UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIE
EXCHANGE ACT OF 1934
For the year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-24940
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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.)
One Rockefeller Plaza, Suite 2412, New York, N.Y. 10020
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (212) 218-1850
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Title of each class Name of each exchange on which registered
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock (Title of Class)
Warrants (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
<PAGE>
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 $2,089,286. As of March
29, 2000, there were 2,771,136 shares of the Registrant's common stock, $.01 par
value, issued and outstanding of which 1,070,045 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 $668,778. 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 29, 2000 there were
2,771,136 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 December 31, 1999 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 Certificat of Incorporation of the Company
3.4 By-Laws of the Company
10.1 Credit Agreement between Bank One, Texas, N.A. and the Company
10.3 The Company's Non-Qualified Stock Option Plan
<PAGE>
PART I
Item 1. Description of the Business.
General
Pioneer Commercial Funding Corp. ("Pioneer" or the "Company") was engaged in the
business of a mortgage warehouse lender providing short-term (generally 10-90
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").
Pursuant to an Asset Purchase Agreement dated July 30, 1999 with Princap
Mortgage Warehouse, Inc., a California corporation, with its principal office at
23550 Hawthorne Boulevard, Torrance, California ("PMW") the Company has sold to
PMW all of its equipment, furniture and other physical assets, all of its
computer operating systems, for the sum of $800,000. PMW also had the right to
purchase any or all of the customer accounts of the Company for an amount equal
to the aggregate outstanding principal balance and all accrued but unpaid fees
and interest on such accounts as of the Closing. The Company will continue its
collection activities with respect to those accounts which are not purchased by
PMW. The Company's shareholders approved the sale on September 21, 1999.
Management of the Company determined that the Company did not meet the revenue
objectives for its mortgage warehouse lending business as it was not able to
procure credit lines and did not expect the Company to be able to meet these
objectives in the foreseeable future. The Company therefore decided to sell its
hard assets and explore other business opportunities.
The Company found that the present comparatively high cost to it for borrowed
funds and the inability to borrow enough funds to create a sufficient volume of
loan transactions resulted in rates of return and total returns that were
unacceptable in relation to the degree of risk inherent in lending in the
secondary market.
The high cost to the Company for available borrowed mone is due, in large
measure, to the fact that, unlike its competitors which are, generally, banking
institutions or their affiliates, it was required to borrow funds at the Prime
Rate of interest rather than at LIBOR base. This difference often meant as much
as a 2% difference in the borrowing rates, thereby having a significant negative
effect on the margins for each loan transaction. In addition, unlike banking
institutions, which could generally obtain borrowed funds at up to ten to
fifteen times their capital, the Company was only able to borrow approximately
six times its capital. This resulted in less funds available to make loans;
therefore, the volume of transactions and the resulting revenues have been
significantly lower than that which could be achieved by the Company's
competitors. This problem was significantly exacerbated by a situation which
arose in October and November, 1997 in which the Company was unable to gain
access to over $1.7 Million of its own funds. This matter is the subject of an
ongoing litigation in the Philadelphia Court of Common Pleas,
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entitled Pioneer Commercial Funding Corporation and Banc One, Texas, N.A. v.
American Financial Mortgage Corporation, Thomas F. Flately, Norwest Funding,
Inc. and Corestates Bank, N.A. (No. 0885, April Term, 1998) in which the Company
has alleged that the defendants have wrongfully diverted approximately $1.7
Million belonging to the Company, representing amounts due for loans made by the
Company to a company in the business of originating residential mortgage loans.
The unavailability of these funds has further significantly contributed to the
Company's inability to generate a sufficient volume of loan transactions by
decreasing its borrowing abilities, and the rate at which it could borrow,
thereby severely affecting the Company's ability to generate sufficient revenues
to make its business economically viable. The defendants in this matter have
denied all material allegations of the Company's complaint. The Company makes no
representation regarding the likelihood of prevailing in this litigation These
high costs of obtaining funds and the difficulty in obtaining adequate levels of
funding have resulted in a much slower development for the Company than was
originally anticipated.
The high cost of borrowed funds and the low volume of transactions has made the
mortgage warehouse lending business unattractive in relation to the risks
inherent in this business. Since the loans are in the secondary market, the
source for recovery on the loans is frequently limited to the value of the
underlying property. This leads to greater risk of recovery on a loan. In
addition, since the Company acts as an intermediary as a warehouse lender, it
does not receive all the information necessary to fully assess the risk of each
loan transaction; therefore, the risk of lending is greater.
Based on these factors, Management decided that the Company's assets would be
more efficiently utilized in investment in other businesses; however no other
businesses have been identified at this time.
As a result of the sale, the Company no longer has any continuing business
operation other than winding up of its operations. The Company is seeking to
engage in other business ventures, but there can be no assurance as to when, or
if, an economically viable business can be acquired or continued successfully.
Management is diligently seeking other opportunities for the Company.
The Company's Bank One, Texas, N.A. Line of Credit.
As of March 31, 1997, the Company entered into a one yea 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. On February 18,
1999,
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Bank One extended the Stated Termination date to April 30, 1999. In addition,
Bank One amended the total Principal Debt of Borrowings so that it may never
exceed the lesser of either (a) a $40,000,000 Commitment or (b) the sum of the
Borrowing Base plus (i) through and including February 28, 1999, $15,000,000,
(ii) thereafter through March 31, 1999, $10,000,000, and (iii) thereafter
through April 30, 1999, $5,000,000. This credit facility was subsequently
extended to September 30, 1999. No further extension has been granted.
The Company's Mortgage Banking Company Customers
During the 1999 fiscal year, the Company funded 1972 loans aggregating
$164,256,735 with the three largest customers, which accounted for 49.2 % of its
total fundings. The Company funded 466 loans aggregating $28,715,350 for one
customer, which accounted for 17.5% of the Company's fundings; 176 loans
aggregating $28,108,730 for the second customer, which accounted for 17.1% of
the Company's fundings; and 275 loans aggregating $23,970,531 funded for the
third customer, which accounted for 14.6% of the Company's fundings.
At December 31, 1999, the Company had no mortgage banking customers.
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. For the year ended December 31, 1999 and the
year ended December 31,1998 the Company has made advances to PHF and is
reflecting a receivable (included in other assets on the balance sheet) totaling
$294,345 and $275,344, respectively. At December 31, 1999, the Company has
recorded a reserve aggregating $294,345 against this receivable due to the
financial condition of PHF.
Employees
At December 31, 1999 the Company employed one full-time employee The Company
believes that its relations with its employee is good.
Item 2. Property
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. This space was sublet to
PMW through January 31,2000 at the same rental. The Company is negotiating with
the landlord to relinquish or sublease the space.
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Item 3. Legal Proceedings.
During October 1997 the Company warehoused mortgages for a customer who used a
third party conduit, American Financial Mortgage Corporation, to sell its loans
to an investor, Norwest Funding, Inc. 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 approximately $1.7 Million to the
conduit's bank, Corestates Bank, N.A. the conduit's bank has refused to return
the funds. The Company commenced legal action, to collect the funds from the
conduit, the conduit's guarantor, the investor and the conduit's bank. The
Company's lender, Bank One Texas, N.A. ("Bank One"), has joined the litigation
as a co-plaintiff in support of the Company's position. In addition the company
has a $5 million personal guarantee from the third party conduit's primary
shareholder and an additional $2 million guarantee from the customer's primary
shareholder. Although it is impossible to determine the ultimate outcome of this
matter, management believes that it will recover the funds as well as claims for
destruction of business. The trial is expected to take place in May,2000.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Stock and Related Stockholder Matters.
The Common Stock issued by the Company in connection wit the IPO is listed on
the Bulletin Board 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
March 31, 1998 $ 2.6875 $ 1.75
June 30, 1998 $ 3.25 $ 1.875
September 30, 1998 $2.4375 $ 1.25
December 31, 1998 $ 2.25 $ .25
March 31, 1999 $ 4.00 $ 0.75
June 30, 1999 $ 2.625 $ 1.00
September 30, 1999 $ 1.937 $ 1.00
December 31, 1999 $0.625 $ 0.50
As of December 31, 1999, there were 23 record 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
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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, 1999, 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
When used in this Form 10-KSB and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases "will likely result"
and "the company expects," "will continue," "is anticipated," "estimated,"
"project," "outlook" or similar expressions are intended to identify
"forward-looking statements." Pioneer Commercial Funding Corp wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions, which
may be made to any forward- looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
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 provided 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. The line of credit was reduced to
$50,000,000 on October 1, 1998 and $40,000,000 on October 30, 1998. As of
August, 1999 the Company sold its assets constituting its mortgage lending
business and as a result, the Company does not have any operations at this time.
The Company is seeking other business opportunities.
As of December 31, 1998, the Company had 39 customers an had funded 7,569 loans
with an aggregate value of $470 million.
As of December 31, 1999, the Company had no customers an funded 1972 Loans with
an aggregate value of $164,256,735. The Company is in the process of liquidating
such loans.
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Results of Operation for Year Ended December 31, 1999 Compared t the Year Ended
December 31, 1998.
Revenues: The Company's revenues decreased from $6,414,161 for
the year ended December 31, 1998 to $2,089,286 for the year ended December 31,
1999. This decrease is attributable to the Company's winding down its mortgage
business. Processing fees decreased from $1,752,390 for the year ended December
31, 1998 to $476,743 for the year ended December 31, 1999. Part of the decrease
in loan volume is the interest component of revenues (interest charged
customers). Interest revenue decreased from $4,424,386 for the year ended
December 31, 1998 to $1,553,085 for the year ended December 31, 1998.
Interest and Fee Costs: The Company's direct costs consist of interest and other
charges that it pays to its revolving credit line provider. The Company's
interest and fee charge for the year ended December 31, 1999 was $1,563,837 as
compared to $3,991,137 for the year ended December 31, 1998. This decrease is
attributable to the decrease in loan funding volume during 1999.
Loan Loss Provision: The $2,442,899 loan loss provision for the year ended
December 31, 1999 and $1,016,450 loan loss provision for the year ended December
31, 1998 were due to the recognition of a discount on the sale of loans during
the years and the accrual of a reserve for estimated losses on the future
disposition of loans held for sale, mortgage warehouse loans and for
uncollectible interest and fees receivable. Management estimates that certain
other uncommitted mortgage warehouse loans belonging to customers described
above may be sold at discounts significant enough that those customers may be
unable to cover the shortage and pay all of the accrued interest and fees
thereon. Accordingly, an estimate for these future potential losses has also
been established.
Other Operating Expenses: Other operating expenses increased to $2,670,122 for
the year ended December 31, 1999 from $2,597,223 for the year ended December 31,
1998. Compensation and benefits decreased from $1,055,972 for the year ended
December 31, 1998 to $850,435 for the year ended December 31, 1999 due to the
reduction of employees after the decision to exit the mortgage business. It is
the Company's intention to dramatically reduce operating costs during the wind
down of operations.
Depreciation expense decreased from $202,530 for the yea ended December 31, 1998
to $144,508 for the year ended December 31, 1999 due to the sale of all fixed
assets in 1999 (See Note A of Notes to Financial Statements). Fixed assets
decreased from $1,384,179 to $-0- and net fixed assets decreased from $732,796
to $-0- at December 31, 1999 from December 31, 1998.
Professional fees, which include accounting, legal fees and consulting,
increased to $1,038,257 for the year ended December 31, 1999 from $322,075 for
the year ended December 31, 1998 primarily due to the additional legal costs
attendant to the lawsuit, more fully described in Item 3, against Corestates
Bank, N.A., American Financial Mortgage Corporation and Norwest Funding, Inc.
Rent expense decreased from $210,591 for the year ended December 31, 1998 to
$148,840 for the year ended December 31, 1999 due to the sublease of the
Woodland Hills, California office to the acquirer of the Company's fixed assets,
with a $13,692 base monthly rent after September 1999.
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Net Loss:
The Company incurred a net loss of $4,445,262 including loan loss provision of
$2,442,899, for the year ended December 31, 1999 compared to net loss of
$1,158,753 including loan loss provision of $1,016,450 for the year ended
December 31, 1998. The exiting of the mortgage business, and increased loan loss
reserves negatively effected the 1999 operations.
Cash Flows:
Operating Activities: In spite of a $4,445,262 loss for the year ended December
31, 1999, the Company generated $28.6 million of cash from operating activities
as a result of a reduction in warehouse mortgages receivable of $29.9 million.
In the year ended December 31, 1998 the Company generated $14.7 million due to
decreases of $12.1 million of mortgage warehouse loans and $3.6 million of loans
held for resale.
Investing Activities: In 1999, the Company invested $113,773 in fixed assets and
subsequently sold all of its fixed assets and recorded net proceeds on the sale
of $792,638.
Financing Activities: In 1999, $28.7 million was used t reduce short term
borrowings on the Company's line of credit compared to a $16.7 million reduction
in short term line of credit borrowings in 1998. In 1998, $726,000 and $241,000
was generated by the issuance of subordinated debt and common stock compared to
the repayment of $100,000 of subordinated debt in 1999.
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Liquidity and Capital Resources:
Bank One has not renewed the revolving line of credit with the Company, which
was previously extended to September 30, 1999. In 1999, the Company's primary
sources of capital, which it employed in its warehouse lending operations, were
borrowings under its Bank One line of credit and $1.7 million in subordinated
debt.
Item 7. Financial Statements
See pages F-1 to F-20
Item 8. Changes in and Disagreements with Accountants o 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......... 36 Chairman of the Board, Director
M. Albert Nissim... 66 President, Director
David W. Sass...... 64 Secretary
Richard Fried...... 53 Director
Tamar Lieber....... 57 Director
Lynda Davey........ 45 Director
Joseph Samuels..... 69 Director
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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. From 1993 to 1997, Mr. Harel has been the Managing Director
of Leedan Business Enterprise Ltd. ("Leedan"), a publicly-held Israeli company
which is the beneficial owner of 58% 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.
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.
David W. Sass has been a Director since April, 1998 and has been a practicing
attorney in New York City for the past 38 years and is currently a senior
partner in the law firm of McLaughlin & Stern, LLP, securities counsel to the
Company. Mr. Sass is also a director of Pallet Management Systems, Inc., a
company engaged in the manufacture and repair of wooden pallets and other
packaging services and a director of BarPoint.Com, Inc. a company that will
operate a patent pending search engine and software technology that allows
consumers to search for product specific information on the Internet and a
member and Vice Chairman of the Board of Trustees of Ithaca College. Mr. Sass
earned a B.A. from Ithaca College, a J.D. from Temple University School of Law
and an L.L.M. (in taxation) from New York University School of Law.
Richard Fried was appointed to the Predecessor's Board i February 1994 and
served as Vice- President of the Predecessor. Upon consummation of the Merger in
November 1994, he became a director of the Company. Since June 1991 Mr. Fried
has served as President of Medical Systems, Inc., an application software
development company, of which he has been a principal shareholder. From February
1993, he has served as President of Montgomery Associates, Inc., a corporation
wholly-owned by him, which is engaged in business as an importer-exporter. Since
April 1993, Mr. Fried has been a principal shareholder, and has served as
President, of Sea Change Systems, Inc., a software tools development company.
From April 1993 to May 1994, he was a Branch Manager of LPL Financial Services,
a stock brokerage firm, which is an NASD member firm. Since November 1994, Mr.
Fried has been a controlling shareholder and has served as President of
SMARTpay, Inc., a collection service. From April 1995 he has served as President
of Centennial Systems, Inc., a software distribution, sales and service firm of
which he is a principal shareholder. Since October 1996, Mr. Fried has been a
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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 throughout
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.
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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 $100,000 during the 1999 fiscal year. During such fiscal
year, the Company did not grant any restricted stock awards or stock
appreciation rights to any of its executives.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Annual Compensation Awards
Name and
rincipal Position Fiscal Year Salary($) Bonus($) Other Annual Securities
Compensation ($) Underlying
Option
Boaz Harel* 1999 $100,000 50,000
Chairman of 1998(1) $100,000 $15,000
the Board 1997(2) $25,000 7,500
M. Albert Nissim**
President 1999 $118,385
1998(1) $118,654 $12,000 25,000
1997(2) $54,000 45,000
John O'Brien***
Chief Financial
Officer 1999 $122,083
1998(1) $58,513
David W. Sass**** 1999 $0
Secretary 1998 $0
</TABLE>
* Commenced as Chairman on July 2, 1997.
** Commenced service as President of the Company in the fourth quarter of the
1996 fiscal year.
*** Commenced service as Chief Financial Officer in the second quarter of the
1998 fiscal year and terminated employment in September, 1999.
**** Commenced service as Secretary in the second quarter of the 1998 fiscal
year.
(1) For the Year Ending December 31, 1998
(2) Nine Months ended December 31, 1997
Compensation of Directors.
The Directors of the Company received cash compensation of $300 per meeting in
his or her capacity as a director.
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Options Issued to Executives.
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) 25,000 $10.00 October, 2002
45,000 $ 4.50 February, 2002
Boaz Harel(1) 50,000 $4.750 October, 2002
7,500 $2.250 January, 2002
Richard Fried(1) 12,000 $4.250 October, 2002
7,500 $2.250 January, 2002
Tamar Lieber(1) 12,000 $ 4.250 October, 2002
7,500 $ 2.250 January, 2002
Lynda Davey(1) 12,000 $ 4.250 October, 2002
Joseph Samuels(1) 12,000 $4.250 October, 2002
</TABLE>
*Former officer and director.
(1) Options vested at the rate of 1/3rd each year.
Employment Agreements.
In July 1997, the Company extended the Employment Agreement with M. Albert
Nissim as President for an indefinite period, on a part-time basis, at a salary
of $6,000 (amended to $9,500) per month. The Agreement may be terminated by
either party on not less than 90 days prior notice. On May 12, 1998, Albert
Nissim's compensation was increased to $9,500 per month effective April 1, 1998
in consideration of his contributions to the Company. In addition, Mr. Nissim
was awarded a $12,000 bonus payable in the second quarter in consideration of
the Company's performance.
16
<PAGE>
Boaz and Leedan Agreement
The Company has approved a compensation plan for Mr. Boa 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
remuneration to Mr. Harel and/or Leedan of $100,000 per annum plus 5% of the
Company's net income pre-tax above $1,000,000 annually. Leedan and Mr. Harel
will determine how such compensation will be divided between them. On May 12,
1998 Boaz Harel was awarded a $15,000 bonus, payable in the second quarter in
consideration of the Company's performance.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the holdings of the Commo Stock as of March ,
2000 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 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
ICTS International N.V. 150,000 5.4%
Vertrekpassage 226
1118 AV Schiphol Airport
Holland
Lancer Partners L.P. 172,500 6.2%
200 Park Avenue, Ste 3900
New York, NY 10166
Leedan Business
Enterprise Ltd. 1,188,068(1) 42.9%
("Leedan Business")
8 Shaul Hamelech Blvd.
Tel-Aviv 64733, Israel
Rogosin International B.V. 265,000(3) 9.5%
One Rockefeller Plaza,
Ste. 2412
New York, NY 10020
17
<PAGE>
Number of Shares Percent
Name Title of Common Stock of Class
Boaz Harel Director 1,188,068(1)(2) 42.9%
1 Rockfeller Plaza
Suite 2412
New York, New York
0020
M. Albert Nissim President and 70,000(4) *
One Rockefeller Plaza Director
Suite 2412
New York, NY
Tamar Lieber Director 169,500(5) 5.8%
160 W. 66th Street
Apt. 49B
New York, NY 10023
Richard Fried Director 25,523(5) *
33 Marian Road
Marblehead, MA 01945
Lynda Davey Director 12,000(5) *
1375 Broadway
5th Floor
New York, NY 10018
Joseph Samuels Director 12,000(5) *
321 24th Street
Santa Monica, CA 90402
Directors and
Executive
Officers as a
group (6 persons) 1,492,091(6) 53.8%
* Less than 1%
</TABLE>
(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 50,000, vesting 1/3rd each year,
exercisable at $4.75 per share nor a three year option for 7,500 shares
exercisable at $2.25 per share, vesting 1/3rd each year.
(3) An affiliate to Leedan Business Enterprises Ltd. Shares were purchased in a
private transaction.
(4) Includes 45,000 shares of Common Stock exercisable at $4.50 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 25,000 option exercisable a $10.00 per
share at the rate of 1/3rd per year for three years.
(5) Includes 12,000 shares as part of a 3 year option, exercisable at $4.25 per
share, vesting at the rate of 1/3rd per year for three years as well as 7,500
shares as part of a three year option exercisable at $2.25 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.
18
<PAGE>
Item 12. Certain Relationships and Related Transactions Certain Transactions.
On November 18, 1998 a settlement was reached with a guarantor of a mortgage
banking customer's defaulted line of credit. The guarantor was also a company
stockholder. Pursuant to the settlement, an entity which is an affiliate of
Leedan accepted $530,000 of the guarantor's recognized debt to the Company in
exchange for the guarantor's shares in the Company. This entity paid the Company
$176,667 and issued two installment notes of $176,667 each with maturity dates
of August 23, 1999 and May 23, 2000, respectively. These notes bear interest at
a rate of 8.25% per annum and are payable quarterly commencing three months from
the date of issuance which was November 23, 1998.
On November 18, 1998, a settlement was reached with a guarantor of a mortgage
banking customer's defaulted line of credit. The guarantor was also a Company
stockholder. Pursuant to the settlement, Rogosin Business Enterprises Ltd.,
accepted $530,000 of the guarantor's recognized debt to the Company in trade for
the guarantor's shares in the Company. Furthermore, pursuant to the settlement,
the guarantor issued two additional notes in the amount of $735,102 to the
Company.
Pursuant to the settlement as stated above, the guaranto issued to the Company
two installment notes in the amounts of $265,103 and $470,000, respectively.
These notes bear interest at a rate of 8.25% per annum and are payable quarterly
commencing three months from November 18, 1998, the date of issuance of the
notes. Both notes mature November 18, 2000.
On September 14, 1998 Joseph Samuels, a Director of the Company and two
affiliates of Leedan Business Enterprises Ltd. loaned to the Company $100,000
and $550,000 and $76,000, respectively. The loan was in connection to the Ninth
Amendment to the Credit Agreement with Bank One to authorize the infusion of an
aggregate of $726,000 in the form of the Company's 11% Subordinated Debenture
for a term until a new lending facility is in place to replace Bank One.
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.
19
<PAGE>
Item 13. Exhibits & Reports on Form 8-K
(A) The Following financial statements are included in Part II, Item 7:
Independent Auditors' Report by Lazar, Levine & Felix, LLP for the
two years ended December 31, 1999
Balance Sheets as of December 31, 1999 and 1998.
Statements of Operations for the two years ended December 31, 1999.
Statements of Comprehensive Income for the two years ended December
31, 1999.
Statements of Stockholders' Equity for the two years ended December
31, 1999.
Statements of Cash Flows for the two years ended December 31, 1999.
Notes to Financial Statements.
Schedules are omitted for the reason that they are not required, are
not applicable, or the required information is included in the financial
statements or notes thereto.
(B) Reports on Form 8-K. Not applicable.
(C) Exhibits. The following exhibits are filed as part of the
Company's report. Where such filing is made by incorporation by reference
(I/B/R) to a previously filed statement or report, such statement or report is
identified in parenthesis.
Official Exhibit
Number Description
[3.1] Certificate of Incorporation of the Company.
[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.
[10.1] Credit Agreement between Bank One, Texas, N.A. and the Company, dated
March 31, 1997.
11 Earnings Per Share
27 Financial Data Schedule
20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Pioneer Commercial Funding Corp.
We have audited the accompanying balance sheets of Pioneer Commercial Funding
Corporation (a New York corporation) as of December 31, 1999 and 1998, and the
related statements of operations, changes in stockholders' equity, and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pioneer Commercial Funding
Corporation as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company is winding down its' mortgage warehouse
lending business. The Company has also suffered recurring losses from
operations. These factors raise substantial doubt about its ability to continue
as a going concern. Management's plans regarding those matters also are
described in Note C. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
LAZAR LEVINE & FELIX LLP
New York, New York
March 27, 2000
F-1
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- ASSETS -
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 1,979,395 $ 1,503,788
Mortgage warehouse loans receivable, net of allowance for loan losses 1,572,550 33,640,202
Loans held for resale, net of allowance for loan losses 236,179 705,479
Receivable for loans shipped 1,716,969 1,716,969
Accrued interest and fee receivable 208,256 825,340
Notes receivable-current portion 1,067,696 176,667
Prepaid and other current assets 138,688 180,503
TOAL CURRENT ASSETS 6,919,733 38,748,948
FIXED ASSETS:
Furniture and equipment - 634,376
Proprietary computer software - 551,114
Leasehold improvements - 198,689
1,384,179
Less accumulated depreciation and amortization - 651,383
Net fixed assets - 732,796
OTHER ASSETS:
Investment securities available for sale 108,750 318,750
Notes receivable - noncurrent portion - 911,770
Other assets 192,282 475,063
TOTAL ASSETS $ 7,220,765 $41,187,327
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Mortgage warehouse loans payable $ 4,721,817 $33,384,925
Accounts payable and accrued expenses 152,131 213,646
Accrued interest and fees 511,349 777,798
Due to mortgage banking companies - 220,228
Deferred loan fees 29,000 29,000
Deferred legal fees 65,395 65,395
TOTAL CURRENT LIABILITIES 5,479,692 34,690,992
SUBORDINATED DEBT 1,626,000 1,726,000
TOTAL LIABILITIES 7,105,692 36,416,992
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value; authorized 20,000,000 shares; 2,771,134 shares
issued and outstanding 27,712 27,712
Additional paid-in capital 14,584,663 14,584,663
Accumulated deficit (14,381,052) (9,935,790)
Accumulated other comprehensive income (loss) (116,250) 93,750
TOTAL STOCKHOLDERS EQUITY 115,073 4,770,335
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,220,765 $ 41,187,327
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
INCOME:
Interest income $ 1,553,085 $ 4,424,386
Commissions and facility fees 59,458 237,385
Processing fees 476,743 1,752,390
TOTAL INCOME 2,089,286 6,414,161
INTEREST AND FEE COSTS:
Interest expense - warehouse and lines of credit 1,470,003 3,762,591
Bank charges and facility fees 59,228 141,042
Bank processing fees 34,606 87,504
TOTAL INTEREST AND FEES COSTS 1,563,837 3,991,137
NET INTEREST AND FEE INCOME 525,449 2,423,024
(1,917,450) 1,406,574
OTHER OPERATING EXPENSES:
Compensation and benefits 850,435 1,055,972
Depreciation and amortization 144,508 202,530
Professional fees 1,038,257 322,075
Loan administration charges - 198,756
Utilities 27,954 46,448
Rent 148,840 210,591
Repairs and maintenance 2,826 13,408
Other 457,302 547,443
TOTAL OTHER OPERATING EXPENSES 2,670,122 2,597,223
LOSS FROM OPERATIONS (4,587,572) (1,190,649)
OTHER INCOME AND (EXPENSE):
Interest income - other 53,002 77,799
Interest expense - other (2,749) (5,099)
Miscellaneous income 2,579 25
Equity in loss of affiliate - (40,000)
Gain from sale of fixed assets 90,577 -
TOTAL OTHER INCOME AND EXPENSE 143,409 32,725
LOSS BEFORE TAXES (4,444,163) (1,157,924)
Provision for taxes 1,099 829
NET LOSS $(4,445,262) $(1,158,753)
BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK $ (1.60) $ (.42)
WEIGHTED AVERAGE NUMBER OF SHARES 2,771,134 2,768,260
F-3
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
NET LOSS $ (4,445,262) $ (1,158,753)
Change in unrealized gain on investment in securities available for sale (210,000) (713,250)
COMPREHENSIVE NET LOSS $ (4,655,262) $ (1,872,003)
F-4
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Additional Other Total
Common Paid-In Accumulated Comprehensive Stockholders'
Stock Capital Deficit Income (Loss) Equity
Balance, December 31, 1997 as
previously reported $ 54,423 $ 14,316,952 $ (8,777,037) $ 807,000 $ 6,401,338
One for two reverse stock split (27,211) 27,211 - - -
effective June 29, 1999
Balance, December 31, 1997 27,212 14,344,163 (8,777,037) 807,000 6,401,338
Issuance of 50,000 shares of common 500 240,500 - - 241,000
stock on January 21, 1998 converting
November 26, 1997 options
Change in unrealized gain on - - - (713,250) (713,250)
investment in securities available
for sale
Net loss - - (1,158,753) - (1,158,753)
Balance, December 31, 1998 27,712 14,584,663 (9,935,790) 93,750 4,770,335
Change in unrealized gain on - - - (210,000) (210,000)
investment in securities for sale
Net loss (4,445,262) - (4,445,262)
Balance, December 31, 1999 $ 27,712 $ 14,584,663 $ (14,381,052) $ (116,250) $ 115,073
F-5
<PAGE>
PIONEER COMMERCIAL FUNDING CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,445,262) $(1,158,753)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 144,508 202,530
Loan loss reserve and provision for bad debts 1,782,719 775,136
Gain from sale of fixed assets (90,577) -
Note receivable written off 75,000 -
Equity in loss of affiliate - 40,000
(Increase) decrease in:
Mortgage warehouse loans receivable 29,935,861 12,070,883
Loans held for resale 160,300 3,625,170
Accrued interest receivable 617,084 105,316
Prepaid expenses 41,815 (80,596)
Notes receivable 603,813
Other assets 282,781 (50,064)
Increase (decrease) in:
Accrued interest payable (61,515) (269,334)
Due to mortgage banking companies (220,228) (409,193)
Accounts payable and accrued expenses (266,449) (149,223)
Net cash provided by operating activities 28,559,850 14,701,872
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (113,773) (380,537)
Investment in and advances to joint ventures - (90,869)
Net proceeds from sale of fixed assets 792,638 -
Net cash provided by (used in) investing activities 678,865 (471,406)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in borrowings used in operations (28,663,108) (16,671,235)
Increase in deferred expenses - 4,712
Increase in subordinated debt - 726,000
Payment of subordinated debt (100,000) -
Net proceeds from issuance of stock - 241,000
Net cash (used by) financing activities (28,763,108) (15,699,523)
NET INCREASE (DECREASE) IN CASH 475,607 (1,469,057)
Cash and cash equivalents at the beginning of year 1,503,788 2,972,845
CASH AND CASH EQUIVALENTS AT THE END OF YEAR $ 1,979,395 $1,503,788
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest $ 1,540,309 $4,037,024
Income taxes $ 1,099 $ 829
NONCASH FINANCING ACTIVITIES:
Conversion of mortgage loans receivable to notes receivable $ 658,072 $1,088,437
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
NOTE A - 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.
In 1997, the Company changed its year end from March 31 to December 31.
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.
Operations:
The Company was 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 obtained its funds to provide
such financing from third-party funding sources with which it had available
lines of credit and from its own sources. The Company's loans receivable from
the mortgage banking companies are secured by an interest in the underlying real
property which are then assigned to the Company's funding sources. Investor
groups who purchase the mortgages (which generally occurs within 10 to 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 were 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 borrowed from its funding
source and the rate it charged the mortgage banking company. The Company's
customers fund loans throughout the United States.
The Company's operations were subject to certain risks which are inherent to its
industry. Its results of operations depended heavily upon the ability of its
mortgage banking customers to originate mortgage loans. This ability was largely
dependent upon general economic conditions in the geographic areas that the
Company serves. Because these general economic conditions fluctuate, there was
no assurance that prevailing economic conditions would 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 were 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 were: 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 should have
a commitment for each loan from an approved third-party agency ("Agency") before
the Company would extend mortgage warehouse financing, there was no guarantee
that the Agency would, 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 did not accept the mortgage loan, and the
Company's mortgage banking customer was unable to pay back its obligation to the
Company through other
F-7
<PAGE>
NOTE A - NATURE OF OPERATIONS (Continued):
Operations (Continued):
means, the Company would find itself the owner of a long-term loan of less than
market value instead of short-term bridge financing receivable.
In September 1999, the Company pursuant to an Asset Purchase Agreement dated
July 30, 1999 with Princap Mortgage Warehouse, Inc. ("PMW"), sold to PMW all of
its equipment, furniture and other physical assets and all its computer
operating systems for the sum of $800,000. As a result of this sale, the Company
moved its operations to New York and no longer has any continuing business
operations other than winding up its operations which includes collection
activities with respect to outstanding loans.
NOTE B - 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 estimated losses on the
disposition of stale loans and uncollectable interest and fees, for deferred
income taxes and the estimated obligations due under the POR, as more fully
described in Notes M and P, 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.
Income Taxes:
The Company utilizes SFAS 109 "Accounting for Income Taxes" which requires use
of the asset and liability approach of providing for income taxes. This
statement requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method deferred tax liabilities
and assets are determined based on the differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date
(see also Note K).
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 customer loan and security agreement.
Loan Fees:
Loan processing fees are capitalized and recognized as an adjustment of the
yield of the related loan in accordance with SFAS No. 91.
F-8
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Basic and Diluted Earnings (Loss) Per Share of Common Stock:
Net earnings or loss per share is calculated in accordance with Statement of
Financial Standards No. 128, Earnings Per Share ("SFAS 128"), which superseded
APB Opinion No. 15. Basic net earnings per share is based upon the weighted
average number of common shares outstanding. Diluted earnings per share is based
on the assumption that all stock options and warrants were exercised.
For the years ended December 31, 1999 and 1998, the exercise price exceeded the
average sale price for most options and warrants, and the impact of conversion
of the warrants and options would have been antidilutive or immaterial.
Therefore, the options and warrants were not considered in the calculation of
earnings (loss) per common share.
Concentration of Credit Risk/Fair Value:
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash investments and mortgage warehouse loans
receivable.
The Company maintains, at times, deposits in federally insured financial
institutions in excess of federally insured limits. Management monitors the
soundness of these financial institutions and feels the Company's risk is
negligible.
Management believes that concentrations of credit risk with respect to mortgage
warehouse loans receivable are limited due to the underlying assignment of note
and deed of trust on residential real estate collateral for each loan,
guarantees by mortgage banking customer principals, security deposits
approximating 10% of each customer's line of credit and UCC filings on the
assets of the Company's mortgage banking customers.
As of December 31, 1999 and 1998, the fair value of cash and cash equivalents,
receivables, obligations under accounts payable and debt instruments approximate
the carrying value.
Marketable Securities:
At December 31, 1999 and 1998, marketable securities have been categorized as
available for sale and, as a result, are stated at fair value in accordance with
Statement of Financial Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Unrealized gains and losses are included in
shareholders' equity as other comprehensive income (loss).
Fixed Assets:
Fixed assets (which were sold during 1999) were recorded at cost. Depreciation
of fixed assets was provided on a straight-line basis as follows:
Furniture and equipment 3 - 10 years
Proprietary computer software 5 years
F-9
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Fixed Assets (Continued):
Maintenance and repairs are expensed as incurred. Leasehold improvements are
amortized over the useful life of the asset or the lease, whichever is shorter.
Proprietary computer software consisted of a set of computer programs that were
developed internally by the Company for the use in its business and were not for
resale to the other mortgage finance companies (see also Note A).
Depreciation and amortization expense for the years ended December 31, 1999 and
1998 aggregated $144,508 and $202,350, respectively.
Advertising Costs:
Advertising costs, which are included in general and administrative expenses,
are expensed as incurred. For the years ended December 31, 1999 and 1998,
advertising costs aggregated $3,338 and $45,593, respectively.
Comprehensive Income:
In 1997, the Company adopted Statement of Financing Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes new rules
for the reporting and display of other comprehensive income and its components.
SFAS 130 requires unrealized gains or losses on the Company's available-for-sale
securities to be included in other comprehensive income.
Segments of an Enterprise and Related Information:
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes standards for reporting on operating segments. The Company has
determined that no operating segment outside of its core business met the
quantitative thresholds for separate reporting. Accordingly, no separate
information has been reported.
Reclassifications:
Certain reclassifications have been made to conform prior years data to the
current format.
NOTE C - GOING CONCERN UNCERTAINTY:
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company is winding down its mortgage
warehouse lending business, has sustained substantial operating losses over the
last two years and has used substantial amounts of working capital in its
operations. Management of the Company determined that the Company did not meet
the revenue objectives for its mortgage warehouse lending business and did not
expect the Company to be able to meet these objectives in the foreseeable
future. The Company therefore decided to sell all its operating assets and will
explore other business opportunities.
In view of these matters, realization of the assets of the Company is dependent
upon the Company's ability to meet its financing requirements and the success of
future operations. The financial statements do not include adjustments relating
to the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
F-10
<PAGE>
NOTE D - MORTGAGE WAREHOUSE LOANS RECEIVABLE/PAYABLE:
Loans receivable are generally due within sixty days from the date funded, with
an average outstanding period of 33 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. During the fiscal year ended 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, September 26 and December 12, 1997,
Bank One amended the credit facility to provide the Company with $35,000,000,
$50,000,000 and $60,000,000, respectively. Effective June 30, 1998 Leedan
Business Enterprise Ltd. ("Leedan"), a 49% owner of the Company, entered into a
Capital Maintenance Agreement with Bank One wherein Leedan agreed to cause
capital contributions or subordinated debt advances, up to $2 million, to be
made to the Company in order to maintain an adjusted Company net worth of a
least $8 million, upon official written request by Bank One. This agreement
continues in effect until the Company has paid its obligation to Bank One and
Bank One terminates its commitment to supply the Company credit (See also Note
N). On September 1 and September 15, 1998, Bank One amended the credit facility
to decrease the borrowing limit to $55,000,000 and $50,000,000 respectively. The
credit facility expired on October 30, 1998, whereupon Bank One agreed to
continue funding the Company's loans until the facility was renewed or another
lender replaced Bank One. On February 18, 1999, Bank One renewed the credit
facility with a borrowing limit of $40,000,000 through April 30, 1999. This
credit facility was subsequently extended to September 30, 1999 and as of the
date of these financial statements, no additional renewal was granted by Bank
One. At December 31, 1999, the Company continues to owe Bank One $4,721,817.
For the years ended December 31, 1999 and 1998, the weighted average interest
rate on loans receivable was 9.65% and 10.23%, respectively, and on loans
payable was 7.88% and 8.36%, 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.
NOTE E - LOANS HELD FOR RESALE
In 1997, 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 had a perfected interest in the loans and sold 32 of the loans at a
net discount of $72,070. The five loans unsold at December 31, 1998 with an
original loan amount of $698,116, together with holdback receivables on sold
loans of $180,945, were held at net realizable value which included a reserve of
$173,582. These loans were subsequently sold during the year ended December 31,
1999.
In September 1999, the Company used a portion of the proceeds from the sale of
fixed assets (see Note A) and acquired 36 stale loans for $574,774 from Bank
One. At December 31, 1999, the balance of these loans are reflected in the
financial statements at net realizable value aggregating $236,179, which
includes a reserve of $309,000.
F-11
<PAGE>
NOTE F - RECEIVABLE FOR LOANS SHIPPED:
During October 1997, the Company warehoused $1.7 million in mortgages for the
same customer as described in Note E above, who used a third party conduit,
American Financial Mortgage Corporation, to sell its loans to an investor,
Norwest Funding, Inc. 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 miswired the funds to the conduit's bank, Corestates Bank, N.A. The
conduit's bank has refused to return the funds. The Company is taking actions,
including legal action, to collect the funds from the conduit, the conduit's
guarantor, the investor and the conduit's bank. The Company's lender, Bank One
Texas, N.A. ("Bank One"), has joined the litigation as a co-plaintiff in support
of the Company's position. In addition, the Company has a $5 million personal
guarantee from the third party conduit's primary shareholder and an additional
$2 million guarantee from the customer's primary shareholder. Although it is
impossible to assess with accuracy the ultimate outcome of this matter,
management and their attorneys believe that the Company's claims in this
litigation have merit and that the Company will be successful in the assertion
of those claims against the defendants.
NOTE G - INVESTMENT 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.
On May 6, 1999, management of FFIR approved a 1 for 50 reverse stock split,
reducing the Company's number of shares to 6,000. In November 1999, the Company
received 1,250 restricted bonus FFIR shares. FFIR shares closed on December 31,
1999 and 1998 at $15 and $1.06 per share (before reverse stock split),
respectively, resulting in an unrealized loss of $210,000 in 1999 and an
unrealized loss of $713,250 in 1998. Fidelity First Mortgage, which is also a
customer of the Company, is based in Columbia, Maryland and funds conforming and
non-conforming single family residential mortgages in Maryland, Virginia,
Delaware, Florida, North and South Carolina. At December 31, 1999 and 1998,
mortgage warehouse loans receivable from this customer amounted to $-0- and
$1,633,457, respectively and net accrued interest receivable amounted to $14,868
and $47,970 for 1999 and 1998, respectively.
F-12
<PAGE>
NOTE H - NOTES RECEIVABLE:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
On November 18, 1998, a settlement was reached with a guarantor of a mortgage
banking customer's defaulted line of credit. The guarantor was also a company
stockholder. Pursuant to the settlement, an entity which is an affiliate of
Leedan (see Note D) accepted $530,000 of the guarantor's recognized debt to the
Company in exchange for the guarantor's shares in the Company. This entity paid
the Company $176,667 and issued two installment notes of $176,667 each with
maturity dates of August 23, 1999 and May 23, 2000, respectively. These notes
bear interest at a rate of 8.25% per annum and are payable quarterly commencing
three months from the date of issuance which was November 23, 1998. $ 176,667
Pursuant to the settlement as stated above, the guarantor also issued to the
Company two installment notes in the amounts of $265,103 and $470,000,
respectively. These notes bear interest at a rate of 8.25% per annum and are
payable quarterly commencing three months from November 18, 1998, the date of
issuance of the notes. Both notes mature November 18, 2000. 735,103
On March 29, 1999, a settlement was reached with two clients and their guarantor
wherein the remaining loans on each client's line and interest and fees due
through October 31, 1998 were replaced with a note from each client guaranteed
by the client's guarantor in the amounts of $453,430 and $204,640, respectively,
each payable in sixteen monthly installments plus interest at an annual rate of
10%. Both notes mature June 29, 2000. 155,926
-----------
$1,067,696
==========
NOTE I - 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 80% and 20% ownership interests, respectively, in PHF. 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% interest in PHF. As of December 31, 1999 and 1998, the Company
has advanced as a loan receivable $294,345 and $275,344, respectively (which is
included in other assets on the balance sheet). At December 31, 1999 and 1998,
the Company has recorded a reserve aggregating $294,345 and $110,000,
respectively, against this receivable due to the financial condition of PHF.
NOTE J - OTHER ASSETS:
The following items are also included in other assets on the Company's financial
statements:
1. 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, 1999 and is renewable annually at the discretion of
the insurance carrier.
F-13
</TABLE>
<PAGE>
NOTE J - OTHER ASSETS (Continued):
2. 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 (See Note P).
NOTE K - INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1999 1998
Current:
Federal $ - $ -
State 1,099 829
1,099 829
Deferred:
Federal - -
State - -
Provision for income taxes $ 1,099 $ 829
The tax effects of temporary differences that give rise to deferred tax assets
are presented below:
1999 1998
Net operating losses $ 2,230,000 $ 680,000
Valuation allowances (2,230,000) (680,000)
$ - $ -
At December 31, 1999, the Company had net operating loss (NOL's) carryforwards
available for income tax purposes of approximately $5.6 million expiring in
varying amounts through 2013. Approximately $1 million of the NOL's are limited
in use pursuant to a change in ownership in November 1994.
</TABLE>
NOTE L - 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 plus premiums or less discounts 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.
F-14
<PAGE>
NOTE M - DEFERRED LEGAL FEES:
Deferred legal fees are a consequence of the POR (see Note P) and are payable in
four annual installments which began on April 16, 1994. The Company has not paid
the April 1996, 1997 and 1998 installments aggregating $65,395 as of December
31, 1999.
NOTE N - STOCKHOLDERS' EQUITY AND INITIAL PUBLIC OFFERING:
Common Stock:
At the annual meeting of the stockholders on June 29, 1999, a reverse stock
split of 1 for 2 was approved. The date of record for the reverse split was June
29, 1999.
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 the outstanding
Convertible Notes into 1.8 million shares of common stock.
F-15
<PAGE>
NOTE N - STOCKHOLDERS' EQUITY AND INITIAL PUBLIC OFFERING (Continued):
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 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. On
September 11, 1998 three subordinated debt advances pursuant to the Leedan
Capital Maintenance Agreement (Note D) were made to the Company totaling
$726,000, secured by notes. The notes are due when a replacement for the Bank
One lending facility is in place, with interest paid quarterly at 11% per annum.
During the first quarter of 1999 $100,000 of debt was repaid.
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, 1999, 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 P for further discussion of restrictions
under the POR).
NOTE O - 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.
F-16
<PAGE>
NOTE O - STOCK OPTION PLANS (Continued):
Weighed average fair value of options granted during the year (adjusted for 1
for 2 reverse stock split) is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 December 31, 1998
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Options outstanding
beginning 208,500 $4.90 412,523 $6.47
Granted - - - -
Exercised - - - -
Canceled - - 204,023 8.08
Options outstanding ending 208,500 $4.90 208,500 $4.90
============= ================ ============= =============
The following information applies to options outstanding at December 31, 1999
Options Outstanding Options Exercisable
Weighted Average
Remaining
Contractual Life Weighted Average
Range of exercise prices Number Outstanding (Years) Exercise Price Number Exercisable
$1.00 - $2.25 22,500 2.25 $2.25 22,500
$2.26 - $4.50 111,000 2.50 $4.35 111,000
$4.51 - $10.00 75,000 2.75 $6.50 75,000
208,500 2.57 $4.90 208,500
------------------------- =================== -------------------- ------------------- =================== --------------------
No options were granted during the years ended December 31, 1999 and 1998.
</TABLE>
F-17
<PAGE>
NOTE P - COMMITMENTS AND CONTINGENCIES:
Plan of Reorganization:
Under the POR, the Company is contingently liable to its pre-Chapter 11
unsecured creditors, for such creditors' pro rata shares of noninterest-bearing
notes (the "Notes") totaling $1,350,000. Commencing with the close of the 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.
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.
For the years ended December 31, 1999 and 1998 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
for 1998 or 1999.
As of December 31, 1999, 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 future liability has been reflected in the
Company's balance sheet for the Notes or the professional fees.
In accordance with the POR, certain operating restrictions have been placed upon
the Company until the time that all amounts due on the Notes have been paid in
full. These restrictions include:
- - Incurring new debt in excess of $25,000, except for secured lending
required in the ordinary course of the Company's mortgage lending
operations.
- - Expending more than $25,000 in the aggregate in a calendar year to
purchase or lease capital assets, except to replace existing assets.
- - Expending more than $320,000 annually in the aggregate to the officers of
the Company and placing limitations on salary increases.
- - Merging or consolidating with another business.
- - Declaring dividends on any class of common stock, except that, if there
should be a public offering of the securities of the Company, and, if at
the option of the Company, fifty percent of the proceeds in excess of
$5,000,000 from such offering are utilized for the payment of the Notes,
then such dividend restriction shall be deemed waived.
In 1998 and 1999 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 believed that these expenditures were necessary to expand the
Company's mortgage operations, and is not aware of any financial impact on the
Company under the restrictions of the POR because of these expenditures.
F-18
<PAGE>
NOTE P - COMMITMENTS AND CONTINGENCIES (Continued):
Lease Obligation:
The Company leases 6,846 square feet of office space through October of 2007.
The monthly base rent through September 2002 is $13,692 and for years six
through ten is $15,745. The Asset Purchase agreement (see Note A) also provides
for the purchaser to rent this space for four months commencing October 1, 1999
at $13,873 per month.
The Company continues to be obligated under a previous office lease through
October 31, 2001. This lease calls for monthly rent of $2,178 and CPI increases
with a minimum of 3% and a maximum of 5% annually. The Company sublets this
space for $1,410 per month subject to three one year leases.
Rent expenses (net of rental income) for the years ended December 31, 1999 and
1998 aggregated $148,840 and $210,591, respectively.
At December 31, 1999, future minimum rental are as follows:
Fiscal Year Ended December 31,
2000 $ 190,440
2001 188,262
2002 164,304
2003 188,950
2004 188,950
Thereafter 535,360
$ 1,456,266
Commitments to Extend Credit Facilities:
At December 31, 1998 the Company had made approximately $80 million in
commitments to extend credit facilities to it 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. There were no such commitments made at December 31,
1999.
Employment Agreement:
In July 1997, the Company extended the Employment Agreement with M. Albert
Nissim as President for an indefinite period, at a salary of $6,000 per month.
Effective April 1, 1998, Mr. Nissim's compensation was increased to $9,500 per
month. In addition, he was awarded a $12,000 bonus. The Agreement may be
terminated by either party on not less than 90 days prior to notice.
F-19
<PAGE>
NOTE P - COMMITMENTS AND CONTINGENCIES (Continued):
Other Agreement:
The Company has approved a compensation plan for a director and/or Leedan the
company which provides management services to the Company. Leedan is also a
principal shareholder of the Company. The plan provides aggregate remuneration
to the director and/or Leedan of $100,000 per annum plus 5% of the Company's net
income (pre-tax) above $1,000,000 annually. Leedan and the director will
determine how such compensation will be divided between them.
NOTE Q - ECONOMIC DEPENDENCY:
During the year ended December 31, 1999, the Company funded 466, 176, 275 and
279 loans aggregating approximately $28.7 million, $28.1 million, $24 million
and $23.1 million, respectively to four customers. At December 31, 1999 mortgage
warehouse loans receivable from these customers amounted to $662,000, $-0-, $-0-
and $-0-, respectively.
During the 1998 fiscal year, the Company funded 893 and 813 loans aggregating
approximately $76.6 million and $53 million, respectively, to two customers. At
December 31, 1998 mortgage warehouse loans receivable from these customers
amounted to $8,393,600 and $3,036,283, respectively.
NOTE R - RELATED PARTY TRANSACTIONS:
For the year ended December 31, 1998 certain family members of a previous
executive officer and a member of the BOD of the Company were engaged to perform
various accounting and consulting services for the Company. Such individuals
were compensated approximately $16,166 for these services. (See also Notes H, I
and Q for other related party transactions.)
F-20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PIONEER COMMERCIAL FUNDING CORP.
By: /s/ M. Albert Nissim
Name: M. Albert Nissim
Title: President
Date: March 31, 2000
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ M. Albert Nissim
Name: M. Albert Nissim
Title: President and Chief
Financial Officer
Date: March 31, 2000
By: /s/ Richard Fried
Name: Richard Fried
Title: Director
Date: March 31, 2000
By: /s/ Boaz Harel
Name: Boaz Harel
Title: Director
Date: March 31, 2000
By: /s/ Tamar Lieber
Name: Tamar Lieber
Title: Director
Date: March 31, 2000
By: /s/ Lynda Davey
Name: Lynda Davey
Title: Director
Date: March 31, 2000
By: /s/ Joseph Samuels
Name: Joseph Samuels
Title: Director
Date: March 31, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,979,395
<SECURITIES> 0
<RECEIVABLES> 5,258,154
<ALLOWANCES> 1,524,200
<INVENTORY> 0
<CURRENT-ASSETS> 6,919,733
<PP&E> 1,384,179
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 5,479,692
<BONDS> 0
0
0
<COMMON> 27,712
<OTHER-SE> 14,584,663
<TOTAL-LIABILITY-AND-EQUITY> 7,220,765
<SALES> 0
<TOTAL-REVENUES> 2,089,286
<CGS> 0
<TOTAL-COSTS> 1,563,837
<OTHER-EXPENSES> 2,670,122
<LOSS-PROVISION> 2,442,899
<INTEREST-EXPENSE> 2,749
<INCOME-PRETAX> (4,444,163)
<INCOME-TAX> 1,099
<INCOME-CONTINUING> (4,445,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,445,262)
<EPS-BASIC> (1.60)
<EPS-DILUTED> (1.60)
</TABLE>
