UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from March 31, 1997 to December
31, 1997
Commission file number 0-24940
PIONEER COMMERCIAL FUNDING CORP.
(Name of small business issuer in its charter)
New York 13-3763437
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification No.)
21700 Oxnard Street, Woodland Hills, CA 91367
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (818) 346-1921
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which
registered
Common Stock NASDAQ
Warrants NASDAQ
Securities registered under Section 12(g) of the Exchange Act:
(Title of Class)
(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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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. $3,115,750
As of March 17, 1998, there were 5,542,272 shares of the
Registrant's common stock, $.01 par value, issued and outstanding
of which 2,519,559 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 $6,298,898. 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. As
of March 17, 1998 there were 5,542,272 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following exhibits are incorporated by reference to the
Registrant's Annual Report on Form 10KSB filed for the year ended
March 31, 1997 or to the Company's Registration Statement on Form
SB-2, Registration No. 33-82838 NY.
Exhibit
Number Description
3.1 Certificate of Incorporation
3.2 Certificate of Amendment of the Company's
Certificate of Incorporation
3.3 Certificate of Amendment of Certificate of
Incorporation of the Company
3.4 By-Laws of the Company
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10.1 Credit Agreement between Bank One, Texas, N.A.
and the Company
10.2 Revolving Line of Credit and Security Agreement
between UMB Bank and Trust Company and the
Company, as amended
10.3 Employment Agreement for Glenda S. Klein, dated
April 1, 1995
10.4 The Company's Non-Qualified Stock Option Plan
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PART I
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 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.
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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. On November
26,1997 a private investor purchased an option for $9,000 to
acquire 100,000 common shares at $2.41 per share. On January 21,
1998 the option was exercised and 100,000 common shares were issued
for a purchase price of $241,000.
General
The Company is a mortgage warehouse lender providing
short-term (generally 10-90 days with an average of 26 days per
loan) financing to small and 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 and 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 owner and non-owner
occupied residential Properties (maximum four units).
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
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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 90 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 any 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 increased to
a range of 1.625% to 2.00% 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
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the loan was repaid within 60 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 $225 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
provided the Company with a $25,000,000 revolving line of credit
(the "Bank One Credit Line") and the Company paid 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 Credit Line and
all mortgages or other forms of collateral securing the funding of
such loans. On August 25,1997, Bank One amended the credit
facility that it provides to the Company to $35,000,000. On
September 26,1997 and December 12, 1997 the facility was increased
to $50,000,000 and $60,000,000, respectively.
Prior to the Credit Agreement with Bank One, the Company had
a line of credit with United Mizrahi Bank ("UMB"). The UMB credit
line was paid in full by the Company in February 1997.
The Company's Mortgage Banking Company Customers
During the 1996 fiscal year, the Company funded 643 loans
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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 funded
for the third customer, which accounted for 23.2% of the Company's
fundings.
At December 31, 1997, the Company had 46 mortgage banking
company customers. During the period April 1, through December 31,
1997, the Company funded 4,824 mortgage warehouse loans for an
aggregate dollar volume of $311.0 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
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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
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 will have all of the data and
documentation necessary to sell the loan to another Financial
Institution to a mortgage loan originator if, for any reason, a
Financial Institution refuses to accept and pay for a loan
subsequent to the closing thereof.
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 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
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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 nine
months ended December 31, 1997 and 1996 and 1995 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 nine month period ended December 31, 1997 and
1996 and 1995 fiscal years, the Company invested approximately
$52,235, $14,000 and $4,805, respectively, for development and
modification of the CTS to meet the Company's needs.
The Year 2000 Issue.
Management has assessed the year 2000 issue and has determined
that the estimated cost will not be material and this issue will
not impair the Companys ability to operate.
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
loans (loans which are not sold to the Agencies) and home equity
loans.
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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 accounts for this investment on the equity
method. The agreement provides that the Company and MFC would
maintain a 80 percent and a 20 percent ownership interest,
respectively. An amendment to the agreement was made on October 31,
1997. This amendment provides that the Company would contribute
$40,000 for a 20 percent interest in PHF. In addition, the Company
may from time to time make loans to PHF as needed. Under this
agreement the Company has the option to convert loans made to PHF
into an 80 percent interest in PHF. As of December 31, 1997 the
Company has made advances to PHF totaling $224,476.
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. This 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
At December 31, 1997 the Company employed fifteen 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. The Company plans to
sublease this space. On October 17,1997, the Company entered into
a ten year lease to rent 6,846 square feet on the sixteenth floor
of an office building at 21700 Oxnard Street, Woodland Hills,
California. The monthly base rent during year one through five is
$13,692 and for years six through ten is $15,745.
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
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:
Quarter Ended High Low
September 30, 1996 $ 4.875 $2.375
December 31, 1996 $ 2.75 $ 1.38
March 31, 1997 $ 3.00 $ 0.78
June 30, 1997 $ 2.50 $ 1.25
September 30, 1997 $ 2.8125 $1.875
December 31, 1997 $ 2.875 $ 1.50
As of December 31, 1997, there were approximately 32 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
December 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 Securities and Exchange Act of 1934, as
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mended. 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
The Company commenced active operations on June 14, 1993
following its emergence from Chapter 11 bankruptcy proceedings.
The Company did not engage in any substantial mortgage warehouse
lending activities from the time it emerged from bankruptcy
through March 31, 1997. During the nine months ended December 31,
1997 the Company significantly increased its financing facility
and began the process of evaluating many new customer
relationships. On March 31, 1997 the Company entered into a
credit agreement with Bank One on August 25,1997, Bank One
amended the credit facility that it provides to the Company to
$35,000,000. On September 26,1997 and December 12, 1997 the
facility increased to $50,000,000 and $60,000,000, respectively.
As of December 31, 1997, the Company had 46 customers and
during the nine months then ended had funded 4,824 loans with an
aggregate value of $311.0 million.
Management believes that the diversity and breadth of the
Company's current customers and its expanded financing resources
make it unlikely that any one event or a decline in business
conditions in a particular market would have a severe impact on
the Company's operating results.
Results of Operations for Nine-Month Period Ended December 31,
1997 compared to the fiscal year 1996
Revenues: The Company's revenues increased to $3,115,750
during the nine month period ending December 31, 1997, from
$329,425 for the 1996 fiscal year. This increase in revenue is
attributable to an increase in the volume of loans funded. The
nine-month aggregate loan volume for the period ended December
31, 1997 was $311 million (4,824 loans) as compared to fiscal
year 1996 loan volume of $60.9 million (764 loans). Attending
this increase in loan volume is a corresponding increase in the
interest component of revenues (interest charged customers.).
Interest revenue increased to $2,163,182 for the nine months
ended December 31, 1997 from the fiscal year 1996 level of
$260,550, processing fees increased from $62,178 in the 1996
fiscal year to $842,654 for the nine-month period ending December
31, 1997.
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Direct Costs: The Company's direct costs consist of interest
and other charges that it pays to its revolving credit line
providers. The Company's interest and fee charges for the nine-
month period ended December 31, 1997 were $1,737,215 as compared
to $279,756 (inclusive of $42,385 bridge financing expense) for
the fiscal year 1996. This increase is attributable to the
increase in loan funding volume.
During the nine-month period ended December 31, 1997, the
Company financed a total of 4,824 loans aggregating $311,000,000
in the weighted average principal amount of $64,879, for an
average duration of 26 days per borrowing including 4,448 funded
through bank borrowings aggregating $286.7 million weighted
average principal amount of $ 67,456 for an average duration of
26 days.
In fiscal year 1996 the Company funded 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 and the increase in
the average duration period are primarily due to expanded product
mix and customer base. The Company's product mix now includes
home equity loans and its customer base includes companies
located in regions where there are lower priced homes.
Operating Expenses: Operating expenses increased from
$702,801 in the 1996 fiscal year to $919,005 during the nine
month period ending December 31, 1997.
Operating expenses in the 1996 fiscal year included $188,882
of salaries and benefits paid to executives and others, and
$112,065 of depreciation and amortization, compared to $370,077
of salaries and benefits to executives, others and $36,421
depreciation and amortization expense in the nine months ending
December 31, 1997.
Accounting and legal fees in the 1996 fiscal year amounted
to $191,513 compared to $127,136 in the nine-month period ended
December 31, 1997. The accounting and legal fee expenses for
fiscal year 1996 were primarily attributable to the expanded
reporting requirements of the Company as a publicly held
corporation.
It is anticipated that aggregate operating expenses will
continue to 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.
Net Income Versus Net Loss:
The Company earned net income of $529,743 for the nine-month
period ended December 31, 1997, which included $459,530 in income
from operations and $71,362 in other income; compared to a loss
of $1,232,213 in the 1996 fiscal year. The fiscal year 1996
results represented a loss from operations of $653,132 and non-
operating charges to income totaling $614,459 which includes
$285,931, for costs incurred in connection with a proposed
secondary public offering not consummated, and approximately
$328,528 of other financing related costs.
Cash Flows:
Operating Activities: During the nine-month period ended
December 31, 1997 the Company utilized $50.42 million in cash in
its operating activities primarily as a result of an increase in
Warehouse receivables of $44.83 million. The increase in
warehouse receivables is considered a use of cash. In fiscal year
1996 where net cash provided by operations was $49,805 despite a
loss of $1.2 million. The company was able to report an increase
in cash from operations during fiscal 1996 primarily because its
mortgage receivables declined by $1.05 million. A decline in
mortgage receivables is considered a generator of cash for the
purpose of the statement of cash flows.
Investing Activities: The primary investing activity for
which cash was used in the nine-month period ended December 31,
1997 was the investment in the publicly traded stock of Fidelity
First Mortgage Corp. ($225,000) deposit on furniture and fixtures
($321,260) and investment in and advances to joint venture
($264,476). Net cash used in investing activities was $903,068 in
the nine-month period ended December 1, 1997 and $80,871 in
fiscal 1996.
Financing Activities: Net cash provided by financing
activities amounted to $51 million for the nine-month period
ended December 31, 1997 and $2.6 million in fiscal 1996. The
increase in cash flow from financing activities for the nine-
month period ended December 31, 1997 was primarily due to the
increase in short term debt of $60 million. Net cash provided in
fiscal year 1996 was primarily attributable to the initial public
offering consumated on August 16, 1996, at which time 600,000
shares of common stock and 690,000 warrants were issued providing
approximately $2.0 million; and to a private placement of
securities with eight investors who invested an aggregate of $4
million ( 2.2 million shares of common stock and $1.8 million
convertible promissory notes of the Company).
Liquidity and Capital Resources:
As of December 31, 1997, Bank One made available to the
Company a $60 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
15
<PAGE>
$6.7 million (after giving effect to the exercise of the option
to purchase 100,000 of common stock at the exercise price of
$2.41 per share in January, 1998). Management believes that such
capital will enable the Company to maintain profitable
operations.
Results of Operations for fiscal year 1996 compared to fiscal
year 1995
Revenues: The Company's revenues were $329,425 for the 1996
fiscal year, on loan volume of 764 loans with an aggregate loan
value of $60.9 million. This represents a 239% increase in the
1995 fiscal year revenues of $97,190 on loan volume of 201 loans
with an aggregate loan value of $20.5 million.
The interest and processing fee components of revenues for
fiscal year 1996 were $260,550, and $62,178, respectively. This
represented an increase over the fiscal year 1995 interest and
processing fee components of $76,957 and $15,733, respectively.
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, interest paid to its pre-IPO bridge
financing ("Bridge Financing") lenders for fiscal 1996 and 1995.
The Company's direct costs increased by 61% to $279,756 in
the 1996 fiscal year from $174,639 in fiscal year 1995. In the
1995 fiscal year, the Company's interest expense and other bank
charges paid to revolving line of credit lenders amounted to
$95,408 compared to $237,271 in fiscal 1996.
During fiscal year 1996 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. In fiscal year
1995, 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.
Interest expense on the Bridge Financing was $42,385 in
fiscal 1996 representing a reduction of 46.5% from the 1995
expense of $79,231. The Bridge Financing expense for fiscal 1996
consisted of debt discount amortization of $37,500 and deferred
issuance costs of $4,885. The Bridge Financing cost for fiscal
1995 was composed of interest of $21,163; debt discount
16
<PAGE>
amortization of
$55,244 and deferred issuance cost amortization of $2,824. In
fiscal 1996 the Company paid $128,356 in satisfaction of its
obligation to the two remaining Bridge Financing lenders upon the
closing of the IPO in August 1996. 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.
Operating Expenses: Operating expenses increased to $702,801
in the 1996 fiscal year from $433,709 in fiscal 1995. Operating
expenses in the 1996 fiscal year included $188,882 of salaries
and benefits paid to executives, former executives and others;
and $112,064 of depreciation and amortization compared to
$134,555 in salaries and benefits and $101,300 in depreciation
and amortization in fiscal 1995, of which the primary component
was $92,312 in costs attributable to the CTS system. Accounting
and legal fees in the 1996 fiscal year amounted to $191,513
compared to $114,382 in fiscal 1995. The increase in accounting
and legal fees expense was due to the expanded reporting
requirements of the Company as a publicly held corporation.
Net Losses
During the 1995 fiscal year the Company incurred net losses
of $479,803. Such losses were partly attributable to non-cash
expenses; primarily depreciation, amortization, debt discount
expenses, and deferred consulting agreement expenses totaling
$164,000. During the 1996 fiscal year the Company incurred net
losses of $1,232,213. This loss was attributable in part to
$614,459 of non-operating expenses, of which $285,931 represented
one-time only costs incurred in connection with a proposed
secondary public offering not consummated, and to other costs of
financing-related efforts. During this restart period the Company
was unable to generate sufficient loan volume, given its limited
financing facility, to offset its non-operating expenses.
Cash Flows:
Operating Activities: In fiscal year 1996, the Company's
operating activities provided cash of $49,805 compared to fiscal
year 1996 where net cash used by operations was $2.8 million. The
cash flow provided by operations for the fiscal year 1996 and the
negative cash flow for fiscal year 1995 are primarily the
consequence of the changes in the level of warehouse loans
receivable. Warehouse loans receivable is financed with short-
term borrowings; therefore, the cash so provided or utilized was
related to changes in short-term debt as discussed under
"Financing Activities".
Investing Activities: The primary investing activity for
which cash was used in fiscal year 1996 was the investment in
17
<PAGE>
fixed assets. Net cash used in investing activities was $80,871
in fiscal 1996 and $4,804 in fiscal 1995.
Financing Activities: Net cash provided by financing
activities amounted to $2.6 million for the fiscal year 1996 and
$2.4 million in fiscal 1995. The increase in cash flow in fiscal
1995 was primarily due to the increase in short term debt; and
the net cash provided in fiscal year 1996 was primarily
attributable to the initial public offering consummated on August
16, 1996, at which time 600,000 shares of common stock and
690,000 warrants were issued providing approximately $2.0 million
and to a private placement of securities with eight investors who
invested an aggregate of $4 million ( 2.2 million shares of
common stock and $1.8 million convertible promissory notes of the
Company).
18
<PAGE>
Item 7. Financial Statements
See pages F-1 to F-18
19
<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:
Name Age Position
Boaz Harel......... 34 Chairman of the Board
M. Albert Nissim... 64 President, Director
Glenda S. Klein.... 54 Director, Senior Vice
President,
Secretary, Treasurer and Chief
Financial Officer
Richard Fried...... 51 Director
Tamar Lieber....... 55 Director
Lynda Davey 43 Director
Joseph Samuels 67 Director
Boaz Harel was appointed to the Board in November 1996 and
elected as Chairman of the Board on July 2, 1997. 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.
20
<PAGE>
M. Albert Nissim was appointed as the President of the
Company in January 1997 and was elected to the Board on September
25, 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., 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.
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.
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
21
<PAGE>
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.
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.
Lynda Davey was elected to the Board on September 25, 1997.
Ms. Davey has served as the President of Avalon Group, Ltd. And
Chairman of Avalon Securities, Ltd., private investment banking
firms, since April, 1992. From April, 1988 throught 1991 Ms.
Davey was Managing Director and head of investment banking at
Tribeca Corporation, a New York merchant bank. Prior to 1988,
Ms. Davey was Vice-President of the Merchandise and Retail Group
in the corporate finance department of Salomon Brothers Inc. Ms.
Davey also serves as a director of Tuffy Associates Corp. And the
Center for Design Innovation of the Fashion Institute of
Technology. Ms. Davey is a registered architect.
Joseph Samuels has served as a president and is the sole
shareholder of Fulton Properties of Calif. Inc., an investment
corporation engaged in acquisition, development and management of
real estate for more than the past five years. Mr. Samuels has
also served as President and is the sole shareholder of Goldsboro
Properties Inc., a real estate holding corporation, for more than
the past five years.
22
<PAGE>
Item 10. Executive Compensation.
The following table sets forth compensation awarded to, earned by or
paid to executives of the Company. No executive officer of the Company
earned a salary and bonus of more than $100,000 during any one of the,
1995 and 1996 fiscal years. During such fiscal years, the Company did
not grant any restricted stock awards or stock appreciation rights to any
of its executives.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Annual Compensation Awards
Name and
Principal Position Fiscal Year Salary($) Bonus($) Other Annual Securities
Compensation ($) Underlying
Option
Boaz Harel*
Chairman of the Board 1997(1) $25,000 100,000
1996(2) 15,000
1995(3)
M. Albert Nissim**
President 1997(1) $54,000 50,000
1996(2) $14,385 90,000
1995(3)
Glenda S. Klein,
Senior Vice President 1997(1) $75,000 6,245(4)
1996(2) $98,998 172,879
1995(3) $90,000 $10,000 75,758
</TABLE>
* Commenced as Chairman on July 2, 1997.
** Commenced service as President of the Company in the fourth quarter of
the 1996 fiscal year.
(1) For the Nine Months ended December 31, 1997
(2) For Fiscal Year Ending March 31, 1997
(3) For Fiscal Year Ending March 31, 1996
(4) Represents Life Insurance premium paid per employment contract
23
<PAGE>
Compensation of Directors.
None of the Directors of the Company has received cash
compensation 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 to executive officers and Directors of
the Company.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Number of Exercise Price
Name Options Granted Per Share Expiration Date
M. Albert Nissim(1) 50,000 $5.00 October, 2000
90,000 $2.50 February, 2000
Glenda Klein(2) 248,637 $1.99 - $5.00 August, 2001
Arthur Goldberg* 75,758 $5.00 August, 2001
Elie Housman* 75,758 $5.00 August, 2001
Boaz Harel(1) 100,000 $2.375 October, 2000
15,000 $1.125 January, 2000
Richard Fried(1) 24,000 $2.125 October, 2000
15,000 $1.125 January, 2000
Tamar Lieber(1) 24,000 $2.125 October, 2000
15,000 $1.125 January, 2000
Lynda Davey(1) 24,000 $2.125 October, 2000
Joseph Samuels(1) 24,000 $2.125 October, 2000
</TABLE>
*Former officer and director.
(1) Options vested at the rate of 1/3rd each year.
(2) Of such options 228,637 are fully vested.
Employment Agreements.
In July 1997, the Company extended the Employment Agreement
with M. Albert Nissim as President for an indefinite period, on a
24
<PAGE>
part-time basis, at a salary of $6,000 per month. The Agreement
may be 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
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.
Boaz and Leedan Agreement
The Company has approved a compensation plan for Mr. Boaz
Harel and/or Leedan Business Enterprises, Ltd. ("Leedan"), the
company which provides management services to the Company by
making Mr. Harel available to the Company. Leedan is also a
principal shareholder of the Company. The plan provides aggregate
renumeration to Mr. Harel and/or Leedan of $100,000 per annum
plus 5% of the Company's net income plus tax above $1,000,000
annually. Leedan and Mr. Harel will determine how such
compensation will be divided between them.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the holdings of the Common
Stock as of March 17, 1998 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 and by (1) each
25
<PAGE>
director and named executive officer; and (2) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Number of Shares Percent
Name Title of Common Stock of Class
Leedan Business
Enterprise Ltd. 2,716,636(1) 49%
("Leedan Business")
8 Shaul Hamelech Blvd.
Tel-Aviv 64733, Israel
Jay Botchman 530,000 9.5%
1500 E. Tropicana Avenue
Suite 100
Las Vegas, Nevada 89113
Boaz Harel Director 2,716,636(1)(2) 49%
1 Rockfeller Plaza
Suite 2412
New York, New York 10020
Glenda Klein Director and 261,046(3) 4.7%
21700 Oxnard St. Senior Vice
Woodland Hills, CA President, Secretary,
Treasurer and Chief
Financial Officer
M. Albert Nissim President and 140,0004 *
One Rockefeller Plaza Director
Suite 2412
New York, NY
26
<PAGE>
Number of Shares Percent
Name Title of Common Stock of Class
Tamar Lieber Director 361,122(5) 5.8%
160 W. 66th Street
Apt. 49B
New York, NY 10023
Richard Fried Director 51,046(5) Less than 1%
33 Marian Road
Marblehead, MA 01945
Lynda Davey Director 24,000(5) *
1375 Broadway
5th Floor
New York, NY 10018
Joseph Samuels Director 24,000(5) *
321 24th Street
Santa Monica, CA 90402
Directors and 3,063,213(6) 55.2%
Executive
Officers as a
group (6 persons)
</TABLE>
* Less than 1%
(1) Leedan International Holdings B.V., which together with Leedan Systems &
Properties Promotion (1003) Ltd. Holds 48.2% 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 an other member of the Harel family.
(2) Does not include three year option for 100,000, vesting 1/3rd each year,
exercisable at $2.375 per share nor a three year option for 15,000 shares
exercisable at $1.125 per share, vesting 1/3rd each year.
(3) Includes 228,637 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 90,000 shares of Common Stock exercisable at $2.50 per share which
Mr. Nissim has the right to acquire within 60 days from the date hereof upon
exercise of an option held by him and 50,000 option exercisable at $5.00 per
share at the rate of 1/3rd per year for three years.
(5) Includes 24,000 shares as part of a 3 year option, exercisable at $2.125 per
share, vesting at the rate of 1/3rd per year for three years as well as 15,000
shares as part of a three year option exercisable at $1.125 per share, vesting
at the rate of 1/3rd per year.
(6) Does not include any options referred to in notes (2), (3), (4) and (5)
hereof.
27
<PAGE>
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. Ms. 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
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.
The transaction was not completed; Trans Lending did not
deliver any stock certificates to the Company and the Company did
not pay the full amount agreed upon. During fiscal 1996 the
Company paid $100,000 to Trans Lending pursuant to the Agreement.
As of March 31, 1997, the Company wrote-off its investment of
$100,000.
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, 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.
Item 13. Exhibits & Reports on Form 8-K
(a) Financial Statements
(b) Exhibit
Number Description
28
<PAGE>
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, Registration #33-82838-
NY)
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, Registration #33-82838-NY)
3.3 Certificate of Amendment of Certificate of
Incorporation of the Company (incorporated by
reference to Form 10-KSB for the year ended March
31, 1997)
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,
Registration #33-82838-NY)
10.1 Credit Agreement between Bank One, Texas, N.A.
and the Company, dated March 31, 1997
(incorporated by reference to Form 10-KSB)
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,
Registration ##33-82838-NY)
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,
Registration # 33-82838-NY)
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, Registration # #33-82838-
NY)
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
29
<PAGE>
Reports on Form 8-K
During the fourth quarter of the 1997 fiscal year, the Company
filed no reports on Form 8-K.
30
<PAGE>
Grant Thornton
Suite 700
1000 Wilshire Blvd.
Los Angeles, CA 90017-2464
(213) 627-1717
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Pioneer Commercial Funding Corporation
We have audited the accompanying balance sheet of Pioneer Commercial Funding
Corporation (a New York corporation) (the "Company") as of December 31, 1997,
and the related statements of earnings, stockholders' equity, and cash flows for
the nine month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Pioneer Commercial Funding
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the nine months then ended, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Los Angeles, California
March 25, 1998
F-1
<PAGE>
Pioneer Commercial Funding Corp.
Balance Sheets
December 31 and March 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, March 31,
ASSETS
Cash and cash equivalents $ 2,972,845 $ 2,704,078
Mortgage warehouse loans receivable 47,291,076 2,456,154
Loans held for resale 4,504,231 -
Receivable for loans shipped 1,716,969 -
Accrued interest and fee receivable 930,656 27,824
Prepaid and other assets 99,907 33,798
---------------- ----------------
Total Current Assets 57,515,684 5,221,854
Furniture and equipment 119,882 106,640
Proprietary computer software 535,645 483,410
Leasehold Improvements 26,855 10,846
---------------- ----------------
682,382 600,896
Less accumulated depreciation and amortization 448,853 414,100
---------------- ----------------
Net Fixed Assets 233,529 186,796
---------------- ----------------
1,032,000 -
321,260 -
484,130 25,000
---------------- ----------------
Total Assets $ 59,586,603 $ 5,433,650
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable, mortgage warehouse $ 50,056,160 $ -
Accounts payable & accrued expenses 362,869 235,360
Accrued interest & fees 1,047,132 -
Due to mortgage banking companies 629,421 85,546
Deferred loan fees 29,000 -
Deferred legal fees 60,683 57,149
----------------
---------------- ----------------
Total Current Liabilities 52,185,265 378,055
---------------- ----------------
1,000,000 -
- 1,800,000
---------------- ----------------
Total Liabilities 53,185,265 2,178,055
---------------- ----------------
Common stock-$.01 par value; authorized 20,000,000 shares;
issued and outstanding - 5,442,272 at December 31, 1997 and
3,642,272 at March 31, 1997 54,423 36,423
Additional paid-in capital 14,316,952 12,525,952
Accumulated deficit (8,777,037) (9,306,780)
Unrealized gain on investment in securities available for sale 807,000 -
---------------- ----------------
Total Stockholders, Equity 6,401,338 3,255,595
---------------- ----------------
Total Liabilities and Stockholders, Equity $ 59,586,603 $ 5,433,650
================ ================
The accompanying notes are an integral part of these statements.
</TABLE>
F-2
<PAGE>
Pioneer Commercial Funding Corp.
Statements of Operations
For the Nine Months Ended December 31, 1997 and The Twelve Months Ended
March 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, March 31, March 31,
1997 1997 1996
---------------- ------------ ----------
INCOME:
Interest income $ 2,163,182 $ 260,550 $ 76,957
Commissions and facility fees 109,914 6,697 4,500
Processing fees 842,654 62,178 15,733
---------------- ----------- ----------
Total income 3,115,750 329,425 97,190
---------------- ------------ ---------
DIRECT COSTS:
Interest expense- warehouse and
revolving lines of credit 1,671,389 207,105 81,104
Interest expense -bridge financing - 42,385 79,231
Bank charges & fees 7,765 17,786 9,711
Bank processing fees 58,061 12,480 4,593
---------------- ---------------- ------
Total direct costs 1,737,215 79,756 174,639
---------------- ---------------- -------
Income (loss) before operating expenses 1,378,535 49,669 (77,449)
COMPENSATION AND BENEFITS 370,077 188,822 134,555
OPERATING EXPENSES 548,928 513,979 299,154
---------------- ---------------- --------
Total compensation and operating expenses 919,005 702,801 433,709
Income (loss) from operations 459,530 (653,132) (511,158)
---------------- --------------- --------
OTHER INCOME (EXPENSE)
Interest income -other 64,668 24,459 24,830
Interest expense - other (3,534) (4,712) (4,712)
Miscellaneous income 10,228 18,800 12,425
Non-operating expense - (614,459) -
---------------- --------------- --------
Total other income(expense) 71,362 (575,912) 32,543
---------------- ---------------- ------
Income (loss) from operations 530,892 (1,229,044) (478,615)
PROVISION FOR INCOME TAXES 1,149 3,169 1,188
---------------- -------------- ---------
Net income (loss) $ 529,743 $ (1,232,213) $ (479,803)
================ =============== =======
BASIC AND DILUTED INCOME (LOSS) PER SHARE OF COMMON STOCK $0.10 ($0.88) ($0.58)
================ ================ ======
WEIGHTED AVERAGE NUMBER OF SHARES 5,193,545 1,403,460 826,644
================ ================ ========
The accompanying notes are an integral part of these statements.
</TABLE>
F-3
<PAGE>
Pioneer Commercial Funding Corp.
Statement of Stockholders' Equity
For the Nine Months Ended December 31, 1997 and 1996
The Twelve Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Additional Unrealized Total
Stock Paid-in Accumulated Gain on Stockholders'
Capital Deficit Securities Equity
----------- ------------- ------------------------------- ---------------
BALANCE April 1, 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 73 (73) -
bridge financing
Issuance of 600,000 shares of 6,000 1,972,295 - 1,978,295
common stock and 690,000 warrants
Issuance of 2,200,000 shares of 22,000 1,955,096 - 1,977,096
common stock - -
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
Issuance of 1,800,000 shares of the
Company's common stock in connection
with the conversion of the convertible
note to shares as of May 9, 1997 18,000 1,782,000 1,800,000
Unrealized gain on securities available
for sale 807,000 807,000
Issuance of options to purchase
100,000 shares of Common Stock,
November 26, 1997 9,000 9,000
Net Income for the period 529,743 529,743
----------- ------------- -------------- ------------- ---------------
BALANCE December 31, 1997 $ 54,423 $ 14,316,952 $ (8,777,037) $ 807,000 $ 6,401,338
=========== ============= ============== ============= ===============
The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
Pioneer Commercial Funding Corp.
Statements of Cash Flows
For the Nine Months Ended December 31, 1997 and the
Twelve Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, March 31, March 31,
1997 1997 1996
----------------- ------------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 529,743 $ (1,232,213) $(479,803)
----------------- ------------- --------
Adjustments to reconcile net income(loss) to net cash used in operating activities:
Depreciation and amortization 36,421 149,565 164,080
Loss on abandonment of leasholds 9,178 - -
(Increase) decrease in --
Mortgage warehouse loan receivables (44,834,922) 1,056,621 (2,579,116)
Loans held for resale (4,504,231)
Receivable for loans shipped (1,716,969)
Accrued interest receivable (902,832) 2,183 (10,866)
Prepaid expenses (66,109) (7,710) (6,654)
Other assets (194,654) (25,000) -
Increase (decrease) in --
Accrued interest payable 1,047,132 (43,564) (1,543)
Due to mortgage banking companies 543,875 64,628 (15,054)
Accounts payable & accrued expenses 160,043 85,295 96,921
----------------- ------------- ---------
(50,423,068) 1,282,018 (2,352,232)
----------------- ------------- -----------
Net cash provided by (used in) operating activities (49,893,325) 49,805 (2,832,035)
----------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (92,332) (80,871) (4,805)
Investment in and advances to joint venture (264,476)
Deposits on furniture & fixtures (321,260) - -
Investment in securities available for sale (225,000) - -
----------------- ------------- ------
Net cash provided by(used in) investing activities (903,068) (80,871) (4,805)
----------------- ------------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in borrowings used in operations,
net of issuance costs 50,056,160 (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 convertable note - 1,800,000 -
Increase in subordinated debt 1,000,000 - -
Net proceeds from issuance of stock 9,000 4,270,430 -
----------------- ------------- -------
Net cash provided by financing activities 51,065,160 2,636,795 2,497,615
----------------- ------------- ---------
Net increase (decrease) in cash 268,767 2,605,729 (339,225)
CASH AND CASH EQUIVALENTS -
at the beginning of the period 2,704,078 98,349 437,574
----------------- ------------- --------
CASH AND CASH EQUIVALENTS -
at the end of the period $ 2,972,845 $ 2,704,078 $98,349
================= ============= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 642,076 $ 218,365 $98,911
Income taxes paid 1,149 3,169 1,188
================= ============= ======
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.
F-5
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31,1997 and 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"). From June 14, 1993, when the Company commenced active
operations following its emergence from Chapter 11 until fiscal year ended March
31, 1997, it operated with limited financing sources and substantially all of
the business conducted by the Company was with one to four mortgage banking
companies.
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 (the "Common Stock"), and
690,000 warrants (including warrants sold upon exercise of the underwriters'
over-allotment option) to the public, which yielded to the Company net proceeds
of approximately $2 million.
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. On November 26,1997 a private investor
purchased an option for $9,000 to acquire 100,000 common shares at $2.41 per
share. On January 21, 1998 the option was exercised and 100,000 common shares
were issued for a purchase price of $241,000.
F-6
<PAGE>
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 to provide such
financing from third-party funding sources with which it has available lines of
credit and from its own sources. The Company's loans receivable from the
mortgage banking company 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 45 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 the mortgage
banking company for each loan financed and the interest rate spread (usually
1.75%) between the rate at which the Company borrows from its funding source and
the rate it charges the mortgage banking company. The Company's customers fund
loans throughout the United States.
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 ("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 short-term bridge financing receivable.
During the twelve month periods ended March 31, 1997, 1996 and 1995, the Company
operated with a limited number of customers and funding sources. As of April 1,
1997 the Company had significantly increased funds available from financing
sources and its own sources and had developed several new customer relationships
and was in the process of evaluating the creditworthiness of many others. As of
December 31, 1997, the Company had 46 customers and credit facilities of
$60,000,000. In management's opinion, the diversity and breadth of the Company's
current customers and its expanded financing sources adequately mitigate the
risk that a severe impact will occur in the near term as a result of its
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.
F-7
<PAGE>
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 10 and
15, 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.
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:
Years
----------------
Furniture and equipment 3 to 10
Leasehold improvements 3 to 10
Proprietary computer software 5
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 No. 109, "Accounting for Income Taxes (SFAS No. 109)." Under SFAS No.
109, deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and tax bases of assets
and liabilities.
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.
Revenue Recognition
The Company recognizes revenue at the time a mortgage loan receivable is
funded. Interest income is recorded on the accrual basis in accordance with the
terms of the loan receivable.
Fair value of financial instruments
The carrying amount of financial instruments approximates the fair value as of
December 31, 1997 and March 31, 1997.
F-8
<PAGE>
Loans Fees
Loan processing fees are capitalized and recognized as an adjustment of the
yield of the related loan in accordance with SFAS No. 91.
Basic and Diluted Earnings(Loss) Per Share of Common Stock
Net earnings per share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which superseded
APB Opinion No.15. Net earnings per share for all periods presented has been
restated to reflect the adoption of SFAS 128. Basic net earnings per share is
based upon the weighted average number of common shares outstanding. Diluted net
earnings per share is based on the assumption that all stock options were
exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at that time of issuance, if latter), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
For the nine month period ended December 31, 1997, and the twelve month periods
ended March 31, 1997, and 1996, the exercise price exceeded the average share
price for most options and warrants, and the impact of conversion of the
warrants and options would have been immaterial at December 31 1997 and
antidilutive at March 31, 1997 and 1996.. Therefore, the options and warrants
were not considered in the calculation of basic and diluted earnings(loss) per
common share.
Reclassifications
Certain reclassifications have been made to conform prior years' data to the
current format.
3. MORTGAGE WAREHOUSE LOANS RECEIVABLE/PAYABLE
Loans receivable are generally due within sixty days from the date funded, with
an average outstanding period of twenty- six days and interest payable ranging
from prime plus 1.75% to prime plus 2.0%. Similarly, all of the related loans
payable are due within the same time frame. The Company's available line of
credit was $4 million as of March 31, 1996, with interest payable at prime plus
1.0%.
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 that had been granted to
the lending bank, 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 pays 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. On August 25,1997, Bank One amended
the credit facility that it provides to the Company to $35,000,000. On September
26,1997 and December 12, 1997 the facility was increased to $50,000,000 and
$60,000,000, respectively. As part of its Security Agreement with Bank One, the
Company is required to maintain a minimum ratio of 1.4 to 1 for Earnings Before
Interest Depreciation and Amortization "EBITDA" to interest expense . The
Company has a ratio of 1.37 to 1 EBITDA to interest expense at December 31,
1997.
For the nine months ended December 31, 1997, and for the fiscal years ended
March 31, 1997 and 1996, the weighted average interest rate on loans receivable
was 10.3%, 9.66% and 9.93%, respectively, and on loans payable was 8.39%, 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.
F-9
<PAGE>
4. LOANS HELD FOR RESALE
The Company in accordance with its loan and security agreement took possession
from a customer in the process of liquidating under Chapter 7 of the Bankruptcy
Code 37 loans it funded having an aggregate value of $4.5 million. The Company
has a perfected interest in the loans and management is confident that the
thirty-seven loans will be realized. The loans are held at the lower of cost or
market.
5. RECEIVABLE FOR LOANS SHIPPED
During October, 1997 the Company warehoused $1.7 million in mortgages for the
same customer as described in Note 4 above, who used a third party conduit to
sell its loans to an investor. The Company provided instructions to the third
party conduit that the funds were to be wired by the investor to the Company's
bank. The investor mis-wired the funds to the conduits bank. The bank has
refused to return the funds. The Company is taking actions, including legal
action if necessary, to collect the funds. In addition the Company has a $5
million personal guarantee from the third party conduits primary shareholder and
an additional $2 million guarantee from the customer's primary shareholder.
Although it is impossible assess with accuracy the ultimate outcome of this
matter, management is confident that it will recover the funds from either the
bank or the third party guarantors.
6. INVESTMENTS SECURITIES AVAILABLE FOR SALE
On July 7 , 1997 the Company purchased 300,000 shares at $.75 per share of
Fidelity First Mortgage Corp., NASDAQ (FFIR) for a total investment of $225,000.
FFIR shares closed on December 31,1997 at $3.44 per share, resulting in an
unrealized gain of $807,000. The stock is restricted for a period of one year.
Fidelity First Mortgage is based in Columbia Maryland and funds conforming and
non-conforming single family residential mortgages in Maryland, Virginia,
Delaware, Florida, North and South Carolina.
7. INVESTMENT IN AND ADVANCES TO PIONEER HOME FUNDING
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 accounts for this
investment on the equity method. The agreement provides that the Company and MFC
would maintain a 80 percent and a 20 percent ownership interest, respectively.
An amendment to the agreement was made on October 31, 1997. This amendment
provides that the Company would contribute $40,000 for a 20 percent interest in
PHF. In addition, the Company may from time to time, at its option, make loans
to PHF as needed. Under this agreement the Company has the option to convert
loans made to PHF into an 80 percent interest in PHF. As of December 31, 1997
the Company has made advances to PHF totaling $224,476.
8. OTHER ASSETS
The following items are included in Other Assets on the Company's financial
statements:
A). 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. The certificate of deposit was renewed as of
April 25,1997 and is renewably annually at the discretion of the insurance
carrier.
B). As a result of the signing of a ten (10) year lease for office space at
21700 Oxnard Street, Suite 1650, Woodland Hills, California, on October 17,
1997, the Company delivered an unconditional, irrevocable and renewable Letter
of Credit(LC), in the amount of $150,000, in favor of the Landlord. The LC is
secured by a $150,000 Certificate of Deposit which is included in Other Assets
on the Company's financial statements.
9. 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 issued in fiscal
1997 discussed below were assigned a $5.00 per share value (which is equal to
the price that
F-10
<PAGE>
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.
10. INCOME TAXES
The components of the provision for income taxes were as follows:
Nine Months Year Year
Ended Ended Ended
December 31, March 31, March 31,
1997 1997 1996
Current
Federal - - -
State $1,149 $3,169 $1,188
Deferred
Federal - - -
- - -
---------- --------- -----------
Provision for income taxes $1,149 $3,169 $1,188
========= =========== =========
The Company's reported income tax expense varied from the statutory federal
income tax rate due to the effect of net operating loss carryforwards for the
nine month period ended December 31, 1997 and the years ended March 31, 1997,
and March 31, 1996.
December 31, March 31, March 31,
1997 1997 1996
Deferred income tax assets
Net operating loss $516,000 $1,252,000 $ -
Valuation allowance (516,000) (1,252,000) -
--------- ----------- -------
$ - $ - $ -
========= ======== ==========
F-11
<PAGE>
At December 31, 1997, the Company had net operating loss (NOL's) carryforwards
available for income tax purposes of approximately $2 million expiring in
varying amounts through 2011. Approximately $1 million of the NOL's are limited
in use pursuant to a change in ownership in November 1994.
11. DUE TO MORTGAGE BANKING COMPANIES
The Company generally finances up to 100% 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, from time to time, holds such funds until receipt of amounts due from
the mortgage banking company for fees and accrued interest.
12 DEFERRED LEGAL FEES
Deferred legal fees are a consequence of the POR and were payable in four annual
installments which began on April 16, 1994. The Company has not paid the April
1996 and 1997 installments totaling $60,683 as of December 31, 1997.
13. 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.
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 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"). 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.
F-12
<PAGE>
Subordinated Debt
On November 26, 1997, the Company issued $1,000,000 in subordinated debt as part
of a $4 million private placement. The private placement provided for a minimum
purchase of $250,000(1 unit) with each unit obtaining 7,500 Warrants that allow
for the purchase of 7,500 shares. The exercise price of the shares is equal to
the price of the Company's stock as of the date of the issue of the subordinated
debt. The Company has 30,000 Warrants outstanding (7,500 per unit for 4 units).
The subordinated debt carries an interest rate of 10% per annum and matures on
November 25, 2002. The Company's stock price on November 26, 1997 was $2.875.
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
December 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 15 for further discussion of restrictions under the POR).
14. STOCK OPTION PLANS
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation costs
have been recognized for the Company's Non-Qualified Stock Option Plan (the
"Plan").
The Plan (previously known as PCF Acquisition Corp. Non-qualified Stock Option
Plan) was adopted on August 1, 1994, and provided 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 Plan was
modified on November 4, 1994, in anticipation of the then forthcoming merger,
with and into Pioneer Commercial Funding Corp. The modification provided for a
maximum of 200,000 shares of stock that may be optioned or sold under the Plan.
In 1997, the Company adopted the 1997 Omnibus Stock Incentive Plan under which
it was authorized to issue non- qualified stock options, incentive stock
options, and warrants to key employees, directors and selected advisors to
purchase up to an aggregate of 500,000 shares of the stock of the Company. The
options have a term of five years and generally become fully vested by the end
of the third year.
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:
Weighed Average fair value of options granted during the year
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 March 31, 1997 March 31, 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding
Beginning 543,045 $3.57 235,166 $5.00 7,892 $5.00
Granted 282,000 $2.73 307,879 $2.48 227,274 $5.00
Exercised
Canceled
-------------- ------- --------- ---------- --------
Options outstanding end 825,045 $3.28 543,045 $3.57 235,166 $5.00
============ ========== ==========
F-13
</TABLE>
<PAGE>
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
12/31/97 3/31/97 3/31/96
Exercise price exceeds market price at date of grant $0.96 $0.53 -
Exercise price exceeds market price at date of grant $1.14 $1.56
Exercise price exceeds market price at date of grant - $1.45 -
</TABLE>
The following information applies to options outstanding at December 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
--------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual life Average Number Average
exercies prices Outstanding (YEARS) Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------- ------------------------------
$1.00 -$1.50 45,000 4.01 $1.13 - -
$1.51 - $2.25 207,000 4.47 $2.08 119,000 $2.04
$2.26 - $3.40 250,000 4.37 $2.45 83,333 $2.45
$3.41 - $5.00 323,045 2.71 $5.00 289,712 $5.00
============== ==============
825,045 3.28 $3.28 492,045 $3.85
============== ==============
</TABLE>
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
12/31/97 3/31/97 3/31/96
Expected Life (years) 3 3 3
Risk free interest rate 5.5% 5.5% 5.5%
Volatility 77.7% 77.7% 77.7%
Dividend Yield 0% 0% 0%
F-14
<PAGE>
had compensation cost for the plan been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No. 123, the
Company's net earnings would have been:
12/31/97 3/31/97 3/31/96
Net earnings
As reported $529,743 $(1,232,213) $(479,803)
Pro forma $421,867 $(1,366,635) $(846,623)
Basic earnings per share
As reported $0.10 $(0.88) $(0.58)
Pro forma $0.08 $(0.97) $(1.02)
Diluted earnings per share
As reported $0.10 $(0.88) $(0.58)
Pro forma $0.08 $(0.97) $(1.02)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to 1995, and
additional awards in future years are anticipated.
15. 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 non-interest-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 nine months ended December 31, 1997 and 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 December 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.
F-15
<PAGE>
- - 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.
In 1997 and 1998 the Company has made expenditures of more than $25,000 to
purchase and lease capital assets in connection with its move to new facilities.
Management believes that these expenditures were necessary to expand the
Company's mortgage lending operations, and is not aware of any financial impact
on the Company under the restrictions of the POR because of these expenditures.
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 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.
F-16
<PAGE>
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 during the year ended 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%.
On October 17,1997, the Company entered into a ten year lease to rent 6,846
square feet on the sixteenth floor of an office building at 21700 Oxnard Street,
Woodland Hills, California. The monthly base rent during year one through five
is $13,692 and for years six through ten is $15,745. The Company also has
certain deposits on furniture and equipment at December 31, 1997 with additional
commitments of $238,700.
The Company plans to sublease the space at the Reseda location.
Future minimum lease commitments as of December 31, 1997 are as follows:
Woodland Hills Reseda
1998 164,304 26,136
1999 164,304 26,136
2000 164,304 26,136
2001 164,304 26,136
2002 164,304
2003-2007 657,216
--------------------------------------------
$1,478,736 $104,544
========================= ================
Commitments to Extend Credit Facilities
At December 31,1997 the Company had made approximately $120.6 million in
commitments to extend credit facilities to its current customers. These
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Because many of the commitments will not be
fully drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
F-17
<PAGE>
16. OPERATING AND NON-OPERATING EXPENSES
Operating and non-operating expenses consisted of the following for
the nine month period ended December 31, 1997 and the fiscal years
ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, March 31, March 31,
1997 1997 1996
Salaries and benefits $370,077 $188,822 $134,555
Depreciation and amortization 36,421 112,065 101,300
Professional fees 127,136 191,513 114,382
Utilities 25,712 26,928 19,782
Rent 37,072 17,662 11,609
Repairs and maintenance 10,275 5,608 4,616
Other 312,312 160,203 47,465
------------------ ----------------- ----------------
Operating expenses 919,005 702,801 433,709
Non-operating expenses - 614,459 -
------------------ ----------------- ----------------
$919,005 $1,317,260 $433,709
================== ================= ================
</TABLE>
The Company's non-operating expenses during 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.
17. RELATED PARTY TRANSACTIONS
For the nine months ended December 31, 1997 and the fiscal 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 during the nine
months ended December 31, 1997 and the fiscal years ended March 31, 1997 and
1996, approximately $15,865, $15,481 and $3,106, respectively, for these
services.
18. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"). Reporting Comprehensive
Income, which prescribes standards for reporting comprehensive income and its
components. Comprehensive income consists of net earnings or loss for the
current period and other comprehensive income (income, expenses, gains and
losses that currently bypass the income statement and are reported directly in a
separate component of equity). SFAS 130 is effective for financial statements
issued for periods beginning after December 15, 1997. The Company has not
determined the effect, if any, on the Company's future financial statements.
F-18
<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
Title: President
Date: March 31, 1998
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
Title: President
Date: March 31, 1998
By: /s/ Glenda Klein
Title: Senior Vice President, Chief
Financial Officer, Secretary,
Treasurer and Director
Date: March 31, 1998
By: /s/ Richard Fried
Title: Director
Date: March 31, 1998
31
<PAGE>
By: /s/ Boaz Harel
Title: Director
Date: March 31, 1998
By: /s/ Tamar Lieber
Title: Director
Date: March 31, 1998
By: /s/ Lynda Davey
Title: Director
Date: March 31, 1998
By: /s/ Joseph Samuels
Title: Director
Date: March 31, 1998
32
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Pioneer Home Funding, L.L.C, a California limited liability
company doing business as Pioneer Home Funding.
33
<PAGE>
<TABLE> <S> <C>
<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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,972,845
<SECURITIES> 0
<RECEIVABLES> 49,938,701
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 57,515,684
<PP&E> 682,382
<DEPRECIATION> 448,853
<TOTAL-ASSETS> 59,586,603
<CURRENT-LIABILITIES> 52,185,265
<BONDS> 0
0
0
<COMMON> 54,423
<OTHER-SE> 14,316,952
<TOTAL-LIABILITY-AND-EQUITY> 59,586,603
<SALES> 0
<TOTAL-REVENUES> 3,115,750
<CGS> 0
<TOTAL-COSTS> 1,737,215
<OTHER-EXPENSES> 919,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,668
<INCOME-PRETAX> 530,892
<INCOME-TAX> 1,149
<INCOME-CONTINUING> 529,743
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 529,743
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
