, insured by
the Farmer's Home Administration or guaranteed by the Veteran's Administration
(collectively, "FHA/VA Loans"); (ii) conventional residential mortgage loans,
i.e., non-FHA/VA Loans which comply with the requirements for sale to, or
conversion into, mortgage-backed securities issued by FNMA or FHLMC ("conforming
loans"); and (iii) non-conforming product which includes sub-prime loans.
After a customer has satisfied the Company's application standards, a
credit facility agreement is entered into by the Company and the customer
("Credit Facility Agreement") which specifies, among other things, the maximum
amount which can be borrowed by the customer under the Credit Facility
Agreement, the maximum percentage of any single mortgage loan that will be
advanced, the interest rate and the terms of repayment. All funds advanced by
the Company under a Credit Facility Agreement are collateralized by a security
interest in the note and mortgage or deed of trust, as well as all instruments
and documents comprising the loan documentation on each loan funded by the
Company and a personal guaranty of the principals of the customer. To insure
completeness, the process of reviewing and determining whether an applicant has
satisfied these standards is fully monitored through the Company's Collateral
Tracking System (the "CTS"), which the Company utilizes to manage the risks
inherent in its business, and prepare, track and confirm the on-time delivery of
all necessary documents to the appropriate Financial Institution.
Within one day of the CTS's confirmation that all required documentation
has been received and reviewed by the Company's staff, the Company will wire
between 98% to 100% of the proceeds of the loan to the appropriate escrow agent
or title company with
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instructions to disburse the funds only upon consummation of the loan closing,
or otherwise return the funds to the Company. At the time of closing, the
mortgage banking company funds the balance of the loan.
On or shortly before expiration of the Commitment Date, the Company
delivers all promissory notes and mortgage instruments comprising the loans to
be purchased pursuant to the Financial Institution's commitment to such
Financial Institution upon payment to the Company of the aggregate principal
amount of the loans being delivered. Upon receipt of such funds from the
Financial Institution or the paying agent, the Company applies such funds
against amounts due from the customer to repay the principal of the Company's
warehouse loan to the customer and then remits the excess funds to the customer.
By limiting the mortgage loans funded to those that conform to Financial
Institution criteria, which define the prevalent standards for the entire
secondary mortgage market, the Company reduces its overall financing risk to
those mortgages which are the most liquid and readily acceptable by secondary
mortgage market lenders. Furthermore the Company obtains sufficient
documentation to ensure that if, for any reason, a Financial Institution refuses
to accept and pay for a loan subsequent to the closing thereof, the Company will
have all of the data and documentation necessary to sell the loan to another
Financial Institution or to a mortgage loan originator or warehouse lender.
In the 1994, 1995 and 1996 fiscal years, no loan which was approved for
funding by the Company failed to close, and every loan which was closed with the
Company's funds during those periods was sold to a Financial Institution in
accordance with the commitment made by the Financial Institution in advance of
such closing.
. THE COLLATERAL TRACKING SYSTEM
The Company manages the risks inherent in its business and prepares, tracks
and confirms the on-time delivery of all necessary documents to the appropriate
Financial Institution with the CTS, a proprietary set of computer-based
operating software. The CTS, which was developed principally by the Company for
its business and not for resale to other mortgage financing companies, provides
the operating data controls that are used by the Company's staff to run the
business on a day-to-day basis. The CTS programs assist the Company in its
efforts to avoid problems caused by, and the monetary losses that can result
from, frequent short-term processing deadlines, the high volume of loan
transactions and the complex document structures of mortgage loan financing
transactions which are integral parts of the mortgage loan warehouse financing
business. Substantial penalties for delay in delivering loan documents to the
secondary market, which
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may range from a surcharge of 1% to 2% of the principal amount of a loan in the
case of a delay regarding an individual loan commitment, to a complete rejection
and refusal to purchase an entire pool of loans in the case of a delay in
filling a pool commitment, are an integral part of the mortgage loan warehouse
financing business. An individual loan surcharge will not have any adverse
effect upon the Company, inasmuch as the amount would be deducted from the
proceeds of the particular loan which the Company would otherwise be obligated
to remit to its mortgage banking customer upon its acceptance and funding by a
Financial Institution. However, a delay which would cause a Financial
Institution to refuse to purchase a pool could result in a delay in replacing
the rescinded pool commitment with a new pool commitment from another Financial
Institution, or in selling the components of the pool as individual loans.
Although the Company would ultimately be compensated for the delay through
higher fees and interest charged to its customer on the pool of loans in
question, the delay could hinder its ability to timely fund additional loans
submitted by other customers, and thereby adversely affect its ongoing relations
with such other customers as a reliable source of mortgage warehouse financing.
During the 1995 and 1996 fiscal years, none of the individual or pool loans
funded by the Company on behalf of its customers was rejected by reason of a
delay in the delivery thereof to a Financial Institution.
The CTS keeps track of all amounts funded under its customer's line of
credit, automatically determines whether a sufficient balance remains thereunder
to fund a particular loan and updates the available balance information upon
transfer of funds. The CTS generates all documentation pertaining to the
transfer of funds to the title company closing a loan, the transmittal and
release of loan documents to a Financial Institution, the receipt of funds in
payment of loans purchased by a Financial Institution, and the distribution of
funds due to the mortgage banking company.
The CTS programs, which include all phases of the Company's mortgage
financing operations, have been modified and altered over time so that they meet
the Company's evolving business requirements. CTS was first developed in 1987
by principals of the Predecessor. In the 1995 and 1996 fiscal years, the
Company invested approximately $4,805 and $14,000, respectively, for development
and modification of the CTS to meet the Company's needs.
. STRATEGY.
The Company has embarked on strategies to meet competitive forces in the
mortgage market. These strategies include focusing on customers with a broader
product base such as non-conforming
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loans (loans which are not sold to the Agencies) and home equity loans.
The Company is seeking acquisitions of complementary businesses such as
mortgage companies and companies that provide specialty financial services
within the mortgage industry.
. MORTGAGE BANKING OPERATIONS
On April 16, 1997, the Company entered into a joint venture agreement with
Maryland Financial Corporation ("MFC") to form Pioneer Home Funding, LLC, a
California limited liability company ("PHF"). The Company and MFC will maintain
80 and 20 percent ownership interests, respectively, in PHF. As of June 10,
1997, the Company and MFC contributed to PHF $40,000 and $20,000, respectively.
These amounts are anticipated to increase up to $200,000 and $50,000,
respectively. PHF is a mortgage banking company organized for the primary
purposes of originating, acquiring, marketing and selling mortgage loans on
residential properties. PHF is expected to commence operations in July 1997.
. COMPETITION.
The business of originating and financing the origination of residential
mortgage loans is highly competitive. In order to obtain qualified residential
mortgage loans from small to medium sized originating mortgage bankers, the
Company competes with national, regional and local commercial banks and mortgage
banking companies who engage in mortgage loan warehouse lending that have longer
operating histories and significantly greater resources than those of the
Company in providing multi-state, computer-based bridge financing of residential
mortgage loans. In recent years, a declining interest rate environment
favorable to mortgage loan originations has existed. During the period 1995-
1997, larger, established mortgage banking companies have formed mortgage
warehouse divisions. The Company believes that as an independent warehouse
lender, it can effectively compete by adjusting to an ever-changing mortgage
market while providing a high-quality service through experienced management and
information provided to the Company's customers through the CTS.
. SEASONALITY.
The mortgage banking industry is generally subject to seasonal trends.
These trends reflect a national pattern of sales and resales of homes, although
refinancing tends to be less seasonal and more closely related to changes in
interest rates. Sales and resales of homes typically peak during the spring and
summer and decline to lower levels from December through March.
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. REGULATION - MORTGAGE WAREHOUSE LENDING.
Mortgage loan warehousing is not presently subject to federal regulation.
At the state level, the California Finance Lenders Law went into effect July 1,
1995. That law imposes licensing obligations on the Company, requires the
filing of annual and periodic reports, establishes maximum interest rates and
repayment terms in certain cases, and provides for fines and imprisonment for
violation of the law. Other participants in the mortgage warehouse financing
process, such as title companies and appraisers, are regulated by the states in
which they reside and such regulations often determine the scope and approach of
the Company's collateral control monitoring program. Furthermore, mortgage
banking is a highly regulated industry. The Company's mortgage banking
customers are subject to the rules and regulations of, and examinations by, the
Federal Housing Administration ("FHA"), the Veterans Administration ("VA"),
GNMA, FNMA, FHLMC and state regulatory authorities with respect to originating,
processing, underwriting, selling, securitizing and servicing residential
mortgage loans. In addition, there are other federal and state statutes and
regulations affecting such activities.
. EMPLOYEES
During the 1994 fiscal year, the Company had two full-time employees and
one part-time employee. During the 1995 and 1996 fiscal years, the Company had
one full-time and three part-time employees and temporary staff based on the
Company's needs. Since May 1997, the Company has employed seven full time
employees. None of the employees of the Company is represented by a labor union
or is subject to a collective bargaining agreement. The Company believes that
its relations with its employees are good.
ITEM 2. PROPERTY
The Company maintains its office at 6650 Reseda Boulevard, Reseda,
California which is occupied pursuant to a five year lease which commenced on
November 1, 1996 and provides for the payment of rent in the amount of $2,178
per month.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently engaged in or, to its knowledge, threatened
with, any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
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ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Common Stock issued by the Company in connection with the IPO has been
listed on the Nasdaq SmallCap Market since August 14, 1996 under the symbol
"PCFC". The following table sets forth below the high and low sale prices for
the Common Stock for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended High Low
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<S> <C> <C>
September 30, 1996 $4.875 $2.375
December 31, 1996 $ 2.75 $ 1.38
March 31, 1997 $ 3.00 $ 0.78
</TABLE>
As of March 31, 1997, there were approximately 500 beneficial holders of
the Common Stock.
. DIVIDEND POLICY AND RESTRICTIONS ON PAYMENT OF DIVIDENDS.
The Company has never paid cash dividends on its Common Stock.
Furthermore, the provisions of the plan of reorganization (the "POR") pertaining
to the Predecessor's emergence from bankruptcy prohibit the Company from paying
any dividends to its common shareholders until the sum of $1,350,000 shall have
been paid to the Predecessor's pre-bankruptcy unsecured creditors. As of March
31, 1997, no payment to the unsecured creditors has been made. Further, in
accordance with the POR, the Predecessor became obligated to pay certain
portions of its net income in satisfaction of said payment obligation to its
pre-bankruptcy creditors. Upon consummation of the Merger, the Company became
obligated, by operation of law, to comply with such payment obligation and
dividend payment prohibition, among other operating restrictions. The Company
does not anticipate paying cash dividends on the Common Stock in the foreseeable
future as it intends to retain future earnings to finance the growth of the
business. The payment of future cash dividends on the Common Stock will depend
on such factors as earnings levels, anticipated capital requirements, the
operating and financial condition of the Company and other factors deemed
relevant by the Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters addressed in this Annual Report may constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the
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Securities and Exchange Act of 1934, as amended. Such forward-looking
statements are subject to a variety of risks and uncertainties that could cause
actual results to differ materially from those anticipated by the Company's
management. The Private Securities Litigation Reform Act of 1995 (the "Act")
provides certain "safe harbor" provisions for forward-looking statements. All
forward-looking statements made in this Annual Report are made pursuant to the
Act.
GENERAL.
As of June 14, 1993, when the Company commenced active operations following
its emergence from Chapter 11 bankruptcy proceedings, it had an available credit
line of $1 million from one source, UMB. The Company's lines of available credit
from UMB were subsequently increased to an aggregate of $4 million as of March
31, 1996 and were utilized by the Company through February 1997. As of March 31,
1997 the Company entered into the Credit Agreement with Bank One, which provides
for a $25 million line of credit.
As a result of the death of Uri Lieber, the Company's former Chairman and
Chief Executive Officer, in April 1995, the Company did not engage in any
substantial mortgage warehouse lending activities from April 1995 through August
1995. During the period from August 1995 through November 1995, the Company
developed customer relationships with three new mortgage banking companies, and
from August 1995 through March 1996 the Company generated approximately $20.4
million in mortgage warehouse lending volume from those new customers. During
the 1996 fiscal year, the three largest customers generated $51.4 million in
warehouse loan volume, a 152% increase over the 1995 fiscal year. In September
1996, the Company obtained a fourth customer.
During each of the twelve month periods ended March 31, 1995, 1996 and
1997, the Company operated with a limited number of customers and funding
sources. However, since April 1, 1997, the Company has developed several new
customer relationships and is in the process of evaluating the creditworthiness
of many others. Management believes that the diversity and breadth of the
Company's current customers and its expanded financing sources make it unlikely
that any one event, such as the loss of any individual customer or a decline in
business conditions in a particular market, would have a severe impact on the
Company's operating results.
During the 1995 and 1996 fiscal years, the Company incurred net losses of
$479,803 and $1,232,213, respectively. With respect to the 1995 fiscal year,
such losses were partly attributable to non-cash expenses, primarily
depreciation, amortization, debt discount expenses and deferred consulting
12
<PAGE>
agreement expenses totaling $164,000. With respect to the 1996 fiscal year,
such losses were partly attributable to $614,459 of non-operating expenses, of
which $285,931 represent one-time only costs incurred in connection with a
proposed secondary public offering not consummated and the balance was
attributable to other costs of financing-related efforts. As further described
below, losses were also attributable to the inability of the Company to generate
a sufficient volume of loan transactions with its customers to offset such
expenses.
Results of Operations for Year Ended March 31, 1997 Compared with Year Ended
March 31, 1996
REVENUES: The Company's revenues increased in the 1996 fiscal year by 239%
from $97,190 in the 1995 fiscal year to $329,425 in the 1996 fiscal year. This
increase was attributable to an increase in loans funded by the Company from 201
loans with an aggregate dollar value of $20.5 million in the 1995 fiscal year to
764 loans with an aggregate dollar value of $60.9 million in the 1996 fiscal
year. Due to increased loan volume, the interest component of revenues
increased by 239% from $76,957 in the 1995 fiscal year to $260,550 in the 1996
fiscal year and processing fees increased by 295% from $15,733 in the 1995
fiscal year to $62,178 in the 1996 fiscal year.
DIRECT COSTS: The Company's direct costs consist of interest and other
charges which it was required to pay to its revolving credit line providers and
to its pre-IPO bridge financing ("Bridge Financing") lenders. The Company's
direct costs increased by 60% from $174,640 in the 1995 fiscal year to $279,756
in the 1996 fiscal year, primarily due to the increase in loan funding volume.
During the 1995 fiscal year, the Company's interest expense and other bank
charges paid to revolving line of credit lenders amounted to $95,409. During
this period the Company financed a total of 201 loans aggregating $20.5 million
in weighted average principal amounts of $101,996 for an average duration of 15
days per borrowing, including 153 loans funded through bank borrowings
aggregating $16.5 million in weighted average principal amounts of $108,601 for
an average duration of 15 days. During the 1996 fiscal year, the Company's
interest expense and other bank charges paid to revolving line of credit lenders
aggregated $237,371. During this period the Company financed a total of 764
loans aggregating $60.9 million in weighted average principal amounts of $79,713
for an average duration of 17 days per borrowing, including 483 loans funded
through bank borrowings aggregating $39.4 million in weighted average principal
amounts of $81,605 for an average duration of 17 days. The reduction in the
average loan size is primarily due to the increase in loans funded in the 1996
fiscal year by two new customers which funded loans for lower priced homes. The
increase in the bank interest and related charges is primarily
13
<PAGE>
due to a three-fold increase in the Company's use of its revolving credit
facility in the 1996 fiscal year versus the 1995 fiscal year.
Interest expense on the Bridge Financing was reduced by 46.5% from $79,231
in the 1995 fiscal year to $42,385 in 1996 fiscal year. Such interest expense
consisted of interest payable of $21,163 in the 1995 fiscal year and no interest
payable in the 1996 fiscal year; debt discount amortization of $55,244 in the
1995 fiscal year and $37,500 in the 1996 fiscal year and deferred issuance cost
amortization of $2,824 and $4,885 in the 1995 and 1996 fiscal years,
respectively. In the fourth quarter of 1995 fiscal year, the Company paid
$122,492 in full satisfaction of its indebtedness to two of the Bridge Financing
lenders and, upon the closing of the IPO in August 1996, the Company paid
$128,356 in full satisfaction of its obligation to the two remaining Bridge
Financing lenders.
OPERATING EXPENSES: Operating expenses increased from $433,709 in the 1995
fiscal year to $702,801 during the 1996 fiscal year. Operating expenses
included $134,555 of salaries and benefits paid to executives and other staff,
and $101,300 of depreciation and amortization, the primary component of which is
$92,312 attributable to the CTS, compared to $188,882 of salaries and benefits
to executives, former executives and others and $112,064 depreciation and
amortization expense in the 1996 fiscal year. Accounting and legal fees in the
1995 fiscal year amounted to $114,382 compared to $192,074 in the 1996 fiscal
year. This increase of accounting and legal fee expenses is due to the expanded
reporting requirements of the Company as a publicly held corporation.
It is anticipated that aggregate operating expenses will increase as staff
and office space are increased to manage the greater number of mortgage
warehouse loan transactions that management believes the Company will be
processing as a result of the recent increase of credit lines available to the
Company.
NET LOSS: Net loss from operations increased from $511,158 in the 1995
fiscal year to $653,132 in the 1996 fiscal year due to the limited nature of the
lending capital which was available to the Company and the inability to attract
customers due to the limited credit facility available to the Company during the
1995 and 1996 fiscal years. Net loss increased from $479,803 in the 1995 fiscal
year to $1,232,213 in the 1996 fiscal year, primarily due to non-operating
expenses incurred during the 1996 fiscal year of $614,459 of which $285,931 were
one-time only costs incurred in connection with a proposed secondary public
offering not consummated and the balance was attributable to other financing-
related efforts. Management believes that the Company's $25 million line of
credit obtained from Bank One,
14
<PAGE>
effective March 31, 1997, will allow the Company to increase its customer base
and loan volume for the current fiscal year.
Based upon ongoing discussions with mortgage banking companies who have
recently filed applications with the Company to become customers and the 21
mortgage banking companies which have become customers during the period from
April 1 through May 31, 1997, management believes that the revenue stream from
loan processing fees and interest charges will increase. From April 1 through
May 31, 1997, the Company has funded 379 loans for an aggregate dollar amount of
$28.4 million compared to 129 loans for an aggregate dollar amount of $11.3
million for the equivalent period in the 1996 fiscal year.
CASH FLOWS FROM OPERATIONS: The Company generated negative cash flow from
operations of approximately $2.8 million for the 1995 fiscal year and a positive
cash flow from operations of $50,000 for the 1996 fiscal year. For the 1995
fiscal year, approximately $2.6 million of such negative cash flow was generated
by an increase in warehouse loan receivables and the balance of the negative
cash flow from operations of $253,000 was primarily a result of the Company's
inability to generate a sufficient level of loan volume from its customers,
which was further negatively impacted by the limited funds available to the
Company for use in its mortgage warehouse activities. The positive cash flow for
the 1996 fiscal year was primarily the result of a $1.1 million reduction in
warehouse loan receivables. Without such reduction in loan receivables there
would have been negative cash flow from operations of approximately $1.0 million
which was primarily a result of the Company's inability to generate a sufficient
level of loan volume from its customers, which was further negatively impacted
by the limited funds available to the Company for use in its mortgage warehouse
activities. In an effort to generate positive cash flow from operations,
effective March 31, 1997, the Company obtained a $25 million credit facility
from Bank One Texas, N.A. Management believes that such credit facility will
allow the Company to produce profits and maintain positive cash flow from
operations.
REALIZABILITY OF LONG-LIVED ASSETS: Management evaluated the realizability
of its long-lived assets (primarily furniture and equipment and proprietary
computer software) having a net book value of $186,796 on March 31, 1997 in
accordance with the provisions of Statement of Financial Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of." Based on such evaluation, and taking into consideration the
positive cash flows and earnings that management believes the Company will be
able to generate in future periods, as further discussed above under "Cash Flows
from Operations," management does not believe that there is an impairment of its
long-lived assets at March 31, 1997.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES: As of March 31, 1997, Bank One made
available to the Company a $25 million revolving line of credit. The Company's
primary sources of capital which it employs in its warehouse lending operations
are borrowings under its Bank One revolving line of credit and its net equity
capital funds of approximately $5 million (after giving effect to $4 million of
funds received by the Company in February 1997 as proceeds of the Private
Placement). Management believes that such capital will enable the Company to
increase its customer base and thereby create a greater demand for and volume of
loans to be funded, which, in turn, is anticipated to generate sufficient
revenues from such expanded operations to maintain liquidity and generate
positive cash flow.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors of
Pioneer Commercial Funding Corp.:
We have audited the accompanying balance sheet of Pioneer Commercial Funding
Corp. (a New York corporation) (the "Company") as of March 31, 1997, and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the two years in the period ended March 31, 1997. 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Pioneer Commercial Funding
Corp. as of March 31, 1997, and the results of its operations and its cash flows
for each of the two years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 25, 1997
17
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 2,704,078
Mortgage warehouse loan receivables 2,456,154
Accrued interest and fee receivable 27,824
Prepaid and other assets 33,798
-----------
Total Current Assets 5,221,854
-----------
Fixed Assets:
Furniture and equipment 106,640
Proprietary computer software 483,410
Leasehold Improvements 10,846
-----------
600,896
Less accumulated depreciation and amortization 414,100
-----------
Net Fixed Assets 186,796
-----------
Other assets 25,000
-----------
Total Assets $ 5,433,650
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable & accrued expenses $ 235,360
Due to mortgage banking companies 85,546
Deferred legal fees 57,149
-----------
Total Current Liabilities 378,055
-----------
Convertible note payable 1,800,000
-----------
Total Liabilities 2,178,055
-----------
Stockholders' Equity:
Common stock-$.01 par value; authorized 5,000,000 shares;
3,642,272 shares issued and outstanding at March 31, 1997 36,423
Additional paid-in capital 12,525,952
Accumulated deficit (9,306,780)
-----------
Total Stockholders' Equity 3,255,595
-----------
Total Liabilities and Stockholders' Equity $ 5,433,650
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
18
<PAGE>
PIONEER COMMERICAL FUNDING CORP.
STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
INCOME:
Interest income................................ $ 260,550 $ 76,957
Commissions and fees........................... 6,697 4,500
Processing fees................................ 62,178 15,733
----------- ---------
Total income.......................... 329,425 97,190
----------- ---------
DIRECT COSTS:
Interest expense - warehouse and
revolving lines of credit.................... 207,105 81,104
Interest expense - bridge financing............ 42,385 79,231
Bank charges & fees............................ 17,786 9,711
Bank processing fees........................... 12,480 4,593
----------- ---------
Total direct costs...................... 279,756 174,639
----------- ---------
INCOME/LOSS BEFORE OPERATING EXPENSES.......... 49,669 (77,449)
OPERATING EXPENSES............................. 702,801 433,709
----------- ---------
Loss from operations.................... (653,132) (511,158)
----------- ---------
OTHER INCOME (EXPENSE)
Interest income - other........................ 24,459 24,570
Interest expense - other....................... (4,712) (4,712)
Miscellaneous income........................... 18,800 12,685
Non-operating expense.......................... (614,459) -
----------- ---------
Total other income (expense)............ (575,912) 32,543
----------- ---------
LOSS BEFORE INCOME TAXES....................... (1,229,044) (478,615)
PROVISION FOR INCOME TAXES..................... 3,169 1,188
----------- ---------
Net loss................................ $(1,232,213) $(479,803)
=========== =========
LOSS PER SHARE OF COMMON STOCK................. ($0.88) ($0.58)
=========== =========
WEIGHTED AVERAGE NUMBER OF SHARES.............. 1,403,460 826,644
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWELVE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
------- ------------ ------------ ------------
<S> <C>
BALANCE March 31, 1995................... $ 8,250 $ 8,548,734 $(7,594,764) $ 962,220
Issuance of 10,000 shares of the
Company's common stock
in connection with the bridge
financing............................ 100 49,900 - 50,000
Net loss for the period................. - - (479,803) (479,803)
------- ----------- ----------- -----------
BALANCE March 31, 1996................... 8,350 8,598,634 (8,074,567) 532,417
Issuance of 7,272 common
shares in connection with
bridge financing..................... 73 (73) - -
Issuance of 600,000 shares of
common stock and warrants............ 6,000 1,972,295 - 1,978,295
Issuance of 2,200,000 shares of
common stock......................... 22,000 1,955,096 - 1,977,096
Net loss for the period................. - - (1,232,213) (1,232,213)
------- ----------- ----------- ----------
BALANCE March 31, 1997................... $36,423 $12,525,952 $(9,306,780) $3,255,595
======= =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
STATEMENTS OF CASH FLOWS
FOR THE TWELVE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,232,213) $ (479,803)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 149,565 164,080
(Increase) decrease in --
Mortgage warehouse loan receivables 1,056,621 (2,579,116)
Accrued interest receivable 2,183 (10,866)
Prepaid expenses (7,710) (6,654)
Other assets (25,000) -
Increase (decrease) in --
Accrued interest payable (43,564) (1,543)
Due to mortgage banking companies 64,628 (15,054)
Accounts payable & accrued expenses 85,295 96,921
----------- -----------
1,282,018 (2,352,232)
----------- -----------
Net cash provided by (used in) operating activities 49,805 (2,832,035)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (80,871) (4,805)
----------- -----------
Net cash provided by (used in) investing activities (80,871) (4,805)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in borrowings used in operations,
net of issuance costs (3,254,235) 2,680,185
Decrease in revolving line of credit and bridge financing (179,400) -
Increase in deferred costs of equity offering - (182,570)
Increase in convertible note 1,800,000 -
Net proceeds from issuance of stock 4,270,430 -
----------- -----------
Net cash provided by financing activities 2,636,795 2,497,615
----------- -----------
Net increase (decrease) in cash 2,605,729 (339,225)
CASH AND CASH EQUIVALENTS -
at the beginning of the period 98,349 437,574
----------- -----------
CASH AND CASH EQUIVALENTS -
at the end of the period $ 2,704,078 $ 98,349
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 218,365 $ 98,911
=========== ===========
NON CASH FINANCING ACTIVITIES
Cost of equity offering paid in prior years $ 315,039
===========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
MARCH 31, 1997
--------------
1. NATURE OF OPERATIONS
--------------------
Pioneer Commercial Funding Corp. (the "Company"), formerly known as PCF
Acquisition Corp. ("PCF") is a New York corporation which merged with Pioneer
Commercial Funding Corp. (a New York corporation) ("Pioneer") on November 23,
1994. PCF was organized and commenced operations on March 8, 1994 for the
express purpose of raising capital through an initial public offering ("IPO")
for the benefit of Pioneer.
Pioneer's Reorganization
- ------------------------
On April 2, 1993, Pioneer emerged from Chapter 11 of the United States
Bankruptcy Code pursuant to a confirmed First Amended Modified Plan of
Reorganization ("POR"). As of June 14, 1993, when the Company commenced active
operations following its emergence from Chapter 11, it operated with limited
financing sources. In addition, substantially all of the business conducted by
the Company during the fiscal years ended March 31, 1994, 1995 and 1996 was with
one to four mortgage banking companies.
Operations
- ----------
The Company is engaged in the business of mortgage warehouse lending which
primarily consists of providing lines of credit, in the form of "warehouse
financing," to mortgage banking companies to enable them to close real estate
loans on single family, owner-occupied dwellings and sell such loans to
investors in the secondary market. The Company obtains its funds from third-
party funding sources through lines of credit and from its own sources. The
Company's loan receivables from the mortgage banking companies are secured by an
interest in the underlying real property which are then assigned to the
Company's funding sources. Investor groups who purchase the mortgages, which
generally occurs within 10 to 60 days from the time the Company makes the loan,
remit the proceeds directly to the Company in satisfaction of the loan and
interest receivable from the mortgage banking company. The Company will
simultaneously use the funds to pay off its loan and accrued interest payable to
its funding sources. The Company's primary sources of income from operations
are processing fees received from its mortgage banking customer for each loan
financed and the interest rate spread between the rate at which the Company
borrowed from its funding source and the rate it charges its customer. The
Company's customers fund loans throughout the United States with concentrations
in California, Pennsylvania, Arizona and Colorado.
22
<PAGE>
The Company's operations are subject to certain risks which are inherent to its
industry. Its results of operations depend heavily upon the ability of its
mortgage banking customers to originate mortgage loans. This ability is largely
dependent upon general economic conditions in the geographic areas that the
Company serves. Because these general economic conditions fluctuate, there can
be no assurance that prevailing economic conditions will always favor the
Company's business and operations. In addition, mortgage banking firms have
historically experienced a wide range of financial results, from highly
profitable to highly unprofitable. These financial results are due to many
factors which affect most, if not all, firms in the mortgage banking business at
about the same time. Three of these factors which predominate are: changes in
mortgage interest rates, the availability of affordable credit, and the state of
the domestic economy. These three factors, among others, affect the demand for
new and used housing and thus the demand for financing and refinancing of
mortgages. Lastly, although the Company's mortgage banking customers must have
a commitment for each loan from an approved third-party agency (the "Agency")
before the Company will extend mortgage warehouse financing, there is no
guarantee that the Agency will, in fact, accept the mortgage loan when delivered
due to certain deficiencies in the loan or other unanticipated circumstances
which may exist. If for any reason an Agency does not accept the mortgage loan,
and the Company's mortgage banking customer is unable to pay back its obligation
to the Company through other means, the Company could find itself the owner of a
long-term loan of less than market value instead of a short-term bridge
financing receivable.
During the twelve month periods ended March 31, 1997, and 1996, the Company
operated with a limited number of customers and funding sources. As of April 1,
1997, the Company had significantly increased its funds available from financing
sources and its own sources. In addition, the Company had developed several new
customer relationships and was in the process of evaluating the creditworthiness
of many others. In management's opinion, the diversity and breadth of the
Company's current customers and its expanded financing sources adequately
mitigate the risk that the Company will be severely impacted in the near term as
a result of the Company's customer base, competition, sources of supply, or
composition of its markets. Management believes it is unlikely that any one
event, such as loss of any individual customer, or decline in business
conditions in a particular market would have a severe impact on the Company's
operating results and that the Company will continue to operate in the normal
course.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Use of Estimates
- ----------------
The accompanying financial statements, which are prepared in conformity with
generally accepted accounting principles, require the use of estimates made by
management. The most significant estimates with regard to these financial
statements relate to the valuation allowance for deferred income taxes and the
estimated obligations due under the POR, as more fully described in Notes 5 and
10, respectively. Actual results may differ from those assumed in management's
estimates.
Cash and Cash Equivalents
- -------------------------
Cash equivalents include time deposits and highly liquid investments with
original maturities of three months or less.
23
<PAGE>
Other Assets
- ------------
Effective April 25, 1996, a one year certificate of deposit in the amount of
$25,000 was pledged in order for the Company to receive a California Lender Bond
as a California Financial Lender, to be renewed annually at the discretion of
the insurance carrier. The certificate of deposit is included in other assets
in the accompanying financial statements.
Fixed Assets
- ------------
Depreciation expense is computed generally on a straight-line basis over the
estimated useful life of the asset. Leasehold improvements are amortized over
the estimated life of the asset or the term of the lease, whichever is shorter.
The ranges of estimated useful lives used in computing depreciation and
amortization are as follows:
<TABLE>
<CAPTION>
Years
-------
<S> <C>
Furniture and equipment 3 to 10
Autos and trucks 5
Leasehold improvements 3 to 10
Proprietary computer software 5
</TABLE>
Proprietary computer software consists of a set of computer programs that were
developed internally by the Company for use in its business and are not for
resale to other mortgage finance companies.
Income Taxes
- ------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred income taxes are provided for at the statutory rates on the difference
between financial statement basis and tax basis of assets and liabilities and
are classified in the balance sheets as current or noncurrent consistent with
the assets and liabilities which give rise to such deferred income taxes.
Deferred Costs of Equity Offering and Debt Issuance
- ---------------------------------------------------
Certain costs associated with the IPO were paid by the Company and deferred as
of March 31, 1996. Upon the successful completion of the IPO, these costs were
written off as a non-operating expense or shown as a direct reduction to
additional paid-in capital as appropriate.
Loss Per Share of Common Stock
- ------------------------------
The loss per share of common stock was computed using the net loss for the year,
divided by the weighted average number of shares outstanding during the period
(adjusted for the reverse stock split effective in June 1996). Weighted average
shares outstanding are further adjusted for the impact of shares issued and
warrants issued and options granted for which the exercise price is less than
the average share price.
24
<PAGE>
For the twelve month periods ended March 31, 1997, and 1996, the average share
price exceeded the exercisable price for all options and warrants, and the
impact of conversion of the warrants and options would have been anti-dilutive.
Therefore, the options and warrants were not considered in the calculation of
loss per common share.
The Company will adopt Statement of Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" during the next fiscal period. SFAS No. 128 more clearly
defines basic and diluted earnings per share and a reconciliation of numerators
and denominators used in the computations. Management has determined that the
adoption of SFAS No. 128 will not have an impact on the results of the
operations or financial position of the Company.
Reclassifications
- -----------------
Certain reclassifications have been made to conform prior years data to the
current format.
3. MORTGAGE WAREHOUSE LOAN RECEIVABLES/PAYABLE
-------------------------------------------
Loan receivables are generally due within sixty days from the date funded, with
an average outstanding period of seventeen days and interest payable at prime
plus 1.5%. Similarly, all of the related loans payable are due within the same
time frame with interest payable at prime plus 1%. The Company's available line
of credit was $4 million as of March 31, 1996.
As of September 1, 1996, the $4 million line of credit was renewed for one year
with a 1 percent renewal fee amortized over the life of the loan. As of March
31, 1997, the line was terminated and the Company was refunded the unamortized
portion of the renewal fee and all unexercised options immediately expired.
As of March 31, 1997, the Company obtained a $25 million revolving line of
credit pursuant to a security agreement between the Company and Bank One, Texas,
N.A. ("Bank One"). The Company will pay interest on advances at the "prime
rate" of interest, quoted from time to time by the Wall Street Journal plus or
minus one-eighth of a percent. As collateral security for its indebtedness to
Bank One the Company granted to Bank One a security interest in various assets
including, but not limited to, all promissory notes acquired by the Company with
respect to any loan funded by it with moneys advanced under its Bank One credit
line and all mortgages or other forms of collateral security obtained by the
Company in connection with the funding of such loans.
For the years ended March 31, 1997 and 1996, the weighted average interest rate
on loans receivable was 9.66% and 9.93%, respectively, and on loans payable was
9.25% and 9.53%, respectively. Loans receivable are collateralized by a
security interest in the underlying real property which the Company then assigns
to its funding sources as security for the loans payable.
4. BRIDGE FINANCING
----------------
In March 1994, the Company entered into a loan arrangement with various
individuals (original bridge financiers) to provide $200,000 in additional funds
to be used in the ordinary course of the Company's warehouse lending operations
and to defray certain expenses of the anticipated IPO. The loans bore interest
at a rate of 12% and were due at the earlier of the successful completion of the
IPO or August 31, 1995. As an inducement to make these loans, the Company
issued 22,727 shares of its common stock to the original bridge financiers. The
original 22,727 shares issued and the additional 7,272 shares
25
<PAGE>
issued in fiscal 1997 discussed below were assigned a $5.00 per share value
(which is equal to the price that these shares were offered at in the IPO)
resulting in a $150,000 discount to the debt. The discount was amortized to
interest expense over the term of the debt agreements resulting in an effective
interest rate of 248%.
On August 31, 1995, the bridge loans matured but were not paid by the Company.
On January 16, 1996, the Company paid off in full loans outstanding to two of
the bridge financiers. On February 1, 1996, the Company entered into agreements
with the remaining two bridge financiers (the remaining bridge financiers) with
aggregate outstanding loans to the Company as of such date totaling $123,708
(which includes $23,708 of unpaid accrued interest), whereby the maturity date
of the bridge loan obligations was extended to the earlier of three days
following the consummation of the IPO or December 31, 1996.
The Company received waivers from all of the original bridge financiers for any
defaults which may have occurred as a result of the Company's failure to pay off
its debt obligations on their original maturity date of August 31, 1995. In
consideration for the waivers received and in order to adjust the number of
shares given to the original bridge financiers for the impact of the June 1996
reverse stock split which reduced their number of shares owned from 30,000 to
22,727 shares, the Company issued to the original bridge financiers an
additional 7,272 shares of common stock in June 1996. In addition, the Company
issued 10,000 more post-split shares to the remaining bridge financiers in
consideration for extending the maturity on their debt in February 1996. A
value of $5.00 per share was assigned to these shares on the date of the debt
modification resulting in a $50,000 discount to the debt. Such discount is
being amortized to interest expense over the remaining term of the modified debt
agreements resulting in an effective interest rate of 133% for the period from
February 1, 1996 through December 31, 1996. Upon successful completion of the
IPO on August 12, 1996, all outstanding principal and interest related to the
above agreements was paid in full.
5. INCOME TAXES
------------
The Company recorded losses from operations for the twelve month periods ended
March 31, 1997 and 1996 for both financial reporting and Federal income tax
purposes and provided $3,169, and $1,188, respectively, for income taxes, which
represents provisions for minimum state taxes.
Deferred taxes consist primarily of net operating loss carryforwards ("NOL's")
for tax purposes which can be off-set against future taxable income. As of
March 31, 1997, the Company's NOL is $2.0 million, which expires in varying
amounts between 2000 and 2011. Approximately $1.3 million of the NOL is limited
to use (approximately $100,000 per year) due to a change in ownership in
November 1994 resulting from the merger between Pioneer and PCF.
The realization of the future tax benefits from deferred tax assets is dependent
upon the Company generating sufficient future taxable income. Accordingly, a
100% valuation allowance has been established against the net deferred tax
asset.
6. DUE TO MORTGAGE BANKING COMPANIES
---------------------------------
The Company generally will only finance up to 98% of the total loan amount
closed by the mortgage banking company. Upon sale of the loan to the investor
group, proceeds for 100% of the loan amount are remitted to the Company by the
investor. The Company holds such funds until receipt of amounts due from the
mortgage banking company for fees and accrued interest on the 98% financed.
26
<PAGE>
7. DEFERRED LEGAL FEES
-------------------
Deferred legal fees are a consequence of the POR and are payable in four annual
installments which began on April 16, 1994. The Company has not paid the April
1996 and 1997 installments totaling $57,149 as of March 31, 1997.
8. STOCKHOLDERS' EQUITY AND INITIAL PUBLIC OFFERING
------------------------------------------------
Reverse Stock Split
- -------------------
Effective June 1996, the Board of Directors of the Company authorized a .758 for
1 reverse stock split of all of its then outstanding common stock. All share
and per share amounts in these financial statements have been restated to give
effect to the reverse stock split as if it had occurred on the first day of each
period presented.
Share Voting Agreements
- -----------------------
On October 25, 1994, in connection with a stock purchase agreement with an
unrelated third party, Pioneer issued an additional 176,136 shares of its Class
B common stock for $500,000 (which were exchanged for 176,136 common shares of
PCF upon the consummation of the merger). The agreement gives the third party
the right to acquire additional shares, if, in future periods, additional shares
are issued to other parties so that this third party's percentage ownership in
the Company does not fall below 20% of the total outstanding common shares. In
connection with this stock purchase transaction, the unrelated third party
entered into a share voting agreement with certain existing shareholders of the
Company, who after the merger, own greater than 50% of the Company in the
aggregate. The share voting agreement requires that all parties to the
agreement will vote on all matters subject to shareholder approval in a
consistent fashion. The agreement was terminated upon the successful completion
of the stock offering discussed below.
Initial Public Offering
- -----------------------
In August 1996, the Company consummated its IPO pursuant to which the Company
issued and sold 600,000 shares of its common stock, par value $.01 per share
(the "Common Stock"), and 690,000 warrants (including warrants sold upon
exercise of the underwriters' over-allotment option) to the public at a price of
$5.00 per share and $.10 per warrant, which yielded to the Company net proceeds
of approximately $2 million. The warrants give the owner the right to purchase
an additional share of common stock at a price of $5.50 for a period of four
years commencing after the completion of the IPO (the "Exercise Period"). Such
warrants will be immediately tradable separate from the common stock.
Commencing two years after the completion of the IPO and through the end of the
exercise period, the warrants may be redeemed by the Company upon 30 days'
written notice at a price of $.05 per warrant, provided that (1) the closing
sale price of the Company's common stock shall not be less than $7.50 per share
for any period 20 days subsequent to the issuance of the written notice, or (2)
that the warrant holders have not exercised their warrants at any time prior to
the period 30 days after the issuance of the written notice. In addition, the
underwriter was issued the right for a period of four years commencing one year
after the completion of the IPO to purchase, in tandem, 60,000 shares of common
stock of the Company and 60,000 common stock purchase warrants at a price of
$6.12 for each combined share and warrant. The terms of the warrants acquired
by the managing underwriter were the
27
<PAGE>
same as those discussed above except that such options are nontransferable. The
warrants are exercisable into 690,000 shares of Common Stock at a price of $5.50
per share August 12, 2000.
Private Placement
- -----------------
On February 28, 1997, the Company completed a private placement of securities
(the "Private Placement") with eight investors who invested an aggregate of $4
million in the Company in consideration for 2.2 million shares of Common Stock
and $1.8 million principal amount of convertible promissory notes of the Company
(the "Convertible Notes"). The Convertible Notes were converted into 1.8
million shares of common stock on May 9, 1997.
Dividend Restriction
- --------------------
The holders of the Company's Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. The
common stockholders are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available. As of March
31, 1997, in management's opinion, it is not anticipated that dividends will be
paid on common stock in the foreseeable future as certain of the debt
instruments to which the Company is a party to prohibit or restrict the payment
of dividends (see Note 10 for further discussion of restrictions under the POR).
9. STOCK OPTION PLANS
------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation costs
has been recognized for the Company's Non-Qualified Stock Option Plan (the
"Plan"). The Company has calculated pro-forma financial results based on the
estimate of the fair value of its stock options at grant date, as required under
SFAS No. 123, and noted that the impact on the net loss for the fiscal year
ended March 31, 1997 was not material.
The Plan which was adopted on August 1, 1994, provides for the issuance of
options to purchase up to 151,515 shares of the Company's common stock to
persons who are at the time of grant, employees of, or consultants to, the
Company.
The Company has issued additional options outside the Plan at the discretion of
its Board of Directors ("BOD").
The following table summarizes information related to shares under option and
shares available for grant under the Plan and separate actions of the BOD:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Options outstanding at beginning of year 235,166 7,892
Options granted during the year 112,879 227,274
Options relinquished during the year - -
-------- --------
Options outstanding at end of year 348,045 235,166
======== ========
Per share price of outstanding options issued in prior year $5.00 $5.00
Per share price of outstanding options issued in current year $1.99 to $5.00
$5.00
</TABLE>
28
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
Plan of Reorganization
- ----------------------
Under the POR, the Company is contingently liable to its pre-Chapter 11
unsecured creditors, for such creditors' pro rata shares of noninterest-bearing
notes (the "Notes") totaling $1,350,000. Commencing with the close of fiscal
year ending March 31, 1996, and for all succeeding years thereafter, until full
aggregate payment of $1,350,000 is made under the Notes, each Note holder shall
receive a cash distribution equal to such Creditors' pro-rata share of twenty
percent of the Net Income Available for Note Payments, if the Net Income for any
such year exceeds $1,300,000.
For the fiscal years ended March 31, 1997 and 1996, the Company had not
generated income that resulted in payment on the Notes. Accordingly, no
liability has been reflected in the Company's balance sheet for the Notes or the
professional fees.
In addition to the Notes, approximately $50,000 in professional fees incurred in
connection with the POR were deferred and will only be paid to the extent the
Notes are paid in full.
As of March 31, 1997, the Company was unable to determine whether it is probable
that it will generate income in future years which would result in payments on
the Notes. As such, no liability has been reflected in the Company's balance
sheet for the Notes or the professional fees.
In accordance with the POR, certain operating restrictions have been placed upon
the Company until the time that all amounts due on the Notes have been paid in
full. These restrictions include:
- Incurring new debt in excess of $25,000, except for secured lending
required in the ordinary course of the Company's mortgage lending
operations.
- Expending more than $25,000 in the aggregate in a calendar year to
purchase or lease capital assets, except to replace existing assets.
- Expending more than $320,000 annually in the aggregate to the officers of
the Company and placing limitations on salary increases.
- Merging or consolidating with another business.
- Declaring dividends on any class of common stock, except that, if there
should be a public offering of the securities of the Company, and, if at
the option of the Company, fifty percent of the proceeds in excess of
$5,000,000 from such offering are utilized for the payment of the Notes,
then such dividend restriction shall be deemed waived.
As of March 31, 1997, the Company was in compliance with the above restrictions.
Consulting Contract
- -------------------
In September 1996, the Company entered into a two year consulting contract with
Boru Enterprises to assist the Company in its relationships with investment
bankers, analysts and other members of the financial community. Under terms of
the agreement the Company paid the consultant $100,000 in
29
<PAGE>
advance. In February 1997, the contract was terminated by the Company and the
entire contract was expensed to non-operating expense for the fiscal year ended
March 31, 1997.
Employment Contracts
- --------------------
In March 1995, the Company entered into a two-year employment agreement with its
Chief Financial Officer ("CFO") which provided for a base annual salary of
$100,000 and $90,000 for the fiscal years ending March 31, 1997 and 1996,
respectively. This contract was subsequently extended through March 31, 1998 at
a base salary of $100,000. In addition, the Company must reimburse the CFO
certain business-related expenses, provide for the use of a Company automobile
and pay the premiums for life and long-term disability insurance. In the event
of termination in connection with a change in control, the CFO is entitled to
the balance of the amount due under this agreement plus an additional $100,000.
The agreement also provides for the granting to the CFO an option to purchase
75,758 shares of the Company's common stock at an exercise price of $5.00 per
share and a second grant on May 1, 1996 to purchase an additional 37,879 shares
at the market price of the common stock estimated at that date to be $5.00 per
share. Both options are immediately exercisable and expire five years from the
date of grant.
In June 1995, the Company entered into employment contracts with its Chief
Executive Officer ("CEO") and President providing for an annual salary of
$55,000 for each individual commencing after the completion of the IPO. For the
period from June 1995 through the completion of the IPO on August 12, 1996 these
officers were each granted an option to purchase 75,758 shares at an exercise
price of $5.00 per share in lieu of salaries. See Note 9 for a summary of stock
options awarded by the Company.
Investment in Trans Lending Corporation
- ---------------------------------------
On December 23, 1996, prior management of the Company signed a Stock Purchase
Agreement (the "Agreement") to acquire 500 shares of Trans Lending Corporation
("Trans Lending") common Stock for $100,000 and 200 shares of Trans Lending's
non-voting, non-dividend paying preferred stock for $200,000. Trans Lending was
formed to originate consumer automobile financing transactions for non-prime
borrowers by acquiring contracts from franchised and independent car dealers.
As of March 31, 1997 the Company had paid $100,000 to Trans Lending pursuant to
the Agreement.
Several conditions precedent to closing the transaction, pursuant to the
Agreement, had not been completed as of March 31, 1997, including delivery of
the share certificates evidencing Pioneer's ownership of 500 fully paid and
nonassessable shares of common stock. Management does not intend to remit the
$200,000 for the preferred stock in Trans Lending, nor do they believe they are
liable for the obligations or operating performance of Trans Lending.
Additionally, management is of the opinion that the Agreement is not binding or
enforceable. The Company has written-off their $100,000 investment in Trans
Lending at March 31, 1997.
Lease Obligation
- ----------------
The Company leases its office space under an operating lease expiring October
31, 2001. The current lease calls for CPI increases in years 2 through 5 with a
minimum of 3% and a maximum of 5%.
Future minimum lease commitments as of March 31, 1997 are as follows, for the
fiscal years ending March 31, :
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
1998 $ 26,136
1999 26,136
2000 26,136
2001 26,136
2002 15,246
--------
$119,790
========
</TABLE>
11. OPERATING AND NON-OPERATING EXPENSES
-------------------------------------
Operating and non-operating expenses consisted of the following
for the years ended March 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Salaries and benefits $ 188,822 $134,555
Depreciation and amortization 112,065 101,300
Professional fees 191,513 114,382
Utilities 26,928 19,782
Rent 17,662 11,609
Repairs and maintenance 5,608 4,616
Other 160,203 47,465
---------- --------
Operating expenses 702,801 433,709
Non-operating expenses 614,459 -
---------- --------
$1,317,260 $433,709
========== ========
</TABLE>
The Company's non-operating expenses for the fiscal year ended March 31, 1997
represent one time only costs incurred in connection with a proposed, but not
consummated, second offering of the Company's common stock and other financing
related efforts in fiscal 1997.
12. RELATED PARTY TRANSACTIONS
--------------------------
For the years ended March 31, 1997 and 1996, certain family members of an
executive officer and a member of the BOD of the Company were engaged to perform
various accounting and consulting services for the Company. Such individuals
were compensated approximately $15,481 and $3,106 for these services in 1997 and
1996, respectively.
13. SUBSEQUENT EVENTS
-----------------
On April 2, 1997 and April 4, 1997 the Company issued unsecured loans of
$400,000 and $600,000, respectively to Rogosin Converters, Inc. an affiliate of
the Company. The loans were guaranteed by Leedan International, B.V., a
shareholder of the Company with a substantial net worth. The Company earned 12%
interest per annum on the loans which was paid monthly. Management determined
that this would yield a better return than investing the otherwise idle cash in
other investment alternatives, such as
31
<PAGE>
Treasury bills or commercial paper. The loans were approved by the BOD of the
Company. All unpaid principal and interest owing on the loans was paid in full
on June 20, 1997.
On April 16, 1997 the Company entered into a joint venture agreement with
Maryland Financial Corporation ("MFC") to form Pioneer Home Funding, LLC, a
California Limited Liability Company, ("PHF"). The Company and MFC will
maintain 80% and 20% ownership interests, respectively, in PHF. The Company and
MFC have contributed $40,000 and $20,000, respectively, as of June 10, 1997.
These amounts are anticipated to increase up to $200,000 and $50,000,
respectively. PHF is a mortgage banking company organized for the primary
purpose of originating, acquiring, marketing and selling mortgage loans on
residential properties. PHF will focus on various lending markets including
the subprime market. All loans originated or acquired by PHF will be sold
servicing released. PHF is expected to commence operations in July 1997.
On May 9, 1997, the Company increased its authorized shares of common stock by
15 million to 20 million shares. With these newly available shares, the Company
immediately converted its outstanding Convertible Notes into 1.8 million shares
of common stock.
On June 25, 1997, the Company has filed a form 8-K with the Securities and
Exchange Commission ("SEC") to change its fiscal year end from March 31 to
December 31 as of December 31, 1997. No response has been received from the SEC
as of the date of this filing.
32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
M. Albert Nissim... 63 President
Glenda S. Klein.... 53 Director, Senior Vice President,
Secretary, Treasurer and Chief Financial Officer
Richard Fried...... 51 Director
Boaz Harel......... 34 Director
Tamar Lieber....... 55 Director
Mark Roth.......... 35 Director
</TABLE>
Glenda S. Klein has served as a director of the Predecessor since 1993, and
was appointed to serve as the Predecessor's Treasurer and Chief Financial
Officer in 1994. She assumed the same directorial and official positions with
the Company upon consummation of the Merger in November 1994. In 1993 Ms. Klein
and her husband filed a petition pursuant Chapter 7 of the Bankruptcy Code.
After receiving a discharge in bankruptcy, they reopened the bankruptcy
proceedings and converted same to a case under Chapter 11 of the Bankruptcy
Code. In April 1995, Ms. Klein and her husband deposited $100,000 into the
Bankruptcy Court for the purpose of paying in full, with interest, any of the
creditors of their bankrupt estate who had filed claims against them in said
proceedings. In October 1995, such proceedings were closed. In April 1997 Ms.
Klein was appointed as one of the Company's designees on the Board of Directors
of Pioneer Home Funding, L.L.C., a subsidiary of the Company.
33
<PAGE>
Richard Fried was appointed to the Predecessor's Board in February 1994 and
served as Vice-President of the Predecessor. Upon consummation of the Merger in
November 1994, he became a director of the Company. Since June 1991 Mr. Fried
has served as President of Medical Systems, Inc., an application software
development company, of which he has been a principal shareholder. From
February 1993, he has served as President of Montgomery Associates, Inc., a
corporation wholly-owned by him, which is engaged in business as an importer-
exporter. Since April 1993, Mr. Fried has been a principal shareholder, and has
served as President, of Sea Change Systems, Inc., a software tools development
company. From April 1993 to May 1994, he was a Branch Manager of LPL Financial
Services, a stock brokerage firm, which is an NASD member firm. Since November
1994, Mr. Fried has been a controlling shareholder and has served as President
of SMARTpay, Inc., a collection service. From April 1995 he has served as
President of Centennial Systems, Inc., a software distribution, sales and
service firm of which he is a principal shareholder. Since October 1996, Mr.
Fried has been a controlling shareholder, and has served as President, of
Leeward Software, Inc., an application software developer. From October 1996 he
has also served as President of Windward Software, Inc., a materials management
software intellectual property company of which he is also a principal
shareholder. From December 1996 he has served as President of Strategic
Reporting Systems, Inc., a database report generation software development and
distribution firm of which he is a principal shareholder. From April 1997, he
has served as managing director of HYCOM USA, Inc., an international software
development and distribution company, of which he is a principal shareholder.
Boaz Harel was appointed to the Board in November 1996. From 1991 to 1993,
Mr. Harel was the founder and managing director of Mashik Business and
Development Ltd., an engineering consulting company. Since 1993, Mr. Harel has
been the Managing Director of Leedan Business Enterprise Ltd. ("Leedan"), a
publicly-held Israeli company which is the beneficial owner of 49% of the
Company's Common Stock. Since January 1994, Mr. Harel has served as a member of
the Supervisory Board of ICTS International N.V. and since September 1996, Mr.
Harel has served as the Chairman of ICTS USA (1994), Inc., an indirect
subsidiary of Leedan. Since 1997 Mr. Harel has been Co-Managing Director of
Leedan International Holdings B.V., a principal shareholder of the Company and
an indirect wholly-owned subsidiary of Leedan.
Tamar Lieber was appointed to the Board in June 1995. Ms. Lieber has been
engaged in practice as a senior psychotherapist at the Center for Preventive
Psychiatry in White Plains, New York, a non-for profit community mental health
clinic, for more than the past five years.
34
<PAGE>
Mark Roth was appointed to the Board in November 1996 as designee of
National Securities Corporation ("National"), the underwriter of the Company's
IPO. Mr. Roth is an attorney who engaged in the private practice of law between
March 1992 and September 1995. In 1992, Mr. Roth began representing National
and since October 1995 Mr. Roth has served as General Counsel of National and
continues to serve in that capacity. Since February 1997 he has also served as
Secretary of National. Mr. Roth also serves as Secretary and General Counsel of
Olympic Cascade Financial Corporation, a publicly traded financial holding
company and a parent of National.
M. Albert Nissim was appointed as the President of the Company in January
1997. He has served as Secretary of ICTS International N.V. since January 1996.
Mr. Nissim has also served as President of ICTS USA (1994), Inc. since January
1994. From 1994 to 1995, he served as Managing Director of ICTS International
B.V. Mr. Nissim served as the President of Harel & Partners from 1991 to 1994.
From 1990 to the present, he has been the Vice President and a director of Tuffy
Associates Corp., an automotive repair franchise company affiliated with Mr.
Ezra Harel, the brother of Boaz Harel. Mr. Nissim is also a Co-Managing
Director of Leedan International Holdings B.V., and a principal shareholder of
the Company. In April 1997, Mr. Nissim was appointed as one of the Company's
designees on the Board of Directors of Pioneer Home Funding, L.L.C., a
subsidiary of the Company.
On January 9, 1997, Messrs. Arthur Goldberg and Elie Housman, the Company's
Chief Executive Officer and Chief Operating Officer, respectively, were removed
from their respective offices by the Board of Directors following disagreements
between the Board of Directors and those two officers with respect to the
Company's financing efforts and investment strategies. On January 20, 1997,
Messrs. Goldberg and Housman resigned from their positions as directors of the
Company.
. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
On February 28, 1997, as a result of the completion of the Private
Placement, Leedan International Holdings B.V. ("Leedan") became the holder of
38% of the Common Stock and Leedan Business Enterprise Ltd. ("Leedan Business"),
an indirect parent corporation of Leedan became the beneficial holder of 42% of
the Common Stock. Prior to the Private Placement, Leedan Business was the
beneficial holder of more than 10% of the Common Stock. The Company did not
receive a Form 3 on behalf of Leedan Business or a Form 3 on behalf of Leedan
until June 25, 1997.
35
<PAGE>
M. Albert Nissim was appointed as the President of the Company on January
9, 1997. A Form 3 was not filed on behalf of Mr. Nissim until March 10, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth compensation awarded to, earned by or paid
to executives of the Company and to Uri Lieber and Arthur Goldberg in their
former capacities as Chief Executive Officers of the Company. No executive
officer of the Company earned a salary and bonus of more than $100,000 during
any one of the 1994, 1995 and 1996 fiscal years. During such fiscal years the
Company did not grant any restricted stock awards or stock appreciation rights
to any of its executives.
<TABLE>
<CAPTION>
====================================================================================================
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION AWARDS
- ----------------------------------------------------------------------------------------------------
OTHER
FISCAL YEAR ANNUAL SECURITIES
ENDED COMPENSA- UNDERLYING
MARCH 31 SALARY($) BONUS($) TION ($) OPTIONS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
M. Albert Nissim* 1997 $ 14,385 90,000
President
- ----------------------------------------------------------------------------------------------------
Glenda S. Klein, 1997 $ 98,998 172,879
Senior Vice President
- ----------------------------------------------------------------------------------------------------
1996 $ 90,000 $10,000 75,758
- ----------------------------------------------------------------------------------------------------
1995 $ 56,017
- ----------------------------------------------------------------------------------------------------
Uri Lieber, Former CEO 1995 $ 97,139(1) -- $8,003(2) --
- ----------------------------------------------------------------------------------------------------
Arthur Goldberg, Former CEO 1997 --(3) -- -- 75,758
===================================================================================================
</TABLE>
*Commenced service as President of the Company in the fourth quarter of the 1996
fiscal year.
(1) Represents compensation paid to Mrs. Lieber on behalf of Uri Lieber under
his employment agreement with the Company.
(2) Represents the premiums paid by the Company with respect to term life
insurance owned by Mr. Lieber and payable to his designated beneficiary.
(3) The Company has been accruing a compensation obligation of $18,333 to Mr.
Arthur Goldberg, a former Chief Executive Officer.
36
<PAGE>
. COMPENSATION OF DIRECTORS.
None of the directors of the Company has been compensated in his or her
capacity as a director.
. OPTIONS ISSUED TO EXECUTIVES.
In consideration of the services rendered by Messrs. Goldberg and Housman,
in lieu of payment of salaries, between June 1995 and the closing of the IPO,
the Company issued five year options to each of them to purchase 75,758 shares
of Common Stock at an exercise price of $5.00 per share. Such options were not
issued pursuant to the Company's Incentive Stock Option Plan. The table below
sets forth information regarding option grants in 1996 fiscal year to executive
officers of the Company.
<TABLE>
<CAPTION>
===============================================================================================================
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------------------------------------------
NO. OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEE EXERCISE PRICE
NAME GRANTED IN 1996 FISCAL YEAR PER SHARE EXPIRATION DATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
M. Albert Nissim 90,000 100 $2.50 February, 2000
- ---------------------------------------------------------------------------------------------------------------
Glenda Klein 248,637 93.6 $1.99 - $5.00 August, 2001
- ---------------------------------------------------------------------------------------------------------------
Arthur Goldberg* 75,758 100 $5.00 August, 2001
- ---------------------------------------------------------------------------------------------------------------
Elie Housman* 75,758 100 $5.00 August, 2001
===============================================================================================================
</TABLE>
*Former officer and director.
. EMPLOYMENT AGREEMENTS.
In January 1997, the Company appointed M. Albert Nissim as President for a
six-month term on a part-time basis, at a salary of $6,000 per month. The
employment arrangement has been extended by the Company, effective July 9, 1997,
for a two-year period, unless earlier terminated by either party on not less
than 90 days prior notice.
In March 1995, the Company entered into an employment agreement with Glenda
S. Klein, pursuant to which the Company agreed to employ Ms. Klein as its Senior
Vice President, Secretary, Treasurer and Chief Financial Officer through March
31, 1997. The agreement was extended for one additional year on the same terms
and conditions. The agreement provides for base compensation of $90,000 per
annum for the first year, $100,000 per annum for the second year and $100,000
for the additional year. The agreement further provides for the grant of
37
<PAGE>
a five-year option to purchase 75,758 shares of Common Stock of the Company
exercisable at a price of $5.00 per share and the grant of a second five-year
option on May 1, 1996, entitling her to purchase 37,879 shares of Common Stock
of the Company at a price of $5.00 per share; obligates the Company to pay the
premiums with respect to a term life insurance policy payable to Ms. Klein's
designated beneficiary in the aggregate amount of $750,000 during the first year
of the term and $1,000,000 during the second year and the extension year of the
term; obligates the Company to pay the premiums with respect to a long-term
disability policy in an amount sufficient to cover the salary payable to Ms.
Klein pursuant to the employment agreement; and obligates the Company, in the
event of the termination of Ms. Klein's employment in connection with a change
in control of the Company, to pay as severance the balance of the salary payable
under the employment agreement plus an additional $100,000 and to continue
medical coverage for the balance of the term.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the holdings of the Common Stock as of June
25, 1997 by each person or entity known to the Company to be the beneficial
owner of more than five percent (5%) of the outstanding shares of Common Stock.
38
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
- ------------------- ------------------ ------------------
<S> <C> <C>
Leedan Business Enterprise Ltd. 2,676,136/1/ 49.2%
("Leedan Business")
8 Shaul Hamelech Blvd.
Tel-Aviv 64733, Israel
Jay Botchman 530,000 9.7%
1500 E. Tropicana Avenue
Suite 100
Las Vegas, Nevada 89113
Michael Lauer 600,000/2/ 11%
200 Park Avenue
Suite 3900
New York, New York 10166
Tamar Lieber 322,122 5.9%
160 West 66th Street
New York, New York 10022
</TABLE>
- ----------
/1/ Leedan International Holdings B.V., which together with Leedan Systems &
Properties Promotion (1993) Ltd. holds 49.2% of the issued and outstanding
Common Stock of the Company, is an indirect wholly-owned subsidiary of
Leedan Business. Certain members of the family of Mr. Boaz Harel, a
director of the Company, collectively own approximately 57.5% of the
outstanding shares of Leedan Business. Mr. Harel owns approximately 17% of
the outstanding shares of Leedan Business and disclaims beneficial
ownership of any stock of Leedan Business held by any other member of the
Harel family.
/2/ Mr. Lauer owns shares of the Company and is the investment manager with
authority to vote and dispose securities owned by three entities that he
manages. The shares of the Company owned by Mr. Lauer directly and by the
entities he manages total more than 5% of the outstanding shares of Common
Stock of the Company.
39
<PAGE>
The following table sets forth the holdings of the Common Stock as of June
25, 1997 by (1) each director and named executive officer; and (2) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME TITLE OF COMMON STOCK OF CLASS
- ---- ----- ---------------- ------------
<S> <C> <C> <C>
Glenda Klein Director and 217,546/3/ 3.8%
Senior Vice
President, Secretary,
Treasurer and Chief
Financial Officer
Tamar Lieber Director 322,122 5.9%
Richard Fried Director 12,046 Less than 1%
M. Albert Nissim President 30,000/4/ Less than 1%
Directors and 581,714/3/ 10.3%
Executive
Officers as a
group (6 persons)
</TABLE>
__________
/3/ Includes 168,637 shares of Common Stock which Ms. Klein has the right to
acquire within 60 days from the date hereof upon exercise of an option
held by her.
/4/ Includes 30,000 shares of Common Stock which Mr. Nissim has the right to
acquire within 60 days from the date hereof upon exercise of an option
held by him.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
. CERTAIN TRANSACTIONS.
In November 1995, the Company borrowed $35,000 from Glenda Klein and
$38,000 from Tamar Lieber. Each of such loans earned interest at the prime rate
published from time to time by the Wall Street Journal plus 1/4% per annum
pursuant to a revolving credit and security agreement which provided that
advances under such lines were secured by the mortgage liens created as a result
of the loans funded with such advances. Mrs. Klein was paid a fee of $588.17 to
cover the penalties she incurred from the early redemption of certificates of
deposit which were used to provide such loan funds. All such loans were paid in
full in the 1996 fiscal year.
. THE COMPANY'S ACQUISITION OF TRANS LENDING CORPORATION
On December 23, 1996, the Company signed a Stock Purchase Agreement (the
"Agreement") to acquire 500 shares of common stock of Trans Lending Corporation
("Trans Lending") for $100,000 and
40
<PAGE>
200 shares of Trans Lending's non-voting, non-dividend paying preferred stock
for $200,000. Trans Lending represented to the Company that it was formed to
originate consumer automobile financing transactions for non-prime borrowers by
acquiring contracts from franchised and independent car dealers.
Alan Mann, Arthur's Goldberg's son-in-law, owned 25% of the outstanding
common stock of Trans Lending at the time of the transaction. Arthur Goldberg
was the Chief Executive Officer and Chairman of the Company at the time of the
transaction. The transaction has not been completed; Trans Lending has not
delivered any stock certificates to the Company and the Company has not paid the
full amount agreed upon. As of March 31, 1997, the Company had paid $100,000 to
Trans Lending pursuant to the Agreement. However, several conditions precedent
to the closing of the transaction pursuant to the Agreement had not been
completed as of March 31, 1997, including delivery of the share certificates
evidencing Pioneer's ownership of 500 shares of common stock of Trans Lending.
Management of the Company does not intend to remit the $200,000 for the
preferred stock of Trans Lending, nor does it believe that the Company is liable
for the obligations or operations of Trans Lending. As of March 31, 1997, the
Company wrote-off its investment of $100,000 in Trans Lending and is presently
considering whether to pursue legal action against Trans Lending and/or its
principals for the loss of its investment.
. LOAN TO ROGOSIN
On April 2, 1997 and April 4, 1997, the Company issued unsecured loans of
$400,000 and $600,000, respectively, to Rogosin Converters, Inc., an affiliate
of the Company. Members of the family of Mr. Boaz Harel, including Mr. Harel, a
director of the Company, have an indirect controlling interest in Rogosin
Converters, Inc. The loans were guaranteed by Leedan International B.V., a
shareholder of the Company. The Company earned interest of 12% per annum on the
loans, which interest was paid monthly. The principal and accrued interest on
the loans were paid in full on June 20, 1997.
* * *
41
<PAGE>
ITEM 13. EXHIBITS & REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form SB-2,
dated December 27, 1996)
3.2 Certificate of Amendment of the Company's Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form SB-2, dated December 27,
1996)
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company
3.4 By-Laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form SB-2 dated
December 27, 1996)
10.1 Credit Agreement between Bank One, Texas, N.A. and the Company,
dated March 31, 1997
10.2 Revolving Line of Credit and Security Agreement between UMB Bank
and Trust Company and the Company, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement
on Form SB-2 dated December 27, 1996)
10.3 Employment Agreement for Glenda S. Klein dated April 1, 1995
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form SB-2 dated December 27, 1996)
10.4 The Company's Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form SB-2 dated December 27, 1996)
10.5 Stock Purchase Agreement between the Company and Trans Lending
Corporation, dated December 23, 1996 (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement on Form
SB-2 dated December 27, 1996)
11 Statement regarding computation of per share earnings: set forth
in note 2 on page F-8 of the Financial Statements in Item 7 of
this Report
21 List of subsidiaries
27 Financial Data Schedule, submitted only in electronic format
. REPORTS ON FORM 8-K
During the fourth quarter of the 1996 fiscal year, the Company
filed three reports on Form 8-K as set forth below:
1. On January 23, 1997 in response to "Item 5-Other Matters"
in connection with the replacement and resignation of
certain executive officers and directors of the Company.
2. On February 7, 1997 in response to "Item 5-Other Matters"
in connection with the Company's Private Placement.
3. On March 5, 1997 in response to "Item 1-Change in Control
of the Registrant" in connection with the change in
control of the Company as a result of the completion of the
Private Placement.
</TABLE>
42
<PAGE>
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.
PIONEER COMMERCIAL FUNDING CORP.
By: /s/ M. Albert Nissim
________________________________
Name: M. Albert Nissim
Title: President
Date: June 25, 1997
________________________________
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 dates indicated.
By: /s/ M. Albert Nissim
________________________________
Name: M. Albert Nissim
Title: President
Date: June 25, 1997
_______________________________
By: /s/ Glenda Klein
________________________________
Name: Glenda Klein
Title: Senior Vice President, Chief
Financial Officer, Secretary,
Treasurer and Director
Date: June 26, 1997
_______________________________
By: /s/ Richard Fried
________________________________
Name: Richard Fried
Title: Director
Date: June 26, 1997
_______________________________
By: /s/ Boaz Harel
________________________________
Name: Boaz Harel
Title: Director
Date: June 25, 1997
_______________________________
43
<PAGE>
By: /s/ Tamar Lieber
________________________________
Name: Tamar Lieber
Title: Director
Date: June 26, 1997
______________________________
By: /s/ Mark Roth
________________________________
Name: Mark Roth
Title: Director
Date: June 27, 1997
______________________________
44
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on Form SB-2,
dated December 27, 1996)
3.2 Certificate of Amendment of the Company's Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form SB-2, dated December 27,
1996)
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company
3.4 By-Laws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form SB-2 dated
December 27, 1996)
10.1 Credit Agreement between Bank One, Texas, N.A. and the Company,
dated March 31, 1997
10.2 Revolving Line of Credit and Security Agreement between UMB Bank
and Trust Company and the Company, as amended (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement
on Form SB-2 dated December 27, 1996)
10.3 Employment Agreement for Glenda S. Klein dated April 1, 1995
(incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form SB-2 dated December 27, 1996)
10.4 The Company's Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form SB-2 dated December 27, 1996)
10.5 Stock Purchase Agreement between the Company and Trans Lending
Corporation, dated December 23, 1996 (incorporated by reference
to Exhibit 10.3 to the Company's Registration Statement on Form
SB-2 dated December 27, 1996)
11 Statement regarding computation of per share earnings: set forth
in note 2 on page F-8 of the Financial Statements in Item 7 of
this Report
21 List of subsidiaries
27 Financial Data Schedule, submitted only in electronic format
</TABLE>
45
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
PIONEER COMMERCIAL FUNDING CORP.
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW
-----------------------------------
WE, THE UNDERSIGNED, Albert M. Nissim and Glenda S. Klein, being
respectively the president and secretary of Pioneer Commercial Funding Corp.
(the "Corporation") hereby certify that:
1. The name of the Corporation is Pioneer Commercial Funding Corp. The
name under which the Corporation was formed is PCF Acquisition Corp.
2. The certificate of incorporation of the Corporation was filed with the
Department of State of the State of New York on March 8, 1994.
3. A. The amendment of the certificate of incorporation of the
Corporation effected by this certificate of amendment is to increase the number
of shares which the Corporation shall have authority to issue from $5,000,000
shares, par value $.0l (one cent) per share, to 20,000,000 shares, par value
$.0l (one cent) per share, by authorizing 15,000,000 additional shares of par
value $.0l (one cent) per share of the same class as the presently authorized
shares.
B. To accomplish the foregoing amendment, Article FOURTH a) of the
Certificate of Incorporation of the Corporation is hereby amended to read as
follows:
"FOURTH: a) The authorized capital stock of the Company is 20,000,000
shares of Common Stock, par value $.0l per share."
4. The foregoing amendment of the certificate of incorporation of the
Corporation was authorized by written consent of all of the members of the Board
of Directors of the
<PAGE>
corporation, followed by vote of the holders of a majority of all outstanding
shares entitled to vote thereon at a special meeting of shareholders held on
May 8, 1997, at which a quorum was present and acting throughout.
IN WITNESS WHEREOF, we have signed this certificate on the 8th day of
May, 1997, and we affirm under the penalties of perjury, that the statements
contained therein have been examined by us and are true and correct.
DATED: May 8, 1997
/s/ M. Albert Nissim
-----------------------------------------------
M. Albert Nissim, President
/s/ Glenda S. Klein
-----------------------------------------------
Glenda S. Klein, Secretary
-2-
<PAGE>
EXHIBIT 10.1
CREDIT AGREEMENT
between
PIONEER COMMERCIAL FUNDING CORP.,
as Borrower
BANK ONE, TEXAS, N.A.,
as Agent,
and
CERTAIN LENDERS,
as Lenders
$25,000,000
MARCH 31, 1997
[BANK ONE LOGO]
[PREPARED BY HAYNES AND BOONE, L.L.P.]
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS AND REFERENCES........................................ 1
1.1 Definitions....................................................... 1
1.2 Time References................................................... 12
1.3 Other References.................................................. 12
1.4 Accounting Principles............................................. 12
SECTION 2. BORROWING PROVISIONS.............................................. 12
2.1 Borrowings........................................................ 12
2.2 Borrowing Request................................................. 13
2.3 Fundings.......................................................... 13
2.4 Wet-Borrowing Procedures.......................................... 14
2.5 Terminations...................................................... 14
SECTION 3. PAYMENT TERMS..................................................... 14
3.1 Notes............................................................. 14
3.2 Payment Procedures................................................ 14
3.3 Scheduled Payments................................................ 15
3.4 Prepayments....................................................... 15
3.5 Order of Application.............................................. 15
3.6 Sharing........................................................... 16
3.7 Interest Rates.................................................... 16
3.8 Capital Adequacy.................................................. 17
3.9 Foreign Lenders, Participants, and Purchasers..................... 17
3.10 Fees.............................................................. 18
SECTION 4. COLLATERAL PROCEDURES............................................. 18
4.1 Eligible Collateral............................................... 18
4.2 Borrowing Base.................................................... 18
4.3 Collateral Delivery............................................... 19
4.4 Bailee and Agent.................................................. 19
4.5 Shipment for Sale................................................. 19
4.6 Shipment for Correction........................................... 20
4.7 Release of Collateral............................................. 20
SECTION 5. CONDITIONS PRECEDENT.............................................. 20
SECTION 6. REPRESENTATIONS AND WARRANTIES.................................... 21
6.1 Purpose of Credit................................................. 21
6.2 About the Companies............................................... 21
6.3 Authorization and Contravention................................... 21
6.4 Binding Effect.................................................... 22
6.5 [Intentionally Blank]............................................. 22
6.6 Current Financials................................................ 22
6.7 Debt.............................................................. 22
6.8 Solvency.......................................................... 22
6.9 Litigation........................................................ 22
6.10 Transactions with Affiliates...................................... 22
6.11 Taxes............................................................. 22
6.12 Employee Plans.................................................... 22
6.13 Property and Liens................................................ 23
6.14 Intellectual Property............................................. 23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
6.15 Environmental Matters............................................. 23
6.16 Government Regulations............................................ 23
6.17 Insurance......................................................... 23
6.18 Appraisals........................................................ 23
6.19 Full Disclosure................................................... 23
SECTION 7. AFFIRMATIVE COVENANTS............................................. 23
7.1 Reporting Requirements............................................ 24
7.2 Use of Proceeds................................................... 25
7.3 Books and Records................................................. 25
7.4 Inspections....................................................... 25
7.5 Taxes............................................................. 25
7.6 Expenses.......................................................... 25
7.7 Maintenance of Existence, Assets, and Business.................... 25
7.8 Insurance......................................................... 25
7.9 Take-Out Commitments.............................................. 26
7.10 Appraisals........................................................ 26
7.11 INDEMNIFICATION................................................... 26
SECTION 8. NEGATIVE COVENANTS................................................ 26
8.1 Debt.............................................................. 26
8.2 Liens............................................................. 27
8.3 Investments....................................................... 27
8.4 [Intentionally Blank]............................................. 27
8.5 Merger or Consolidation........................................... 27
8.6 Liquidations and Dispositions of Assets........................... 27
8.7 Use of Proceeds................................................... 27
8.8 Transactions with Affiliates...................................... 27
8.9 Employee Plans.................................................... 27
8.10 Compliance with Laws and Documents................................ 27
8.11 Government Regulations............................................ 27
8.12 Subordinated Debt................................................. 27
8.13 New Businesses.................................................... 28
8.14 Assignment........................................................ 28
SECTION 9. FINANCIAL COVENANTS............................................... 28
9.1 Adjusted-Net Worth................................................ 28
9.2 Adjusted Debt/Adjusted-Net Worth.................................. 28
9.3 EBITDA/Interest Expense........................................... 28
9.4 Production........................................................ 28
SECTION 10. DEFAULTS AND REMEDIES............................................. 29
10.1 Default........................................................... 29
10.2 Remedies.......................................................... 30
10.3 Right of Offset................................................... 30
10.4 Waivers........................................................... 31
10.5 Performance by Agent.............................................. 31
10.6 No Responsibility................................................. 31
10.7 No Waiver......................................................... 31
10.8 Cumulative Rights................................................. 31
10.9 Rights of Individual Lenders...................................... 32
10.10 Notice to Agent................................................... 32
10.11 Costs............................................................. 32
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 11. MISCELLANEOUS..................................................... 32
11.1 Nonbusiness Days.................................................. 32
11.2 Communications.................................................... 32
11.3 Form and Number of Documents...................................... 33
11.4 Exceptions to Covenants........................................... 33
11.5 Survival.......................................................... 33
11.6 Governing Law..................................................... 33
11.7 Invalid Provisions................................................ 33
11.8 Conflicts Between Loan Documents.................................. 33
11.9 Discharge and Certain Reinstatement............................... 33
11.10 Amendments, Consents, Conflicts, and Waivers...................... 33
11.11 Multiple Counterparts............................................. 34
11.12 Parties........................................................... 34
11.13 Participations.................................................... 35
11.14 Transfers......................................................... 35
11.15 Entire Agreement.................................................. 36
</TABLE>
(iii)
<PAGE>
SCHEDULES AND EXHIBITS
----------------------
<TABLE>
<S> <C>
Schedule 2 - Lenders and Commitments
Schedule 4.1 - Eligibility Conditions
Schedule 4.2 - Borrowing-Base Calculations
Schedule 4.3 - Collateral Procedures
Schedule 5 - Closing Conditions
Schedule 6.2 - Companies
Schedule 6.9 - Litigation and Judgments
Schedule 6.10 - Affiliate Transactions
Schedule 8.1 - Permitted Debt
Schedule 8.2 - Permitted Liens
Schedule 8.3 - Permitted Investments
Exhibit A - Note
Exhibit B-1 - Security Agreement
Exhibit B-2 - Financing Statement
Exhibit B-3 - Three-Party Agreement
Exhibit B-4 - Shipping Request
Exhibit B-5 - Bailee Letter for Investors
Exhibit B-6 - Bailee Letter for Pool Custodian
Exhibit B-7 - Trust Receipt and Agreement
Exhibit B-8 - Release Request
Exhibit C-1 - Borrowing Request
Exhibit C-2 - Collateral-Delivery Notice
Exhibit C-3 - Borrowing-Base Report
Exhibit C-4 - Compliance Certificate (Monthly)
Exhibit C-5 - Compliance Certificate (Quarterly)
Exhibit D - Opinion of Counsel
</TABLE>
(iv)
<PAGE>
CREDIT AGREEMENT
----------------
THIS AGREEMENT is entered into as of March 31, 1997, between PIONEER
COMMERCIAL FUNDING CORP., a New York corporation ("BORROWER"), the Lenders
described below, and BANK ONE, TEXAS, N.A., as Agent for Lenders.
(see SECTION 1.1 for defined terms)
A. Approved Originators originate, acquire, market, and sell Mortgage
Loans and have entered into Originator Loan Agreements with Borrower under which
Borrower provides financing to Approved Originators for their Mortgage Loan
origination and acquisition until those Mortgage Loans are sold in the secondary
market. Approved Originators respectively grant to Borrower first-priority Liens
upon, among other things, the Mortgage Collateral delivered to or for Borrower
by or for them under their respective Originator Loan Agreements.
B. Borrower has requested Lenders to commit to provide Borrowings to
Borrower to finance its extensions of credit to Approved Originators under
Originator Loan Agreements. Borrower proposes to (1) grant to Agent for Lenders
first-priority Liens upon, among other things, the Originator Collateral,
Mortgage Collateral, and CD Collateral according to the Loan Documents and (2)
cause each Approved Originator to enter into a Three-Party Agreement with
Borrower and Agent. Lenders have agreed upon the terms of this agreement to
provide those Borrowings up to the lesser of either the total Commitments or the
Borrowing Base.
ACCORDINGLY, for adequate and sufficient consideration, Borrower, Lenders,
and Agent agree as follows:
SECTION 1. DEFINITIONS AND REFERENCES. Unless stated otherwise, the
- ---------- --------------------------
following provisions apply to each Loan Document and annexes, exhibits, and
schedules to (and certificates, reports, and other writings delivered under) the
Loan Documents.
1.1 DEFINITIONS.
-----------
"ACTUAL-TERMINATION DATE" means the earlier of either (a) the Stated-
Termination Date or (b) the effective date that Lenders' commitments to lend
under this agreement are fully canceled or terminated.
"ADJUSTED-NET WORTH" means, for the Companies and at any time, the sum of
(a) the amount that should in accordance with GAAP be reflected on the
Companies' balance sheet as its stockholders' equity plus (b) Subordinated Debt
not due within one year from the date of determination, minus (c) Investments in
Trans Lending Corporation, minus (d) the total (without duplication of
deductions already made in arriving at stockholders' equity) of the book value
of all assets that would be treated as intangible assets under GAAP, including
goodwill, trademarks, trade names, copyrights, and patents.
"AFFILIATE" means, for any Person, any other individual or entity that
(directly or indirectly through ownership, voting securities, contract, or
otherwise) controls, is controlled by, or under common control with that Person.
"AGENCY QUALIFIED" means, for any Originator, that it is approved and
qualified and in good standing as an issuer, mortgagee, or seller/servicer, as
described below, and meets all requirements
<PAGE>
applicable to its status as such: (a) GNMA approved issuer of Mortgage-Backed
Securities guaranteed by GNMA; (b) FNMA approved seller/servicer of Mortgage
Loans, eligible to originate, purchase, hold, sell, and service Mortgage Loans
to be sold to FNMA; (c) FHLMC approved seller/servicer of Mortgage Loans,
eligible to originate, purchase, hold, sell and service Mortgage Loans to be
sold to FHLMC; (d) FHA approved mortgagee, eligible to originate, purchase,
hold, sell and service FHA Loans; and (e) VA approved mortgagee, eligible to
originate, purchase, hold, sell and service VA Loans.
"AGENT" means, at any time, Bank One, Texas, N.A. (or its successor
appointed under the Lenders' Agreement) acting as agent for Lenders under the
Loan Documents.
"APPRAISAL" means, for any Mortgage Loan, a written statement of the market
value of the real property securing it.
"APPRAISAL LAW" means any Law that is applicable to appraisals of
mortgaged-residential property in connection with transactions involving that
property, including, without limitation, Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989, the Federal Deposit Insurance
Corporation Improvement Act of 1991, 12 C.F.R. Chapter 1, Part 34, Subpart C,
12 C.F.R. Chapter II, Subchapter A, Part 225, Subpart G, and 12 C.F.R.
Chapter III, Subchapter B, Part 323.
"APPROVED INVESTOR" means (a) FHLMC, FNMA, and GNMA and (b) any other
Person from time to time named on a list agreed to by Agent and Borrower (which
list Agent shall furnish to any Lender upon request) as that list may be amended
from time to time (i) by Borrower and Agent to remove or add other names as
Agent and Borrower may agree, (ii) by either Agent or Determining Lenders to
remove any such other Person after Agent has or Determining Lenders have given
to Borrower notice of (and an opportunity to discuss) the proposed removal of
that Person, or (iii) automatically (without signing by any party) to remove any
such Person who then (A) is not Solvent, (B) fails to pay its debts generally as
they become due, (C) voluntarily seeks, consents to, or acquiesces in the
benefit of any Debtor Law, or (D) becomes a party to or is made the subject of
any proceeding provided for by any Debtor Law (other than as a creditor or
claimant) that could suspend or otherwise adversely affect the Rights of any
Company, Agent, or any Lender in connection with the transactions contemplated
in the Loan Documents. Separate lists of Approved Investors will be maintained
for B/C Borrowings, Second-Lien Borrowings, and all other Borrowings.
"APPROVED ORIGINATOR" means any Originator who (a) has entered into a
Three-Party Agreement with Borrower and Agent and (b) is from time to time named
on a list agreed to by Agent and Borrower (which list Agent shall furnish to any
Lender upon request) as that list may be amended from time to time (i) by
Borrower and Agent to remove or add other names as Agent and Borrower may agree,
(ii) by either Agent or Determining Lenders to remove any such other Person
after Agent has or Determining Lenders have given to Borrower notice of (and an
opportunity to discuss) the proposed removal of that Person, or (iii)
automatically (without signing by any party) to remove any such Person who then
(A) is not Solvent, (B) fails to pay its debts generally as they become due, (C)
voluntarily seeks, consents to, or acquiesces in the benefit of any Debtor Law,
(D) becomes a party to or is made the subject of any proceeding provided for by
any Debtor Law (other than as a creditor or claimant) that could suspend or
otherwise adversely affect the Rights of any Company, Agent, or any Lender in
connection with the transactions contemplated in the Originator Documents or
Loan Documents, (E) is in default under its Originator Loan Agreement, or (F)
fails to be Agency Qualified in any respect.
"AVERAGE-ADJUSTED-BASE RATE" means, for any period, an annual interest rate
equal to the quotient of (a) the sum of the Base Rate plus (or minus, as the
case may be) the applicable interest margin for each
2
<PAGE>
calendar day during that period divided by (b) the number of days during that
period. The applicable interest margin for purposes of this definition is (i)
positive 0.125% for B/C Borrowings and Second-Lien Borrowings, and (ii) negative
0.125% for all other Borrowings.
"AVERAGE-PRINCIPAL DEBT" means, for any period and any Lender, the quotient
of (a) the sum of the Principal Debt owed to that Lender as of the close of
business for each calendar day (which for any day that is not a Business Day is
deemed for this definition to be the Principal Debt as of the close of business
for the preceding Business Day) divided by (b) the number of days during that
period.
"BASE RATE" means an annual interest rate equal from day to day to the
floating annual interest rate established by Agent from time to time as its
base-rate of interest, which may not be the lowest interest rate charged by
Agent on loans similar to Borrowings.
"BAILEE LETTER" means, as applicable under the circumstances, one of the
letters executed and delivered by Agent in substantially the form of EXHIBIT B-5
or EXHIBIT B-6.
"B/C BORROWING" means a Borrowing that is subject to the B/C-Second-Lien
Sublimit and supported by the Borrowing Base for Eligible-B/C Loans.
"B/C-SECOND-LIEN SUBLIMIT" means, at any time, 30% of the total
Commitments as that percentage may be modified by Agent on a quarterly basis
in its sole discretion based upon loan-production volumes.
"BORROWER" is defined in the preamble to this agreement.
"BORROWING" means any amount disbursed (a) by Lenders to Borrower under
the Loan Documents as an original disbursement of funds or (b) by Agent or any
Lender in accordance with (and to satisfy a Company's obligations under) any
Loan Document.
"BORROWING BASE" means, at any time, the amount described on SCHEDULE 4.2
and calculated under SECTION 4.2.
"BORROWING-BASE REPORT" means a report executed by Agent and delivered to
Borrower and Lenders in substantially the form of EXHIBIT C-3.
"BORROWING DATE" means, for any Borrowing, the date it is disbursed.
"BORROWING EXCESS" means, at any time, the amount by which any of the
limitations of SECTION 2.1 is exceeded.
"BORROWING REQUEST" means a request executed by a Responsible Officer of
Borrower requesting a Borrowing and delivered to Agent in substantially the form
of EXHIBIT C-1.
"BUSINESS DAY" means any day other than Saturday, Sunday, and any other day
that commercial banks are authorized or obligated by Law to be closed in Texas.
"CALENDAR MONTH" means that portion of a calendar month that occurs at any
time from the date of this agreement to the Actual-Termination Date.
3
<PAGE>
"CASH-EQUIVALENT COLLATERAL" means any combination of the following have a
total face amount of at least $1,000,000 on which valid Lender Liens have been
created: (a) One or more certificates of deposit issued by any one or more
Lenders; (b) cash deposited into a collateral account with Agent; or (c) any
combination of Investments in obligations, with maturities of one year or less,
issued or unconditionally guaranteed by (or issued by any of its agencies and
backed by the full faith and credit of) the United States of America.
"CLOSING DATE" means the date agreed to by Borrower and Agent for the
initial Borrowing under this agreement, which date may not be (a) before the
conditions precedent for the initial Borrowing have been satisfied or (b) if at
all, later than April 15, 1997.
"COLLATERAL" means Originator Collateral, Mortgage Collateral, Cash-
Equivalent Collateral, and all other collateral defined in the Security
Agreement.
"COLLATERAL-DELIVERY NOTICE" means a notice executed by a Responsible
Officer of Borrower delivering Collateral Documents and delivered to Agent in
substantially the form of EXHIBIT C-2.
"COLLATERAL DOCUMENTS" means the documents and other items described on
SCHEDULE 4.3 and required to be delivered to Agent under SECTION 4.3.
"COMMITMENT" means, for any Lender, the amount stated beside its name and
so designated on SCHEDULE 2 (as it may be amended under this agreement), as that
amount may be canceled or terminated under this agreement.
"COMMITMENT PERCENTAGE" means, at any time for any Lender, the proportion
(stated as a percentage) that its Commitment bears to the total Commitments.
"COMPANIES" means, at any time, Borrower and all of its Subsidiaries, if
any, and "COMPANY" means each of them.
"COMPLIANCE CERTIFICATE" means a certificate executed by a Responsible
Officer of Borrower and delivered to Agent in substantially the form of EXHIBIT
C-4 or C-5, as the case may be.
"CONVENTIONAL LOAN" means a Mortgage Loan that (a) is not a FHA Loan or VA
Loan but (b) complies with all applicable requirements for purchase under the
FNMA or FHLMC standard form of conventional-mortgage-purchase contract.
"CORRECTION PERIOD" means 14 calendar days for any Collateral Documents for
any Mortgage Loan shipped under SECTION 4.6 for correction.
"CURRENT FINANCIALS" means either (a) the Companies' Financials for the
year ended March 31, 1996, and for the nine months ended December 31, 1996, or
(b) at any time after the Companies' annual Financials are first delivered under
SECTION 7.1, the Companies' annual Financials then most recently delivered to
Agent and subsequent interim Financials then most recently delivered to Agent.
"DEBT," for any Person and without duplication, means (a) all obligations
required by GAAP to be classified upon that Person's balance sheet as
liabilities, (b) liabilities secured (or for which the holder of the liabilities
has an existing Right, contingent or otherwise, to be so secured) by any Lien
existing on property owned or acquired by that Person, (c) obligations that
under GAAP should be capitalized for
4
<PAGE>
financial reporting purposes, and (d) all guaranties, endorsements, and other
contingent obligations with respect to Debt of others or in respect of any
Employee Plan.
"DEBTOR LAWS" means all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization,
or similar Laws from time to time in effect and generally affecting creditors'
Rights.
"DEFAULT" is defined in SECTION 10.1.
"DEFAULT PERCENTAGE" means, at any time for any Lender, the proportion
(stated as a percentage) that its Principal Debt bears to the total Principal
Debt.
"DEFAULT RATE" means, for any day, an annual interest rate equal to the
lesser of either (a) the Base Rate plus 4% or (b) the Maximum Rate.
"DETERMINING LENDERS" means, at any time, any combination of Lenders whose
(a) Default Percentages total at least 66 2/3% at any time on or after the
Actual-Termination Date, or (b) Commitment Percentages total at least 66 2/3% at
all other times.
"DISTRIBUTION" -- with respect to any shares of any capital stock or other
equity securities issued by a Person -- means (a) the retirement, redemption,
purchase, or other acquisition for value of those securities, (b) the
declaration or payment of any dividend with respect to those securities, (c) any
loan or advance by that Person to, or other investment by that Person in, the
holder of any of those securities, and (d) any other payment by that Person with
respect to those securities.
"DRY BORROWING" means a Borrowing for which all of the Collateral
Documents have been delivered to Agent in accordance with SECTION 4.3.
"EBITDA" for any period and any Person:
(a) Means the sum (without duplication) of the following for that
Person and for that period taken as a single-accounting period: (i) Net
Income; minus (ii) extraordinary gains; plus (iii) extraordinary losses;
plus (iv) to the extent included in determining Net Income (A) income
Taxes, (B) Interest Expense, (C) depreciation, and (D) amortization; and
(b) Unless otherwise specified, is determined (i) for a period of
four-consecutive-fiscal quarters of that Person taken as a single-
accounting period, and (ii) exclusive of the EBITDA of any entity (A)
before it became a Subsidiary of that Person or transferred substantially
all of its assets to that Person or (B) after it is directly or indirectly
disposed of by that Person.
"ELIGIBLE-B/C LOAN" is defined in SCHEDULE 4.1.
"ELIGIBLE-MORTGAGE COLLATERAL" means, at any time, all Eligible-Mortgage
Loans and all Eligible-Mortgage Securities.
"ELIGIBLE-MORTGAGE LOAN" means, at any time, a Mortgage Loan for which the
applicable conditions for eligibility described in SCHEDULE 4.1 are satisfied
and which may under SECTION 4.1 be included in the Borrowing Base.
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"ELIGIBLE-MORTGAGE SECURITY" means, at any time, a Mortgage Security for
which the applicable conditions for eligibility described in SCHEDULE 4.1 are
satisfied and which may under SECTION 4.1 be included in the Borrowing Base.
"ELIGIBLE-ORIGINATOR LOAN" is defined in SCHEDULE 4.1.
"ELIGIBLE-SECOND-LIEN LOAN" is defined in SCHEDULE 4.1.
"EMPLOYEE PLAN" means an employee-pension-benefit plan covered by Title IV
of ERISA and established or maintained by any Company.
"ENVIRONMENTAL LAW" means any Law that relates to the pollution or
protection of the environment or to Hazardous Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA AFFILIATES" means Borrower and every trade or business (whether or
not incorporated) that, together with any Company, would be treated as a single-
employer under (S) 4001 of ERISA.
"FED-FUNDS RATE" means, for any day, the annual interest rate (rounded
upwards, if necessary, to the nearest 0.01%) determined by Agent to be either
(a) the weighted average of the rates on overnight-federal-funds transactions
with member banks of the Federal Reserve System arranged by federal-funds
brokers for that day (or, if not a Business Day on the preceding Business Day)
as published by the Federal Reserve Bank of New York (as published by Knight-
Ridder, page 73, utilizing the Fed-Effective Rate), or (b) if not so published
for any day, the average of the quotations for that day on those transactions
received by Agent from three federal-funds brokers of recognized standing it may
select.
"FHA" means the Federal Housing Administration within the United States
Department of Housing and Urban Development.
"FHA LOAN" means a Mortgage Loan which is either (a) fully or partially
insured by FHA under the National Housing Act or Title V of the Housing Act of
1949, (b) subject to a current, binding, and enforceable commitment issued by
FHA for that insurance, or (c) eligible for direct endorsement under the FHA
Direct Endorsement Program.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FINANCIALS" means balance sheets, profit and loss statements, statements
of cash flow, and any other financial statements, reports, or information
specified by any Lender.
"FNMA" means the Federal National Mortgage Association.
"FUNDING ACCOUNT" means a non-interest bearing deposit account that is (a)
established by Borrower for the deposit of Borrowings and (b) styled and
numbered "Pioneer Commercial Funding Corp. Funding Account" Account
No. 1825160334.
"GAAP" means generally accepted accounting principles of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
the Financial Accounting Standards Board that are applicable from time to time.
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<PAGE>
"GNMA" means the Government National Mortgage Association.
"HAZARDOUS SUBSTANCE" means any substance (a) the presence of which
requires removal, remediation, or investigation under any Environmental Law, or
(b) that is defined or classified as a hazardous waste, hazardous material,
pollutant, contaminant, or toxic or hazardous substance under any Environmental
Law.
"INTEREST EXPENSE" means -- for any Person, for any period, and without
duplication -- all interest on Debt, whether paid in cash or accrued as a
liability and payable in cash during any subsequent period (including the
interest component of leases that should be capitalized on a balance sheet), as
determined by GAAP, and premium or penalty for repayment, redemption, or
repurchase of debt.
"INVESTMENT" means, in respect of any Person, any loan, advance, extension
of credit, or capital contribution to that Person, any investment in that
Person, or any purchase or commitment to purchase any equity securities or Debt
issued by that Person or substantially all of the assets or a division or other
business Unit of that Person.
"IRC" means the Internal Revenue Code of 1986.
"JUMBO LOAN" means a Mortgage Loan (other than a FHA Loan or VA Loan) that
complies with all applicable requirements for purchase under either the FNMA or
FHLMC standard form of conventional mortgage purchase contract then in effect or
otherwise meets or exceeds the requirements of any other applicable Approved
Investor except that the amount of it exceeds the maximum loan amount under
those requirements.
"JUMBO SUBLIMIT," at any time, means (a) for all Jumbo Loans, 10% of the
total Commitments, and (b) for any Jumbo Loan in excess of $450,000 only the
first $450,000 except that Agent may grant exceptions to this CLAUSE (B) upon
request by Borrower on a case-by-case basis, and in Agent's absolute discretion.
"LAWS" means all applicable statutes, laws, treaties, ordinances, rules,
regulations, orders, writs, injunctions, decrees, judgments, opinions, and
interpretations of any Tribunal.
"LENDER LIEN" means any present or future first-priority Lien securing the
Obligation and assigned, conveyed, and granted to or created in favor of Agent
for the benefit of Lenders under the Loan Documents.
"LENDERS" means (a) the financial institutions named on the attached
SCHEDULE 2 or on the most recently amended SCHEDULE 2, if any, prepared by Agent
under this agreement, and (b) subject to this agreement, their respective
successors and permitted assigns, but (c) not any Participant who is not
otherwise a party to this agreement.
"LENDERS' AGREEMENT" means the Lenders' Agreement, if any, executed by
Agent and Lenders in connection with this agreement.
"LIEN" means any lien, mortgage, security interest, pledge, assignment,
charge, title retention agreement, or encumbrance of any kind and any other
arrangement for a creditor's claim to be satisfied from assets or proceeds prior
to the claims of other creditors or the owners.
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"LITIGATION" means any action by or before any Tribunal.
"LOAN DOCUMENTS" means (a) this agreement, certificates and reports
delivered under this agreement, and exhibits and schedules to this agreement,
(b) all agreements, documents, and instruments in favor of Agent or Lenders (or
Agent on behalf of Lenders) ever delivered under this agreement or otherwise
delivered in connection with any of the Obligation, (c) the Lenders' Agreement,
if any, and (d) all renewals, extensions, and restatements of, and amendments
and supplements to, any of the foregoing.
"MARKET VALUE" means, at any time (a) for Mortgage Loans -- except as
provided in clause (b) below -- a market value based upon the then-most recent
posted net yield for 30-day mandatory future delivery furnished by FNMA and
published and distributed by Telerate Mortgage Services or (if that posted net
yield is not available from Telerate Mortgage Services) obtained by Agent from
FNMA, (b) for Jumbo Loans or any other Mortgage Loan when the posted rate is not
available from FNMA, the value determined in good faith by Agent, and (c) for
Mortgage Securities, the applicable Take-Out Prices, as detailed in the then
most-recent Take-Out Report delivered by Borrower under this agreement of all
Take-Out Commitments relating to Mortgage Securities.
"MATERIAL-ADVERSE EVENT" means any circumstance or event that, individually
or collectively, is reasonably expected to result in any (a) impairment of
Borrower's ability to perform any of its payment or other material obligations
under any Loan Document or Agent's or any Lender's ability to enforce any of
those obligations or any of its Rights under any Loan Document, (b) material-
adverse effect on Borrower's individual financial condition or the Companies'
consolidated financial condition represented to Lenders in the Current
Financials most recently delivered to Lenders as of the Closing Date (c)
material-adverse effect on any Collateral, or (d) Default.
"MAXIMUM AMOUNT and MAXIMUM RATE" respectively mean, for any day and for
any Lender, the maximum non-usurious amount and the maximum non-usurious rate of
interest that, under applicable Law, the Lender is permitted to contract for,
charge, take, reserve, or receive on its portion of the Obligation.
"MORTGAGE COLLATERAL" means all Mortgage Loans, Mortgage Securities, and
related Collateral Documents offered as Collateral under an Originator Loan
Agreement and the Loan Documents.
"MORTGAGE LOAN" means a loan that is not a construction or non-residential
commercial loan, is evidenced by a valid promissory note, and is secured by a
mortgage, deed of trust, or trust deed that grants a perfected first- or second-
priority Lien on the residential-real property.
"MORTGAGE SECURITY" means a security (in respect of an underlying pool of
related Mortgage Loans) that provides for payment by the issuer to the holder of
specified principal installments and a fixed-interest rate on the unpaid
balance, with all prepayments being passed through to the holder, and is issued
in certificate or book-entry form.
"MULTIEMPLOYER PLAN" means a multiemployer plan as defined in (S)(S) 3(37)
or 4001(a)(3) of ERISA or (S) 414(f) of the IRC to which any ERISA Affiliate is
making, or has made, or is accruing, or has accrued, an obligation to make
contributions.
"NET INCOME" means, for any Person and for any period, the amount that
should in accordance with GAAP be reflected on that Person's income statement as
net income for that period after deduction of any minority interests.
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<PAGE>
"NOTE" means a promissory note executed and delivered by Borrower, payable
to a Lender's order, in the stated principal amount of its Commitment and
substantially in the form of EXHIBIT A.
"OBLIGATION" means all (a) present and future indebtedness, obligations,
and liabilities of Borrower or any Guarantor to Agent or any Lender and related
to any Loan Document, whether principal, interest, fees, costs, attorneys' fees,
or otherwise, (b) amounts that would become due but for operation of 11 U.S.C.
(S)(S) 502 and 503 or any other provision of Title 11 of the United States
Code, (c) pre- and post-maturity interest on any of the foregoing, including,
without limitation, all post-petition interest if any Company voluntarily or
involuntarily files for protection under any Debtor Law, and (d) all renewals,
extensions, and modifications of any of the foregoing.
"ORIGINATOR" means any Person who originates and acquires Mortgage Loans
and markets and sells then in the secondary market.
"ORIGINATOR COLLATERAL" means all Originator Documents offered as
Collateral under the Loan Documents.
"ORIGINATOR DOCUMENTS" means for any Approved Originator, its Originator
Loan Agreement and the documents and items described on SCHEDULE 4.3 and
required to be delivered to Agent under SECTION 4.3.
"ORIGINATOR LOAN AGREEMENT" means a loan agreement between Borrower and an
Approved Originator under which, among other things (a) Borrower provides
financing to that Approved Originator for its Mortgage Loan origination and
acquisition until those Mortgage Loans are sold in the secondary market, and (b)
that Approved Originator grants to Borrower first-priority Liens upon, among
other things, the Mortgage Collateral delivered to or for Borrower by or for
that Approved Originator.
"PARTICIPANT" is defined in Section 11.13.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PERMITTED DEBT" means Debt described on SCHEDULE 8.1.
"PERMITTED LIENS" means Liens described on SCHEDULE 8.2.
"PERMITTED INVESTMENTS" means Investments described on SCHEDULE 8.3.
"PERSON" means any individual, entity, or Tribunal.
"POTENTIAL DEFAULT" means the occurrence of any event or existence of any
circumstance that would (upon notice, time lapse, or both) become a Default.
"PRINCIPAL DEBT" means, at any time, the outstanding principal balance of
all Borrowings.
"PURCHASER" is defined in SECTION 11.14
"REGULATION U" means Regulation U promulgated by the Board of Governors of
the Federal Reserve System, 12 C.F.R. PART 221.
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<PAGE>
"RELEASE REQUEST" means a Release Request executed and delivered by a
Responsible Officer of Borrower requesting the release of Collateral to Agent in
substantially the form of EXHIBIT B-8.
"REPRESENTATIVES" means representatives, officers, directors, employees,
attorneys, and agents.
"RESPONSIBLE OFFICER" means the chairman, president, vice president, chief
executive officer, chief financial officer, or any other officer designated as a
"Responsible Officer" by any of the above in writing to Agent.
"RIGHTS" means rights, remedies, powers, privileges, and benefits.
"SECOND-LIEN BORROWING" means a Borrowing that is subject to the B/C-
Second-Lien Sublimit and supported by the Borrowing Base for Eligible-Second-
Lien Loans.
"SECURITY AGREEMENT" means the Security Agreement executed by Borrower and
Agent in substantially the form of EXHIBIT B-I.
"SETTLEMENT ACCOUNT" means a non-interest bearing deposit account that is
(a) established by Borrower with Agent for the deposit of payments from
investors in or the settlement of Mortgage Collateral and for the deposit of
payments on the Obligation and (b) styled and numbered "Pioneer Commercial
Funding Corp. Settlement Account," Account No. 1825160375.
"SHIPPING PERIOD" means 45 calendar days for the Collateral Documents for
any Mortgage Loan shipped to or for an investor under SECTION 4.5.
"SHIPPING REQUEST" means a Shipping Request executed and delivered by a
Responsible Officer of Borrower requesting the shipment of Collateral to Agent
in substantially the form of EXHIBIT B-4
"SOLVENT" means, for any Person, that (a) the fair-market value of its
assets exceeds its liabilities, (b) it has sufficient cash flow to enable it to
pay its debts as they mature, and (c) it does not have unreasonably small
capital to conduct its businesses.
"STATED-TERMINATION DATE" means March 30, 1998.
"SUBORDINATED DEBT" means, at any time Debt of any Company that (a) is
subject to subordination, payment blockage, and standstill provisions acceptable
to Determining Lenders in their sole discretion and (b) does not have any
scheduled or mandatory principal or sinking fund payment due before one year
after the then-effective Stated-Termination Date.
"SUBSIDIARY" of any Person means any entity of which at least 50% (in
number of votes) of the stock (or equivalent interests) is owned of record or
beneficially, directly or indirectly, by that Person.
"TAKE-OUT COMMITMENT" means a binding commitment from an Approved Investor
to purchase Mortgage Collateral, acceptable in form and substance to Agent, in
favor of Borrower, with respect to which there is no condition which cannot be
reasonably anticipated to be satisfied or complied with before its expiration.
"TAKE-OUT PRICE" means, at any time, the amount described and calculated
as provided on SCHEDULE 4.2.
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"TAXES" means for any Person, taxes, assessments, or other governmental
charges or levies imposed upon it, its income, or any of its properties,
franchises, or assets.
"THREE-PARTY AGREEMENT" means a Three-Party Agreement entered into between
Agent, Borrower, and an Approved Originator substantially in the form of Exhibit
B-3.
"TRIBUNAL" means any (a) local, state, or federal judicial, executive, or
legislative instrumentality, (b) private arbitration board or panel, or (c)
central bank.
"TRUST RECEIPT" means a Trust Receipt and Agreement executed and delivered
by Borrower requesting the return of Collateral to Agent in substantially the
form of Exhibit B-7.
"UCC" means the Uniform Commercial Code as enacted in Texas or other
applicable jurisdictions.
"VA" means the Department of Veteran's Affairs.
"VA LOAN" means a Mortgage Loan either (a) full or partial payment of which
is guaranteed by VA under the Servicemen's Readjustment Act of 1944 or Chapter
37 of Title 38 of the United States Code, (b) for which VA has issued a current
binding and enforceable commitment for such a guaranty, or (c) which is subject
to automatic guarantee by VA, which in each case, the applicable guaranty,
commitment to guarantee, or automatic guaranty is for the maximum amount
permitted by Law.
"WET BORROWING" means a Borrowing for which all of the Collateral Documents
have not been delivered to Lender in accordance with Section 4.3.
"WET PERIOD" means five Business Days for the Collateral Documents for any
Mortgage Loan that supports a Wet Borrowing.
"WET SUBLIMIT" means, at any time, a percentage of the total Commitments,
which percentage is (a) 30% for the first four and last three Business Days of
each Calendar Month, and (b) 20% at all other times.
"WIRE INSTRUCTIONS" mean, for any Person, the information for wire
transfers of funds to that Person, which (until changed by written notice to all
other parties to this agreement) are stated for (a) Borrower and Agent, beside
their names on the signature pages below, and (b) each Lender, beside its name
on Schedule 2.
1.2 TIME REFERENCES. Unless otherwise specified, in the Loan Documents
---------------
(a) time references (e.g., 10:00 a.m.) are to time in Dallas, Texas, and (b) in
calculating a period from one date to another, the word "from" means "from and
including" and the word "to" or "until" means "to but excluding."
1.3 OTHER REFERENCES. Unless otherwise specified, in the Loan Documents
----------------
(a) where appropriate, the singular includes the plural and vice versa, and
words of any gender include each other gender, (b) where appropriate, words
include their respective cognate expressions, (c) heading and caption references
may not be construed in interpreting provisions, (d) monetary references are to
currency of the United States of America, (e) section, paragraph, annex,
schedule, exhibit, and similar references are to the particular Loan Document in
which they are used, (f) references to "telecopy," "facsimile," or "fax" are to
facsimile or telecopy transmissions, (g) the term "including" means including
without limiting the
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generality of any description preceding that term, (h) references to "writing"
include printing, typing, lithography, and other means of reproducing words in a
tangible, visible form, (i) references to any Person include that Person's
heirs, personal representatives, successors, trustees, receivers, and permitted
assigns, (j) references to any Tribunal include any Person succeeding to its
relevant function, (k) references to any Law include every amendment or
supplement to it, rule and regulation adopted under it, and successor or
replacement for it, and (l) references to any Loan Document or other document
include (to the extent not prohibited by the terms of the Loan Documents) every
renewal and extension of it, amendment and supplement to it, and replacement or
substitution for it.
1.4 ACCOUNTING PRINCIPLES. Unless otherwise specified, in the Loan
---------------------
Documents (a) GAAP determines all accounting and financial terms and compliance
with financial covenants, (b) GAAP in effect on the date of this agreement
determines compliance with financial covenants, (c) otherwise, all accounting
principles applied in a current period must be comparable in all material
respects to those applied during the preceding comparable period, and (d) all
accounting and financial terms and compliance with reporting and financial
covenants must be on a consolidated basis, if applicable.
SECTION 2. BORROWING PROVISIONS.
---------------------
2.1 BORROWINGS. Borrowings may be made under the Loan Documents on a
----------
revolving basis subject to the following conditions and all other conditions of
the Loan Documents.
. The total Principal Debt of Borrowings may never exceed the lesser of
either (a) the total Commitments or (b) the Borrowing Base.
. The total Principal Debt of Wet Borrowings may never exceed the Wet
Sublimit.
. The total Principal Debt of all B/C Borrowings may never exceed the
lesser of either (i) the Borrowing Base for Eligible-B/C Loans or
(ii) the sum of the B/C-Second-Lien Sublimit (as adjusted pursuant to
Schedule 4.2) minus the total Principal Debt of all Second-Lien
Borrowings.
. The total Principal Debt of all Second-Lien Borrowings may never
exceed the lesser of either (i) the Borrowing Base for Eligible-
Second-Lien Loans or (ii) the sum of the B/C-Second-Lien Sublimit (as
adjusted pursuant to Schedule 4.2) minus the total Principal Debt of
all Second-Lien Borrowings.
. No Borrowing may be made on a day that is not a Business Day or on or
after the Actual-Termination Date.
2.2 BORROWING REQUEST. Borrower may only request a Borrowing by timely
-----------------
delivering to Agent a Collateral-Delivery Notice and all required Originator
Documents and Collateral Documents under Section 4.3 and by delivering to Agent
a Borrowing Request for the Borrowing before noon on the Borrowing Date for it.
A Borrowing Request is irrevocable and binding on Borrower when delivered. Agent
shall use its best efforts to promptly send a copy of it to each Lender by fax
and confirm it by telephone.
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2.3 FUNDINGS.
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(a) REMITTANCE BY LENDERS. Each Lender shall remit its Commitment
---------------------
Percentage of any Borrowing requested in a Borrowing Request to Agent's
principal office in Dallas, Texas, by wire transfer according to Agent's
Wire Instructions, in funds that are available for immediate use by Agent
by 11:00 a.m. on the Borrowing Date.
(b) FUNDING BY AGENT. Subject to receipt of those funds, Agent shall
----------------
on the Borrowing Date (unless to its actual knowledge any of the applicable
conditions precedent have not been satisfied by Borrower or waived by the
requisite Lenders) either deposit those funds into the Funding Account for
a Dry Borrowing or wire transfer those funds in accordance with the
Borrowing Request for a Wet Borrowing.
(c) NON-REMITTANCE. Absent contrary written notice from a Lender
--------------
received by Agent by 12:00 Noon on the Borrowing Date, Agent may assume
that each Lender has made its Commitment Percentage of a Borrowing under a
Borrowing Request available to Agent on the Borrowing Date and may (but is
not obligated to) make available to Borrower a corresponding amount. If a
Lender fails to make its Commitment Percentage of that Borrowing available
to Agent on the Borrowing Date (whether because of that Lender's default,
because that Lender is not open for business on that Business Day, or
otherwise) then Agent may recover that amount on demand (i) from that
Lender, together with interest at the Fed-Funds Rate plus 1.50%, during the
period from the Borrowing Date to the date Agent recovers that amount from
that Lender (which payment is then deemed to be that Lender's Commitment
Percentage of that Borrowing) or (ii) if that Lender fails to pay that
amount upon demand, then from Borrower if applicable, together with
interest at an annual interest rate equal to the rate applicable to the
requested Borrowing during the period from the Borrowing Date to the date
Agent recovers that amount from Borrower. Notwithstanding these provisions,
each Lender remains obligated to lend its Commitment Percentage of that
Borrowing, assumes the credit risk for that amount when the Borrowing is
made available to or for Borrower, and -- after Agent has recovered the
amount of interest provided for in clause (i) above -- is entitled to
interest on that amount from the Borrowing Date.
(d) OTHER LENDERS. Although no Lender is responsible for the failure
-------------
of any other Lender to make its Commitment Percentage of any Borrowing,
that failure does not excuse any other Lender from making its Commitment
Percentage of that Borrowing.
2.4 WET-BORROWING PROCEDURES. The conditions and procedures of Section
------------------------
2.2 and Section 2.3 apply to Wet Borrowings except as follows:
(a) COLLATERAL DOCUMENTS. A Wet Borrowing may be funded before
--------------------
delivery to Agent of all of the required Collateral Documents for the
Eligible-Mortgage Loans supporting that Wet Borrowing. The Collateral-
Delivery Notice delivered to Agent for a Wet Borrowing may be sent to Agent
by fax but must identify and describe each Mortgage Loan that supports that
Wet Borrowing and the amount of the Borrowing Base applicable to it. By
delivering the Collateral-Delivery Notice, Borrower confirms its grant
under this agreement of Lender Liens (from the Borrowing Date for each Wet
Borrowing) on each Collateral Document offered as Collateral in that
Col1ateral-De1ivery Notice that is perfected subject to the delivery of the
related promissory notes for those Mortgage Loans to Agent or its bailee.
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(b) FUNDING BY AGENT. Agent shall make the funds available to
----------------
Borrower by 12:00 Noon on the Borrowing Date by wire transferring these
funds in accordance with the Borrowing Request or by depositing these funds
into the Funding Account.
2.5 TERMINATIONS. The total Commitments automatically terminate on the
------------
Stated-Termination Date. After giving written and irrevocable notice to Agent
and each Lender at least five Business Days before the effective date of any
termination, Borrower may fully or partially terminate the Commitments before
the Stated-Termination Date ratably in accordance with each Lender's Commitment
Percentage. Once terminated, no part of any Commitment may be reinstated except
by an amendment to this agreement.
SECTION 3. PAYMENT TERMS.
- --------- -------------
3.1 NOTES. The Principal Debt and interest on it are evidenced by the
-----
Notes. Notwithstanding any sale of participating interests under Section 11.13
or any contrary notice, Borrower and Agent may deem and treat each Lender as the
absolute owner of its respective Note for all purposes.
3.2 Payment Procedures.
(a) PAYMENTS. Borrower shall make each payment and prepayment on the
--------
Obligation to Agent, on behalf of Lenders, in accordance with Agent's Wire
Instructions in funds that are available for immediate use by Agent.
Payments that are received by 4:00 p.m. on a Business Day are deemed
received on that Business Day. Payments that are received after 4:00 p.m.
on a Business Day are deemed received on the next Business Day. Subject to
Section 3.7(f), applicable interest continues to accrue through the
calendar day immediately before the Business Day on which the payment is
deemed received. No Lender directly invoices Borrower for (and only Agent
invoices Borrower for) interest under the Loan Documents.
(b) DISTRIBUTIONS. When received under clause (a) above, Agent shall
-------------
distribute each payment to each Lender (in accordance with Section 3.5 and
each Lender's Wire Instructions) reasonably promptly after receipt but by
no later than 5:00 p.m. on the Business Day the payment is deemed to be
received by Agent under clause (a) above. If Agent fails to distribute any
payment to any Lender as required by this clause, then Agent shall pay to
that Lender on demand interest on that payment, from the date due under
this clause until paid, at an annual interest rate equal from day to day to
the Fed-Funds Rate.
3.3 SCHEDULED PAYMENTS. Borrower shall pay (a) interest on the 15th day of
------------------
each Calendar Month (commencing on the first such date after the Closing Date)
as it accrued through the last day of the preceding Calendar Month, and (b) the
Principal Debt and all accrued and unpaid interest on the Actual-Termination
Date.
3.4 PREPAYMENTS. Borrower (a) shall, on demand when any Borrowing Excess
-----------
exists, prepay the appropriate Principal Debt or take any other actions in
accordance with this agreement necessary to eliminate the Borrowing Excess, and
(b) may otherwise voluntarily prepay any of the Obligation at any time without
premium or penalty.
3.5 ORDER OF APPLICATION. All payments and proceeds (whether voluntary,
--------------------
involuntary, through the exercise of any Right of set-off or other Right,
realization against any Collateral, or otherwise) shall be applied in the
following order:
14
<PAGE>
(a) NO DEFAULT. While no Default exists (i) all payments of regularly
----------
scheduled interest shall be applied to accrued and unpaid interest on the
Obligation, payable ratably to Lenders in the proportion that the amount of
interest owed to each Lender bears to the total of all interest owed to all
Lenders, (ii) all payments and proceeds from the sale or other disposition
of Collateral shall be applied to Principal Debt, payable ratably to each
Lender in accordance with its Commitment Percentage, and (iii) all other
payments and proceeds as Borrower directs.
(b) DEFAULT. While a Default exists, in the following order and
-------
manner:
(i) All costs and expenses incurred by Agent in connection with
its duties under the Loan Documents (including, without limitation,
fees and expenses paid by Agent to any servicing companies retained
by Agent to assist it in servicing any Collateral required to be
serviced, to any attorneys, or to any agents) that have not been
reimbursed by Lenders, together with interest at the Default Rate,
payable solely to Agent.
(ii) All costs and expenses incurred by any Lender in connection
with the Loan Documents that are reimbursable to it under the Loan
Documents and all amounts paid by that Lender to Agent as a
reimbursement to it of costs and expenses incurred by Agent in
connection with its duties under the Loan Documents (together with
interest at the Default Rate), payable ratably to Lenders in the
proportion that each Lender's share of those costs and expenses bears
to the total of those costs and expenses for all Lenders.
(iii) Accrued and unpaid interest on the Obligation, payable
ratably to Lenders in the proportion that the amount of interest owed
to each Lender bears to the total of all interest owed to all
Lenders.
(iv) Principal Debt, payable ratably to each Lender in
accordance with its Default Percentage, applied first to Wet
Borrowings, then to Second-Lien Borrowings, then to B/C Borrowings,
and then to other Borrowings.
(v) All other portions of the Obligation, payable ratably to
Lenders in the proportion that each Lender's share of those amounts
bears to the total of those amounts for all Lenders.
(vi) Either (i) to Borrower or to its successors or assigns on
their behalf, to be divided between them as they may agree, or (ii)
as a court of competent jurisdiction may direct.
3.6 SHARING. If any Lender obtains any amount (whether voluntary,
-------
involuntary, or otherwise, including, without limitation, as a result of
exercising its Rights under Section 10.3) that exceeds the portion of that
amount it is otherwise entitled under the Loan Documents to receive, then that
Lender shall purchase from the other Lenders participations that result in the
purchasing Lender's sharing the excess amount ratably with each Lender in
accordance with the portion it is entitled to receive under the Loan Documents.
If all or any of that excess amount is subsequently recovered from that
purchasing Lender, then the purchase of participations in it is automatically
rescinded and the purchase price restored to that purchasing Lender to the
extent of the recovery. Any Lender purchasing a participation from another
Lender under this section may, to the extent lawful, exercise all of its Rights
of payment
15
<PAGE>
(including the Right of offset) with respect to that participation as fully as
if that Lender were the direct creditor of Borrower in the amount of that
participation.
3.7 INTEREST RATES.
--------------
(a) NON-DEFAULT RATE. Subject to clause (b) below, all Principal Debt
----------------
bears an annual interest rate equal to the lesser of either the Maximum
Rate or the Average-Adjusted-Base Rate for that Calendar Month.
(b) DEFAULT RATE. All past-due Principal Debt and past-due interest
------------
on it bears interest at the Default Rate from the date due (stated or by
acceleration) until paid, whether or not payment is before or after entry
of a judgment.
(c) RATE CHANGES. Each change in the Base Rate, Fed-Funds Rate, and
------------
the Maximum Rate is effective upon the effective date of change without
notice to Borrower or any other Person.
(d) CALCULATIONS. Interest is calculated on the basis of actual days
------------
(including the first but excluding the last) over a 360-day year, unless
the calculation would result in an interest rate greater than the Maximum
Rate, in which event interest is calculated on the basis of the actual days
in that year.
(e) RECAPTURE. If the designated interest rate applicable to any
---------
Borrowing exceeds the Maximum Rate, the interest rate on that Borrowing is
limited to the Maximum Rate. However, any subsequent reductions in the
designated rate shall not become effective until the total amount of
accrued interest equals the amount of interest that would have accrued if
that designated rate had always been in effect. If at maturity (stated or
by acceleration), or at final payment of the Notes, the total interest paid
or accrued is less than the interest that would have accrued if the
designated rates had always been in effect, then, at that time and to the
extent permitted by Law, Borrower shall pay an amount equal to the
difference of (i) the lesser of either the amount of interest that would
have accrued if the designated rates had always been in effect or the
amount of interest that would have accrued if the Maximum Rate had always
been in effect, minus (ii) the amount of interest actually paid or accrued
on the Notes.
(f) MAXIMUM RATE. Regardless of any Loan Document provision, no
------------
Lender is entitled to contract for, charge, take, reserve, receive, or
apply, as interest on all or any of the Obligation any amount in excess of
the Maximum Rate. If a Lender ever does so, then any excess is treated as a
partial prepayment of principal, and any remaining excess shall be refunded
to Borrower. In determining if the interest paid or payable exceeds the
Maximum Rate, Borrower and Lenders shall, to the extent lawful (i) treat
all Borrowings as but a single extension of credit, (ii) characterize any
nonprincipal payment as an expense, fee, or premium rather than as
interest, (iii) exclude voluntary prepayments and their effects, and (iv)
amortize, prorate, allocate, and spread the total amount of interest
throughout the full-contemplated term of the Obligation. However, if the
Obligation is paid in full before the end of that full-contemplated term
and the interest received for the Obligation's actual period of existence
exceeds the Maximum Amount, then Lenders shall refund any excess without
being subject to any penalties provided by any Laws. If Texas Laws are
applicable for purposes of determining the "Maximum Rate" or the "Maximum
Amount," then those terms mean the "indicated rate ceiling" from time to
time in effect under Article 1.04, Title 79, Texas Revised Civil Statutes.
Chapter 15, Subtitle 79, Texas Revised Civil
16
<PAGE>
Statutes, 1925 (which regulates certain revolving credit loan accounts and
revolving triparty accounts), does not apply to the Obligation.
3.8 CAPITAL ADEQUACY. If (a) any change after the date of this agreement
----------------
in any present Law or any future Law regarding capital adequacy or compliance by
any Lender with any request, directive, or requirement now or in the future
imposed by any Tribunal regarding capital adequacy or any change in the risk
category of this transaction reduces the rate of return on its capital as a
consequence of its obligations under this agreement to a level below that which
it otherwise could have achieved (taking into consideration its policies with
respect to capital adequacy) by an amount deemed by it to be material (and it
may, in determining the amount, utilize reasonable assumptions and allocations
of costs and expenses and use any reasonable averaging or attribution method),
then (b) that Lender (through Agent) shall notify Borrower and deliver to
Borrower a certificate stating in reasonable detail the calculation of the
amount necessary to compensate it (which certificate is presumed correct), and
Borrower shall pay that amount to that Lender within ten days after demand. This
section survives the full satisfaction of the Obligation and termination of the
Loan Documents, and release of Lender Liens.
3.9 FOREIGN LENDERS, PARTICIPANTS, AND PURCHASERS. Each Lender,
---------------------------------------------
Participant (by accepting a participation interest under this agreement), and
Purchaser (by executing an Assignment) that is not organized under the Laws of
the United States of America or one of its states (a) represents to Agent and
Borrower that (i) no Taxes are required to be withheld by Agent or Borrower with
respect to any payments to be made to it in respect of the Obligation and (ii)
it has furnished to Agent, Borrower, two duly completed copies of either U.S.
Internal Revenue Service Form 4224, Form 1001, Form W-8, or any other form
acceptable to Agent that entitles it to exemption from U.S. federal withholding
Tax on all interest payments under the Loan Documents, and (b) covenants to (i)
provide Agent and Borrower a new Form 4224, Form 1001, Form W-8, or other form
acceptable to Agent upon the expiration or obsolescence of any previously
delivered form according to Law, duly executed and completed by it, and (ii)
comply from time to time with all Laws with regard to the withholding Tax
exemption. If any of the foregoing is not true or the applicable forms are not
provided, then Borrower and Agent (without duplication) may deduct and withhold
from interest payments under the Loan Documents United States federal income Tax
at the full rate applicable under the IRC.
3.10 FEES. The following fees are not compensation for the use, detention,
----
or forbearance of money, are in addition to and not in lieu of interest and
expenses otherwise described in the Loan Documents, are non-refundable, bear
interest if not paid when due at the Default Rate, and are calculated on the
basis of actual days (including the first but excluding the last) elapsed over a
year of 360 days (or actual days during that year, if the calculation would
otherwise result in exceeding the Maximum Amount and the payment were deemed to
be interest notwithstanding the above provisions to the contrary).
(a) CUSTODIAL FEES. On the fifth day of each Calendar Month, Borrower
--------------
shall pay to Agent (for its sole account) custodial fees for the preceding
Calendar Month determined on the basis of the number of Mortgage Loans and
Mortgage Securities that are Collateral during that Calendar Month based on
the following scale:
========================
NUMBER PER ITEM FEE
========================
Up to 250 $17.50
Up to 500 $15.00
More than 500 $12.50
========================
17
<PAGE>
(b) COMMITMENT. In advance on the date of this agreement and on the
----------
first day of each ensuing calendar quarter until the Commitments have been
fully terminated, Borrower shall pay to Agent a commitment fee for the
account of all Lenders. When received, Agent shall pay to each Lender that
Lender's Commitment Percentage of that fee less the applicable portion of
that fee accruing for any period before that Lender became a Lender. Each
payment of that fee is calculated for the period from the first day of the
preceding calendar quarter (or, in the case of the first such payment, the
date of this agreement) to and including the last day of the calendar
quarter. The amount of that fee for that period is the product of (i) 0.25%
(divided by four) times (ii) the Commitments for all Lenders as of the
first day of that period.
SECTION 4. COLLATERAL PROCEDURES.
- --------- ---------------------
4.1 ELIGIBLE COLLATERAL. The requirements for Mortgage Collateral to
-------------------
constitute Eligible-Mortgage Loans or Eligible-Mortgage Securities and be
included in the Borrowing Base are listed on SCHEDULE 4.1. If at any time any
item of Mortgage Collateral ceases to meet those requirements, then that item is
automatically excluded from all calculations of the Borrowing Base.
4.2 BORROWING BASE. The elements for calculating the Borrowing Base
--------------
are listed on SCHEDULE 4.2. By 12:00 Noon on the date of any Borrowing, any
payment of Principal Debt, or removal of any Collateral, Agent shall deliver to
Borrower and Lenders a Borrowing-Base Report prepared on the basis of the
information provided by Borrower in the most recent Take-Out Report and other
information then available to Agent as provided in this agreement.
4.3 COLLATERAL DELIVERY. Borrower must comply with all the required
-------------------
procedures in SCHEDULE 4.3 for Mortgage Collateral offered in connection with
this agreement by no later than 10:00 a.m. on the Borrowing Date for Collateral
supporting any new Borrowing.
4.4 BAILEE AND AGENT. Agent and Lenders appoint each Approved Originator
----------------
as their (a) special agent for the sole and limited purpose of obtaining and
maintaining Appraisals for Mortgage Loans as required by the Loan Documents and
(b) bailee to (i) hold in trust for Agent (A) the original recorded copy of the
mortgage, deed of trust, or trust deed securing each Mortgage Loan, (B) a
mortgagee policy of title insurance (or binding unexpired and unconditional
commitment to issue such insurance if the policy has not yet been delivered to
such Approved Originator) insuring such Approved Originator's perfected, first
priority Lien (or second-priority Lien with respect to Second-Lien Borrowings)
created by that mortgage, deed of trust, or trust deed, and (C) all other
original documents, including any undelivered Take-Out Commitments, promissory
notes, and Mortgage Securities, (ii) specifically identify those items in the
appropriate Collateral-Delivery Notice, and (iii) deliver to Agent any of the
foregoing items as soon as reasonably practicable upon Agent's request.
4.5 SHIPMENT FOR SALE.
-----------------
(a) SHIPMENT OF COLLATERAL. If no Default, Potential Default, or
----------------------
Borrowing Excess exists and if shipment would not result in any Approved
Investor (other than FNMA, FHLMC, and GNMA, or any other investor that
Agent has approved in writing) or its servicers and custodians holding
Collateral Documents for Mortgage Loans with more than a total $2,500,000
face amount, then Borrower may (by a Shipping Request delivered to Agent by
11:00 a.m. on the
18
<PAGE>
Business Day immediately preceding the requested shipping date) request
Agent to ship Collateral Documents to an Approved Investor or its servicer
or custodian for purchase or pooling of the related Mortgage Loans. If
Agent has no actual knowledge that any of the above conditions have not
been satisfied, then Agent shall use its best efforts to ship the
Collateral Documents it holds for those Mortgage Loans to that Approved
Investor or its servicer or custodian under the appropriate Bailee Letter
by the end of the Business Day following the date of receipt of the
applicable Shipping Request.
(b) INELIGIBLE COLLATERAL. Collateral shipped under CLAUSE (A) above,
---------------------
unless returned to Agent, ceases to be Eligible-Mortgage Collateral (i) to
the extent that Collateral Documents for Mortgage Loans with more than a
total face amount of $2,500,000 are held by or for any Approved Investor
(other than FNMA, FHLMC, and GNMA or any other investor that Agent has
approved in writing), and (ii) upon the earlier of either the release of
the Lender Liens in that Collateral under CLAUSE (C) below or the
expiration of the Shipping Period for that Collateral.
(c) RELEASE OF LIENS. The Lender Liens on any Collateral shipped
----------------
under CLAUSE (A) above continues on that Collateral until either (i) Agent
receives payment in the Settlement Account in an amount at least equal to
the greater of (1) the price paid by the purchaser for each Eligible-
Mortgage Loan so sold or (2) the full amount of the Borrowings made with
respect to those Eligible-Mortgage Loans, or (ii) in the case of Mortgage
Loans being sold or exchanged for Mortgage Securities, Eligible-Mortgage
Securities are delivered to or for Agent in accordance with SCHEDULE 4.3
and other applicable provisions of the Loan Documents and become Collateral
under this agreement for all purposes.
(d) CERTAIN CREDITS. Neither Agent nor any Lender is obligated at any
---------------
time to credit Borrower (or any Approved Investor) for any amounts due from
any purchase of any Mortgage Collateral contemplated under this agreement
until Agent has actually received immediately available funds for that
Mortgage Collateral in the amount required under this agreement. Neither
Agent nor any Lender is obligated at any time to collect any amounts or
otherwise enforce any obligations due from any purchaser in respect of any
such purchase.
4.6 SHIPMENT FOR CORRECTION. If no Default, Potential Default, or
-----------------------
Borrowing Excess exists or occurs as a result of the shipment and if shipment
would not result in any Collateral Documents for Mortgage Loans with more than a
total face amount of $500,000 being outstanding for correction, then Borrower
may (by a Trust Receipt delivered to Agent) request that Agent ship to Borrower
the entire mortgage loan file of Collateral Documents for any Mortgage Loan so
that certain of those Collateral Documents may be corrected or replaced for
clerical or other non-substantive mistakes. If Agent has no actual knowledge
that any of the above conditions have not been satisfied, then and subject to
the limitations below, then Agent shall use its best efforts to ship to Borrower
the entire mortgage loan file of Collateral Documents to be corrected or
replaced by the end of the Business Day following the date of receipt of the
applicable Trust Receipt. Borrower shall re-deliver to Agent the corrected
Collateral Documents (meeting the requirements of SCHEDULE 4.3) before the
expiration of the Correction Period for that Collateral. Collateral shipped
under this section, unless returned to Agent, ceases to be Eligible-Mortgage
Collateral (a) to the extent that Collateral Documents for Mortgage Loans with
more than a total face amount of $500,000 are outstanding for correction at any
time and (b) upon the expiration of the Correction Period for that Collateral.
The Lender Liens on any Collateral shipped under this section continue in full
force and effect.
4.7 RELEASE OF COLLATERAL.
----------------------
19
<PAGE>
(a) EXCESS COLLATERAL. If no Default or Potential Default exists and
-----------------
no Borrowing Excess exists or would occur (after taking into account any
corresponding payment on the Obligation) as a result of the release,
Borrower may (by a Release Request delivered to Agent by 11:00 a.m. on the
Business Day of the release) request that Agent release the Lender Liens on
any Collateral.
(b) SATISFACTION OF OBLIGATION. If the Obligation is fully paid and
--------------------------
performed and all commitments by each Lender to extend credit under the
Loan Documents are terminated or canceled, Borrower may (by written request
to Agent) request that Agent release the Lender Liens on all of the
Collateral, return to Borrower or its designee all Collateral Documents
then held by Agent, and execute a release of any financing statements or
other documents filed or recorded to perfect the Lender Liens.
(c) RELEASES. If Agent has no actual knowledge that any of the above
--------
conditions for a release have not been satisfied, then Agent shall effect
those releases.
SECTION 5. CONDITIONS PRECEDENT. No Lender is obligated to fund its part of
- --------- --------------------
any Borrowing unless Agent has received all of the documents and items described
on SCHEDULE 5. In addition, no Lender is obligated to fund its part of any
Borrowing unless on the applicable Borrowing Date (and after giving effect to
the requested Borrowing): (a) Agent has timely received a Borrowing Request; (b)
all of the representations and warranties in the Loan Documents are true and
correct in all material respects (unless they speak to a specific date or are
based on facts which have changed by transactions contemplated or permitted by
this agreement); (c) no Default or Potential Default exists; (d) the funding of
the Borrowing is permitted by Law and does not cause a Borrowing Excess; and (e)
if reasonably requested by Agent, it has received evidence substantiating any of
the matters in the Loan Documents that are necessary to enable Borrower to
qualify for the Borrowing. Each condition precedent in this agreement
(including, without limitation, those on SCHEDULE 5) is material to the
transactions contemplated by this agreement, and time is of the essence with
respect to each. Subject to first obtaining the approval of all Lenders, Agent
or any Lenders may fund any Borrowing without all conditions being satisfied.
However, to the extent lawful, that funding is not a waiver of the requirement
that each condition precedent be satisfied as a prerequisite for any subsequent
funding, unless all Lenders specifically waive an item in writing.
SECTION 6. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
- --------- ------------------------------
Agent and Lenders as follows:
6.1 PURPOSE OF CREDIT. Borrowings are to be used as stated in the
-----------------
recitals of this agreement. No Company is engaged principally (or as one of its
important activities) in the business of extending credit for the purpose of
purchasing or carrying any "margin stock" within the meaning of Regulation U. No
part of the proceeds of any Borrowing is to be used, directly or indirectly, for
a purpose that violates any Law, including, without limitation, the provisions
of Regulation U.
6.2 ABOUT THE COMPANIES.
--------------------
(a) SUBSIDIARIES AND TRADE NAMES. Except as described on SCHEDULE 6.2
----------------------------
(i) no Company has any Subsidiaries and (ii) no Company has used or
transacted business under any other corporate or trade name in the six-
month period preceding the date of this agreement.
20
<PAGE>
(b) EXISTENCE, QUALIFICATION, AND COMPLIANCE. Each Company is duly
----------------------------------------
organized, validly existing, and in good standing under the Laws of the
jurisdiction in which it is incorporated as stated on Schedule 6.2. Except
where failure is not a Material-Adverse Event, each Company (i) is duly
qualified to transact business and is in good standing as a foreign
corporation or other entity in each jurisdiction where the nature and
extent of its business and properties require due qualification and good
standing (as described on SCHEDULE 6.2); (ii) possesses all requisite
authority, permits, and power to conduct its business as is now being -- or
is contemplated by this agreement to be -- conducted, and (iii) is in
compliance with all applicable Laws.
(c) OFFICE. Each Company's chief executive office and other principal
------
offices are described on Schedule 6.2. The present and foreseeable location
of each Company's books and records concerning accounts and accounts
receivable is at its chief executive office, and all of its books, and
records are in its possession.
6.3 AUTHORIZATION AND CONTRAVENTION. The execution and delivery by each
-------------------------------
Company of each Loan Document to which it is a party and the performance by it
of its related obligations (a) are within its corporate power or partnership
authority, as applicable, (b) have been duly authorized by all necessary
corporate or partnership action, as applicable, (c) except for any action or
filing that has been taken or made on or before the date of this agreement,
require no action by or filing with any Tribunal, (d) do not violate any
provision of its charter, articles of incorporation, bylaws, or partnership
agreement, as applicable, (e) except where not a Material-Adverse Event, do not
violate any provision of Law applicable to it or any material agreements to
which it is a party, and (f) except for Lender Liens, do not result in the
creation or imposition of any Lien on any asset of any Company.
6.4 BINDING EFFECT. Upon execution and delivery by all parties to it, each
--------------
Loan Document will constitute a legal and binding obligation of each Company
party to it, enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable Debtor Laws and general principles
of equity.
6.5 [INTENTIONALLY BLANK].
6.6 CURRENT FINANCIALS. The Current Financials were prepared in
------------------
accordance with GAAP and present fairly, in all material respects, the financial
condition, results of operations, and cash flows of the Companies as of, and
for the portion of the fiscal year ending on their date or dates (subject only
to normal year-end adjustments). All material liabilities of the Companies as of
the date or dates of the Current Financials are reflected in them or notes to
them. Except for transactions directly related to, or specifically contemplated
by, the Loan Documents, no subsequent material adverse changes have occurred in
the financial condition of the Companies from that shown in the Current
Financials, nor has any Company incurred any subsequent material liability.
6.7 DEBT. No Company has any Debt except Permitted Debt.
----
6.8 SOLVENCY. On the date of each Borrowing each Company is, and after
--------
giving effect to the requested Borrowing will be, Solvent.
6.9 LITIGATION. Except as disclosed on SCHEDULE 6.9 (a) no Company is
----------
subject to, or aware of the threat of, any Litigation that is reasonably likely
to be determined adversely to it or, if so adversely
21
<PAGE>
determined, would be a Material-Adverse Event, and (b) no outstanding or unpaid
judgments against any Company exists.
6.10 TRANSACTIONS WITH AFFILIATES. No Company is a party to a material
----------------------------
transaction with any of its Affiliates except (a) in transactions in the
ordinary course of business and upon fair and reasonable terms not materially
less favorable than it could obtain or could become entitled to in an arm's-
length transaction with a Person that was not its Affiliate, and (b) the
transactions described on SCHEDULE 6.10.
6.11 TAXES. All Tax returns of each Company required to be filed have
-----
been filed (or extensions have been granted) before delinquency, except for
returns for which the failure to file is not a Material-Adverse Event, and all
Taxes imposed upon each Company that are due and payable have been paid before
delinquency.
6.12 EMPLOYEE PLANS. Except where occurrence or existence is not a
--------------
Material-Adverse Event, (a) no Employee Plan has incurred an "accumulated
funding deficiency" (as defined in (S)302 of ERISA or (S)412 of the IRC), (b) no
Company has incurred liability under ERISA to the PBGC in connection with any
Employee Plan, (c) no Company has withdrawn in whole or in part from
participation in a Multiemployer Plan, (d) no Company has engaged in any
"prohibited transaction" (as defined in (S)406 of ERISA or (S)4975 of the IRC),
and (e) no "reportable event" (as defined in (S)4043 of ERISA) has occurred in
respect of any Employee Plan, excluding events for which the notice requirement
is waived under applicable PBGC regulations.
6.13 PROPERTY AND LIENS. Each Company has good and marketable title to
------------------
all its property reflected on the Current Financials except for property that is
obsolete or that has been disposed of in the ordinary course of business or,
after the date of this agreement, as otherwise permitted by this agreement. All
Collateral is free and clear of any Liens and adverse claims of any nature
except Permitted Liens.
6.14 INTELLECTUAL PROPERTY. Each Company owns all material licenses,
---------------------
patents, patent applications, copyrights, service marks, trademarks, trademark
applications, and trade names necessary to continue to conduct its businesses as
presently conducted by it and proposed to be conducted by it immediately after
the date of this agreement. Each Company is conducting its business without
infringement or claim of infringement of any license, patent, copyright, service
mark, trademark, trade name, trade secret, or other intellectual property right
of others, other than any infringements or claims that, if successfully asserted
against or determined adversely to that Company, are not a Material-Adverse
Event. To each Company's knowledge, no infringement or claim of infringement by
others of any material license, patent, copyright, service mark, trademark,
trade name, trade secret, or other intellectual property of that Company exists.
6.15 ENVIRONMENTAL MATTERS. Except where not a Material-Adverse Event, no
---------------------
Company (a) knows of any environmental condition or circumstance adversely
affecting any Company's properties or operations or any material portion of the
properties subject to Mortgage Loans, (b) has received any report of any
Company's violation of any Environmental Law, or (c) knows that any Company is
under any obligation to remedy any violation of any Environmental Law. Each
Company has taken prudent steps to determine that its properties and operations
and that substantially all of the properties subject to Mortgage Loans do not
violate any Environmental Law except violations that are not a Material-Adverse
Event.
6.16 GOVERNMENT REGULATIONS. No Company is subject to regulation under the
----------------------
Investment Company Act of 1940 or the Public Utility Holding Company Act of
1935.
22
<PAGE>
6.17 INSURANCE. Each Company maintains with financially sound,
---------
responsible, and reputable insurance companies or associations (or, as to
workers' compensation or similar insurance, with an insurance fund or by self-
insurance authorized by the jurisdictions in which it operates) insurance
concerning its properties and businesses against casualties and contingencies
and of types and in amounts (and with co-insurance and deductibles) as is
customary in the case of similar businesses.
6.13 APPRAISALS. With respect to the property the subject of any Mortgage
----------
Loan, each Approved Originator has obtained Appraisals in material compliance
with all Appraisal Laws.
6.19 FULL DISCLOSURE. Each material fact or condition relating to the Loan
---------------
Documents or the financial condition, business, or property of the Companies
that is a Material-Adverse Event has been disclosed in writing to Agent and
Lenders. All information previously furnished by any Company to Agent or any
Lender in connection with the Loan Documents was (and all information furnished
in the future by any Company to Agent or any Lender will be) true and accurate
in all material respects or based on reasonable estimates on the date the
information is stated or certified.
SECTION 7. AFFIRMATIVE COVENANTS. For so long as any Lender is committed to
- --------- ---------------------
lend under this agreement and until the Obligation has been fully paid and
performed, Borrower covenants and agrees with Agent and Lenders that, without
first obtaining Determining Lenders' consent to the contrary:
7.1 REPORTING REQUIREMENTS. Borrower shall cause to be furnished to Agent
----------------------
the following, all in form and detail reasonably satisfactory to Agent, and
reasonably promptly after receiving them Agent shall provide copies of them to
Lenders:
(a) ANNUALLY. Promptly after preparation but no later than 90 days
--------
after the last day of each fiscal year of Borrower (i) Financials showing
Borrower's consolidated and consolidating financial condition and results
of operations as of, and for the year ended on, that last day, (ii) solely
with respect to the consolidated portion of those Financials, the opinions,
without material qualification, of Arthur Andersen, L.L.P. or of another
firm of nationally-recognized independent certified public accountants
reasonably acceptable to Determining Lenders, based on audits using
generally accepted auditing standards, that the consolidated portion of
those Financials were prepared in accordance with GAAP and present fairly,
in all material respects, Borrower's consolidated financial condition and
results of operations, and (iii) a quarterly Compliance Certificate.
(b) QUARTERLY. Promptly after preparation but no later than 60 days
---------
after the last day of the first three fiscal quarters of Borrower each year
(i) Financials showing Borrower's consolidating financial condition and
results of operations for that fiscal quarter and for the period from the
beginning of the current fiscal year to the last day of that fiscal
quarter, and (ii) a quarterly Compliance Certificate.
(c) MONTHLY. Within 45 days affer the last day of each month, a
-------
monthly Compliance Certificate.
(d) INVESTOR AND ORIGINATOR INFORMATION. Promptly affer the request
-----------------------------------
by Agent or Determining Lenders, financial information about any investor
(other than FNMA, FHLMC, and GNMA) or any Originator for purposes of
determining "approved" status under the Loan Documents.
23
<PAGE>
(e) OTHER REPORTS. Promptly after preparation and distribution,
-------------
accurate and complete copies of all reports and other material
communications about material financial matters or material corporate plans
or projections by or for any Company for distribution to the Securities
Exchange Commission, any other Tribunal, or any creditor.
(f) NOTICES. Notice, promptly after any Company knows or has reason
-------
to know, of (i) the existence and status of any Litigation that, if
determined adversely to any Company, would be a Material-Adverse Event,
(ii) any change in any material fact or circumstance represented or
warranted by any Company in any Loan Document that constitutes a Material-
Adverse Event, (iii) the receipt by any Company of notice of any violation
or alleged violation of ERISA or any Environmental Law or other Law if that
violation is a Material-Adverse Event, or (iv) a Default or Potential
Default specifying the nature thereof and what action the Companies have
taken, are taking, or propose to take with respect to it.
(g) OTHER INFORMATION. Promptly upon reasonable request by Agent or
-----------------
Determining Lenders (through Agent), information (not otherwise required to
be furnished under the Loan Documents) respecting the business affairs,
assets, and liabilities of any Company and opinions, certifications, and
documents in addition to those mentioned in this agreement.
7.2 USE OF PROCEEDS. The Companies shall use the proceeds of Borrowings
---------------
only for the purposes represented in this agreement.
7.3 BOOKS AND RECORDS. Each Company shall maintain books, records, and
-----------------
accounts necessary to prepare Financials in accordance with GAAP.
7.4 INSPECTIONS. Upon reasonable request, each Company shall allow Agent,
-----------
any Lender, or their respective Representatives to inspect any of its
properties, to review reports, files, and other records and to make and take
away copies, to conduct tests or investigations, and to discuss any of its
affairs, conditions, and finances with its directors, officers, employees, or
representatives from time to time during reasonable business hours.
7.5 TAXES. Each Company shall promptly pay when due any and all Taxes
-----
other than Taxes of which the failure to pay is not a Material-Adverse Event or
which are being contested in good faith by lawful proceedings diligently
conducted, against which reserve or other provision required by GAAP has been
made, and in respect of which levy and execution of any Lien have been and
continue to be stayed.
7.6 EXPENSES. Each Company shall pay (a) all reasonable legal fees and
--------
expenses incurred by Agent in connection with the preparation, negotiation, and
execution of the Loan Documents, (b) all reasonable legal fees and expenses
incurred by Agent in connection with each separate future amendment, consent,
waiver, or approval executed in connection with any Loan Document, (c) all fees,
charges, or Taxes for the recording or filing of any Loan Document to create or
perfect Lender Liens, (d) all other reasonable out-of-pocket expenses of Agent
or any Lender in connection with the preparation, negotiation, execution, or
administration of the Loan Documents -- including, without limitation, courier
expenses incurred in connection with the Mortgage Collateral, (e) all amounts
expended, advanced, or incurred by Agent or any Lender to satisfy any obligation
of any Company under any Loan Document, to collect the Obligation, or to enforce
the Rights of Agent or any Lender under any Loan Document -- including, without
limitation, all court costs, reasonable attorneys' fees (whether for trial,
appeal, other proceedings, or otherwise), reasonable fees of auditors and
accountants, and investigation expenses reasonably incurred by Agent or any
Lender in connection with any such matters, (f) interest at an annual interest
rate equal
24
<PAGE>
to the Default Rate on each item specified in clause (e) above from 30 days
after the date of written demand or request for reimbursement to the date of
reimbursement, and (g) any and all stamp and other Taxes payable or determined
to be payable in connection with the execution, delivery, or recordation of
any loan document -- IN CONNECTION WITH WHICH THE COMPANIES SHALL INDEMNIFY AND
SAVE AGENT AND EACH LENDER HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES
WITH RESPECT TO OR RESULTING FROM ANY DELAY IN PAYING OR OMISSION TO PAY THOSE
TAXES TO THE EXTENT THOSE LIABILITIES ARISE SOLELY BECAUSE THE COMPANIES FAILED
TO PAY THE TAXES UPON DEMAND BY AGENT OR ANY LENDER, WHICH INDEMNITY SURVIVES
THE PAYMENT AND PERFORMANCE OF THE OBLIGATION AND TERMINATION OF THE LOAN
DOCUMENTS.
7.7 MAINTENANCE OF EXISTENCE, ASSETS, AND BUSINESS. Each Company shall (a)
----------------------------------------------
except as permitted by Section 8.5, maintain its corporate existence and good
standing in its state of incorporation and its authority to transact business in
all other states where failure to maintain its authority to transact business is
a Material-Adverse Event, and (b) maintain all licenses, permits, and franchises
necessary for its business where failure to do so is a Material-Adverse Event.
7.8 INSURANCE. Each Company shall (a) maintain with financially sound and
---------
reputable insurers, insurance with respect to its assets and business against
such liabilities, casualties, risks, and contingencies and in such types and
amounts as is customary in the case of Persons engaged in the same or similar
businesses and similarly situated, and (b) upon Agent's request, furnish to
Agent from time to time (i) a summary of its insurance coverage, in form and
substance satisfactory to Agent, and (ii) originals or copies of the applicable
policies.
7.9 TAKE-OUT COMMITMENTS. Borrower shall perform and observe (and shall
--------------------
cause each Approved Originator to perform and observe) in all material respects
each of the provisions of each Take-Out Commitment on its or their part to be
performed or observed and cause all things to be done that are necessary to have
each item of Mortgage Collateral and the Collateral Documents covered by a Take-
Out Commitment comply with its requirements.
7.10 APPRAISALS. Borrower shall (and shall cause each Approved Originator
----------
to) promptly (a) permit Agent's and any Lender's authorized Representatives to
discuss with its officers or with the appraisers furnishing Appraisals the
procedures for preparation, review, and retention of (and to review and obtain
copies of) all Appraisals pertaining to any Mortgage Collateral, and (b) upon
Agent's or any Lender's request, cooperate with it to ascertain that the
Appraisals comply with all Appraisal Laws.
7.11 INDEMNIFICATION. IN CONSIDERATION OF THE COMMITMENTS BY AGENT AND
---------------
LENDERS UNDER THE LOAN DOCUMENTS, EACH COMPANY SHALL INDEMNIFY AND DEFEND EACH
AGENT, LENDER, AND THEIR RESPECTIVE AFFILIATES AND REPRESENTATIVES
(COLLECTIVELY, THE "INDEMNIFIED PARTIES") -- AND DEFEND THEM AND HOLD EACH OF
THEM HARMLESS -- AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES,
DEFICIENCIES, INTEREST, JUDGMENTS, COSTS, OR EXPENSES -- INCLUDING, WITHOUT
LIMITATION, REASONABLE ATTORNEYS' FEES --INCURRED BY ANY OF THEM ARISING FROM OR
BECAUSE OF (A) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING BROUGHT OR
THREATENED IN CONNECTION WITH ANY LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED BY THE LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, ANY USE BY
ANY COMPANY OF THE PROCEEDS OF BORROWINGS, (B) ANY IMPOUNDMENT, ATTACHMENT, OR
RETENTION OF ANY MORTGAGE COLLATERAL OR ANY FAILURE OF ANY INVESTOR TO PAY THE
ENTIRE PURCHASE PRICE OF ANY MORTGAGE COLLATERAL UNDER ANY TAKE-OUT COMMITMENT,
(C) ANY ALLEGED VIOLATION OF ANY FEDERAL OR STATE LAW RELATING TO USURY IN
CONNECTION WITH ANY MORTGAGE COLLATERAL, AND (D) ANY REPRESENTATION MADE BY ANY
25
<PAGE>
COMPANY UNDER ANY LOAN DOCUMENT ALTHOUGH EACH INDEMNIFIED PARTY IS ENTITLED TO
INDEMNIFICATION FOR ANY INDEMNIFIED PARTY'S ORDINARY NEGLIGENCE, NO INDEMNIFIED
PARTY IS ENTITLED TO INDEMNIFICATION FOR ITS OWN GROSS NEGLIGENCE, WILLFUL
MISCONDUCT, OR FRAUD. THIS INDEMNITY SURVIVES THE PAYMENT AND PERFORMANCE OF
THE OBLIGATION AND TERMINATION OF THE LOAN DOCUMENTS.
SECTION 8. NEGATIVE COVENANTS. For so long as any Lender is committed to lend
- --------- ------------------
under this agreement and until the Obligation has been fully paid and performed,
Borrower covenants and agrees with Agent and Lenders that, without first
obtaining Determining Lenders' consent to the contrary, the Companies designated
in the following sections of this Section 8 may not directly or indirectly do
any of the following or commit (other than a commitment that is not binding on
any Company until any prior written consent of Determining Lenders is first
obtained) to do any of the following:
8.1 DEBT. No Company may directly or indirectly create, incur, or suffer
----
to exist (a) any Debt except Permitted Debt, (b) any Debt in the nature of Dry
Borrowings except in connection with this agreement, or (b) any Debt in the
nature of Wet Borrowings except in connection with this agreement.
8.2 LIENS. No Company may directly or indirectly (a) create, incur, or
-----
suffer to exist any Lien on any of its assets except Permitted Liens or (b)
enter into or permit to exist any arrangement or agreement (except the Loan
Documents) that directly or indirectly prohibits any Company from creating or
incurring any Lien on any of its assets.
8.3 INVESTMENTS. No Company may make any Investments except Permitted
-----------
Investments.
8.4 [Intentionally Blank]
8.5 MERGER OR CONSOLIDATION. No Company may directly or indirectly merge
-----------------------
or consolidate with or into any other Person except that any Company may merge
into or be consolidated with any other Company so long as Borrower is the
surviving corporation if it is involved.
8.6 LIQUIDATIONS AND DISPOSITIONS OF ASSETS. No Company may directly or
---------------------------------------
indirectly dissolve or liquidate or sell, transfer, lease, or otherwise dispose
of any material portion of its assets or business except for sales or other
dispositions by any Company, in the ordinary course of business, of (a) subject
to Section 4, Originator Loans, Mortgage Loans, or Mortgage Securities that are
Collateral, or (b) Originator Loans, Mortgage Loans, or Mortgage Securities that
are not Collateral.
8.7 USE OF PROCEEDS. No Company may directly or indirectly use the
---------------
proceeds of Borrowings for any purpose other than to loan them to Approved
Originators under Eligible-Originator Loans.
8.8 TRANSACTIONS WITH AFFILIATES. No Company may directly or indirectly
----------------------------
enter into any transaction with any of its Affiliates other than transactions in
the ordinary course of business or upon fair and reasonable terms not materially
less favorable than it could obtain or could become entitled to in an arm's-
length transaction with a Person that was not its Affiliate.
8.9 EMPLOYEE PLANS. Except where a Material-Adverse Event would not
--------------
result, no Company may directly or indirectly permit any of the events or
circumstances described in Section 6.12 to exist or occur.
26
<PAGE>
8.10 COMPLIANCE WITH LAWS AND DOCUMENTS. No Company may directly or
----------------------------------
indirectly (a) violate the provisions of any Laws applicable to it or of any
Material Agreement to which it is a party if that violation alone or with all
other violations is a Material-Adverse Event or (b) violate the provisions of
its charter, articles of incorporation, bylaws, or partnership agreement, as
applicable, or repeal, replace or amend any provision of its charter, articles
of incorporation, bylaws, or partnership agreement, as applicable. if any such
action is a Material-Adverse Event.
8.11 GOVERNMENT REGULATIONS. No Company may directly or indirectly conduct
----------------------
its business in a way that it becomes regulated under the Investment Company Act
of 1940.
8.12 SUBORDINATED DEBT.
-----------------
(a) No Company may prepay or cause to be prepaid any principal of, or
any interest on, any of its Subordinated Debt (including, without
limitation, any optional redemption or payments due upon certain designated
events) except (i) conversions of Subordinated Debt to equity of Borrower
that is not mandatorily redeemable, (ii) exchanges of Subordinated Debt for
Subordinated Debt, and (iii) prepayment of Subordinated Debt with the
proceeds of the issuance of additional Subordinated Debt or common stock
issued by Borrower.
(b) No Company may amend or modify the terms of any Subordinated Debt
to any extent that (i) any of the applicable subordination, payment
blockage, or standstill provisions are less favorable to Lenders than
exists for the Subordinated Debt theretofore approved by Determining
Lenders, (ii) the applicable representations, covenants, events of default,
and other provisions are significantly more onerous to the obligor than
exists for the Subordinated Debt theretofore approved by Determining
Lenders, or (iii) scheduled or mandatory principal or sinking fund payment
obligations before one year after the then-effective Stated-Termination
Date are made applicable to any Subordinated Debt.
8.13 NEW BUSINESSES. No Company may directly or indirectly engage in any
--------------
business except the businesses in which it or any of its Affiliates is presently
engaged and any other reasonably-related business.
8.14 ASSIGNMENT. Except as allowed in Section 11.12(a), no Company may
----------
directly or indirectly assign or transfer any of its Rights, duties, or
obligations under any of the Loan Documents.
SECTION 9. FINANCIAL COVENANTS. For so long as any Lender is committed to lend
- --------- -------------------
under this agreement and until the Obligation has been fully paid and performed,
Borrower covenants and agrees with Agent and Lenders, without first obtaining
Determining Lender's consent to the contrary, it may not directly or indirectly
permit any of the following to occur or to exist, as measured at the end of each
of the Companies' fiscal quarters included below:
9.1 ADJUSTED-NET WORTH. For each quarter ending on or after June 30,
------------------
1997, the Companies' Adjusted-Net Worth to be less than the sum of (a)
$5,000,000 plus (ii) 100% of the Companies' cumulative Net Income (without
deduction for losses) after April 30, 1997, plus (iii) 100% of the net (i.e.,
gross proceeds less usual and customary underwriting, placement, and other
related costs and expenses) proceeds of the issuance (upon sale, conversion, or
otherwise other than conversion of Subordinated Debt to equity) of any equity
securities by Borrower after February 28, 1997.
27
<PAGE>
9.2 ADJUSTED DEBT/ADJUSTED-NET WORTH. For each quarter ending on or
---------------------------------
after September 30, 1997, the ratio of the Companies' total Debt (less any
Subordinated Debt not due within one year from the date of determination) to
Adjusted-Net Worth to exceed 6.0 to 1.0.
9.3 EBITDA/INTEREST EXPENSE. For each quarter ending on or after September
-----------------------
30, 1997, the ratio of the Companies' EBITDA to its Interest Expense to be less
than 1.4 to 1.0 for (a) the quarter ending June 30, 1997, (b) the two quarters
ending September 30, 1997, (c) the three quarters ending December 31, 1997, and
(d) for each four-consecutive-quarterly periods ending after December 31, 1997.
9.4 PRODUCTION. The amount of new loans to its customers booked by
----------
Borrower during any calendar month ending at least 90 days after the Closing
Date to be less than $13,000,000.
SECTION 10. DEFAULTS AND REMEDIES.
- ---------- ---------------------
10.1 Default. The term "Default" means the existence or occurrence of any
-------
one or more of the following:
(a) OBLIGATION. Any Company fails to pay (i) any interest on the
----------
Obligation when due under the Loan Documents and that failure continues for
five days or (ii) any other part of the Obligation when due under the Loan
Documents.
(b) COVENANTS. Any Company's failure or refusal to punctually and
---------
properly perform, observe, and comply with any covenant -- other than as
described in clause (a) above -- applicable to it in:
(i) Sections 7.2, 7.7(a), 8.5, 8.6, 8.7, 8.12, 9.1, 9.2, 9.3,
or 9.4;
(ii) Sections 7.9, 8.1, 8.2, 8.3, or 8.8 if that failure or
refusal was inadvertent, is not a Material-Adverse Event, is
susceptible of cure, and is cured within ten days after the earlier
of either any Company knows of it or any Company is notified of it by
either Agent or any Lender; or
(iii) Any other provision of any Loan Document, if that failure
or refusal continues for 20 days after the earlier of either any
Company knows of it or any Company is notified of it by either Agent
or any Lender.
(c) MISREPRESENTATION. Any material statement, warranty, or
-----------------
representation by or on behalf of any Company in any Loan Document or other
writing authored by any Company and furnished in connection with the Loan
Documents, proves to have been incorrect or misleading in any material
respect as of the date made or deemed made.
(d) DEBTOR LAW. Any Company (i) is not Solvent, (ii) fails to pay its
----------
Debts generally as they become due, (iii) voluntarily seeks, consents to,
or acquiesces in the benefit of any Debtor Law, or (iv) becomes a party to
or is made the subject of any proceeding provided for by any Debtor Law
(other than as a creditor or claimant) that could suspend or otherwise
adversely affect the Rights of Agent or any Lender granted in the Loan
Documents unless, if the proceeding is involuntary, the applicable
petition is dismissed within 60 days after its filing.
28
<PAGE>
(e) OTHER DEBT. Any Company fails to make any payment due on any Debt
----------
or security (with respect to which any Company has redemption, sinking
fund, or other purchase obligations) or any event occurs or any condition
exists in respect of any Debt or security of any Company, the effect of
which is (i) to cause or to permit any holder of that Debt or security or a
trustee to cause (whether or not it elects to cause) any of that Debt or
security to become due before its stated maturity or its regularly
scheduled payment dates, or (ii) to permit a trustee or the holder of any
security (other than common stock of any Company) to elect (whether or not
it does elect) a majority of the directors on the board of directors of
that Company.
(f) JUDGMENTS. Any Company fails to pay any money judgment against it
---------
at least ten days prior to the date on which any of the assets of that
Company may be lawfully sold to satisfy that judgment.
(g) ATTACHMENTS. The failure to have discharged within a period of 30
-----------
days after the commencement of any attachment, sequestration, or similar
proceeding against any of the assets of any Company.
(h) UNENFORCEABILITY. Any material provision of any Loan Document for
----------------
any reason ceases to be in full force and effect or is fully or partially
declared null and void or unenforceable or the validity or enforceability
of any Loan Document is challenged or denied by any Company.
(i) CHANGE OF CONTROL. Except as otherwise approved by Agent in
-----------------
writing prior to any such change, any change in the ownership or management
of Borrower from that ownership and management as it exists on the date of
this agreement.
(j) CONVERTIBLE PROMISSORY NOTES. The Convertible Promissory Notes
----------------------------
described on SCHEDULE 8.1 are not fully converted to 1,800,000 shares of
Borrower's Common Stock, $0.01 par value per share, by no later than May
31, 1997.
10.2 REMEDIES.
--------
(a) DEBTOR LAW. Upon the occurrence of a Default under SECTION
----------
10.1(D), the commitments of Lenders to extend credit under this agreement
automatically terminate and the full Obligation is automatically due and
payable, without presentment, demand, notice of default, notice of the
intent to accelerate, notice of acceleration, or other requirements of any
kind, all of which are expressly waived by Borrower.
(b) OTHER DEFAULTS. While a Default exists -- other than those
--------------
described in CLAUSE (A) above -- Agent may and, upon the direction of
Determining Lenders, shall declare the Obligation to be immediately due and
payable, whereupon it shall be due and payable, whereupon the commitments
of Lenders to extend credit under this agreement are then automatically
terminated.
(c) OTHER REMEDIES. Following the termination of the commitments of
--------------
Lenders to extend credit under this agreement and the acceleration of the
Obligation, Agent may (and, at the direction of Determining Lenders, shall)
do any one or more of the following: Reduce any claim to judgment;
foreclose upon or otherwise enforce any Lender Liens; and exercise any
other Rights in the Loan Documents, at Law, in equity, or otherwise that
Determining Lenders may direct. Should any Default continue that, in
Agent's opinion, materially and adversely affects the Collateral or the
interests of the Lenders under this agreement, Agent may, in a notice to
the
29
<PAGE>
Lenders of that Default set forth one or more actions that Agent, in its
opinion, believes should be taken. Unless otherwise directed by Determining
Lenders (excluding the Lender serving as Agent) within ten days following
the date of the notice setting forth the proposed action or actions, Agent
may, but shall not be obligated to, take the action or actions set forth in
that notice.
10.3 RIGHT OF OFFSET. Each Company hereby grants to Agent and to each
---------------
Lender a right of offset, to secure the repayment of the Obligation, upon any
and all monies, securities, or other property of each Company, and the proceeds
therefrom now or hereafter held or received by or in transit to Agent or such
Lender from or for the account of each Company, whether for safekeeping,
custody, pledge, transmission, collection, or otherwise, and also upon any and
all deposits (general or special, time or demand, provisional or final) and
credits of each Company, and any and all claims of any Company against Agent or
such Lender, at any time existing. Upon the occurrence of any Default, Agent and
each Lender are authorized at any time and from time to time, without notice to
any Company, to offset, appropriate, and apply any and all of those items
against the Obligation, subject to SECTION 3.6. Notwithstanding anything in this
section or elsewhere in this agreement to the contrary, neither Agent nor any
other Lender shall have any right to offset, appropriate, or apply any accounts
of any Company which consist of escrowed funds (except and to the extent of any
beneficial interest which any Company has in such escrowed funds) which have
been so identified by any Company in writing at the time of deposit thereof.
10.4 WAIVERS. Each Company waives any right to require Agent to (a)
-------
proceed against any Person, (b) proceed against or exhaust any of the Collateral
or pursue its Rights and remedies as against the Collateral in any particular
order, or (c) pursue any other remedy in its power. Agent shall not be required
to take any steps necessary to preserve any Rights of any Company against any
Person from which any Company purchased any Mortgage Loans or to preserve Rights
against prior parties. Each Company and each surety, endorser, guarantor,
pledgor, and other party ever liable or whose property is ever liable for
payment of any of the Obligation jointly and severally waive presentment and
demand for payment, protest, notice of intention to accelerate, notice of
acceleration, and notice of protest and nonpayment, and agree that their or
their property's liability with respect to the Obligation, or any part thereof,
shall not be affected by any renewal or extension in the time of payment of the
Obligation, by any indulgence, or by any release or change in any security for
the payment of the Obligation, and hereby consent to any and all renewals,
extensions, indulgences, releases, or changes, regardless of the number thereof.
10.5 PERFORMANCE BY AGENT. Should any covenant, duty, or agreement of any
--------------------
Company fail to be performed in accordance with the terms of this agreement or
of any document delivered under this agreement (and any applicable grace period
shall have expired), Agent may, at its option, after notice to Borrower,
perform, or attempt to perform, such covenant, duty, or agreement on behalf of
that Company and shall notify each Lender that it has done so. In such event,
any Company shall jointly and severally, at the request of Agent, promptly pay
any amount expended by Agent in such performance or attempted performance to
Agent at its principal place of business, together with interest thereon at the
Maximum Rate from the date of such expenditure by Agent until paid.
Notwithstanding the foregoing, it is expressly understood that Agent does not
assume and shall never have, except by express written consent of Agent, any
liability or responsibility for the performance of any duties of any Company
under this agreement or under any other document delivered under this agreement.
10.6 NO RESPONSIBILITY. Except in the case of fraud, gross negligence, or
-----------------
willful misconduct, neither Agent nor any of its officers, directors, employees,
or attorneys shall assume -- or ever have any liability or responsibility for --
any diminution in the value of the Collateral or any part of the Collateral.
30
<PAGE>
10.7 NO WAIVER. The acceptance by Agent or any Lender at any time and from
---------
time to time of partial payment or performance by any Company of any of their
respective obligations under this agreement or under any Loan Document shall not
be deemed to be a waiver of any Default then existing. No waiver by Agent or any
Lender shall be deemed to be a waiver of any other then existing or subsequent
Default. No delay or omission by Agent or any Lender in exercising any right
under this agreement or under any other document required to be executed under
or in connection with this agreement shall impair such right or be construed as
a waiver thereof or any acquiescence therein, nor shall any single or partial
exercise of any such right preclude other or further exercise thereof, or the
exercise of any other right under this agreement or otherwise.
10.8 CUMULATIVE RIGHTS. All Rights available to Agent and the Lenders
-----------------
under this agreement or under any other document delivered under this agreement
shall be cumulative of and in addition to all other Rights granted to Agent and
the Lenders at Law or in equity, whether or not the Notes be due and payable and
whether or not Agent shall have instituted any suit for collection, foreclosure,
or other action in connection with this agreement or any other document
delivered under this agreement.
10.9 RIGHTS OF INDIVIDUAL LENDERS. No Lender shall have any right by
----------------------------
virtue of, or by availing itself of, any provision of this agreement to
institute any actions or proceedings at Law, in equity, or otherwise (excluding
any actions in bankruptcy), upon or under or with respect to this agreement, or
for the appointment of a receiver, or for any other remedy under this agreement,
unless (a) the Determining Lenders previously shall have given to Agent written
notice of a Default and the continuance thereof, including a written request
upon Agent to institute such action or proceedings in its own name and offering
to indemnify Agent against the costs, expenses and liabilities to be incurred
therein or thereby, (b) Agent, for ten Business Days after its receipt of such
notice, shall have failed to institute any such action or proceeding, and (c) no
direction inconsistent with such written request shall have been given to Agent
by Determining Lenders. It is understood and intended, and expressly covenanted
by the taker and holder of every Note with every other taker and holder and
Agent, that no one or more holders of Notes shall have any right in any manner
whatever by virtue, or by availing itself, of any provision of this agreement to
affect, disturb or prejudice the Rights of any other Lenders, or to obtain or
seek to obtain priority over or preference to any other such Lender, or to
enforce any right under this agreement, except in the manner herein provided and
for the equal, ratable and common benefit of all Lenders. For the protection and
enforcement of the provisions of this SECTION 10.9, each and every Lender and
Agent shall be entitled to such relief as can be given either at law or in
equity.
10.10 NOTICE TO AGENT. Should any Default or Potential Default occur and
---------------
be continuing, any Lender having actual knowledge thereof shall notify Agent and
Borrower of the existence thereof, but the failure of any Lender to provide that
notice shall not prejudice that Lender's Rights under this agreement.
10.11 COSTS. All court costs, reasonable attorneys' fees, other costs of
-----
collection, and other sums spent by Agent or any Lender in the exercise of any
Right provided in any Loan Document is payable to Agent or that Lender, as the
case may be, on demand, is part of the Obligation, and bears interest at the
Default Rate from the date paid by Agent or any Lender to the date repaid by any
Company.
31
<PAGE>
SECTION 11. MISCELLANEOUS.
- ----------- -------------
11.1 NONBUSINESS DAYS. Any action that is due under any Loan Document on a
----------------
non-Business Day may be delayed until the next Business Day. However, interest
accrues on any payment until it is made.
11.2 COMMUNICATIONS. Unless otherwise stated, a communication under any
--------------
Loan Document to a party to this agreement must be written to be effective and
is deemed given:
. For Borrowing Requests, Collateral Delivery-Notices, Shipping
Requests, and Release Requests, only when actually received by Agent.
. Otherwise, if by fax, when transmitted to the appropriate fax number
-- but, without affecting the date deemed given, the fax must be
promptly confirmed by telephone.
. Otherwise, if by mail, on the third Business Day after enclosed in a
properly addressed, stamped, and sealed envelope deposited in the
appropriate official postal service.
. Otherwise, when actually delivered.
Until changed by written notice to each other party to this agreement, the
address and fax number are stated for (a) Borrower and Agent, beside their names
on the signature pages below, and (b) each Lender, beside its name on SCHEDULE
2.
11.3 FORM AND NUMBER OF DOCUMENTS. The form, substance, and number of
----------------------------
counterparts of each writing to be furnished under the Loan Documents must be
satisfactory to Agent and its counsel.
11.4 EXCEPTIONS TO COVENANTS. An exception to any Loan Document covenant
-----------------------
does not permit violation of any other Loan Document covenant.
11.5 SURVIVAL. All Loan Document provisions survive all closings and are
--------
not affected by any investigation made by any party.
11.6 GOVERNING LAW. Unless otherwise stated, each Loan Document must be
-------------
construed -- and its performance enforced -- under the Laws of the State of
Texas and the United States of America.
11.7 INVALID PROVISIONS. If any provision of a Loan Document is judicially
------------------
determined to be unenforceable, all other provisions of it remain enforceable.
If the provision determined to be unenforceable is a material part of that Loan
Document, then, to the extent lawful, it shall be replaced by a judicially-
construed provision that is enforceable but otherwise as similar in substance
and content to the original provision as the context of it reasonably allows.
11.8 CONFLICTS BETWEEN LOAN DOCUMENTS. The provisions of this agreement
--------------------------------
control if in conflict (i.e., the provisions contradict each other as opposed to
a Loan Document containing additional provisions not in conflict) with the
provisions of any other Loan Document.
11.9 DISCHARGE AND CERTAIN REINSTATEMENT. The Companies' obligations under
-----------------------------------
the Loan Documents remain in full force and effect until no lender has any
commitment to extend credit under the
32
<PAGE>
Loan Documents and the Obligation is fully paid (except for provisions under the
Loan Documents which by their terms expressly survive payment of the Obligation
and termination of the Loan Documents). If any payment under any Loan Document
is ever rescinded or must be restored or returned for any reason, then all
Rights and obligations under the Loan Documents in respect of that payment are
automatically reinstated as though the payment had not been made when due.
11.10 AMENDMENTS, CONSENTS, CONFLICTS, AND WAIVERS. An amendment of -- or
--------------------------------------------
an approval, consent, or waiver by Agent or by one or more Lenders under -- any
Loan Document must be in writing and must be:
(a) Executed by Borrower and Agent if it purports to reduce or
increase any fees payable to Agent by Borrower.
(b) Executed by Borrower and Agent and executed or approved in
writing by all Lenders if action of all Lenders is specifically provided in
any Loan Document or if it purports to (i) except as otherwise stated in
this SECTION 11.10, extend the due date or decrease the scheduled amount of
any payment under -- or reduce the rate or amount of interest, fees, or
other amounts payable to Agent or any Lender under -- any Loan Document,
(ii) change the definition of Borrowing Base (or any component of it),
Commitment Percentage, Determining Lenders, Eligible-Mortgage Collateral,
Market Value, Stated-Termination Date, or Termination Percentage, or (iii)
partially or fully release any Guaranty or any Collateral except releases
of Collateral contemplated in this agreement.
(c) Otherwise (i) for this agreement, executed by Borrower, Agent,
and Determining Lenders, or (ii) for other Loan Documents, approved in
writing by Determining Lenders and executed by Borrower, Agent, and any
other party to that Loan Document.
No course of dealing or any failure or delay by Agent, any Lender, or any of
their respective Representatives with respect to exercising any Right of Agent
or any Lender under the Loan Documents operates as a waiver of that Right. An
approval, consent, or waiver is only effective for the specific instance and
purpose for which it is given. The Loan Documents may only be supplemented by
agreements, documents, and instruments delivered according to their respective
express terms.
11.11 MULTIPLE COUNTERPARTS. Any Loan Document may be executed in any
---------------------
number of counterparts with the same effect as if all signatories had signed the
same document, and all of those counterparts must be construed together to
constitute the same document. This agreement is effective when counterparts of
it have been executed and delivered to Agent by each Lender, Agent, and Borrower
or, in the case only of those Lenders, when Agent has received faxed or other
evidence satisfactory to it that each Lender has executed and is delivering to
Agent a counterpart of it.
11.12 PARTIES. This agreement binds and inures to Borrower, each Lender,
-------
Agent, and their respective successors and permitted assigns. Only those Persons
may rely upon or raise any defense about this agreement.
(a) ASSIGNMENT BY COMPANIES; ASSUMPTIONS BY NEW COMPANIES. No Company
-----------------------------------------------------
may assign any Rights or obligations under any Loan Document without first
obtaining the written consent of Agent.
33
<PAGE>
(b) ASSIGNMENT BY LENDER. Any Lender may assign, pledge, and
--------------------
otherwise transfer all or any of its Rights and obligations under the Loan
Documents either (i) to a Federal Reserve Bank without the consent of any
party to this agreement so long as that Lender is not released from its
obligations under the Loan Documents, or (ii) otherwise in the ordinary
course of its lending business and in accordance with all Laws, with the
Lenders' Agreement, and with SECTION 11.13 or 11.14 so long as (A) except
for assignments, pledges, and other transfers by a Lender to its
Affiliates, the written consent of Borrower, and Agent, which may not be
unreasonably withheld, must be first obtained, (B) the assignment or
transfer (other than a pledge) does not involve a purchase price that
directly or indirectly reflects a discount from face value unless that
Lender first offered that assignment or transfer to the other Lenders on
ratable basis according to their Commitment Percentages, (C) neither
Borrower nor Agent are required to incur any cost or expense incident to
any assignment, pledge, or other transfer by any Lender, all of which are
for the account of the assigning, pledging, or transferring Lender and its
assignee, pledgee, or transferee as they may agree, and (D) if the
Participant or Purchaser is organized under the Laws of any jurisdiction
other than the United States of America or any of its states, it complies
with SECTION 3.9.
(c) OTHERWISE VOID. Any purported assignment, pledge, or other
--------------
transfer in violation of this section is void from beginning and not
effective.
11.13 PARTICIPATIONS. Subject to SECTION 11.12(B) and this section and
--------------
only if no Default exists, a Lender may at any time sell to one or more Persons
(each a "Participant") participating interests in its Commitment and its share
of the Obligation.
(a) ADDITIONAL CONDITIONS. For each participation (i) the selling
---------------------
Lender must remain -- and the Participant may not become -- a "Lender"
under this agreement, (ii) the selling Lender's obligations under the Loan
Documents must remain unchanged, (iii) the selling Lender must remain
solely responsible for the performance of those obligations, (iv) the
selling Lender must remain the holder of its one or more Notes and its
share of the Obligation for all purposes under the Loan Documents, and (v)
Borrower and Agent may continue to deal solely and directly with the
selling Lender in connection with those Rights and obligations.
(b) PARTICIPANT RIGHTS. The selling Lender may obtain for each of its
------------------
Participants the benefits of the Loan Documents related to participations
in its share of the Obligation, but Borrower are never obligated to pay any
greater amount that would be due to the selling Lender under the Loan
Documents calculated as though no participation had been made. Otherwise,
Participants have no Rights under the Loan Documents except certain
permitted voting Rights described below.
(c) PARTICIPATION AGREEMENTS. An agreement for a participating
------------------------
interest (i) may only provide to a Participant voting Rights in respect of
any amendment of or approval, consent, or waiver under any Loan Document
related to the matters in SECTION 11.10(B) if it also provides for a voting
mechanism that a majority of that selling Lender's Commitment Percentage or
Termination Percentage, as the case may be (whether directly held by that
selling Lender or Participant) controls the vote for that selling Lender,
and (ii) may not permit a Participant to assign, pledge, or otherwise
transfer its participating interest in the Obligation to any Person except
any Lender or its Affiliates.
34
<PAGE>
11.14 TRANSFERS. Subject to SECTION 11.12(b) and this section and only if
---------
no Default exists, a Lender may at any time sell to one or more financial
institutions (each a "PURCHASER") all or part of its Rights and obligations
under the Loan Documents.
(a) ADDITIONAL CONDITIONS. The sale (i) must be accomplished by the
---------------------
selling Lender and Purchaser executing and delivering to Agent and Borrower
an assignment and assumption agreement provided for by the Lenders'
Agreement, and (ii) may not occur until the selling Lender pays to Agent an
administrative-transfer fee of $2,500.
(b) PROCEDURES. Upon satisfaction of the foregoing conditions and as
----------
of the Effective Date in the assignment and assumption agreement, which may
not be before delivery of that document to Agent and Borrower, then (i) a
Purchaser is for all purposes a Lender party to -- with all the Rights and
obligations of a Lender under -- this agreement, with a Commitment as
stated in the assumption agreement, (ii) the selling Lender is released
from its obligations under the Loan Documents to a corresponding extent,
(iii) SCHEDULE 2 is automatically deemed to reflect the name, address, and
Commitment of the Purchaser and the reduced Commitment of the selling
Lender, and Agent shall deliver to Borrower and Lenders an amended SCHEDULE
2 reflecting those changes, (iv) Borrower shall execute and deliver to each
of the selling Lender and the Purchaser a Note, each based upon their
respective Commitments following the transfer, (v) upon delivery of the one
or more Notes under CLAUSE (iv) above, the selling Lender shall return to
the appropriate Company all Notes previously delivered to it under this
agreement, and (vi) the Purchaser is subject to all the provisions in the
Loan Documents, the same as if it were a Lender that executed this
agreement on its original date.
11.15 ENTIRE AGREEMENT. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
----------------
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE(S) FOLLOW.
35
<PAGE>
EXECUTED as of the date first stated in this agreement.
<TABLE>
(address)
<S> <C>
Pioneer Commercial Funding Corp. PIONEER COMMERCIAL FUNDING
6650 Reseda Blvd., Suite 108 CORP. as Borrower
Reseda, CA 91335
Attn: Glenda S. Klein, Senior By /s/ M.A. Nissim
Vice President -------------------------------
Tel: (818) 776-0590 M. Albert Nissim, President
FAX: (818) 776-0004
(wire transfer)
Account # 1825160334
Bank: Bank One, Dallas
ABA# 111000614
Attn: Gloria Sadler (214) 290-6069
Ref: Pioneer Commercial Funding Corp.
Funding Account
(address) BANK ONE, TEXAS, N.A., as Agent and the
sole Lender
BANK ONE, TEXAS, N.A.
1717 Main Street
Dallas, TX 75201 By /s/ Paul J. Lazusky
Attn: Paul J. Lazusky, Vice President --------------------------------------
Tel: (214) 290-2153 Paul J. Lazusky, Vice President
Fax: (214) 290-2054
(wire transfer)
Account # 1825160375
Bank: Bank One, Dallas
ABA# 111000614
Attn: Gloria Sadler (214) 290-6069
Ref: Pioneer Commercial Funding Corp.
Settlement Account
</TABLE>
SIGNATURE PAGE
<PAGE>
EXHIBIT 21
----------
LIST OF SUBSIDIARIES
--------------------
Pioneer Home Funding, L.L.C, a California limited liability company doing
business as Pioneer Home Funding.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF OPERATIONS FILED AS PART OF THE COMPANY'S ANNUAL REPORT
ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 2,704,076
<SECURITIES> 0
<RECEIVABLES> 2,456,154
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,221,854
<PP&E> 600,896
<DEPRECIATION> 414,100
<TOTAL-ASSETS> 5,433,650
<CURRENT-LIABILITIES> 378,055
<BONDS> 0
0
0
<COMMON> 36,423
<OTHER-SE> 12,525,952
<TOTAL-LIABILITY-AND-EQUITY> 5,433,650
<SALES> 0
<TOTAL-REVENUES> 329,425
<CGS> 0
<TOTAL-COSTS> 279,756
<OTHER-EXPENSES> 702,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,712
<INCOME-PRETAX> (653,132)
<INCOME-TAX> 3,169
<INCOME-CONTINUING> (617,754)
<DISCONTINUED> 0
<EXTRAORDINARY> 614,459
<CHANGES> 0
<NET-INCOME> (1,232,213)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> (.88)
</TABLE>
