-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KRoKkq1BmjajSbX6rdJl6jzNag7DOFBFZe/hT9zvuv0hHSFb1qMLVpwll2RP8ytl Z6dNyVTe4OxjrZJ+W9jpSg== 0000944209-97-000824.txt : 19970630 0000944209-97-000824.hdr.sgml : 19970630 ACCESSION NUMBER: 0000944209-97-000824 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER COMMERCIAL FUNDING CORP /NY/ CENTRAL INDEX KEY: 0000867713 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 133763437 STATE OF INCORPORATION: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24940 FILM NUMBER: 97632096 BUSINESS ADDRESS: STREET 1: 6660 RESODA BOULEVARD STREET 2: C/O OHRENSTEIN & BROWN CITY: RESODA STATE: CA ZIP: 91335 BUSINESS PHONE: 8187760590 MAIL ADDRESS: STREET 1: 6660 RESODA BOULEVARD CITY: RESODA STATE: CA ZIP: 91335 FORMER COMPANY: FORMER CONFORMED NAME: PCF ACQUISITION CORP DATE OF NAME CHANGE: 19941017 10KSB 1 FORM 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB [x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended March 31, 1997 -------------------------- [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to ------- ---------- Commission file number ----------------------------- PIONEER COMMERCIAL FUNDING CORP. - -------------------------------------------------------------------------------- (Name of small business issuer in its charter) New York 13-3763437 - -------------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 6650 Reseda Blvd., Reseda, California 91335 - -------------------------------------- --------------------------------------- (Address of principal executive (Zip Code) offices) Issuer's telephone number (818) 776-0590 ------ ---------------- 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 --- --- POTENTIAL PERSONS WHO ARE TO RESPOND TO THE COLLECTION OF INFORMATION CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ________ State issuer's revenues for its most recent fiscal year. $329,425 ------------ As of June 25, 1997, there were 5,442,272 shares of the Issuer common stock, $.01 par value, issued and outstanding of which 2,423,069 held by non-affiliates of the Issuer. Based on the closing price for shares of common stock on that date, the aggregate market value of the common stock held by non-affiliates of the Issuer was approximately $4.5 million. For purposes of the foregoing calculation only, all directors and executive officers of the Issuers have been deemed affiliates. (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ______ No ______ (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 5,442,272 - -------------- 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. In August 1996, the Company consummated its initial public offering (the "IPO") pursuant to which the Company issued and sold 600,000 shares of its common stock, par value $.01 per share (the "Common Stock"), and 690,000 warrants (including warrants sold upon exercise of the underwriters' over- allotment option) exercisable into 690,000 shares of Common Stock at a price to the public of $5.00 per share and $.10 per warrant, which yielded to the Company net proceeds of approximately $2 million. The exercise price of the warrants is $5.50 per share exercisable during the four year period commencing August 13, 1996 and ending August 12, 2000. On February 28, 1997, the Company completed a private placement of securities (the "Private Placement") with eight investors who invested an aggregate of $4 million in the Company in consideration for 2.2 million shares of Common Stock and $1.8 million principal amount of convertible promissory notes of the Company (the "Convertible Notes"). The Convertible Notes were converted into 1.8 million shares of Common Stock on May 9, 1997. . GENERAL The Company is a mortgage warehouse lender providing short-term (generally 10-60 days with an average of 21 days per loan) financing to small to medium sized mortgage bankers who hold ("warehouse") mortgage loans which they originate pending the nonrecourse sale of such loans to institutional investor agencies in the secondary mortgage market such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"; each one referred to herein as an "Agency") and/or accredited financial institutions such as banks, thrifts, insurance carriers and large mortgage bankers (each one and each Agency referred to herein as a "Financial Institution"). . THE COMPANY'S MORTGAGE LENDING OPERATIONS The Company provides mortgage warehouse lines of credit for small to medium sized mortgage bankers who have satisfied the Company's financial, business and creditworthiness standards. The mortgage loans for which the Company provides mortgage warehouse lending are primarily used to fund purchases of single family residences and other owner-occupied residential properties, including one to four unit properties in which the owner is the occupant of at least one of such units. 2 In a mortgage warehouse loan transaction, the Company's mortgage banking customer will first obtain a funding commitment from a Financial Institution for a fee, which is usually a fraction of a percent of the commitment amount. The Company's customer will then seek to fill the commitment through the submission of one or more loans to the Financial Institution which conform not only to the Financial Institution's established loan criteria, but also to the commitment's rate and delivery date. These commitments can take three forms: individual loan, small pool, or standard pool. An individual loan commitment is an agreement by a Financial Institution, with a usual term of no longer than two weeks, to purchase a single whole loan of a specified amount on or before a specified date (the "Commitment Date") at a specified rate. A small pool commitment is an agreement by a Financial Institution, with a usual term of no longer than three weeks, to purchase an unrestricted number of whole loans of a specified total amount on or before a specified date at a specified rate. A standard pool commitment is an agreement by a Financial Institution, with a usual term of no longer than 90 days, to purchase an unrestricted number of whole loans of a specified total amount of no less than $1 million on or before a specified date at a specified rate. Generally, the Company's customers do not possess sufficient capital or bank lines of credit to fully fund loans they originate during the period of time that transpires between the date on which a loan is closed and the Commitment Date. Accordingly, the Company provides its customer with a line of credit that is collateralized by each loan that the Company funds for its customer, which enables the customer to hold (warehouse) the loan for the period of approximately 10 to 60 days that typically occurs from the closing of the loan until the Commitment Date. During this period, the Company holds the loan documents (generally, the promissory note and an assignment of the first deed of trust or mortgage securing the note), and upon its delivery of the loan documents to the Financial Institution, the Company receives the full amount of the loan and all other amounts payable to the mortgage banking company. The Company applies such funds against amounts due from its customer to repay the principal of the Company's warehouse loan to the customer and then remits the excess funds to the customer. The Company derives its revenues from both the transaction-based fees that it charges its customers in connection with the loans it funds on their behalf and the interest rate spread between the yield paid by the Company to its financing sources for its borrowed funds, when applicable, and the interest rate charged by the Company for mortgage loans that it funds on behalf of its mortgage banking company customers. During the fiscal years ended March 31, 1996 and 1997 (the "1995 fiscal year" and "1996 fiscal year", respectively), such interest rate spread was generally 0.50%. Since April 1, 1997, the interest rate spread 3 increased to a range of 1.625% to 1.875% based on the type of loan, due to the lower interest rate that the Company pays on advances made by Bank One compared to the UMB (as defined below) interest rate. Transaction fees are determined pursuant to a schedule based upon the length of time between the funding of a loan by the Company and reimbursement of same by the Financial Institution. During the 1995 and 1996 fiscal years, the Company's customers were charged an initial fee of $60 to $190 upon funding of a loan. If the loan was repaid within 30 days of the funding date, additional fees were typically not earned by the Company on such loan. If such loan was not repaid within said period, the customer paid an additional fee of $150. Since April 1, 1997, such fee schedule has been revised and the Company's customers are charged fees which range from $125 to $250 upon funding of a loan and, in addition, a yearly facility fee ranges from 25 to 37.5 basis points based on the approved line of credit to such customer. In the event that the Company disburses funds to a title company in preparation for closing of a loan which thereafter does not close, only the initial fee, plus interest for the one to three days that it normally takes before such funds are returned by the title company to the Company, are charged by the Company to its customer. Generally, the Company's mortgage warehouse loan customers paid interest for the funds they borrowed during the 1995 and 1996 fiscal years at a rate that ranged from one quarter of one percentage point to one percentage point over the UMB Prime Rate (as defined below). . THE COMPANY'S BANK ONE, TEXAS, N.A. LINE OF CREDIT. As of March 31, 1997, the Company entered into a one year credit agreement (the "Credit Agreement") with Bank One, Texas, N.A. ("Bank One"). Pursuant to the Credit Agreement, Bank One provides the Company with a $25,000,000 revolving line of credit (the "Bank One Credit Line") and the Company pays fees ranging from $17.50 to $12.50 per loan based on monthly loan volume. In addition, based on the type of the loan, the Company pays interest on advances made by Bank One at a variable rate ranging from 1/8% below to 1/8% above Bank One's prime rate of interest (the "Bank One Prime Rate"). The Bank One Prime Rate is the rate quoted from time to time by the Wall Street Journal as the base rate on corporate loans at large U.S. money center commercial banks . As collateral security for its indebtedness to Bank One under the Credit Agreement, the Company has granted to Bank One a security interest in various assets including, but not limited to, all promissory notes acquired by the Company with respect to any loan funded by the Company with proceeds of the Bank One 4 Credit Line and all mortgages or other forms of collateral securing the funding of such loans. . THE COMPANY'S UNITED MIZRAHI BANK LINE OF CREDIT. During the 1995 and 1996 fiscal years, the Company utilized a revolving line of credit provided by United Mizrahi Bank ("UMB") under a revolving line of credit and security agreement between the Company and UMB, as amended (the "UMB Agreement"), which was increased over the course of the 1995 fiscal year from $1 million to $4 million. Pursuant to the UMB Agreement, the Company paid a fee of $30.00 per loan plus interest on advances made under its credit line at one percent above the highest "prime rate" of interest quoted from time to time by the Wall Street Journal as the base rate on corporate loans at large U.S. money center commercial banks (the "UMB Prime Rate"). As collateral security for its indebtedness to UMB under the UMB Agreement, the Company granted to UMB a security interest in various assets including, but not limited to, all promissory notes acquired by the Company with respect to any loan funded by it with proceeds of the UMB credit line and all mortgages or other forms of collateral securing the funding of such loans. The UMB credit line was paid in full by the Company in February 1997. . THE COMPANY'S MORTGAGE BANKING COMPANY CUSTOMERS During the fiscal year ended March 31, 1995 (the "1994 fiscal year"), the Company had three customers; however, 82.5% of its fundings were with one customer, Premium Mortgage Company ("Premium"). In the first quarter of the 1995 fiscal year, the Company suspended its customer relationship with Premium due to Premium's failure to comply with the Company's underwriting criteria. During the second and third quarters of the 1995 fiscal year, the Company commenced business operations with three new customers. The Company funded 81, 70 and 49 loans with those three customers, totalling $7,249,533, $9,599,530 and $3,529,393, respectively, which accounted for 35.4%, 46.8% and 17.2%, respectively, of the Company's warehouse lending business during the 1995 fiscal year. During the 1996 fiscal year, the Company funded 643 loans aggregating $51.4 million with the three largest customers, which accounted for 84% of its total fundings. The Company funded 297 loans aggregating $24.7 million for one customer, which accounted for 40.6% of the Company's fundings; 174 loans aggregating $12.6 million for the second customer, which accounted for 20.7% of the Company's fundings; and 172 loans aggregating $14.1 million 5 funded for the third customer, which accounted for 23.2% of the Company's fundings. From April 1 through May 31, 1997, the Company had 21 mortgage banking company customers, of which 12 were active. During this period the Company funded 379 mortgage warehouse loans for an aggregate dollar volume of $28.4 million. . THE MORTGAGE LOAN PROCESS In order to be approved as a customer, a mortgage banking company must satisfy a set of standards that have been established by the Company. All of the Company's customers are Financial Institution-approved mortgage banks that generally originate three categories of mortgage loans which are purchased by such Financial Institutions, i.e., (i) residential mortgage loans which either have been insured by the Federal Housing Administration, insured by the Farmer's Home Administration or guaranteed by the Veteran's Administration (collectively, "FHA/VA Loans"); (ii) conventional residential mortgage loans, i.e., non-FHA/VA Loans which comply with the requirements for sale to, or conversion into, mortgage-backed securities issued by FNMA or FHLMC ("conforming loans"); and (iii) non-conforming product which includes sub-prime loans. After a customer has satisfied the Company's application standards, a credit facility agreement is entered into by the Company and the customer ("Credit Facility Agreement") which specifies, among other things, the maximum amount which can be borrowed by the customer under the Credit Facility Agreement, the maximum percentage of any single mortgage loan that will be advanced, the interest rate and the terms of repayment. All funds advanced by the Company under a Credit Facility Agreement are collateralized by a security interest in the note and mortgage or deed of trust, as well as all instruments and documents comprising the loan documentation on each loan funded by the Company and a personal guaranty of the principals of the customer. To insure completeness, the process of reviewing and determining whether an applicant has satisfied these standards is fully monitored through the Company's Collateral Tracking System (the "CTS"), which the Company utilizes to manage the risks inherent in its business, and prepare, track and confirm the on-time delivery of all necessary documents to the appropriate Financial Institution. Within one day of the CTS's confirmation that all required documentation has been received and reviewed by the Company's staff, the Company will wire between 98% to 100% of the proceeds of the loan to the appropriate escrow agent or title company with 6 instructions to disburse the funds only upon consummation of the loan closing, or otherwise return the funds to the Company. At the time of closing, the mortgage banking company funds the balance of the loan. On or shortly before expiration of the Commitment Date, the Company delivers all promissory notes and mortgage instruments comprising the loans to be purchased pursuant to the Financial Institution's commitment to such Financial Institution upon payment to the Company of the aggregate principal amount of the loans being delivered. Upon receipt of such funds from the Financial Institution or the paying agent, the Company applies such funds against amounts due from the customer to repay the principal of the Company's warehouse loan to the customer and then remits the excess funds to the customer. By limiting the mortgage loans funded to those that conform to Financial Institution criteria, which define the prevalent standards for the entire secondary mortgage market, the Company reduces its overall financing risk to those mortgages which are the most liquid and readily acceptable by secondary mortgage market lenders. Furthermore the Company obtains sufficient documentation to ensure that if, for any reason, a Financial Institution refuses to accept and pay for a loan subsequent to the closing thereof, the Company will have all of the data and documentation necessary to sell the loan to another Financial Institution or to a mortgage loan originator or warehouse lender. In the 1994, 1995 and 1996 fiscal years, no loan which was approved for funding by the Company failed to close, and every loan which was closed with the Company's funds during those periods was sold to a Financial Institution in accordance with the commitment made by the Financial Institution in advance of such closing. . THE COLLATERAL TRACKING SYSTEM The Company manages the risks inherent in its business and prepares, tracks and confirms the on-time delivery of all necessary documents to the appropriate Financial Institution with the CTS, a proprietary set of computer-based operating software. The CTS, which was developed principally by the Company for its business and not for resale to other mortgage financing companies, provides the operating data controls that are used by the Company's staff to run the business on a day-to-day basis. The CTS programs assist the Company in its efforts to avoid problems caused by, and the monetary losses that can result from, frequent short-term processing deadlines, the high volume of loan transactions and the complex document structures of mortgage loan financing transactions which are integral parts of the mortgage loan warehouse financing business. Substantial penalties for delay in delivering loan documents to the secondary market, which 7 may range from a surcharge of 1% to 2% of the principal amount of a loan in the case of a delay regarding an individual loan commitment, to a complete rejection and refusal to purchase an entire pool of loans in the case of a delay in filling a pool commitment, are an integral part of the mortgage loan warehouse financing business. An individual loan surcharge will not have any adverse effect upon the Company, inasmuch as the amount would be deducted from the proceeds of the particular loan which the Company would otherwise be obligated to remit to its mortgage banking customer upon its acceptance and funding by a Financial Institution. However, a delay which would cause a Financial Institution to refuse to purchase a pool could result in a delay in replacing the rescinded pool commitment with a new pool commitment from another Financial Institution, or in selling the components of the pool as individual loans. Although the Company would ultimately be compensated for the delay through higher fees and interest charged to its customer on the pool of loans in question, the delay could hinder its ability to timely fund additional loans submitted by other customers, and thereby adversely affect its ongoing relations with such other customers as a reliable source of mortgage warehouse financing. During the 1995 and 1996 fiscal years, none of the individual or pool loans funded by the Company on behalf of its customers was rejected by reason of a delay in the delivery thereof to a Financial Institution. The CTS keeps track of all amounts funded under its customer's line of credit, automatically determines whether a sufficient balance remains thereunder to fund a particular loan and updates the available balance information upon transfer of funds. The CTS generates all documentation pertaining to the transfer of funds to the title company closing a loan, the transmittal and release of loan documents to a Financial Institution, the receipt of funds in payment of loans purchased by a Financial Institution, and the distribution of funds due to the mortgage banking company. The CTS programs, which include all phases of the Company's mortgage financing operations, have been modified and altered over time so that they meet the Company's evolving business requirements. CTS was first developed in 1987 by principals of the Predecessor. In the 1995 and 1996 fiscal years, the Company invested approximately $4,805 and $14,000, respectively, for development and modification of the CTS to meet the Company's needs. . STRATEGY. The Company has embarked on strategies to meet competitive forces in the mortgage market. These strategies include focusing on customers with a broader product base such as non-conforming 8 loans (loans which are not sold to the Agencies) and home equity loans. The Company is seeking acquisitions of complementary businesses such as mortgage companies and companies that provide specialty financial services within the mortgage industry. . MORTGAGE BANKING OPERATIONS On April 16, 1997, the Company entered into a joint venture agreement with Maryland Financial Corporation ("MFC") to form Pioneer Home Funding, LLC, a California limited liability company ("PHF"). The Company and MFC will maintain 80 and 20 percent ownership interests, respectively, in PHF. As of June 10, 1997, the Company and MFC contributed to PHF $40,000 and $20,000, respectively. These amounts are anticipated to increase up to $200,000 and $50,000, respectively. PHF is a mortgage banking company organized for the primary purposes of originating, acquiring, marketing and selling mortgage loans on residential properties. PHF is expected to commence operations in July 1997. . COMPETITION. The business of originating and financing the origination of residential mortgage loans is highly competitive. In order to obtain qualified residential mortgage loans from small to medium sized originating mortgage bankers, the Company competes with national, regional and local commercial banks and mortgage banking companies who engage in mortgage loan warehouse lending that have longer operating histories and significantly greater resources than those of the Company in providing multi-state, computer-based bridge financing of residential mortgage loans. In recent years, a declining interest rate environment favorable to mortgage loan originations has existed. During the period 1995- 1997, larger, established mortgage banking companies have formed mortgage warehouse divisions. The Company believes that as an independent warehouse lender, it can effectively compete by adjusting to an ever-changing mortgage market while providing a high-quality service through experienced management and information provided to the Company's customers through the CTS. . SEASONALITY. The mortgage banking industry is generally subject to seasonal trends. These trends reflect a national pattern of sales and resales of homes, although refinancing tends to be less seasonal and more closely related to changes in interest rates. Sales and resales of homes typically peak during the spring and summer and decline to lower levels from December through March. 9 . REGULATION - MORTGAGE WAREHOUSE LENDING. Mortgage loan warehousing is not presently subject to federal regulation. At the state level, the California Finance Lenders Law went into effect July 1, 1995. That law imposes licensing obligations on the Company, requires the filing of annual and periodic reports, establishes maximum interest rates and repayment terms in certain cases, and provides for fines and imprisonment for violation of the law. Other participants in the mortgage warehouse financing process, such as title companies and appraisers, are regulated by the states in which they reside and such regulations often determine the scope and approach of the Company's collateral control monitoring program. Furthermore, mortgage banking is a highly regulated industry. The Company's mortgage banking customers are subject to the rules and regulations of, and examinations by, the Federal Housing Administration ("FHA"), the Veterans Administration ("VA"), GNMA, FNMA, FHLMC and state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing residential mortgage loans. In addition, there are other federal and state statutes and regulations affecting such activities. . EMPLOYEES During the 1994 fiscal year, the Company had two full-time employees and one part-time employee. During the 1995 and 1996 fiscal years, the Company had one full-time and three part-time employees and temporary staff based on the Company's needs. Since May 1997, the Company has employed seven full time employees. None of the employees of the Company is represented by a labor union or is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. ITEM 2. PROPERTY The Company maintains its office at 6650 Reseda Boulevard, Reseda, California which is occupied pursuant to a five year lease which commenced on November 1, 1996 and provides for the payment of rent in the amount of $2,178 per month. ITEM 3. LEGAL PROCEEDINGS. The Company is not currently engaged in or, to its knowledge, threatened with, any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 10 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
As of March 31, 1997, there were approximately 500 beneficial holders of the Common Stock. . DIVIDEND POLICY AND RESTRICTIONS ON PAYMENT OF DIVIDENDS. The Company has never paid cash dividends on its Common Stock. Furthermore, the provisions of the plan of reorganization (the "POR") pertaining to the Predecessor's emergence from bankruptcy prohibit the Company from paying any dividends to its common shareholders until the sum of $1,350,000 shall have been paid to the Predecessor's pre-bankruptcy unsecured creditors. As of March 31, 1997, no payment to the unsecured creditors has been made. Further, in accordance with the POR, the Predecessor became obligated to pay certain portions of its net income in satisfaction of said payment obligation to its pre-bankruptcy creditors. Upon consummation of the Merger, the Company became obligated, by operation of law, to comply with such payment obligation and dividend payment prohibition, among other operating restrictions. The Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future as it intends to retain future earnings to finance the growth of the business. The payment of future cash dividends on the Common Stock will depend on such factors as earnings levels, anticipated capital requirements, the operating and financial condition of the Company and other factors deemed relevant by the Board of Directors. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters addressed in this Annual Report may constitute "forward- looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 11 Securities and Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those anticipated by the Company's management. The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Annual Report are made pursuant to the Act. GENERAL. As of June 14, 1993, when the Company commenced active operations following its emergence from Chapter 11 bankruptcy proceedings, it had an available credit line of $1 million from one source, UMB. The Company's lines of available credit from UMB were subsequently increased to an aggregate of $4 million as of March 31, 1996 and were utilized by the Company through February 1997. As of March 31, 1997 the Company entered into the Credit Agreement with Bank One, which provides for a $25 million line of credit. As a result of the death of Uri Lieber, the Company's former Chairman and Chief Executive Officer, in April 1995, the Company did not engage in any substantial mortgage warehouse lending activities from April 1995 through August 1995. During the period from August 1995 through November 1995, the Company developed customer relationships with three new mortgage banking companies, and from August 1995 through March 1996 the Company generated approximately $20.4 million in mortgage warehouse lending volume from those new customers. During the 1996 fiscal year, the three largest customers generated $51.4 million in warehouse loan volume, a 152% increase over the 1995 fiscal year. In September 1996, the Company obtained a fourth customer. During each of the twelve month periods ended March 31, 1995, 1996 and 1997, the Company operated with a limited number of customers and funding sources. However, since April 1, 1997, the Company has developed several new customer relationships and is in the process of evaluating the creditworthiness of many others. Management believes that the diversity and breadth of the Company's current customers and its expanded financing sources make it unlikely that any one event, such as the loss of any individual customer or a decline in business conditions in a particular market, would have a severe impact on the Company's operating results. During the 1995 and 1996 fiscal years, the Company incurred net losses of $479,803 and $1,232,213, respectively. With respect to the 1995 fiscal year, such losses were partly attributable to non-cash expenses, primarily depreciation, amortization, debt discount expenses and deferred consulting 12 agreement expenses totaling $164,000. With respect to the 1996 fiscal year, such losses were partly attributable to $614,459 of non-operating expenses, of which $285,931 represent one-time only costs incurred in connection with a proposed secondary public offering not consummated and the balance was attributable to other costs of financing-related efforts. As further described below, losses were also attributable to the inability of the Company to generate a sufficient volume of loan transactions with its customers to offset such expenses. Results of Operations for Year Ended March 31, 1997 Compared with Year Ended March 31, 1996 REVENUES: The Company's revenues increased in the 1996 fiscal year by 239% from $97,190 in the 1995 fiscal year to $329,425 in the 1996 fiscal year. This increase was attributable to an increase in loans funded by the Company from 201 loans with an aggregate dollar value of $20.5 million in the 1995 fiscal year to 764 loans with an aggregate dollar value of $60.9 million in the 1996 fiscal year. Due to increased loan volume, the interest component of revenues increased by 239% from $76,957 in the 1995 fiscal year to $260,550 in the 1996 fiscal year and processing fees increased by 295% from $15,733 in the 1995 fiscal year to $62,178 in the 1996 fiscal year. DIRECT COSTS: The Company's direct costs consist of interest and other charges which it was required to pay to its revolving credit line providers and to its pre-IPO bridge financing ("Bridge Financing") lenders. The Company's direct costs increased by 60% from $174,640 in the 1995 fiscal year to $279,756 in the 1996 fiscal year, primarily due to the increase in loan funding volume. During the 1995 fiscal year, the Company's interest expense and other bank charges paid to revolving line of credit lenders amounted to $95,409. During this period the Company financed a total of 201 loans aggregating $20.5 million in weighted average principal amounts of $101,996 for an average duration of 15 days per borrowing, including 153 loans funded through bank borrowings aggregating $16.5 million in weighted average principal amounts of $108,601 for an average duration of 15 days. During the 1996 fiscal year, the Company's interest expense and other bank charges paid to revolving line of credit lenders aggregated $237,371. During this period the Company financed a total of 764 loans aggregating $60.9 million in weighted average principal amounts of $79,713 for an average duration of 17 days per borrowing, including 483 loans funded through bank borrowings aggregating $39.4 million in weighted average principal amounts of $81,605 for an average duration of 17 days. The reduction in the average loan size is primarily due to the increase in loans funded in the 1996 fiscal year by two new customers which funded loans for lower priced homes. The increase in the bank interest and related charges is primarily 13 due to a three-fold increase in the Company's use of its revolving credit facility in the 1996 fiscal year versus the 1995 fiscal year. Interest expense on the Bridge Financing was reduced by 46.5% from $79,231 in the 1995 fiscal year to $42,385 in 1996 fiscal year. Such interest expense consisted of interest payable of $21,163 in the 1995 fiscal year and no interest payable in the 1996 fiscal year; debt discount amortization of $55,244 in the 1995 fiscal year and $37,500 in the 1996 fiscal year and deferred issuance cost amortization of $2,824 and $4,885 in the 1995 and 1996 fiscal years, respectively. In the fourth quarter of 1995 fiscal year, the Company paid $122,492 in full satisfaction of its indebtedness to two of the Bridge Financing lenders and, upon the closing of the IPO in August 1996, the Company paid $128,356 in full satisfaction of its obligation to the two remaining Bridge Financing lenders. OPERATING EXPENSES: Operating expenses increased from $433,709 in the 1995 fiscal year to $702,801 during the 1996 fiscal year. Operating expenses included $134,555 of salaries and benefits paid to executives and other staff, and $101,300 of depreciation and amortization, the primary component of which is $92,312 attributable to the CTS, compared to $188,882 of salaries and benefits to executives, former executives and others and $112,064 depreciation and amortization expense in the 1996 fiscal year. Accounting and legal fees in the 1995 fiscal year amounted to $114,382 compared to $192,074 in the 1996 fiscal year. This increase of accounting and legal fee expenses is due to the expanded reporting requirements of the Company as a publicly held corporation. It is anticipated that aggregate operating expenses will increase as staff and office space are increased to manage the greater number of mortgage warehouse loan transactions that management believes the Company will be processing as a result of the recent increase of credit lines available to the Company. NET LOSS: Net loss from operations increased from $511,158 in the 1995 fiscal year to $653,132 in the 1996 fiscal year due to the limited nature of the lending capital which was available to the Company and the inability to attract customers due to the limited credit facility available to the Company during the 1995 and 1996 fiscal years. Net loss increased from $479,803 in the 1995 fiscal year to $1,232,213 in the 1996 fiscal year, primarily due to non-operating expenses incurred during the 1996 fiscal year of $614,459 of which $285,931 were one-time only costs incurred in connection with a proposed secondary public offering not consummated and the balance was attributable to other financing- related efforts. Management believes that the Company's $25 million line of credit obtained from Bank One, 14 effective March 31, 1997, will allow the Company to increase its customer base and loan volume for the current fiscal year. Based upon ongoing discussions with mortgage banking companies who have recently filed applications with the Company to become customers and the 21 mortgage banking companies which have become customers during the period from April 1 through May 31, 1997, management believes that the revenue stream from loan processing fees and interest charges will increase. From April 1 through May 31, 1997, the Company has funded 379 loans for an aggregate dollar amount of $28.4 million compared to 129 loans for an aggregate dollar amount of $11.3 million for the equivalent period in the 1996 fiscal year. CASH FLOWS FROM OPERATIONS: The Company generated negative cash flow from operations of approximately $2.8 million for the 1995 fiscal year and a positive cash flow from operations of $50,000 for the 1996 fiscal year. For the 1995 fiscal year, approximately $2.6 million of such negative cash flow was generated by an increase in warehouse loan receivables and the balance of the negative cash flow from operations of $253,000 was primarily a result of the Company's inability to generate a sufficient level of loan volume from its customers, which was further negatively impacted by the limited funds available to the Company for use in its mortgage warehouse activities. The positive cash flow for the 1996 fiscal year was primarily the result of a $1.1 million reduction in warehouse loan receivables. Without such reduction in loan receivables there would have been negative cash flow from operations of approximately $1.0 million which was primarily a result of the Company's inability to generate a sufficient level of loan volume from its customers, which was further negatively impacted by the limited funds available to the Company for use in its mortgage warehouse activities. In an effort to generate positive cash flow from operations, effective March 31, 1997, the Company obtained a $25 million credit facility from Bank One Texas, N.A. Management believes that such credit facility will allow the Company to produce profits and maintain positive cash flow from operations. REALIZABILITY OF LONG-LIVED ASSETS: Management evaluated the realizability of its long-lived assets (primarily furniture and equipment and proprietary computer software) having a net book value of $186,796 on March 31, 1997 in accordance with the provisions of Statement of Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." Based on such evaluation, and taking into consideration the positive cash flows and earnings that management believes the Company will be able to generate in future periods, as further discussed above under "Cash Flows from Operations," management does not believe that there is an impairment of its long-lived assets at March 31, 1997. 15 LIQUIDITY AND CAPITAL RESOURCES: As of March 31, 1997, Bank One made available to the Company a $25 million revolving line of credit. The Company's primary sources of capital which it employs in its warehouse lending operations are borrowings under its Bank One revolving line of credit and its net equity capital funds of approximately $5 million (after giving effect to $4 million of funds received by the Company in February 1997 as proceeds of the Private Placement). Management believes that such capital will enable the Company to increase its customer base and thereby create a greater demand for and volume of loans to be funded, which, in turn, is anticipated to generate sufficient revenues from such expanded operations to maintain liquidity and generate positive cash flow. 16 ITEM 7. FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors of Pioneer Commercial Funding Corp.: We have audited the accompanying balance sheet of Pioneer Commercial Funding Corp. (a New York corporation) (the "Company") as of March 31, 1997, and the related statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Commercial Funding Corp. as of March 31, 1997, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California June 25, 1997 17 PIONEER COMMERCIAL FUNDING CORP. BALANCE SHEET MARCH 31, 1997
ASSETS Current Assets: Cash and cash equivalents $ 2,704,078 Mortgage warehouse loan receivables 2,456,154 Accrued interest and fee receivable 27,824 Prepaid and other assets 33,798 ----------- Total Current Assets 5,221,854 ----------- Fixed Assets: Furniture and equipment 106,640 Proprietary computer software 483,410 Leasehold Improvements 10,846 ----------- 600,896 Less accumulated depreciation and amortization 414,100 ----------- Net Fixed Assets 186,796 ----------- Other assets 25,000 ----------- Total Assets $ 5,433,650 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable & accrued expenses $ 235,360 Due to mortgage banking companies 85,546 Deferred legal fees 57,149 ----------- Total Current Liabilities 378,055 ----------- Convertible note payable 1,800,000 ----------- Total Liabilities 2,178,055 ----------- Stockholders' Equity: Common stock-$.01 par value; authorized 5,000,000 shares; 3,642,272 shares issued and outstanding at March 31, 1997 36,423 Additional paid-in capital 12,525,952 Accumulated deficit (9,306,780) ----------- Total Stockholders' Equity 3,255,595 ----------- Total Liabilities and Stockholders' Equity $ 5,433,650 ===========
The accompanying notes are an integral part of this balance sheet. 18 PIONEER COMMERICAL FUNDING CORP. STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED MARCH 31,
1997 1996 ----------- --------- INCOME: Interest income................................ $ 260,550 $ 76,957 Commissions and fees........................... 6,697 4,500 Processing fees................................ 62,178 15,733 ----------- --------- Total income.......................... 329,425 97,190 ----------- --------- DIRECT COSTS: Interest expense - warehouse and revolving lines of credit.................... 207,105 81,104 Interest expense - bridge financing............ 42,385 79,231 Bank charges & fees............................ 17,786 9,711 Bank processing fees........................... 12,480 4,593 ----------- --------- Total direct costs...................... 279,756 174,639 ----------- --------- INCOME/LOSS BEFORE OPERATING EXPENSES.......... 49,669 (77,449) OPERATING EXPENSES............................. 702,801 433,709 ----------- --------- Loss from operations.................... (653,132) (511,158) ----------- --------- OTHER INCOME (EXPENSE) Interest income - other........................ 24,459 24,570 Interest expense - other....................... (4,712) (4,712) Miscellaneous income........................... 18,800 12,685 Non-operating expense.......................... (614,459) - ----------- --------- Total other income (expense)............ (575,912) 32,543 ----------- --------- LOSS BEFORE INCOME TAXES....................... (1,229,044) (478,615) PROVISION FOR INCOME TAXES..................... 3,169 1,188 ----------- --------- Net loss................................ $(1,232,213) $(479,803) =========== ========= LOSS PER SHARE OF COMMON STOCK................. ($0.88) ($0.58) =========== ========= WEIGHTED AVERAGE NUMBER OF SHARES.............. 1,403,460 826,644 =========== =========
The accompanying notes are an integral part of these statements. 19 PIONEER COMMERCIAL FUNDING CORP. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE TWELVE MONTHS ENDED MARCH 31, 1997 AND 1996
Additional Total Common Paid-in Accumulated Stockholders' Stock Capital Deficit Equity ------- ------------ ------------ ------------ BALANCE March 31, 1995................... $ 8,250 $ 8,548,734 $(7,594,764) $ 962,220 Issuance of 10,000 shares of the Company's common stock in connection with the bridge financing............................ 100 49,900 - 50,000 Net loss for the period................. - - (479,803) (479,803) ------- ----------- ----------- ----------- BALANCE March 31, 1996................... 8,350 8,598,634 (8,074,567) 532,417 Issuance of 7,272 common shares in connection with bridge financing..................... 73 (73) - - Issuance of 600,000 shares of common stock and warrants............ 6,000 1,972,295 - 1,978,295 Issuance of 2,200,000 shares of common stock......................... 22,000 1,955,096 - 1,977,096 Net loss for the period................. - - (1,232,213) (1,232,213) ------- ----------- ----------- ---------- BALANCE March 31, 1997................... $36,423 $12,525,952 $(9,306,780) $3,255,595 ======= =========== =========== ==========
The accompanying notes are an integral part of these statements. 20 PIONEER COMMERCIAL FUNDING CORP. STATEMENTS OF CASH FLOWS FOR THE TWELVE MONTHS ENDED MARCH 31,
1997 1996 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,232,213) $ (479,803) ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 149,565 164,080 (Increase) decrease in -- Mortgage warehouse loan receivables 1,056,621 (2,579,116) Accrued interest receivable 2,183 (10,866) Prepaid expenses (7,710) (6,654) Other assets (25,000) - Increase (decrease) in -- Accrued interest payable (43,564) (1,543) Due to mortgage banking companies 64,628 (15,054) Accounts payable & accrued expenses 85,295 96,921 ----------- ----------- 1,282,018 (2,352,232) ----------- ----------- Net cash provided by (used in) operating activities 49,805 (2,832,035) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Fixed Assets (80,871) (4,805) ----------- ----------- Net cash provided by (used in) investing activities (80,871) (4,805) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in borrowings used in operations, net of issuance costs (3,254,235) 2,680,185 Decrease in revolving line of credit and bridge financing (179,400) - Increase in deferred costs of equity offering - (182,570) Increase in convertible note 1,800,000 - Net proceeds from issuance of stock 4,270,430 - ----------- ----------- Net cash provided by financing activities 2,636,795 2,497,615 ----------- ----------- Net increase (decrease) in cash 2,605,729 (339,225) CASH AND CASH EQUIVALENTS - at the beginning of the period 98,349 437,574 ----------- ----------- CASH AND CASH EQUIVALENTS - at the end of the period $ 2,704,078 $ 98,349 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 218,365 $ 98,911 =========== =========== NON CASH FINANCING ACTIVITIES Cost of equity offering paid in prior years $ 315,039 ===========
The accompanying notes are an integral part of these statements. 21 PIONEER COMMERCIAL FUNDING CORP. -------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- MARCH 31, 1997 -------------- 1. NATURE OF OPERATIONS -------------------- Pioneer Commercial Funding Corp. (the "Company"), formerly known as PCF Acquisition Corp. ("PCF") is a New York corporation which merged with Pioneer Commercial Funding Corp. (a New York corporation) ("Pioneer") on November 23, 1994. PCF was organized and commenced operations on March 8, 1994 for the express purpose of raising capital through an initial public offering ("IPO") for the benefit of Pioneer. Pioneer's Reorganization - ------------------------ On April 2, 1993, Pioneer emerged from Chapter 11 of the United States Bankruptcy Code pursuant to a confirmed First Amended Modified Plan of Reorganization ("POR"). As of June 14, 1993, when the Company commenced active operations following its emergence from Chapter 11, it operated with limited financing sources. In addition, substantially all of the business conducted by the Company during the fiscal years ended March 31, 1994, 1995 and 1996 was with one to four mortgage banking companies. Operations - ---------- The Company is engaged in the business of mortgage warehouse lending which primarily consists of providing lines of credit, in the form of "warehouse financing," to mortgage banking companies to enable them to close real estate loans on single family, owner-occupied dwellings and sell such loans to investors in the secondary market. The Company obtains its funds from third- party funding sources through lines of credit and from its own sources. The Company's loan receivables from the mortgage banking companies are secured by an interest in the underlying real property which are then assigned to the Company's funding sources. Investor groups who purchase the mortgages, which generally occurs within 10 to 60 days from the time the Company makes the loan, remit the proceeds directly to the Company in satisfaction of the loan and interest receivable from the mortgage banking company. The Company will simultaneously use the funds to pay off its loan and accrued interest payable to its funding sources. The Company's primary sources of income from operations are processing fees received from its mortgage banking customer for each loan financed and the interest rate spread between the rate at which the Company borrowed from its funding source and the rate it charges its customer. The Company's customers fund loans throughout the United States with concentrations in California, Pennsylvania, Arizona and Colorado. 22 The Company's operations are subject to certain risks which are inherent to its industry. Its results of operations depend heavily upon the ability of its mortgage banking customers to originate mortgage loans. This ability is largely dependent upon general economic conditions in the geographic areas that the Company serves. Because these general economic conditions fluctuate, there can be no assurance that prevailing economic conditions will always favor the Company's business and operations. In addition, mortgage banking firms have historically experienced a wide range of financial results, from highly profitable to highly unprofitable. These financial results are due to many factors which affect most, if not all, firms in the mortgage banking business at about the same time. Three of these factors which predominate are: changes in mortgage interest rates, the availability of affordable credit, and the state of the domestic economy. These three factors, among others, affect the demand for new and used housing and thus the demand for financing and refinancing of mortgages. Lastly, although the Company's mortgage banking customers must have a commitment for each loan from an approved third-party agency (the "Agency") before the Company will extend mortgage warehouse financing, there is no guarantee that the Agency will, in fact, accept the mortgage loan when delivered due to certain deficiencies in the loan or other unanticipated circumstances which may exist. If for any reason an Agency does not accept the mortgage loan, and the Company's mortgage banking customer is unable to pay back its obligation to the Company through other means, the Company could find itself the owner of a long-term loan of less than market value instead of a short-term bridge financing receivable. During the twelve month periods ended March 31, 1997, and 1996, the Company operated with a limited number of customers and funding sources. As of April 1, 1997, the Company had significantly increased its funds available from financing sources and its own sources. In addition, the Company had developed several new customer relationships and was in the process of evaluating the creditworthiness of many others. In management's opinion, the diversity and breadth of the Company's current customers and its expanded financing sources adequately mitigate the risk that the Company will be severely impacted in the near term as a result of the Company's customer base, competition, sources of supply, or composition of its markets. Management believes it is unlikely that any one event, such as loss of any individual customer, or decline in business conditions in a particular market would have a severe impact on the Company's operating results and that the Company will continue to operate in the normal course. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Use of Estimates - ---------------- The accompanying financial statements, which are prepared in conformity with generally accepted accounting principles, require the use of estimates made by management. The most significant estimates with regard to these financial statements relate to the valuation allowance for deferred income taxes and the estimated obligations due under the POR, as more fully described in Notes 5 and 10, respectively. Actual results may differ from those assumed in management's estimates. Cash and Cash Equivalents - ------------------------- Cash equivalents include time deposits and highly liquid investments with original maturities of three months or less. 23 Other Assets - ------------ Effective April 25, 1996, a one year certificate of deposit in the amount of $25,000 was pledged in order for the Company to receive a California Lender Bond as a California Financial Lender, to be renewed annually at the discretion of the insurance carrier. The certificate of deposit is included in other assets in the accompanying financial statements. Fixed Assets - ------------ Depreciation expense is computed generally on a straight-line basis over the estimated useful life of the asset. Leasehold improvements are amortized over the estimated life of the asset or the term of the lease, whichever is shorter. The ranges of estimated useful lives used in computing depreciation and amortization are as follows:
Years ------- Furniture and equipment 3 to 10 Autos and trucks 5 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 ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are provided for at the statutory rates on the difference between financial statement basis and tax basis of assets and liabilities and are classified in the balance sheets as current or noncurrent consistent with the assets and liabilities which give rise to such deferred income taxes. Deferred Costs of Equity Offering and Debt Issuance - --------------------------------------------------- Certain costs associated with the IPO were paid by the Company and deferred as of March 31, 1996. Upon the successful completion of the IPO, these costs were written off as a non-operating expense or shown as a direct reduction to additional paid-in capital as appropriate. Loss Per Share of Common Stock - ------------------------------ The loss per share of common stock was computed using the net loss for the year, divided by the weighted average number of shares outstanding during the period (adjusted for the reverse stock split effective in June 1996). Weighted average shares outstanding are further adjusted for the impact of shares issued and warrants issued and options granted for which the exercise price is less than the average share price. 24 For the twelve month periods ended March 31, 1997, and 1996, the average share price exceeded the exercisable price for all options and warrants, and the impact of conversion of the warrants and options would have been anti-dilutive. Therefore, the options and warrants were not considered in the calculation of loss per common share. The Company will adopt Statement of Accounting Standards ("SFAS") No. 128, "Earnings Per Share" during the next fiscal period. SFAS No. 128 more clearly defines basic and diluted earnings per share and a reconciliation of numerators and denominators used in the computations. Management has determined that the adoption of SFAS No. 128 will not have an impact on the results of the operations or financial position of the Company. Reclassifications - ----------------- Certain reclassifications have been made to conform prior years data to the current format. 3. MORTGAGE WAREHOUSE LOAN RECEIVABLES/PAYABLE ------------------------------------------- Loan receivables are generally due within sixty days from the date funded, with an average outstanding period of seventeen days and interest payable at prime plus 1.5%. Similarly, all of the related loans payable are due within the same time frame with interest payable at prime plus 1%. The Company's available line of credit was $4 million as of March 31, 1996. As of September 1, 1996, the $4 million line of credit was renewed for one year with a 1 percent renewal fee amortized over the life of the loan. As of March 31, 1997, the line was terminated and the Company was refunded the unamortized portion of the renewal fee and all unexercised options immediately expired. As of March 31, 1997, the Company obtained a $25 million revolving line of credit pursuant to a security agreement between the Company and Bank One, Texas, N.A. ("Bank One"). The Company will pay interest on advances at the "prime rate" of interest, quoted from time to time by the Wall Street Journal plus or minus one-eighth of a percent. As collateral security for its indebtedness to Bank One the Company granted to Bank One a security interest in various assets including, but not limited to, all promissory notes acquired by the Company with respect to any loan funded by it with moneys advanced under its Bank One credit line and all mortgages or other forms of collateral security obtained by the Company in connection with the funding of such loans. For the years ended March 31, 1997 and 1996, the weighted average interest rate on loans receivable was 9.66% and 9.93%, respectively, and on loans payable was 9.25% and 9.53%, respectively. Loans receivable are collateralized by a security interest in the underlying real property which the Company then assigns to its funding sources as security for the loans payable. 4. BRIDGE FINANCING ---------------- In March 1994, the Company entered into a loan arrangement with various individuals (original bridge financiers) to provide $200,000 in additional funds to be used in the ordinary course of the Company's warehouse lending operations and to defray certain expenses of the anticipated IPO. The loans bore interest at a rate of 12% and were due at the earlier of the successful completion of the IPO or August 31, 1995. As an inducement to make these loans, the Company issued 22,727 shares of its common stock to the original bridge financiers. The original 22,727 shares issued and the additional 7,272 shares 25 issued in fiscal 1997 discussed below were assigned a $5.00 per share value (which is equal to the price that these shares were offered at in the IPO) resulting in a $150,000 discount to the debt. The discount was amortized to interest expense over the term of the debt agreements resulting in an effective interest rate of 248%. On August 31, 1995, the bridge loans matured but were not paid by the Company. On January 16, 1996, the Company paid off in full loans outstanding to two of the bridge financiers. On February 1, 1996, the Company entered into agreements with the remaining two bridge financiers (the remaining bridge financiers) with aggregate outstanding loans to the Company as of such date totaling $123,708 (which includes $23,708 of unpaid accrued interest), whereby the maturity date of the bridge loan obligations was extended to the earlier of three days following the consummation of the IPO or December 31, 1996. The Company received waivers from all of the original bridge financiers for any defaults which may have occurred as a result of the Company's failure to pay off its debt obligations on their original maturity date of August 31, 1995. In consideration for the waivers received and in order to adjust the number of shares given to the original bridge financiers for the impact of the June 1996 reverse stock split which reduced their number of shares owned from 30,000 to 22,727 shares, the Company issued to the original bridge financiers an additional 7,272 shares of common stock in June 1996. In addition, the Company issued 10,000 more post-split shares to the remaining bridge financiers in consideration for extending the maturity on their debt in February 1996. A value of $5.00 per share was assigned to these shares on the date of the debt modification resulting in a $50,000 discount to the debt. Such discount is being amortized to interest expense over the remaining term of the modified debt agreements resulting in an effective interest rate of 133% for the period from February 1, 1996 through December 31, 1996. Upon successful completion of the IPO on August 12, 1996, all outstanding principal and interest related to the above agreements was paid in full. 5. INCOME TAXES ------------ The Company recorded losses from operations for the twelve month periods ended March 31, 1997 and 1996 for both financial reporting and Federal income tax purposes and provided $3,169, and $1,188, respectively, for income taxes, which represents provisions for minimum state taxes. Deferred taxes consist primarily of net operating loss carryforwards ("NOL's") for tax purposes which can be off-set against future taxable income. As of March 31, 1997, the Company's NOL is $2.0 million, which expires in varying amounts between 2000 and 2011. Approximately $1.3 million of the NOL is limited to use (approximately $100,000 per year) due to a change in ownership in November 1994 resulting from the merger between Pioneer and PCF. The realization of the future tax benefits from deferred tax assets is dependent upon the Company generating sufficient future taxable income. Accordingly, a 100% valuation allowance has been established against the net deferred tax asset. 6. DUE TO MORTGAGE BANKING COMPANIES --------------------------------- The Company generally will only finance up to 98% of the total loan amount closed by the mortgage banking company. Upon sale of the loan to the investor group, proceeds for 100% of the loan amount are remitted to the Company by the investor. The Company holds such funds until receipt of amounts due from the mortgage banking company for fees and accrued interest on the 98% financed. 26 7. DEFERRED LEGAL FEES ------------------- Deferred legal fees are a consequence of the POR and are payable in four annual installments which began on April 16, 1994. The Company has not paid the April 1996 and 1997 installments totaling $57,149 as of March 31, 1997. 8. STOCKHOLDERS' EQUITY AND INITIAL PUBLIC OFFERING ------------------------------------------------ Reverse Stock Split - ------------------- Effective June 1996, the Board of Directors of the Company authorized a .758 for 1 reverse stock split of all of its then outstanding common stock. All share and per share amounts in these financial statements have been restated to give effect to the reverse stock split as if it had occurred on the first day of each period presented. Share Voting Agreements - ----------------------- On October 25, 1994, in connection with a stock purchase agreement with an unrelated third party, Pioneer issued an additional 176,136 shares of its Class B common stock for $500,000 (which were exchanged for 176,136 common shares of PCF upon the consummation of the merger). The agreement gives the third party the right to acquire additional shares, if, in future periods, additional shares are issued to other parties so that this third party's percentage ownership in the Company does not fall below 20% of the total outstanding common shares. In connection with this stock purchase transaction, the unrelated third party entered into a share voting agreement with certain existing shareholders of the Company, who after the merger, own greater than 50% of the Company in the aggregate. The share voting agreement requires that all parties to the agreement will vote on all matters subject to shareholder approval in a consistent fashion. The agreement was terminated upon the successful completion of the stock offering discussed below. Initial Public Offering - ----------------------- In August 1996, the Company consummated its IPO pursuant to which the Company issued and sold 600,000 shares of its common stock, par value $.01 per share (the "Common Stock"), and 690,000 warrants (including warrants sold upon exercise of the underwriters' over-allotment option) to the public at a price of $5.00 per share and $.10 per warrant, which yielded to the Company net proceeds of approximately $2 million. The warrants give the owner the right to purchase an additional share of common stock at a price of $5.50 for a period of four years commencing after the completion of the IPO (the "Exercise Period"). Such warrants will be immediately tradable separate from the common stock. Commencing two years after the completion of the IPO and through the end of the exercise period, the warrants may be redeemed by the Company upon 30 days' written notice at a price of $.05 per warrant, provided that (1) the closing sale price of the Company's common stock shall not be less than $7.50 per share for any period 20 days subsequent to the issuance of the written notice, or (2) that the warrant holders have not exercised their warrants at any time prior to the period 30 days after the issuance of the written notice. In addition, the underwriter was issued the right for a period of four years commencing one year after the completion of the IPO to purchase, in tandem, 60,000 shares of common stock of the Company and 60,000 common stock purchase warrants at a price of $6.12 for each combined share and warrant. The terms of the warrants acquired by the managing underwriter were the 27 same as those discussed above except that such options are nontransferable. The warrants are exercisable into 690,000 shares of Common Stock at a price of $5.50 per share August 12, 2000. Private Placement - ----------------- On February 28, 1997, the Company completed a private placement of securities (the "Private Placement") with eight investors who invested an aggregate of $4 million in the Company in consideration for 2.2 million shares of Common Stock and $1.8 million principal amount of convertible promissory notes of the Company (the "Convertible Notes"). The Convertible Notes were converted into 1.8 million shares of common stock on May 9, 1997. Dividend Restriction - -------------------- The holders of the Company's Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The common stockholders are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available. As of March 31, 1997, in management's opinion, it is not anticipated that dividends will be paid on common stock in the foreseeable future as certain of the debt instruments to which the Company is a party to prohibit or restrict the payment of dividends (see Note 10 for further discussion of restrictions under the POR). 9. STOCK OPTION PLANS ------------------ The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation costs has been recognized for the Company's Non-Qualified Stock Option Plan (the "Plan"). The Company has calculated pro-forma financial results based on the estimate of the fair value of its stock options at grant date, as required under SFAS No. 123, and noted that the impact on the net loss for the fiscal year ended March 31, 1997 was not material. The Plan which was adopted on August 1, 1994, provides for the issuance of options to purchase up to 151,515 shares of the Company's common stock to persons who are at the time of grant, employees of, or consultants to, the Company. The Company has issued additional options outside the Plan at the discretion of its Board of Directors ("BOD"). The following table summarizes information related to shares under option and shares available for grant under the Plan and separate actions of the BOD:
1997 1996 -------- -------- Options outstanding at beginning of year 235,166 7,892 Options granted during the year 112,879 227,274 Options relinquished during the year - - -------- -------- Options outstanding at end of year 348,045 235,166 ======== ======== Per share price of outstanding options issued in prior year $5.00 $5.00 Per share price of outstanding options issued in current year $1.99 to $5.00 $5.00
28 10. COMMITMENTS AND CONTINGENCIES ----------------------------- Plan of Reorganization - ---------------------- Under the POR, the Company is contingently liable to its pre-Chapter 11 unsecured creditors, for such creditors' pro rata shares of noninterest-bearing notes (the "Notes") totaling $1,350,000. Commencing with the close of fiscal year ending March 31, 1996, and for all succeeding years thereafter, until full aggregate payment of $1,350,000 is made under the Notes, each Note holder shall receive a cash distribution equal to such Creditors' pro-rata share of twenty percent of the Net Income Available for Note Payments, if the Net Income for any such year exceeds $1,300,000. For the fiscal years ended March 31, 1997 and 1996, the Company had not generated income that resulted in payment on the Notes. Accordingly, no liability has been reflected in the Company's balance sheet for the Notes or the professional fees. In addition to the Notes, approximately $50,000 in professional fees incurred in connection with the POR were deferred and will only be paid to the extent the Notes are paid in full. As of March 31, 1997, the Company was unable to determine whether it is probable that it will generate income in future years which would result in payments on the Notes. As such, no liability has been reflected in the Company's balance sheet for the Notes or the professional fees. In accordance with the POR, certain operating restrictions have been placed upon the Company until the time that all amounts due on the Notes have been paid in full. These restrictions include: - Incurring new debt in excess of $25,000, except for secured lending required in the ordinary course of the Company's mortgage lending operations. - Expending more than $25,000 in the aggregate in a calendar year to purchase or lease capital assets, except to replace existing assets. - Expending more than $320,000 annually in the aggregate to the officers of the Company and placing limitations on salary increases. - Merging or consolidating with another business. - Declaring dividends on any class of common stock, except that, if there should be a public offering of the securities of the Company, and, if at the option of the Company, fifty percent of the proceeds in excess of $5,000,000 from such offering are utilized for the payment of the Notes, then such dividend restriction shall be deemed waived. As of March 31, 1997, the Company was in compliance with the above restrictions. Consulting Contract - ------------------- In September 1996, the Company entered into a two year consulting contract with Boru Enterprises to assist the Company in its relationships with investment bankers, analysts and other members of the financial community. Under terms of the agreement the Company paid the consultant $100,000 in 29 advance. In February 1997, the contract was terminated by the Company and the entire contract was expensed to non-operating expense for the fiscal year ended March 31, 1997. Employment Contracts - -------------------- In March 1995, the Company entered into a two-year employment agreement with its Chief Financial Officer ("CFO") which provided for a base annual salary of $100,000 and $90,000 for the fiscal years ending March 31, 1997 and 1996, respectively. This contract was subsequently extended through March 31, 1998 at a base salary of $100,000. In addition, the Company must reimburse the CFO certain business-related expenses, provide for the use of a Company automobile and pay the premiums for life and long-term disability insurance. In the event of termination in connection with a change in control, the CFO is entitled to the balance of the amount due under this agreement plus an additional $100,000. The agreement also provides for the granting to the CFO an option to purchase 75,758 shares of the Company's common stock at an exercise price of $5.00 per share and a second grant on May 1, 1996 to purchase an additional 37,879 shares at the market price of the common stock estimated at that date to be $5.00 per share. Both options are immediately exercisable and expire five years from the date of grant. In June 1995, the Company entered into employment contracts with its Chief Executive Officer ("CEO") and President providing for an annual salary of $55,000 for each individual commencing after the completion of the IPO. For the period from June 1995 through the completion of the IPO on August 12, 1996 these officers were each granted an option to purchase 75,758 shares at an exercise price of $5.00 per share in lieu of salaries. See Note 9 for a summary of stock options awarded by the Company. Investment in Trans Lending Corporation - --------------------------------------- On December 23, 1996, prior management of the Company signed a Stock Purchase Agreement (the "Agreement") to acquire 500 shares of Trans Lending Corporation ("Trans Lending") common Stock for $100,000 and 200 shares of Trans Lending's non-voting, non-dividend paying preferred stock for $200,000. Trans Lending was formed to originate consumer automobile financing transactions for non-prime borrowers by acquiring contracts from franchised and independent car dealers. As of March 31, 1997 the Company had paid $100,000 to Trans Lending pursuant to the Agreement. Several conditions precedent to closing the transaction, pursuant to the Agreement, had not been completed as of March 31, 1997, including delivery of the share certificates evidencing Pioneer's ownership of 500 fully paid and nonassessable shares of common stock. Management does not intend to remit the $200,000 for the preferred stock in Trans Lending, nor do they believe they are liable for the obligations or operating performance of Trans Lending. Additionally, management is of the opinion that the Agreement is not binding or enforceable. The Company has written-off their $100,000 investment in Trans Lending at March 31, 1997. Lease Obligation - ---------------- The Company leases its office space under an operating lease expiring October 31, 2001. The current lease calls for CPI increases in years 2 through 5 with a minimum of 3% and a maximum of 5%. Future minimum lease commitments as of March 31, 1997 are as follows, for the fiscal years ending March 31, : 30
1998 $ 26,136 1999 26,136 2000 26,136 2001 26,136 2002 15,246 -------- $119,790 ========
11. OPERATING AND NON-OPERATING EXPENSES ------------------------------------- Operating and non-operating expenses consisted of the following for the years ended March 31, 1997 and 1996:
1997 1996 ---------- -------- Salaries and benefits $ 188,822 $134,555 Depreciation and amortization 112,065 101,300 Professional fees 191,513 114,382 Utilities 26,928 19,782 Rent 17,662 11,609 Repairs and maintenance 5,608 4,616 Other 160,203 47,465 ---------- -------- Operating expenses 702,801 433,709 Non-operating expenses 614,459 - ---------- -------- $1,317,260 $433,709 ========== ========
The Company's non-operating expenses for the fiscal year ended March 31, 1997 represent one time only costs incurred in connection with a proposed, but not consummated, second offering of the Company's common stock and other financing related efforts in fiscal 1997. 12. RELATED PARTY TRANSACTIONS -------------------------- For the years ended March 31, 1997 and 1996, certain family members of an executive officer and a member of the BOD of the Company were engaged to perform various accounting and consulting services for the Company. Such individuals were compensated approximately $15,481 and $3,106 for these services in 1997 and 1996, respectively. 13. SUBSEQUENT EVENTS ----------------- On April 2, 1997 and April 4, 1997 the Company issued unsecured loans of $400,000 and $600,000, respectively to Rogosin Converters, Inc. an affiliate of the Company. The loans were guaranteed by Leedan International, B.V., a shareholder of the Company with a substantial net worth. The Company earned 12% interest per annum on the loans which was paid monthly. Management determined that this would yield a better return than investing the otherwise idle cash in other investment alternatives, such as 31 Treasury bills or commercial paper. The loans were approved by the BOD of the Company. All unpaid principal and interest owing on the loans was paid in full on June 20, 1997. On April 16, 1997 the Company entered into a joint venture agreement with Maryland Financial Corporation ("MFC") to form Pioneer Home Funding, LLC, a California Limited Liability Company, ("PHF"). The Company and MFC will maintain 80% and 20% ownership interests, respectively, in PHF. The Company and MFC have contributed $40,000 and $20,000, respectively, as of June 10, 1997. These amounts are anticipated to increase up to $200,000 and $50,000, respectively. PHF is a mortgage banking company organized for the primary purpose of originating, acquiring, marketing and selling mortgage loans on residential properties. PHF will focus on various lending markets including the subprime market. All loans originated or acquired by PHF will be sold servicing released. PHF is expected to commence operations in July 1997. On May 9, 1997, the Company increased its authorized shares of common stock by 15 million to 20 million shares. With these newly available shares, the Company immediately converted its outstanding Convertible Notes into 1.8 million shares of common stock. On June 25, 1997, the Company has filed a form 8-K with the Securities and Exchange Commission ("SEC") to change its fiscal year end from March 31 to December 31 as of December 31, 1997. No response has been received from the SEC as of the date of this filing. 32 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 ---- --- -------- M. Albert Nissim... 63 President Glenda S. Klein.... 53 Director, Senior Vice President, Secretary, Treasurer and Chief Financial Officer Richard Fried...... 51 Director Boaz Harel......... 34 Director Tamar Lieber....... 55 Director Mark Roth.......... 35 Director
Glenda S. Klein has served as a director of the Predecessor since 1993, and was appointed to serve as the Predecessor's Treasurer and Chief Financial Officer in 1994. She assumed the same directorial and official positions with the Company upon consummation of the Merger in November 1994. In 1993 Ms. Klein and her husband filed a petition pursuant Chapter 7 of the Bankruptcy Code. After receiving a discharge in bankruptcy, they reopened the bankruptcy proceedings and converted same to a case under Chapter 11 of the Bankruptcy Code. In April 1995, Ms. Klein and her husband deposited $100,000 into the Bankruptcy Court for the purpose of paying in full, with interest, any of the creditors of their bankrupt estate who had filed claims against them in said proceedings. In October 1995, such proceedings were closed. In April 1997 Ms. Klein was appointed as one of the Company's designees on the Board of Directors of Pioneer Home Funding, L.L.C., a subsidiary of the Company. 33 Richard Fried was appointed to the Predecessor's Board in February 1994 and served as Vice-President of the Predecessor. Upon consummation of the Merger in November 1994, he became a director of the Company. Since June 1991 Mr. Fried has served as President of Medical Systems, Inc., an application software development company, of which he has been a principal shareholder. From February 1993, he has served as President of Montgomery Associates, Inc., a corporation wholly-owned by him, which is engaged in business as an importer- exporter. Since April 1993, Mr. Fried has been a principal shareholder, and has served as President, of Sea Change Systems, Inc., a software tools development company. From April 1993 to May 1994, he was a Branch Manager of LPL Financial Services, a stock brokerage firm, which is an NASD member firm. Since November 1994, Mr. Fried has been a controlling shareholder and has served as President of SMARTpay, Inc., a collection service. From April 1995 he has served as President of Centennial Systems, Inc., a software distribution, sales and service firm of which he is a principal shareholder. Since October 1996, Mr. Fried has been a controlling shareholder, and has served as President, of Leeward Software, Inc., an application software developer. From October 1996 he has also served as President of Windward Software, Inc., a materials management software intellectual property company of which he is also a principal shareholder. From December 1996 he has served as President of Strategic Reporting Systems, Inc., a database report generation software development and distribution firm of which he is a principal shareholder. From April 1997, he has served as managing director of HYCOM USA, Inc., an international software development and distribution company, of which he is a principal shareholder. Boaz Harel was appointed to the Board in November 1996. From 1991 to 1993, Mr. Harel was the founder and managing director of Mashik Business and Development Ltd., an engineering consulting company. Since 1993, Mr. Harel has been the Managing Director of Leedan Business Enterprise Ltd. ("Leedan"), a publicly-held Israeli company which is the beneficial owner of 49% of the Company's Common Stock. Since January 1994, Mr. Harel has served as a member of the Supervisory Board of ICTS International N.V. and since September 1996, Mr. Harel has served as the Chairman of ICTS USA (1994), Inc., an indirect subsidiary of Leedan. Since 1997 Mr. Harel has been Co-Managing Director of Leedan International Holdings B.V., a principal shareholder of the Company and an indirect wholly-owned subsidiary of Leedan. Tamar Lieber was appointed to the Board in June 1995. Ms. Lieber has been engaged in practice as a senior psychotherapist at the Center for Preventive Psychiatry in White Plains, New York, a non-for profit community mental health clinic, for more than the past five years. 34 Mark Roth was appointed to the Board in November 1996 as designee of National Securities Corporation ("National"), the underwriter of the Company's IPO. Mr. Roth is an attorney who engaged in the private practice of law between March 1992 and September 1995. In 1992, Mr. Roth began representing National and since October 1995 Mr. Roth has served as General Counsel of National and continues to serve in that capacity. Since February 1997 he has also served as Secretary of National. Mr. Roth also serves as Secretary and General Counsel of Olympic Cascade Financial Corporation, a publicly traded financial holding company and a parent of National. M. Albert Nissim was appointed as the President of the Company in January 1997. He has served as Secretary of ICTS International N.V. since January 1996. Mr. Nissim has also served as President of ICTS USA (1994), Inc. since January 1994. From 1994 to 1995, he served as Managing Director of ICTS International B.V. Mr. Nissim served as the President of Harel & Partners from 1991 to 1994. From 1990 to the present, he has been the Vice President and a director of Tuffy Associates Corp., an automotive repair franchise company affiliated with Mr. Ezra Harel, the brother of Boaz Harel. Mr. Nissim is also a Co-Managing Director of Leedan International Holdings B.V., and a principal shareholder of the Company. In April 1997, Mr. Nissim was appointed as one of the Company's designees on the Board of Directors of Pioneer Home Funding, L.L.C., a subsidiary of the Company. On January 9, 1997, Messrs. Arthur Goldberg and Elie Housman, the Company's Chief Executive Officer and Chief Operating Officer, respectively, were removed from their respective offices by the Board of Directors following disagreements between the Board of Directors and those two officers with respect to the Company's financing efforts and investment strategies. On January 20, 1997, Messrs. Goldberg and Housman resigned from their positions as directors of the Company. . COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT On February 28, 1997, as a result of the completion of the Private Placement, Leedan International Holdings B.V. ("Leedan") became the holder of 38% of the Common Stock and Leedan Business Enterprise Ltd. ("Leedan Business"), an indirect parent corporation of Leedan became the beneficial holder of 42% of the Common Stock. Prior to the Private Placement, Leedan Business was the beneficial holder of more than 10% of the Common Stock. The Company did not receive a Form 3 on behalf of Leedan Business or a Form 3 on behalf of Leedan until June 25, 1997. 35 M. Albert Nissim was appointed as the President of the Company on January 9, 1997. A Form 3 was not filed on behalf of Mr. Nissim until March 10, 1997. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth compensation awarded to, earned by or paid to executives of the Company and to Uri Lieber and Arthur Goldberg in their former capacities as Chief Executive Officers of the Company. No executive officer of the Company earned a salary and bonus of more than $100,000 during any one of the 1994, 1995 and 1996 fiscal years. During such fiscal years the Company did not grant any restricted stock awards or stock appreciation rights to any of its executives.
==================================================================================================== NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION AWARDS - ---------------------------------------------------------------------------------------------------- OTHER FISCAL YEAR ANNUAL SECURITIES ENDED COMPENSA- UNDERLYING MARCH 31 SALARY($) BONUS($) TION ($) OPTIONS - ---------------------------------------------------------------------------------------------------- M. Albert Nissim* 1997 $ 14,385 90,000 President - ---------------------------------------------------------------------------------------------------- Glenda S. Klein, 1997 $ 98,998 172,879 Senior Vice President - ---------------------------------------------------------------------------------------------------- 1996 $ 90,000 $10,000 75,758 - ---------------------------------------------------------------------------------------------------- 1995 $ 56,017 - ---------------------------------------------------------------------------------------------------- Uri Lieber, Former CEO 1995 $ 97,139(1) -- $8,003(2) -- - ---------------------------------------------------------------------------------------------------- Arthur Goldberg, Former CEO 1997 --(3) -- -- 75,758 ===================================================================================================
*Commenced service as President of the Company in the fourth quarter of the 1996 fiscal year. (1) Represents compensation paid to Mrs. Lieber on behalf of Uri Lieber under his employment agreement with the Company. (2) Represents the premiums paid by the Company with respect to term life insurance owned by Mr. Lieber and payable to his designated beneficiary. (3) The Company has been accruing a compensation obligation of $18,333 to Mr. Arthur Goldberg, a former Chief Executive Officer. 36 . COMPENSATION OF DIRECTORS. None of the directors of the Company has been compensated in his or her capacity as a director. . OPTIONS ISSUED TO EXECUTIVES. In consideration of the services rendered by Messrs. Goldberg and Housman, in lieu of payment of salaries, between June 1995 and the closing of the IPO, the Company issued five year options to each of them to purchase 75,758 shares of Common Stock at an exercise price of $5.00 per share. Such options were not issued pursuant to the Company's Incentive Stock Option Plan. The table below sets forth information regarding option grants in 1996 fiscal year to executive officers of the Company.
=============================================================================================================== INDIVIDUAL GRANTS - --------------------------------------------------------------------------------------------------------------- NO. OF SECURITIES % OF TOTAL OPTIONS UNDERLYING OPTIONS GRANTED TO EMPLOYEE EXERCISE PRICE NAME GRANTED IN 1996 FISCAL YEAR PER SHARE EXPIRATION DATE - --------------------------------------------------------------------------------------------------------------- M. Albert Nissim 90,000 100 $2.50 February, 2000 - --------------------------------------------------------------------------------------------------------------- Glenda Klein 248,637 93.6 $1.99 - $5.00 August, 2001 - --------------------------------------------------------------------------------------------------------------- Arthur Goldberg* 75,758 100 $5.00 August, 2001 - --------------------------------------------------------------------------------------------------------------- Elie Housman* 75,758 100 $5.00 August, 2001 ===============================================================================================================
*Former officer and director. . EMPLOYMENT AGREEMENTS. In January 1997, the Company appointed M. Albert Nissim as President for a six-month term on a part-time basis, at a salary of $6,000 per month. The employment arrangement has been extended by the Company, effective July 9, 1997, for a two-year period, unless earlier terminated by either party on not less than 90 days prior notice. In March 1995, the Company entered into an employment agreement with Glenda S. Klein, pursuant to which the Company agreed to employ Ms. Klein as its Senior Vice President, Secretary, Treasurer and Chief Financial Officer through March 31, 1997. The agreement was extended for one additional year on the same terms and conditions. The agreement provides for base compensation of $90,000 per annum for the first year, $100,000 per annum for the second year and $100,000 for the additional year. The agreement further provides for the grant of 37 a five-year option to purchase 75,758 shares of Common Stock of the Company exercisable at a price of $5.00 per share and the grant of a second five-year option on May 1, 1996, entitling her to purchase 37,879 shares of Common Stock of the Company at a price of $5.00 per share; obligates the Company to pay the premiums with respect to a term life insurance policy payable to Ms. Klein's designated beneficiary in the aggregate amount of $750,000 during the first year of the term and $1,000,000 during the second year and the extension year of the term; obligates the Company to pay the premiums with respect to a long-term disability policy in an amount sufficient to cover the salary payable to Ms. Klein pursuant to the employment agreement; and obligates the Company, in the event of the termination of Ms. Klein's employment in connection with a change in control of the Company, to pay as severance the balance of the salary payable under the employment agreement plus an additional $100,000 and to continue medical coverage for the balance of the term. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the holdings of the Common Stock as of June 25, 1997 by each person or entity known to the Company to be the beneficial owner of more than five percent (5%) of the outstanding shares of Common Stock. 38
COMMON STOCK --------------------------------------------- NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED - ------------------- ------------------ ------------------ Leedan Business Enterprise Ltd. 2,676,136/1/ 49.2% ("Leedan Business") 8 Shaul Hamelech Blvd. Tel-Aviv 64733, Israel Jay Botchman 530,000 9.7% 1500 E. Tropicana Avenue Suite 100 Las Vegas, Nevada 89113 Michael Lauer 600,000/2/ 11% 200 Park Avenue Suite 3900 New York, New York 10166 Tamar Lieber 322,122 5.9% 160 West 66th Street New York, New York 10022
- ---------- /1/ Leedan International Holdings B.V., which together with Leedan Systems & Properties Promotion (1993) Ltd. holds 49.2% of the issued and outstanding Common Stock of the Company, is an indirect wholly-owned subsidiary of Leedan Business. Certain members of the family of Mr. Boaz Harel, a director of the Company, collectively own approximately 57.5% of the outstanding shares of Leedan Business. Mr. Harel owns approximately 17% of the outstanding shares of Leedan Business and disclaims beneficial ownership of any stock of Leedan Business held by any other member of the Harel family. /2/ Mr. Lauer owns shares of the Company and is the investment manager with authority to vote and dispose securities owned by three entities that he manages. The shares of the Company owned by Mr. Lauer directly and by the entities he manages total more than 5% of the outstanding shares of Common Stock of the Company. 39 The following table sets forth the holdings of the Common Stock as of June 25, 1997 by (1) each director and named executive officer; and (2) all directors and executive officers as a group.
NUMBER OF SHARES PERCENT NAME TITLE OF COMMON STOCK OF CLASS - ---- ----- ---------------- ------------ Glenda Klein Director and 217,546/3/ 3.8% Senior Vice President, Secretary, Treasurer and Chief Financial Officer Tamar Lieber Director 322,122 5.9% Richard Fried Director 12,046 Less than 1% M. Albert Nissim President 30,000/4/ Less than 1% Directors and 581,714/3/ 10.3% Executive Officers as a group (6 persons)
__________ /3/ Includes 168,637 shares of Common Stock which Ms. Klein has the right to acquire within 60 days from the date hereof upon exercise of an option held by her. /4/ Includes 30,000 shares of Common Stock which Mr. Nissim has the right to acquire within 60 days from the date hereof upon exercise of an option held by him. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . CERTAIN TRANSACTIONS. In November 1995, the Company borrowed $35,000 from Glenda Klein and $38,000 from Tamar Lieber. Each of such loans earned interest at the prime rate published from time to time by the Wall Street Journal plus 1/4% per annum pursuant to a revolving credit and security agreement which provided that advances under such lines were secured by the mortgage liens created as a result of the loans funded with such advances. Mrs. Klein was paid a fee of $588.17 to cover the penalties she incurred from the early redemption of certificates of deposit which were used to provide such loan funds. All such loans were paid in full in the 1996 fiscal year. . THE COMPANY'S ACQUISITION OF TRANS LENDING CORPORATION On December 23, 1996, the Company signed a Stock Purchase Agreement (the "Agreement") to acquire 500 shares of common stock of Trans Lending Corporation ("Trans Lending") for $100,000 and 40 200 shares of Trans Lending's non-voting, non-dividend paying preferred stock for $200,000. Trans Lending represented to the Company that it was formed to originate consumer automobile financing transactions for non-prime borrowers by acquiring contracts from franchised and independent car dealers. Alan Mann, Arthur's Goldberg's son-in-law, owned 25% of the outstanding common stock of Trans Lending at the time of the transaction. Arthur Goldberg was the Chief Executive Officer and Chairman of the Company at the time of the transaction. The transaction has not been completed; Trans Lending has not delivered any stock certificates to the Company and the Company has not paid the full amount agreed upon. As of March 31, 1997, the Company had paid $100,000 to Trans Lending pursuant to the Agreement. However, several conditions precedent to the closing of the transaction pursuant to the Agreement had not been completed as of March 31, 1997, including delivery of the share certificates evidencing Pioneer's ownership of 500 shares of common stock of Trans Lending. Management of the Company does not intend to remit the $200,000 for the preferred stock of Trans Lending, nor does it believe that the Company is liable for the obligations or operations of Trans Lending. As of March 31, 1997, the Company wrote-off its investment of $100,000 in Trans Lending and is presently considering whether to pursue legal action against Trans Lending and/or its principals for the loss of its investment. . LOAN TO ROGOSIN On April 2, 1997 and April 4, 1997, the Company issued unsecured loans of $400,000 and $600,000, respectively, to Rogosin Converters, Inc., an affiliate of the Company. Members of the family of Mr. Boaz Harel, including Mr. Harel, a director of the Company, have an indirect controlling interest in Rogosin Converters, Inc. The loans were guaranteed by Leedan International B.V., a shareholder of the Company. The Company earned interest of 12% per annum on the loans, which interest was paid monthly. The principal and accrued interest on the loans were paid in full on June 20, 1997. * * * 41 ITEM 13. EXHIBITS & REPORTS ON FORM 8-K
Exhibit Number Description - ------- ----------- 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form SB-2, dated December 27, 1996) 3.2 Certificate of Amendment of the Company's Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form SB-2, dated December 27, 1996) 3.3 Certificate of Amendment of Certificate of Incorporation of the Company 3.4 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 10.1 Credit Agreement between Bank One, Texas, N.A. and the Company, dated March 31, 1997 10.2 Revolving Line of Credit and Security Agreement between UMB Bank and Trust Company and the Company, as amended (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 10.3 Employment Agreement for Glenda S. Klein dated April 1, 1995 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 10.4 The Company's Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 10.5 Stock Purchase Agreement between the Company and Trans Lending Corporation, dated December 23, 1996 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 11 Statement regarding computation of per share earnings: set forth in note 2 on page F-8 of the Financial Statements in Item 7 of this Report 21 List of subsidiaries 27 Financial Data Schedule, submitted only in electronic format . REPORTS ON FORM 8-K During the fourth quarter of the 1996 fiscal year, the Company filed three reports on Form 8-K as set forth below: 1. On January 23, 1997 in response to "Item 5-Other Matters" in connection with the replacement and resignation of certain executive officers and directors of the Company. 2. On February 7, 1997 in response to "Item 5-Other Matters" in connection with the Company's Private Placement. 3. On March 5, 1997 in response to "Item 1-Change in Control of the Registrant" in connection with the change in control of the Company as a result of the completion of the Private Placement.
42 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PIONEER COMMERCIAL FUNDING CORP. By: /s/ M. Albert Nissim ________________________________ Name: M. Albert Nissim Title: President Date: June 25, 1997 ________________________________ In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ M. Albert Nissim ________________________________ Name: M. Albert Nissim Title: President Date: June 25, 1997 _______________________________ By: /s/ Glenda Klein ________________________________ Name: Glenda Klein Title: Senior Vice President, Chief Financial Officer, Secretary, Treasurer and Director Date: June 26, 1997 _______________________________ By: /s/ Richard Fried ________________________________ Name: Richard Fried Title: Director Date: June 26, 1997 _______________________________ By: /s/ Boaz Harel ________________________________ Name: Boaz Harel Title: Director Date: June 25, 1997 _______________________________ 43 By: /s/ Tamar Lieber ________________________________ Name: Tamar Lieber Title: Director Date: June 26, 1997 ______________________________ By: /s/ Mark Roth ________________________________ Name: Mark Roth Title: Director Date: June 27, 1997 ______________________________ 44 EXHIBIT INDEX -------------
Exhibit Number Description - ------- ----------- 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form SB-2, dated December 27, 1996) 3.2 Certificate of Amendment of the Company's Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form SB-2, dated December 27, 1996) 3.3 Certificate of Amendment of Certificate of Incorporation of the Company 3.4 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 10.1 Credit Agreement between Bank One, Texas, N.A. and the Company, dated March 31, 1997 10.2 Revolving Line of Credit and Security Agreement between UMB Bank and Trust Company and the Company, as amended (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 10.3 Employment Agreement for Glenda S. Klein dated April 1, 1995 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 10.4 The Company's Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 10.5 Stock Purchase Agreement between the Company and Trans Lending Corporation, dated December 23, 1996 (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2 dated December 27, 1996) 11 Statement regarding computation of per share earnings: set forth in note 2 on page F-8 of the Financial Statements in Item 7 of this Report 21 List of subsidiaries 27 Financial Data Schedule, submitted only in electronic format
45 EX-3.3 2 CERTIFICATE OF AMENDMENT EXHIBIT 3.3 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PIONEER COMMERCIAL FUNDING CORP. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW ----------------------------------- WE, THE UNDERSIGNED, Albert M. Nissim and Glenda S. Klein, being respectively the president and secretary of Pioneer Commercial Funding Corp. (the "Corporation") hereby certify that: 1. The name of the Corporation is Pioneer Commercial Funding Corp. The name under which the Corporation was formed is PCF Acquisition Corp. 2. The certificate of incorporation of the Corporation was filed with the Department of State of the State of New York on March 8, 1994. 3. A. The amendment of the certificate of incorporation of the Corporation effected by this certificate of amendment is to increase the number of shares which the Corporation shall have authority to issue from $5,000,000 shares, par value $.0l (one cent) per share, to 20,000,000 shares, par value $.0l (one cent) per share, by authorizing 15,000,000 additional shares of par value $.0l (one cent) per share of the same class as the presently authorized shares. B. To accomplish the foregoing amendment, Article FOURTH a) of the Certificate of Incorporation of the Corporation is hereby amended to read as follows: "FOURTH: a) The authorized capital stock of the Company is 20,000,000 shares of Common Stock, par value $.0l per share." 4. The foregoing amendment of the certificate of incorporation of the Corporation was authorized by written consent of all of the members of the Board of Directors of the corporation, followed by vote of the holders of a majority of all outstanding shares entitled to vote thereon at a special meeting of shareholders held on May 8, 1997, at which a quorum was present and acting throughout. IN WITNESS WHEREOF, we have signed this certificate on the 8th day of May, 1997, and we affirm under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. DATED: May 8, 1997 /s/ M. Albert Nissim ----------------------------------------------- M. Albert Nissim, President /s/ Glenda S. Klein ----------------------------------------------- Glenda S. Klein, Secretary -2- EX-10.1 3 CREDIT AGREEMENT EXHIBIT 10.1 CREDIT AGREEMENT between PIONEER COMMERCIAL FUNDING CORP., as Borrower BANK ONE, TEXAS, N.A., as Agent, and CERTAIN LENDERS, as Lenders $25,000,000 MARCH 31, 1997 [BANK ONE LOGO] [PREPARED BY HAYNES AND BOONE, L.L.P.] TABLE OF CONTENTS ----------------- SECTION 1. DEFINITIONS AND REFERENCES........................................ 1 1.1 Definitions....................................................... 1 1.2 Time References................................................... 12 1.3 Other References.................................................. 12 1.4 Accounting Principles............................................. 12 SECTION 2. BORROWING PROVISIONS.............................................. 12 2.1 Borrowings........................................................ 12 2.2 Borrowing Request................................................. 13 2.3 Fundings.......................................................... 13 2.4 Wet-Borrowing Procedures.......................................... 14 2.5 Terminations...................................................... 14 SECTION 3. PAYMENT TERMS..................................................... 14 3.1 Notes............................................................. 14 3.2 Payment Procedures................................................ 14 3.3 Scheduled Payments................................................ 15 3.4 Prepayments....................................................... 15 3.5 Order of Application.............................................. 15 3.6 Sharing........................................................... 16 3.7 Interest Rates.................................................... 16 3.8 Capital Adequacy.................................................. 17 3.9 Foreign Lenders, Participants, and Purchasers..................... 17 3.10 Fees.............................................................. 18 SECTION 4. COLLATERAL PROCEDURES............................................. 18 4.1 Eligible Collateral............................................... 18 4.2 Borrowing Base.................................................... 18 4.3 Collateral Delivery............................................... 19 4.4 Bailee and Agent.................................................. 19 4.5 Shipment for Sale................................................. 19 4.6 Shipment for Correction........................................... 20 4.7 Release of Collateral............................................. 20 SECTION 5. CONDITIONS PRECEDENT.............................................. 20 SECTION 6. REPRESENTATIONS AND WARRANTIES.................................... 21 6.1 Purpose of Credit................................................. 21 6.2 About the Companies............................................... 21 6.3 Authorization and Contravention................................... 21 6.4 Binding Effect.................................................... 22 6.5 [Intentionally Blank]............................................. 22 6.6 Current Financials................................................ 22 6.7 Debt.............................................................. 22 6.8 Solvency.......................................................... 22 6.9 Litigation........................................................ 22 6.10 Transactions with Affiliates...................................... 22 6.11 Taxes............................................................. 22 6.12 Employee Plans.................................................... 22 6.13 Property and Liens................................................ 23 6.14 Intellectual Property............................................. 23
6.15 Environmental Matters............................................. 23 6.16 Government Regulations............................................ 23 6.17 Insurance......................................................... 23 6.18 Appraisals........................................................ 23 6.19 Full Disclosure................................................... 23 SECTION 7. AFFIRMATIVE COVENANTS............................................. 23 7.1 Reporting Requirements............................................ 24 7.2 Use of Proceeds................................................... 25 7.3 Books and Records................................................. 25 7.4 Inspections....................................................... 25 7.5 Taxes............................................................. 25 7.6 Expenses.......................................................... 25 7.7 Maintenance of Existence, Assets, and Business.................... 25 7.8 Insurance......................................................... 25 7.9 Take-Out Commitments.............................................. 26 7.10 Appraisals........................................................ 26 7.11 INDEMNIFICATION................................................... 26 SECTION 8. NEGATIVE COVENANTS................................................ 26 8.1 Debt.............................................................. 26 8.2 Liens............................................................. 27 8.3 Investments....................................................... 27 8.4 [Intentionally Blank]............................................. 27 8.5 Merger or Consolidation........................................... 27 8.6 Liquidations and Dispositions of Assets........................... 27 8.7 Use of Proceeds................................................... 27 8.8 Transactions with Affiliates...................................... 27 8.9 Employee Plans.................................................... 27 8.10 Compliance with Laws and Documents................................ 27 8.11 Government Regulations............................................ 27 8.12 Subordinated Debt................................................. 27 8.13 New Businesses.................................................... 28 8.14 Assignment........................................................ 28 SECTION 9. FINANCIAL COVENANTS............................................... 28 9.1 Adjusted-Net Worth................................................ 28 9.2 Adjusted Debt/Adjusted-Net Worth.................................. 28 9.3 EBITDA/Interest Expense........................................... 28 9.4 Production........................................................ 28 SECTION 10. DEFAULTS AND REMEDIES............................................. 29 10.1 Default........................................................... 29 10.2 Remedies.......................................................... 30 10.3 Right of Offset................................................... 30 10.4 Waivers........................................................... 31 10.5 Performance by Agent.............................................. 31 10.6 No Responsibility................................................. 31 10.7 No Waiver......................................................... 31 10.8 Cumulative Rights................................................. 31 10.9 Rights of Individual Lenders...................................... 32 10.10 Notice to Agent................................................... 32 10.11 Costs............................................................. 32
(ii)
SECTION 11. MISCELLANEOUS..................................................... 32 11.1 Nonbusiness Days.................................................. 32 11.2 Communications.................................................... 32 11.3 Form and Number of Documents...................................... 33 11.4 Exceptions to Covenants........................................... 33 11.5 Survival.......................................................... 33 11.6 Governing Law..................................................... 33 11.7 Invalid Provisions................................................ 33 11.8 Conflicts Between Loan Documents.................................. 33 11.9 Discharge and Certain Reinstatement............................... 33 11.10 Amendments, Consents, Conflicts, and Waivers...................... 33 11.11 Multiple Counterparts............................................. 34 11.12 Parties........................................................... 34 11.13 Participations.................................................... 35 11.14 Transfers......................................................... 35 11.15 Entire Agreement.................................................. 36
(iii) SCHEDULES AND EXHIBITS ---------------------- Schedule 2 - Lenders and Commitments Schedule 4.1 - Eligibility Conditions Schedule 4.2 - Borrowing-Base Calculations Schedule 4.3 - Collateral Procedures Schedule 5 - Closing Conditions Schedule 6.2 - Companies Schedule 6.9 - Litigation and Judgments Schedule 6.10 - Affiliate Transactions Schedule 8.1 - Permitted Debt Schedule 8.2 - Permitted Liens Schedule 8.3 - Permitted Investments Exhibit A - Note Exhibit B-1 - Security Agreement Exhibit B-2 - Financing Statement Exhibit B-3 - Three-Party Agreement Exhibit B-4 - Shipping Request Exhibit B-5 - Bailee Letter for Investors Exhibit B-6 - Bailee Letter for Pool Custodian Exhibit B-7 - Trust Receipt and Agreement Exhibit B-8 - Release Request Exhibit C-1 - Borrowing Request Exhibit C-2 - Collateral-Delivery Notice Exhibit C-3 - Borrowing-Base Report Exhibit C-4 - Compliance Certificate (Monthly) Exhibit C-5 - Compliance Certificate (Quarterly) Exhibit D - Opinion of Counsel
(iv) CREDIT AGREEMENT ---------------- THIS AGREEMENT is entered into as of March 31, 1997, between PIONEER COMMERCIAL FUNDING CORP., a New York corporation ("BORROWER"), the Lenders described below, and BANK ONE, TEXAS, N.A., as Agent for Lenders. (see SECTION 1.1 for defined terms) A. Approved Originators originate, acquire, market, and sell Mortgage Loans and have entered into Originator Loan Agreements with Borrower under which Borrower provides financing to Approved Originators for their Mortgage Loan origination and acquisition until those Mortgage Loans are sold in the secondary market. Approved Originators respectively grant to Borrower first-priority Liens upon, among other things, the Mortgage Collateral delivered to or for Borrower by or for them under their respective Originator Loan Agreements. B. Borrower has requested Lenders to commit to provide Borrowings to Borrower to finance its extensions of credit to Approved Originators under Originator Loan Agreements. Borrower proposes to (1) grant to Agent for Lenders first-priority Liens upon, among other things, the Originator Collateral, Mortgage Collateral, and CD Collateral according to the Loan Documents and (2) cause each Approved Originator to enter into a Three-Party Agreement with Borrower and Agent. Lenders have agreed upon the terms of this agreement to provide those Borrowings up to the lesser of either the total Commitments or the Borrowing Base. ACCORDINGLY, for adequate and sufficient consideration, Borrower, Lenders, and Agent agree as follows: SECTION 1. DEFINITIONS AND REFERENCES. Unless stated otherwise, the - ---------- -------------------------- following provisions apply to each Loan Document and annexes, exhibits, and schedules to (and certificates, reports, and other writings delivered under) the Loan Documents. 1.1 DEFINITIONS. ----------- "ACTUAL-TERMINATION DATE" means the earlier of either (a) the Stated- Termination Date or (b) the effective date that Lenders' commitments to lend under this agreement are fully canceled or terminated. "ADJUSTED-NET WORTH" means, for the Companies and at any time, the sum of (a) the amount that should in accordance with GAAP be reflected on the Companies' balance sheet as its stockholders' equity plus (b) Subordinated Debt not due within one year from the date of determination, minus (c) Investments in Trans Lending Corporation, minus (d) the total (without duplication of deductions already made in arriving at stockholders' equity) of the book value of all assets that would be treated as intangible assets under GAAP, including goodwill, trademarks, trade names, copyrights, and patents. "AFFILIATE" means, for any Person, any other individual or entity that (directly or indirectly through ownership, voting securities, contract, or otherwise) controls, is controlled by, or under common control with that Person. "AGENCY QUALIFIED" means, for any Originator, that it is approved and qualified and in good standing as an issuer, mortgagee, or seller/servicer, as described below, and meets all requirements applicable to its status as such: (a) GNMA approved issuer of Mortgage-Backed Securities guaranteed by GNMA; (b) FNMA approved seller/servicer of Mortgage Loans, eligible to originate, purchase, hold, sell, and service Mortgage Loans to be sold to FNMA; (c) FHLMC approved seller/servicer of Mortgage Loans, eligible to originate, purchase, hold, sell and service Mortgage Loans to be sold to FHLMC; (d) FHA approved mortgagee, eligible to originate, purchase, hold, sell and service FHA Loans; and (e) VA approved mortgagee, eligible to originate, purchase, hold, sell and service VA Loans. "AGENT" means, at any time, Bank One, Texas, N.A. (or its successor appointed under the Lenders' Agreement) acting as agent for Lenders under the Loan Documents. "APPRAISAL" means, for any Mortgage Loan, a written statement of the market value of the real property securing it. "APPRAISAL LAW" means any Law that is applicable to appraisals of mortgaged-residential property in connection with transactions involving that property, including, without limitation, Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Federal Deposit Insurance Corporation Improvement Act of 1991, 12 C.F.R. Chapter 1, Part 34, Subpart C, 12 C.F.R. Chapter II, Subchapter A, Part 225, Subpart G, and 12 C.F.R. Chapter III, Subchapter B, Part 323. "APPROVED INVESTOR" means (a) FHLMC, FNMA, and GNMA and (b) any other Person from time to time named on a list agreed to by Agent and Borrower (which list Agent shall furnish to any Lender upon request) as that list may be amended from time to time (i) by Borrower and Agent to remove or add other names as Agent and Borrower may agree, (ii) by either Agent or Determining Lenders to remove any such other Person after Agent has or Determining Lenders have given to Borrower notice of (and an opportunity to discuss) the proposed removal of that Person, or (iii) automatically (without signing by any party) to remove any such Person who then (A) is not Solvent, (B) fails to pay its debts generally as they become due, (C) voluntarily seeks, consents to, or acquiesces in the benefit of any Debtor Law, or (D) becomes a party to or is made the subject of any proceeding provided for by any Debtor Law (other than as a creditor or claimant) that could suspend or otherwise adversely affect the Rights of any Company, Agent, or any Lender in connection with the transactions contemplated in the Loan Documents. Separate lists of Approved Investors will be maintained for B/C Borrowings, Second-Lien Borrowings, and all other Borrowings. "APPROVED ORIGINATOR" means any Originator who (a) has entered into a Three-Party Agreement with Borrower and Agent and (b) is from time to time named on a list agreed to by Agent and Borrower (which list Agent shall furnish to any Lender upon request) as that list may be amended from time to time (i) by Borrower and Agent to remove or add other names as Agent and Borrower may agree, (ii) by either Agent or Determining Lenders to remove any such other Person after Agent has or Determining Lenders have given to Borrower notice of (and an opportunity to discuss) the proposed removal of that Person, or (iii) automatically (without signing by any party) to remove any such Person who then (A) is not Solvent, (B) fails to pay its debts generally as they become due, (C) voluntarily seeks, consents to, or acquiesces in the benefit of any Debtor Law, (D) becomes a party to or is made the subject of any proceeding provided for by any Debtor Law (other than as a creditor or claimant) that could suspend or otherwise adversely affect the Rights of any Company, Agent, or any Lender in connection with the transactions contemplated in the Originator Documents or Loan Documents, (E) is in default under its Originator Loan Agreement, or (F) fails to be Agency Qualified in any respect. "AVERAGE-ADJUSTED-BASE RATE" means, for any period, an annual interest rate equal to the quotient of (a) the sum of the Base Rate plus (or minus, as the case may be) the applicable interest margin for each 2 calendar day during that period divided by (b) the number of days during that period. The applicable interest margin for purposes of this definition is (i) positive 0.125% for B/C Borrowings and Second-Lien Borrowings, and (ii) negative 0.125% for all other Borrowings. "AVERAGE-PRINCIPAL DEBT" means, for any period and any Lender, the quotient of (a) the sum of the Principal Debt owed to that Lender as of the close of business for each calendar day (which for any day that is not a Business Day is deemed for this definition to be the Principal Debt as of the close of business for the preceding Business Day) divided by (b) the number of days during that period. "BASE RATE" means an annual interest rate equal from day to day to the floating annual interest rate established by Agent from time to time as its base-rate of interest, which may not be the lowest interest rate charged by Agent on loans similar to Borrowings. "BAILEE LETTER" means, as applicable under the circumstances, one of the letters executed and delivered by Agent in substantially the form of EXHIBIT B-5 or EXHIBIT B-6. "B/C BORROWING" means a Borrowing that is subject to the B/C-Second-Lien Sublimit and supported by the Borrowing Base for Eligible-B/C Loans. "B/C-SECOND-LIEN SUBLIMIT" means, at any time, 30% of the total Commitments as that percentage may be modified by Agent on a quarterly basis in its sole discretion based upon loan-production volumes. "BORROWER" is defined in the preamble to this agreement. "BORROWING" means any amount disbursed (a) by Lenders to Borrower under the Loan Documents as an original disbursement of funds or (b) by Agent or any Lender in accordance with (and to satisfy a Company's obligations under) any Loan Document. "BORROWING BASE" means, at any time, the amount described on SCHEDULE 4.2 and calculated under SECTION 4.2. "BORROWING-BASE REPORT" means a report executed by Agent and delivered to Borrower and Lenders in substantially the form of EXHIBIT C-3. "BORROWING DATE" means, for any Borrowing, the date it is disbursed. "BORROWING EXCESS" means, at any time, the amount by which any of the limitations of SECTION 2.1 is exceeded. "BORROWING REQUEST" means a request executed by a Responsible Officer of Borrower requesting a Borrowing and delivered to Agent in substantially the form of EXHIBIT C-1. "BUSINESS DAY" means any day other than Saturday, Sunday, and any other day that commercial banks are authorized or obligated by Law to be closed in Texas. "CALENDAR MONTH" means that portion of a calendar month that occurs at any time from the date of this agreement to the Actual-Termination Date. 3 "CASH-EQUIVALENT COLLATERAL" means any combination of the following have a total face amount of at least $1,000,000 on which valid Lender Liens have been created: (a) One or more certificates of deposit issued by any one or more Lenders; (b) cash deposited into a collateral account with Agent; or (c) any combination of Investments in obligations, with maturities of one year or less, issued or unconditionally guaranteed by (or issued by any of its agencies and backed by the full faith and credit of) the United States of America. "CLOSING DATE" means the date agreed to by Borrower and Agent for the initial Borrowing under this agreement, which date may not be (a) before the conditions precedent for the initial Borrowing have been satisfied or (b) if at all, later than April 15, 1997. "COLLATERAL" means Originator Collateral, Mortgage Collateral, Cash- Equivalent Collateral, and all other collateral defined in the Security Agreement. "COLLATERAL-DELIVERY NOTICE" means a notice executed by a Responsible Officer of Borrower delivering Collateral Documents and delivered to Agent in substantially the form of EXHIBIT C-2. "COLLATERAL DOCUMENTS" means the documents and other items described on SCHEDULE 4.3 and required to be delivered to Agent under SECTION 4.3. "COMMITMENT" means, for any Lender, the amount stated beside its name and so designated on SCHEDULE 2 (as it may be amended under this agreement), as that amount may be canceled or terminated under this agreement. "COMMITMENT PERCENTAGE" means, at any time for any Lender, the proportion (stated as a percentage) that its Commitment bears to the total Commitments. "COMPANIES" means, at any time, Borrower and all of its Subsidiaries, if any, and "COMPANY" means each of them. "COMPLIANCE CERTIFICATE" means a certificate executed by a Responsible Officer of Borrower and delivered to Agent in substantially the form of EXHIBIT C-4 or C-5, as the case may be. "CONVENTIONAL LOAN" means a Mortgage Loan that (a) is not a FHA Loan or VA Loan but (b) complies with all applicable requirements for purchase under the FNMA or FHLMC standard form of conventional-mortgage-purchase contract. "CORRECTION PERIOD" means 14 calendar days for any Collateral Documents for any Mortgage Loan shipped under SECTION 4.6 for correction. "CURRENT FINANCIALS" means either (a) the Companies' Financials for the year ended March 31, 1996, and for the nine months ended December 31, 1996, or (b) at any time after the Companies' annual Financials are first delivered under SECTION 7.1, the Companies' annual Financials then most recently delivered to Agent and subsequent interim Financials then most recently delivered to Agent. "DEBT," for any Person and without duplication, means (a) all obligations required by GAAP to be classified upon that Person's balance sheet as liabilities, (b) liabilities secured (or for which the holder of the liabilities has an existing Right, contingent or otherwise, to be so secured) by any Lien existing on property owned or acquired by that Person, (c) obligations that under GAAP should be capitalized for 4 financial reporting purposes, and (d) all guaranties, endorsements, and other contingent obligations with respect to Debt of others or in respect of any Employee Plan. "DEBTOR LAWS" means all applicable liquidation, conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization, or similar Laws from time to time in effect and generally affecting creditors' Rights. "DEFAULT" is defined in SECTION 10.1. "DEFAULT PERCENTAGE" means, at any time for any Lender, the proportion (stated as a percentage) that its Principal Debt bears to the total Principal Debt. "DEFAULT RATE" means, for any day, an annual interest rate equal to the lesser of either (a) the Base Rate plus 4% or (b) the Maximum Rate. "DETERMINING LENDERS" means, at any time, any combination of Lenders whose (a) Default Percentages total at least 66 2/3% at any time on or after the Actual-Termination Date, or (b) Commitment Percentages total at least 66 2/3% at all other times. "DISTRIBUTION" -- with respect to any shares of any capital stock or other equity securities issued by a Person -- means (a) the retirement, redemption, purchase, or other acquisition for value of those securities, (b) the declaration or payment of any dividend with respect to those securities, (c) any loan or advance by that Person to, or other investment by that Person in, the holder of any of those securities, and (d) any other payment by that Person with respect to those securities. "DRY BORROWING" means a Borrowing for which all of the Collateral Documents have been delivered to Agent in accordance with SECTION 4.3. "EBITDA" for any period and any Person: (a) Means the sum (without duplication) of the following for that Person and for that period taken as a single-accounting period: (i) Net Income; minus (ii) extraordinary gains; plus (iii) extraordinary losses; plus (iv) to the extent included in determining Net Income (A) income Taxes, (B) Interest Expense, (C) depreciation, and (D) amortization; and (b) Unless otherwise specified, is determined (i) for a period of four-consecutive-fiscal quarters of that Person taken as a single- accounting period, and (ii) exclusive of the EBITDA of any entity (A) before it became a Subsidiary of that Person or transferred substantially all of its assets to that Person or (B) after it is directly or indirectly disposed of by that Person. "ELIGIBLE-B/C LOAN" is defined in SCHEDULE 4.1. "ELIGIBLE-MORTGAGE COLLATERAL" means, at any time, all Eligible-Mortgage Loans and all Eligible-Mortgage Securities. "ELIGIBLE-MORTGAGE LOAN" means, at any time, a Mortgage Loan for which the applicable conditions for eligibility described in SCHEDULE 4.1 are satisfied and which may under SECTION 4.1 be included in the Borrowing Base. 5 "ELIGIBLE-MORTGAGE SECURITY" means, at any time, a Mortgage Security for which the applicable conditions for eligibility described in SCHEDULE 4.1 are satisfied and which may under SECTION 4.1 be included in the Borrowing Base. "ELIGIBLE-ORIGINATOR LOAN" is defined in SCHEDULE 4.1. "ELIGIBLE-SECOND-LIEN LOAN" is defined in SCHEDULE 4.1. "EMPLOYEE PLAN" means an employee-pension-benefit plan covered by Title IV of ERISA and established or maintained by any Company. "ENVIRONMENTAL LAW" means any Law that relates to the pollution or protection of the environment or to Hazardous Substances. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA AFFILIATES" means Borrower and every trade or business (whether or not incorporated) that, together with any Company, would be treated as a single- employer under (S) 4001 of ERISA. "FED-FUNDS RATE" means, for any day, the annual interest rate (rounded upwards, if necessary, to the nearest 0.01%) determined by Agent to be either (a) the weighted average of the rates on overnight-federal-funds transactions with member banks of the Federal Reserve System arranged by federal-funds brokers for that day (or, if not a Business Day on the preceding Business Day) as published by the Federal Reserve Bank of New York (as published by Knight- Ridder, page 73, utilizing the Fed-Effective Rate), or (b) if not so published for any day, the average of the quotations for that day on those transactions received by Agent from three federal-funds brokers of recognized standing it may select. "FHA" means the Federal Housing Administration within the United States Department of Housing and Urban Development. "FHA LOAN" means a Mortgage Loan which is either (a) fully or partially insured by FHA under the National Housing Act or Title V of the Housing Act of 1949, (b) subject to a current, binding, and enforceable commitment issued by FHA for that insurance, or (c) eligible for direct endorsement under the FHA Direct Endorsement Program. "FHLMC" means the Federal Home Loan Mortgage Corporation. "FINANCIALS" means balance sheets, profit and loss statements, statements of cash flow, and any other financial statements, reports, or information specified by any Lender. "FNMA" means the Federal National Mortgage Association. "FUNDING ACCOUNT" means a non-interest bearing deposit account that is (a) established by Borrower for the deposit of Borrowings and (b) styled and numbered "Pioneer Commercial Funding Corp. Funding Account" Account No. 1825160334. "GAAP" means generally accepted accounting principles of the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board that are applicable from time to time. 6 "GNMA" means the Government National Mortgage Association. "HAZARDOUS SUBSTANCE" means any substance (a) the presence of which requires removal, remediation, or investigation under any Environmental Law, or (b) that is defined or classified as a hazardous waste, hazardous material, pollutant, contaminant, or toxic or hazardous substance under any Environmental Law. "INTEREST EXPENSE" means -- for any Person, for any period, and without duplication -- all interest on Debt, whether paid in cash or accrued as a liability and payable in cash during any subsequent period (including the interest component of leases that should be capitalized on a balance sheet), as determined by GAAP, and premium or penalty for repayment, redemption, or repurchase of debt. "INVESTMENT" means, in respect of any Person, any loan, advance, extension of credit, or capital contribution to that Person, any investment in that Person, or any purchase or commitment to purchase any equity securities or Debt issued by that Person or substantially all of the assets or a division or other business Unit of that Person. "IRC" means the Internal Revenue Code of 1986. "JUMBO LOAN" means a Mortgage Loan (other than a FHA Loan or VA Loan) that complies with all applicable requirements for purchase under either the FNMA or FHLMC standard form of conventional mortgage purchase contract then in effect or otherwise meets or exceeds the requirements of any other applicable Approved Investor except that the amount of it exceeds the maximum loan amount under those requirements. "JUMBO SUBLIMIT," at any time, means (a) for all Jumbo Loans, 10% of the total Commitments, and (b) for any Jumbo Loan in excess of $450,000 only the first $450,000 except that Agent may grant exceptions to this CLAUSE (B) upon request by Borrower on a case-by-case basis, and in Agent's absolute discretion. "LAWS" means all applicable statutes, laws, treaties, ordinances, rules, regulations, orders, writs, injunctions, decrees, judgments, opinions, and interpretations of any Tribunal. "LENDER LIEN" means any present or future first-priority Lien securing the Obligation and assigned, conveyed, and granted to or created in favor of Agent for the benefit of Lenders under the Loan Documents. "LENDERS" means (a) the financial institutions named on the attached SCHEDULE 2 or on the most recently amended SCHEDULE 2, if any, prepared by Agent under this agreement, and (b) subject to this agreement, their respective successors and permitted assigns, but (c) not any Participant who is not otherwise a party to this agreement. "LENDERS' AGREEMENT" means the Lenders' Agreement, if any, executed by Agent and Lenders in connection with this agreement. "LIEN" means any lien, mortgage, security interest, pledge, assignment, charge, title retention agreement, or encumbrance of any kind and any other arrangement for a creditor's claim to be satisfied from assets or proceeds prior to the claims of other creditors or the owners. 7 "LITIGATION" means any action by or before any Tribunal. "LOAN DOCUMENTS" means (a) this agreement, certificates and reports delivered under this agreement, and exhibits and schedules to this agreement, (b) all agreements, documents, and instruments in favor of Agent or Lenders (or Agent on behalf of Lenders) ever delivered under this agreement or otherwise delivered in connection with any of the Obligation, (c) the Lenders' Agreement, if any, and (d) all renewals, extensions, and restatements of, and amendments and supplements to, any of the foregoing. "MARKET VALUE" means, at any time (a) for Mortgage Loans -- except as provided in clause (b) below -- a market value based upon the then-most recent posted net yield for 30-day mandatory future delivery furnished by FNMA and published and distributed by Telerate Mortgage Services or (if that posted net yield is not available from Telerate Mortgage Services) obtained by Agent from FNMA, (b) for Jumbo Loans or any other Mortgage Loan when the posted rate is not available from FNMA, the value determined in good faith by Agent, and (c) for Mortgage Securities, the applicable Take-Out Prices, as detailed in the then most-recent Take-Out Report delivered by Borrower under this agreement of all Take-Out Commitments relating to Mortgage Securities. "MATERIAL-ADVERSE EVENT" means any circumstance or event that, individually or collectively, is reasonably expected to result in any (a) impairment of Borrower's ability to perform any of its payment or other material obligations under any Loan Document or Agent's or any Lender's ability to enforce any of those obligations or any of its Rights under any Loan Document, (b) material- adverse effect on Borrower's individual financial condition or the Companies' consolidated financial condition represented to Lenders in the Current Financials most recently delivered to Lenders as of the Closing Date (c) material-adverse effect on any Collateral, or (d) Default. "MAXIMUM AMOUNT and MAXIMUM RATE" respectively mean, for any day and for any Lender, the maximum non-usurious amount and the maximum non-usurious rate of interest that, under applicable Law, the Lender is permitted to contract for, charge, take, reserve, or receive on its portion of the Obligation. "MORTGAGE COLLATERAL" means all Mortgage Loans, Mortgage Securities, and related Collateral Documents offered as Collateral under an Originator Loan Agreement and the Loan Documents. "MORTGAGE LOAN" means a loan that is not a construction or non-residential commercial loan, is evidenced by a valid promissory note, and is secured by a mortgage, deed of trust, or trust deed that grants a perfected first- or second- priority Lien on the residential-real property. "MORTGAGE SECURITY" means a security (in respect of an underlying pool of related Mortgage Loans) that provides for payment by the issuer to the holder of specified principal installments and a fixed-interest rate on the unpaid balance, with all prepayments being passed through to the holder, and is issued in certificate or book-entry form. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in (S)(S) 3(37) or 4001(a)(3) of ERISA or (S) 414(f) of the IRC to which any ERISA Affiliate is making, or has made, or is accruing, or has accrued, an obligation to make contributions. "NET INCOME" means, for any Person and for any period, the amount that should in accordance with GAAP be reflected on that Person's income statement as net income for that period after deduction of any minority interests. 8 "NOTE" means a promissory note executed and delivered by Borrower, payable to a Lender's order, in the stated principal amount of its Commitment and substantially in the form of EXHIBIT A. "OBLIGATION" means all (a) present and future indebtedness, obligations, and liabilities of Borrower or any Guarantor to Agent or any Lender and related to any Loan Document, whether principal, interest, fees, costs, attorneys' fees, or otherwise, (b) amounts that would become due but for operation of 11 U.S.C. (S)(S) 502 and 503 or any other provision of Title 11 of the United States Code, (c) pre- and post-maturity interest on any of the foregoing, including, without limitation, all post-petition interest if any Company voluntarily or involuntarily files for protection under any Debtor Law, and (d) all renewals, extensions, and modifications of any of the foregoing. "ORIGINATOR" means any Person who originates and acquires Mortgage Loans and markets and sells then in the secondary market. "ORIGINATOR COLLATERAL" means all Originator Documents offered as Collateral under the Loan Documents. "ORIGINATOR DOCUMENTS" means for any Approved Originator, its Originator Loan Agreement and the documents and items described on SCHEDULE 4.3 and required to be delivered to Agent under SECTION 4.3. "ORIGINATOR LOAN AGREEMENT" means a loan agreement between Borrower and an Approved Originator under which, among other things (a) Borrower provides financing to that Approved Originator for its Mortgage Loan origination and acquisition until those Mortgage Loans are sold in the secondary market, and (b) that Approved Originator grants to Borrower first-priority Liens upon, among other things, the Mortgage Collateral delivered to or for Borrower by or for that Approved Originator. "PARTICIPANT" is defined in Section 11.13. "PBGC" means the Pension Benefit Guaranty Corporation. "PERMITTED DEBT" means Debt described on SCHEDULE 8.1. "PERMITTED LIENS" means Liens described on SCHEDULE 8.2. "PERMITTED INVESTMENTS" means Investments described on SCHEDULE 8.3. "PERSON" means any individual, entity, or Tribunal. "POTENTIAL DEFAULT" means the occurrence of any event or existence of any circumstance that would (upon notice, time lapse, or both) become a Default. "PRINCIPAL DEBT" means, at any time, the outstanding principal balance of all Borrowings. "PURCHASER" is defined in SECTION 11.14 "REGULATION U" means Regulation U promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. PART 221. 9 "RELEASE REQUEST" means a Release Request executed and delivered by a Responsible Officer of Borrower requesting the release of Collateral to Agent in substantially the form of EXHIBIT B-8. "REPRESENTATIVES" means representatives, officers, directors, employees, attorneys, and agents. "RESPONSIBLE OFFICER" means the chairman, president, vice president, chief executive officer, chief financial officer, or any other officer designated as a "Responsible Officer" by any of the above in writing to Agent. "RIGHTS" means rights, remedies, powers, privileges, and benefits. "SECOND-LIEN BORROWING" means a Borrowing that is subject to the B/C- Second-Lien Sublimit and supported by the Borrowing Base for Eligible-Second- Lien Loans. "SECURITY AGREEMENT" means the Security Agreement executed by Borrower and Agent in substantially the form of EXHIBIT B-I. "SETTLEMENT ACCOUNT" means a non-interest bearing deposit account that is (a) established by Borrower with Agent for the deposit of payments from investors in or the settlement of Mortgage Collateral and for the deposit of payments on the Obligation and (b) styled and numbered "Pioneer Commercial Funding Corp. Settlement Account," Account No. 1825160375. "SHIPPING PERIOD" means 45 calendar days for the Collateral Documents for any Mortgage Loan shipped to or for an investor under SECTION 4.5. "SHIPPING REQUEST" means a Shipping Request executed and delivered by a Responsible Officer of Borrower requesting the shipment of Collateral to Agent in substantially the form of EXHIBIT B-4 "SOLVENT" means, for any Person, that (a) the fair-market value of its assets exceeds its liabilities, (b) it has sufficient cash flow to enable it to pay its debts as they mature, and (c) it does not have unreasonably small capital to conduct its businesses. "STATED-TERMINATION DATE" means March 30, 1998. "SUBORDINATED DEBT" means, at any time Debt of any Company that (a) is subject to subordination, payment blockage, and standstill provisions acceptable to Determining Lenders in their sole discretion and (b) does not have any scheduled or mandatory principal or sinking fund payment due before one year after the then-effective Stated-Termination Date. "SUBSIDIARY" of any Person means any entity of which at least 50% (in number of votes) of the stock (or equivalent interests) is owned of record or beneficially, directly or indirectly, by that Person. "TAKE-OUT COMMITMENT" means a binding commitment from an Approved Investor to purchase Mortgage Collateral, acceptable in form and substance to Agent, in favor of Borrower, with respect to which there is no condition which cannot be reasonably anticipated to be satisfied or complied with before its expiration. "TAKE-OUT PRICE" means, at any time, the amount described and calculated as provided on SCHEDULE 4.2. 10 "TAXES" means for any Person, taxes, assessments, or other governmental charges or levies imposed upon it, its income, or any of its properties, franchises, or assets. "THREE-PARTY AGREEMENT" means a Three-Party Agreement entered into between Agent, Borrower, and an Approved Originator substantially in the form of Exhibit B-3. "TRIBUNAL" means any (a) local, state, or federal judicial, executive, or legislative instrumentality, (b) private arbitration board or panel, or (c) central bank. "TRUST RECEIPT" means a Trust Receipt and Agreement executed and delivered by Borrower requesting the return of Collateral to Agent in substantially the form of Exhibit B-7. "UCC" means the Uniform Commercial Code as enacted in Texas or other applicable jurisdictions. "VA" means the Department of Veteran's Affairs. "VA LOAN" means a Mortgage Loan either (a) full or partial payment of which is guaranteed by VA under the Servicemen's Readjustment Act of 1944 or Chapter 37 of Title 38 of the United States Code, (b) for which VA has issued a current binding and enforceable commitment for such a guaranty, or (c) which is subject to automatic guarantee by VA, which in each case, the applicable guaranty, commitment to guarantee, or automatic guaranty is for the maximum amount permitted by Law. "WET BORROWING" means a Borrowing for which all of the Collateral Documents have not been delivered to Lender in accordance with Section 4.3. "WET PERIOD" means five Business Days for the Collateral Documents for any Mortgage Loan that supports a Wet Borrowing. "WET SUBLIMIT" means, at any time, a percentage of the total Commitments, which percentage is (a) 30% for the first four and last three Business Days of each Calendar Month, and (b) 20% at all other times. "WIRE INSTRUCTIONS" mean, for any Person, the information for wire transfers of funds to that Person, which (until changed by written notice to all other parties to this agreement) are stated for (a) Borrower and Agent, beside their names on the signature pages below, and (b) each Lender, beside its name on Schedule 2. 1.2 TIME REFERENCES. Unless otherwise specified, in the Loan Documents --------------- (a) time references (e.g., 10:00 a.m.) are to time in Dallas, Texas, and (b) in calculating a period from one date to another, the word "from" means "from and including" and the word "to" or "until" means "to but excluding." 1.3 OTHER REFERENCES. Unless otherwise specified, in the Loan Documents ---------------- (a) where appropriate, the singular includes the plural and vice versa, and words of any gender include each other gender, (b) where appropriate, words include their respective cognate expressions, (c) heading and caption references may not be construed in interpreting provisions, (d) monetary references are to currency of the United States of America, (e) section, paragraph, annex, schedule, exhibit, and similar references are to the particular Loan Document in which they are used, (f) references to "telecopy," "facsimile," or "fax" are to facsimile or telecopy transmissions, (g) the term "including" means including without limiting the 11 generality of any description preceding that term, (h) references to "writing" include printing, typing, lithography, and other means of reproducing words in a tangible, visible form, (i) references to any Person include that Person's heirs, personal representatives, successors, trustees, receivers, and permitted assigns, (j) references to any Tribunal include any Person succeeding to its relevant function, (k) references to any Law include every amendment or supplement to it, rule and regulation adopted under it, and successor or replacement for it, and (l) references to any Loan Document or other document include (to the extent not prohibited by the terms of the Loan Documents) every renewal and extension of it, amendment and supplement to it, and replacement or substitution for it. 1.4 ACCOUNTING PRINCIPLES. Unless otherwise specified, in the Loan --------------------- Documents (a) GAAP determines all accounting and financial terms and compliance with financial covenants, (b) GAAP in effect on the date of this agreement determines compliance with financial covenants, (c) otherwise, all accounting principles applied in a current period must be comparable in all material respects to those applied during the preceding comparable period, and (d) all accounting and financial terms and compliance with reporting and financial covenants must be on a consolidated basis, if applicable. SECTION 2. BORROWING PROVISIONS. --------------------- 2.1 BORROWINGS. Borrowings may be made under the Loan Documents on a ---------- revolving basis subject to the following conditions and all other conditions of the Loan Documents. . The total Principal Debt of Borrowings may never exceed the lesser of either (a) the total Commitments or (b) the Borrowing Base. . The total Principal Debt of Wet Borrowings may never exceed the Wet Sublimit. . The total Principal Debt of all B/C Borrowings may never exceed the lesser of either (i) the Borrowing Base for Eligible-B/C Loans or (ii) the sum of the B/C-Second-Lien Sublimit (as adjusted pursuant to Schedule 4.2) minus the total Principal Debt of all Second-Lien Borrowings. . The total Principal Debt of all Second-Lien Borrowings may never exceed the lesser of either (i) the Borrowing Base for Eligible- Second-Lien Loans or (ii) the sum of the B/C-Second-Lien Sublimit (as adjusted pursuant to Schedule 4.2) minus the total Principal Debt of all Second-Lien Borrowings. . No Borrowing may be made on a day that is not a Business Day or on or after the Actual-Termination Date. 2.2 BORROWING REQUEST. Borrower may only request a Borrowing by timely ----------------- delivering to Agent a Collateral-Delivery Notice and all required Originator Documents and Collateral Documents under Section 4.3 and by delivering to Agent a Borrowing Request for the Borrowing before noon on the Borrowing Date for it. A Borrowing Request is irrevocable and binding on Borrower when delivered. Agent shall use its best efforts to promptly send a copy of it to each Lender by fax and confirm it by telephone. 12 2.3 FUNDINGS. -------- (a) REMITTANCE BY LENDERS. Each Lender shall remit its Commitment --------------------- Percentage of any Borrowing requested in a Borrowing Request to Agent's principal office in Dallas, Texas, by wire transfer according to Agent's Wire Instructions, in funds that are available for immediate use by Agent by 11:00 a.m. on the Borrowing Date. (b) FUNDING BY AGENT. Subject to receipt of those funds, Agent shall ---------------- on the Borrowing Date (unless to its actual knowledge any of the applicable conditions precedent have not been satisfied by Borrower or waived by the requisite Lenders) either deposit those funds into the Funding Account for a Dry Borrowing or wire transfer those funds in accordance with the Borrowing Request for a Wet Borrowing. (c) NON-REMITTANCE. Absent contrary written notice from a Lender -------------- received by Agent by 12:00 Noon on the Borrowing Date, Agent may assume that each Lender has made its Commitment Percentage of a Borrowing under a Borrowing Request available to Agent on the Borrowing Date and may (but is not obligated to) make available to Borrower a corresponding amount. If a Lender fails to make its Commitment Percentage of that Borrowing available to Agent on the Borrowing Date (whether because of that Lender's default, because that Lender is not open for business on that Business Day, or otherwise) then Agent may recover that amount on demand (i) from that Lender, together with interest at the Fed-Funds Rate plus 1.50%, during the period from the Borrowing Date to the date Agent recovers that amount from that Lender (which payment is then deemed to be that Lender's Commitment Percentage of that Borrowing) or (ii) if that Lender fails to pay that amount upon demand, then from Borrower if applicable, together with interest at an annual interest rate equal to the rate applicable to the requested Borrowing during the period from the Borrowing Date to the date Agent recovers that amount from Borrower. Notwithstanding these provisions, each Lender remains obligated to lend its Commitment Percentage of that Borrowing, assumes the credit risk for that amount when the Borrowing is made available to or for Borrower, and -- after Agent has recovered the amount of interest provided for in clause (i) above -- is entitled to interest on that amount from the Borrowing Date. (d) OTHER LENDERS. Although no Lender is responsible for the failure ------------- of any other Lender to make its Commitment Percentage of any Borrowing, that failure does not excuse any other Lender from making its Commitment Percentage of that Borrowing. 2.4 WET-BORROWING PROCEDURES. The conditions and procedures of Section ------------------------ 2.2 and Section 2.3 apply to Wet Borrowings except as follows: (a) COLLATERAL DOCUMENTS. A Wet Borrowing may be funded before -------------------- delivery to Agent of all of the required Collateral Documents for the Eligible-Mortgage Loans supporting that Wet Borrowing. The Collateral- Delivery Notice delivered to Agent for a Wet Borrowing may be sent to Agent by fax but must identify and describe each Mortgage Loan that supports that Wet Borrowing and the amount of the Borrowing Base applicable to it. By delivering the Collateral-Delivery Notice, Borrower confirms its grant under this agreement of Lender Liens (from the Borrowing Date for each Wet Borrowing) on each Collateral Document offered as Collateral in that Col1ateral-De1ivery Notice that is perfected subject to the delivery of the related promissory notes for those Mortgage Loans to Agent or its bailee. 13 (b) FUNDING BY AGENT. Agent shall make the funds available to ---------------- Borrower by 12:00 Noon on the Borrowing Date by wire transferring these funds in accordance with the Borrowing Request or by depositing these funds into the Funding Account. 2.5 TERMINATIONS. The total Commitments automatically terminate on the ------------ Stated-Termination Date. After giving written and irrevocable notice to Agent and each Lender at least five Business Days before the effective date of any termination, Borrower may fully or partially terminate the Commitments before the Stated-Termination Date ratably in accordance with each Lender's Commitment Percentage. Once terminated, no part of any Commitment may be reinstated except by an amendment to this agreement. SECTION 3. PAYMENT TERMS. - --------- ------------- 3.1 NOTES. The Principal Debt and interest on it are evidenced by the ----- Notes. Notwithstanding any sale of participating interests under Section 11.13 or any contrary notice, Borrower and Agent may deem and treat each Lender as the absolute owner of its respective Note for all purposes. 3.2 Payment Procedures. (a) PAYMENTS. Borrower shall make each payment and prepayment on the -------- Obligation to Agent, on behalf of Lenders, in accordance with Agent's Wire Instructions in funds that are available for immediate use by Agent. Payments that are received by 4:00 p.m. on a Business Day are deemed received on that Business Day. Payments that are received after 4:00 p.m. on a Business Day are deemed received on the next Business Day. Subject to Section 3.7(f), applicable interest continues to accrue through the calendar day immediately before the Business Day on which the payment is deemed received. No Lender directly invoices Borrower for (and only Agent invoices Borrower for) interest under the Loan Documents. (b) DISTRIBUTIONS. When received under clause (a) above, Agent shall ------------- distribute each payment to each Lender (in accordance with Section 3.5 and each Lender's Wire Instructions) reasonably promptly after receipt but by no later than 5:00 p.m. on the Business Day the payment is deemed to be received by Agent under clause (a) above. If Agent fails to distribute any payment to any Lender as required by this clause, then Agent shall pay to that Lender on demand interest on that payment, from the date due under this clause until paid, at an annual interest rate equal from day to day to the Fed-Funds Rate. 3.3 SCHEDULED PAYMENTS. Borrower shall pay (a) interest on the 15th day of ------------------ each Calendar Month (commencing on the first such date after the Closing Date) as it accrued through the last day of the preceding Calendar Month, and (b) the Principal Debt and all accrued and unpaid interest on the Actual-Termination Date. 3.4 PREPAYMENTS. Borrower (a) shall, on demand when any Borrowing Excess ----------- exists, prepay the appropriate Principal Debt or take any other actions in accordance with this agreement necessary to eliminate the Borrowing Excess, and (b) may otherwise voluntarily prepay any of the Obligation at any time without premium or penalty. 3.5 ORDER OF APPLICATION. All payments and proceeds (whether voluntary, -------------------- involuntary, through the exercise of any Right of set-off or other Right, realization against any Collateral, or otherwise) shall be applied in the following order: 14 (a) NO DEFAULT. While no Default exists (i) all payments of regularly ---------- scheduled interest shall be applied to accrued and unpaid interest on the Obligation, payable ratably to Lenders in the proportion that the amount of interest owed to each Lender bears to the total of all interest owed to all Lenders, (ii) all payments and proceeds from the sale or other disposition of Collateral shall be applied to Principal Debt, payable ratably to each Lender in accordance with its Commitment Percentage, and (iii) all other payments and proceeds as Borrower directs. (b) DEFAULT. While a Default exists, in the following order and ------- manner: (i) All costs and expenses incurred by Agent in connection with its duties under the Loan Documents (including, without limitation, fees and expenses paid by Agent to any servicing companies retained by Agent to assist it in servicing any Collateral required to be serviced, to any attorneys, or to any agents) that have not been reimbursed by Lenders, together with interest at the Default Rate, payable solely to Agent. (ii) All costs and expenses incurred by any Lender in connection with the Loan Documents that are reimbursable to it under the Loan Documents and all amounts paid by that Lender to Agent as a reimbursement to it of costs and expenses incurred by Agent in connection with its duties under the Loan Documents (together with interest at the Default Rate), payable ratably to Lenders in the proportion that each Lender's share of those costs and expenses bears to the total of those costs and expenses for all Lenders. (iii) Accrued and unpaid interest on the Obligation, payable ratably to Lenders in the proportion that the amount of interest owed to each Lender bears to the total of all interest owed to all Lenders. (iv) Principal Debt, payable ratably to each Lender in accordance with its Default Percentage, applied first to Wet Borrowings, then to Second-Lien Borrowings, then to B/C Borrowings, and then to other Borrowings. (v) All other portions of the Obligation, payable ratably to Lenders in the proportion that each Lender's share of those amounts bears to the total of those amounts for all Lenders. (vi) Either (i) to Borrower or to its successors or assigns on their behalf, to be divided between them as they may agree, or (ii) as a court of competent jurisdiction may direct. 3.6 SHARING. If any Lender obtains any amount (whether voluntary, ------- involuntary, or otherwise, including, without limitation, as a result of exercising its Rights under Section 10.3) that exceeds the portion of that amount it is otherwise entitled under the Loan Documents to receive, then that Lender shall purchase from the other Lenders participations that result in the purchasing Lender's sharing the excess amount ratably with each Lender in accordance with the portion it is entitled to receive under the Loan Documents. If all or any of that excess amount is subsequently recovered from that purchasing Lender, then the purchase of participations in it is automatically rescinded and the purchase price restored to that purchasing Lender to the extent of the recovery. Any Lender purchasing a participation from another Lender under this section may, to the extent lawful, exercise all of its Rights of payment 15 (including the Right of offset) with respect to that participation as fully as if that Lender were the direct creditor of Borrower in the amount of that participation. 3.7 INTEREST RATES. -------------- (a) NON-DEFAULT RATE. Subject to clause (b) below, all Principal Debt ---------------- bears an annual interest rate equal to the lesser of either the Maximum Rate or the Average-Adjusted-Base Rate for that Calendar Month. (b) DEFAULT RATE. All past-due Principal Debt and past-due interest ------------ on it bears interest at the Default Rate from the date due (stated or by acceleration) until paid, whether or not payment is before or after entry of a judgment. (c) RATE CHANGES. Each change in the Base Rate, Fed-Funds Rate, and ------------ the Maximum Rate is effective upon the effective date of change without notice to Borrower or any other Person. (d) CALCULATIONS. Interest is calculated on the basis of actual days ------------ (including the first but excluding the last) over a 360-day year, unless the calculation would result in an interest rate greater than the Maximum Rate, in which event interest is calculated on the basis of the actual days in that year. (e) RECAPTURE. If the designated interest rate applicable to any --------- Borrowing exceeds the Maximum Rate, the interest rate on that Borrowing is limited to the Maximum Rate. However, any subsequent reductions in the designated rate shall not become effective until the total amount of accrued interest equals the amount of interest that would have accrued if that designated rate had always been in effect. If at maturity (stated or by acceleration), or at final payment of the Notes, the total interest paid or accrued is less than the interest that would have accrued if the designated rates had always been in effect, then, at that time and to the extent permitted by Law, Borrower shall pay an amount equal to the difference of (i) the lesser of either the amount of interest that would have accrued if the designated rates had always been in effect or the amount of interest that would have accrued if the Maximum Rate had always been in effect, minus (ii) the amount of interest actually paid or accrued on the Notes. (f) MAXIMUM RATE. Regardless of any Loan Document provision, no ------------ Lender is entitled to contract for, charge, take, reserve, receive, or apply, as interest on all or any of the Obligation any amount in excess of the Maximum Rate. If a Lender ever does so, then any excess is treated as a partial prepayment of principal, and any remaining excess shall be refunded to Borrower. In determining if the interest paid or payable exceeds the Maximum Rate, Borrower and Lenders shall, to the extent lawful (i) treat all Borrowings as but a single extension of credit, (ii) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (iii) exclude voluntary prepayments and their effects, and (iv) amortize, prorate, allocate, and spread the total amount of interest throughout the full-contemplated term of the Obligation. However, if the Obligation is paid in full before the end of that full-contemplated term and the interest received for the Obligation's actual period of existence exceeds the Maximum Amount, then Lenders shall refund any excess without being subject to any penalties provided by any Laws. If Texas Laws are applicable for purposes of determining the "Maximum Rate" or the "Maximum Amount," then those terms mean the "indicated rate ceiling" from time to time in effect under Article 1.04, Title 79, Texas Revised Civil Statutes. Chapter 15, Subtitle 79, Texas Revised Civil 16 Statutes, 1925 (which regulates certain revolving credit loan accounts and revolving triparty accounts), does not apply to the Obligation. 3.8 CAPITAL ADEQUACY. If (a) any change after the date of this agreement ---------------- in any present Law or any future Law regarding capital adequacy or compliance by any Lender with any request, directive, or requirement now or in the future imposed by any Tribunal regarding capital adequacy or any change in the risk category of this transaction reduces the rate of return on its capital as a consequence of its obligations under this agreement to a level below that which it otherwise could have achieved (taking into consideration its policies with respect to capital adequacy) by an amount deemed by it to be material (and it may, in determining the amount, utilize reasonable assumptions and allocations of costs and expenses and use any reasonable averaging or attribution method), then (b) that Lender (through Agent) shall notify Borrower and deliver to Borrower a certificate stating in reasonable detail the calculation of the amount necessary to compensate it (which certificate is presumed correct), and Borrower shall pay that amount to that Lender within ten days after demand. This section survives the full satisfaction of the Obligation and termination of the Loan Documents, and release of Lender Liens. 3.9 FOREIGN LENDERS, PARTICIPANTS, AND PURCHASERS. Each Lender, --------------------------------------------- Participant (by accepting a participation interest under this agreement), and Purchaser (by executing an Assignment) that is not organized under the Laws of the United States of America or one of its states (a) represents to Agent and Borrower that (i) no Taxes are required to be withheld by Agent or Borrower with respect to any payments to be made to it in respect of the Obligation and (ii) it has furnished to Agent, Borrower, two duly completed copies of either U.S. Internal Revenue Service Form 4224, Form 1001, Form W-8, or any other form acceptable to Agent that entitles it to exemption from U.S. federal withholding Tax on all interest payments under the Loan Documents, and (b) covenants to (i) provide Agent and Borrower a new Form 4224, Form 1001, Form W-8, or other form acceptable to Agent upon the expiration or obsolescence of any previously delivered form according to Law, duly executed and completed by it, and (ii) comply from time to time with all Laws with regard to the withholding Tax exemption. If any of the foregoing is not true or the applicable forms are not provided, then Borrower and Agent (without duplication) may deduct and withhold from interest payments under the Loan Documents United States federal income Tax at the full rate applicable under the IRC. 3.10 FEES. The following fees are not compensation for the use, detention, ---- or forbearance of money, are in addition to and not in lieu of interest and expenses otherwise described in the Loan Documents, are non-refundable, bear interest if not paid when due at the Default Rate, and are calculated on the basis of actual days (including the first but excluding the last) elapsed over a year of 360 days (or actual days during that year, if the calculation would otherwise result in exceeding the Maximum Amount and the payment were deemed to be interest notwithstanding the above provisions to the contrary). (a) CUSTODIAL FEES. On the fifth day of each Calendar Month, Borrower -------------- shall pay to Agent (for its sole account) custodial fees for the preceding Calendar Month determined on the basis of the number of Mortgage Loans and Mortgage Securities that are Collateral during that Calendar Month based on the following scale: ======================== NUMBER PER ITEM FEE ======================== Up to 250 $17.50 Up to 500 $15.00 More than 500 $12.50 ======================== 17 (b) COMMITMENT. In advance on the date of this agreement and on the ---------- first day of each ensuing calendar quarter until the Commitments have been fully terminated, Borrower shall pay to Agent a commitment fee for the account of all Lenders. When received, Agent shall pay to each Lender that Lender's Commitment Percentage of that fee less the applicable portion of that fee accruing for any period before that Lender became a Lender. Each payment of that fee is calculated for the period from the first day of the preceding calendar quarter (or, in the case of the first such payment, the date of this agreement) to and including the last day of the calendar quarter. The amount of that fee for that period is the product of (i) 0.25% (divided by four) times (ii) the Commitments for all Lenders as of the first day of that period. SECTION 4. COLLATERAL PROCEDURES. - --------- --------------------- 4.1 ELIGIBLE COLLATERAL. The requirements for Mortgage Collateral to ------------------- constitute Eligible-Mortgage Loans or Eligible-Mortgage Securities and be included in the Borrowing Base are listed on SCHEDULE 4.1. If at any time any item of Mortgage Collateral ceases to meet those requirements, then that item is automatically excluded from all calculations of the Borrowing Base. 4.2 BORROWING BASE. The elements for calculating the Borrowing Base -------------- are listed on SCHEDULE 4.2. By 12:00 Noon on the date of any Borrowing, any payment of Principal Debt, or removal of any Collateral, Agent shall deliver to Borrower and Lenders a Borrowing-Base Report prepared on the basis of the information provided by Borrower in the most recent Take-Out Report and other information then available to Agent as provided in this agreement. 4.3 COLLATERAL DELIVERY. Borrower must comply with all the required ------------------- procedures in SCHEDULE 4.3 for Mortgage Collateral offered in connection with this agreement by no later than 10:00 a.m. on the Borrowing Date for Collateral supporting any new Borrowing. 4.4 BAILEE AND AGENT. Agent and Lenders appoint each Approved Originator ---------------- as their (a) special agent for the sole and limited purpose of obtaining and maintaining Appraisals for Mortgage Loans as required by the Loan Documents and (b) bailee to (i) hold in trust for Agent (A) the original recorded copy of the mortgage, deed of trust, or trust deed securing each Mortgage Loan, (B) a mortgagee policy of title insurance (or binding unexpired and unconditional commitment to issue such insurance if the policy has not yet been delivered to such Approved Originator) insuring such Approved Originator's perfected, first priority Lien (or second-priority Lien with respect to Second-Lien Borrowings) created by that mortgage, deed of trust, or trust deed, and (C) all other original documents, including any undelivered Take-Out Commitments, promissory notes, and Mortgage Securities, (ii) specifically identify those items in the appropriate Collateral-Delivery Notice, and (iii) deliver to Agent any of the foregoing items as soon as reasonably practicable upon Agent's request. 4.5 SHIPMENT FOR SALE. ----------------- (a) SHIPMENT OF COLLATERAL. If no Default, Potential Default, or ---------------------- Borrowing Excess exists and if shipment would not result in any Approved Investor (other than FNMA, FHLMC, and GNMA, or any other investor that Agent has approved in writing) or its servicers and custodians holding Collateral Documents for Mortgage Loans with more than a total $2,500,000 face amount, then Borrower may (by a Shipping Request delivered to Agent by 11:00 a.m. on the 18 Business Day immediately preceding the requested shipping date) request Agent to ship Collateral Documents to an Approved Investor or its servicer or custodian for purchase or pooling of the related Mortgage Loans. If Agent has no actual knowledge that any of the above conditions have not been satisfied, then Agent shall use its best efforts to ship the Collateral Documents it holds for those Mortgage Loans to that Approved Investor or its servicer or custodian under the appropriate Bailee Letter by the end of the Business Day following the date of receipt of the applicable Shipping Request. (b) INELIGIBLE COLLATERAL. Collateral shipped under CLAUSE (A) above, --------------------- unless returned to Agent, ceases to be Eligible-Mortgage Collateral (i) to the extent that Collateral Documents for Mortgage Loans with more than a total face amount of $2,500,000 are held by or for any Approved Investor (other than FNMA, FHLMC, and GNMA or any other investor that Agent has approved in writing), and (ii) upon the earlier of either the release of the Lender Liens in that Collateral under CLAUSE (C) below or the expiration of the Shipping Period for that Collateral. (c) RELEASE OF LIENS. The Lender Liens on any Collateral shipped ---------------- under CLAUSE (A) above continues on that Collateral until either (i) Agent receives payment in the Settlement Account in an amount at least equal to the greater of (1) the price paid by the purchaser for each Eligible- Mortgage Loan so sold or (2) the full amount of the Borrowings made with respect to those Eligible-Mortgage Loans, or (ii) in the case of Mortgage Loans being sold or exchanged for Mortgage Securities, Eligible-Mortgage Securities are delivered to or for Agent in accordance with SCHEDULE 4.3 and other applicable provisions of the Loan Documents and become Collateral under this agreement for all purposes. (d) CERTAIN CREDITS. Neither Agent nor any Lender is obligated at any --------------- time to credit Borrower (or any Approved Investor) for any amounts due from any purchase of any Mortgage Collateral contemplated under this agreement until Agent has actually received immediately available funds for that Mortgage Collateral in the amount required under this agreement. Neither Agent nor any Lender is obligated at any time to collect any amounts or otherwise enforce any obligations due from any purchaser in respect of any such purchase. 4.6 SHIPMENT FOR CORRECTION. If no Default, Potential Default, or ----------------------- Borrowing Excess exists or occurs as a result of the shipment and if shipment would not result in any Collateral Documents for Mortgage Loans with more than a total face amount of $500,000 being outstanding for correction, then Borrower may (by a Trust Receipt delivered to Agent) request that Agent ship to Borrower the entire mortgage loan file of Collateral Documents for any Mortgage Loan so that certain of those Collateral Documents may be corrected or replaced for clerical or other non-substantive mistakes. If Agent has no actual knowledge that any of the above conditions have not been satisfied, then and subject to the limitations below, then Agent shall use its best efforts to ship to Borrower the entire mortgage loan file of Collateral Documents to be corrected or replaced by the end of the Business Day following the date of receipt of the applicable Trust Receipt. Borrower shall re-deliver to Agent the corrected Collateral Documents (meeting the requirements of SCHEDULE 4.3) before the expiration of the Correction Period for that Collateral. Collateral shipped under this section, unless returned to Agent, ceases to be Eligible-Mortgage Collateral (a) to the extent that Collateral Documents for Mortgage Loans with more than a total face amount of $500,000 are outstanding for correction at any time and (b) upon the expiration of the Correction Period for that Collateral. The Lender Liens on any Collateral shipped under this section continue in full force and effect. 4.7 RELEASE OF COLLATERAL. ---------------------- 19 (a) EXCESS COLLATERAL. If no Default or Potential Default exists and ----------------- no Borrowing Excess exists or would occur (after taking into account any corresponding payment on the Obligation) as a result of the release, Borrower may (by a Release Request delivered to Agent by 11:00 a.m. on the Business Day of the release) request that Agent release the Lender Liens on any Collateral. (b) SATISFACTION OF OBLIGATION. If the Obligation is fully paid and -------------------------- performed and all commitments by each Lender to extend credit under the Loan Documents are terminated or canceled, Borrower may (by written request to Agent) request that Agent release the Lender Liens on all of the Collateral, return to Borrower or its designee all Collateral Documents then held by Agent, and execute a release of any financing statements or other documents filed or recorded to perfect the Lender Liens. (c) RELEASES. If Agent has no actual knowledge that any of the above -------- conditions for a release have not been satisfied, then Agent shall effect those releases. SECTION 5. CONDITIONS PRECEDENT. No Lender is obligated to fund its part of - --------- -------------------- any Borrowing unless Agent has received all of the documents and items described on SCHEDULE 5. In addition, no Lender is obligated to fund its part of any Borrowing unless on the applicable Borrowing Date (and after giving effect to the requested Borrowing): (a) Agent has timely received a Borrowing Request; (b) all of the representations and warranties in the Loan Documents are true and correct in all material respects (unless they speak to a specific date or are based on facts which have changed by transactions contemplated or permitted by this agreement); (c) no Default or Potential Default exists; (d) the funding of the Borrowing is permitted by Law and does not cause a Borrowing Excess; and (e) if reasonably requested by Agent, it has received evidence substantiating any of the matters in the Loan Documents that are necessary to enable Borrower to qualify for the Borrowing. Each condition precedent in this agreement (including, without limitation, those on SCHEDULE 5) is material to the transactions contemplated by this agreement, and time is of the essence with respect to each. Subject to first obtaining the approval of all Lenders, Agent or any Lenders may fund any Borrowing without all conditions being satisfied. However, to the extent lawful, that funding is not a waiver of the requirement that each condition precedent be satisfied as a prerequisite for any subsequent funding, unless all Lenders specifically waive an item in writing. SECTION 6. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to - --------- ------------------------------ Agent and Lenders as follows: 6.1 PURPOSE OF CREDIT. Borrowings are to be used as stated in the ----------------- recitals of this agreement. No Company is engaged principally (or as one of its important activities) in the business of extending credit for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U. No part of the proceeds of any Borrowing is to be used, directly or indirectly, for a purpose that violates any Law, including, without limitation, the provisions of Regulation U. 6.2 ABOUT THE COMPANIES. -------------------- (a) SUBSIDIARIES AND TRADE NAMES. Except as described on SCHEDULE 6.2 ---------------------------- (i) no Company has any Subsidiaries and (ii) no Company has used or transacted business under any other corporate or trade name in the six- month period preceding the date of this agreement. 20 (b) EXISTENCE, QUALIFICATION, AND COMPLIANCE. Each Company is duly ---------------------------------------- organized, validly existing, and in good standing under the Laws of the jurisdiction in which it is incorporated as stated on Schedule 6.2. Except where failure is not a Material-Adverse Event, each Company (i) is duly qualified to transact business and is in good standing as a foreign corporation or other entity in each jurisdiction where the nature and extent of its business and properties require due qualification and good standing (as described on SCHEDULE 6.2); (ii) possesses all requisite authority, permits, and power to conduct its business as is now being -- or is contemplated by this agreement to be -- conducted, and (iii) is in compliance with all applicable Laws. (c) OFFICE. Each Company's chief executive office and other principal ------ offices are described on Schedule 6.2. The present and foreseeable location of each Company's books and records concerning accounts and accounts receivable is at its chief executive office, and all of its books, and records are in its possession. 6.3 AUTHORIZATION AND CONTRAVENTION. The execution and delivery by each ------------------------------- Company of each Loan Document to which it is a party and the performance by it of its related obligations (a) are within its corporate power or partnership authority, as applicable, (b) have been duly authorized by all necessary corporate or partnership action, as applicable, (c) except for any action or filing that has been taken or made on or before the date of this agreement, require no action by or filing with any Tribunal, (d) do not violate any provision of its charter, articles of incorporation, bylaws, or partnership agreement, as applicable, (e) except where not a Material-Adverse Event, do not violate any provision of Law applicable to it or any material agreements to which it is a party, and (f) except for Lender Liens, do not result in the creation or imposition of any Lien on any asset of any Company. 6.4 BINDING EFFECT. Upon execution and delivery by all parties to it, each -------------- Loan Document will constitute a legal and binding obligation of each Company party to it, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable Debtor Laws and general principles of equity. 6.5 [INTENTIONALLY BLANK]. 6.6 CURRENT FINANCIALS. The Current Financials were prepared in ------------------ accordance with GAAP and present fairly, in all material respects, the financial condition, results of operations, and cash flows of the Companies as of, and for the portion of the fiscal year ending on their date or dates (subject only to normal year-end adjustments). All material liabilities of the Companies as of the date or dates of the Current Financials are reflected in them or notes to them. Except for transactions directly related to, or specifically contemplated by, the Loan Documents, no subsequent material adverse changes have occurred in the financial condition of the Companies from that shown in the Current Financials, nor has any Company incurred any subsequent material liability. 6.7 DEBT. No Company has any Debt except Permitted Debt. ---- 6.8 SOLVENCY. On the date of each Borrowing each Company is, and after -------- giving effect to the requested Borrowing will be, Solvent. 6.9 LITIGATION. Except as disclosed on SCHEDULE 6.9 (a) no Company is ---------- subject to, or aware of the threat of, any Litigation that is reasonably likely to be determined adversely to it or, if so adversely 21 determined, would be a Material-Adverse Event, and (b) no outstanding or unpaid judgments against any Company exists. 6.10 TRANSACTIONS WITH AFFILIATES. No Company is a party to a material ---------------------------- transaction with any of its Affiliates except (a) in transactions in the ordinary course of business and upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm's- length transaction with a Person that was not its Affiliate, and (b) the transactions described on SCHEDULE 6.10. 6.11 TAXES. All Tax returns of each Company required to be filed have ----- been filed (or extensions have been granted) before delinquency, except for returns for which the failure to file is not a Material-Adverse Event, and all Taxes imposed upon each Company that are due and payable have been paid before delinquency. 6.12 EMPLOYEE PLANS. Except where occurrence or existence is not a -------------- Material-Adverse Event, (a) no Employee Plan has incurred an "accumulated funding deficiency" (as defined in (S)302 of ERISA or (S)412 of the IRC), (b) no Company has incurred liability under ERISA to the PBGC in connection with any Employee Plan, (c) no Company has withdrawn in whole or in part from participation in a Multiemployer Plan, (d) no Company has engaged in any "prohibited transaction" (as defined in (S)406 of ERISA or (S)4975 of the IRC), and (e) no "reportable event" (as defined in (S)4043 of ERISA) has occurred in respect of any Employee Plan, excluding events for which the notice requirement is waived under applicable PBGC regulations. 6.13 PROPERTY AND LIENS. Each Company has good and marketable title to ------------------ all its property reflected on the Current Financials except for property that is obsolete or that has been disposed of in the ordinary course of business or, after the date of this agreement, as otherwise permitted by this agreement. All Collateral is free and clear of any Liens and adverse claims of any nature except Permitted Liens. 6.14 INTELLECTUAL PROPERTY. Each Company owns all material licenses, --------------------- patents, patent applications, copyrights, service marks, trademarks, trademark applications, and trade names necessary to continue to conduct its businesses as presently conducted by it and proposed to be conducted by it immediately after the date of this agreement. Each Company is conducting its business without infringement or claim of infringement of any license, patent, copyright, service mark, trademark, trade name, trade secret, or other intellectual property right of others, other than any infringements or claims that, if successfully asserted against or determined adversely to that Company, are not a Material-Adverse Event. To each Company's knowledge, no infringement or claim of infringement by others of any material license, patent, copyright, service mark, trademark, trade name, trade secret, or other intellectual property of that Company exists. 6.15 ENVIRONMENTAL MATTERS. Except where not a Material-Adverse Event, no --------------------- Company (a) knows of any environmental condition or circumstance adversely affecting any Company's properties or operations or any material portion of the properties subject to Mortgage Loans, (b) has received any report of any Company's violation of any Environmental Law, or (c) knows that any Company is under any obligation to remedy any violation of any Environmental Law. Each Company has taken prudent steps to determine that its properties and operations and that substantially all of the properties subject to Mortgage Loans do not violate any Environmental Law except violations that are not a Material-Adverse Event. 6.16 GOVERNMENT REGULATIONS. No Company is subject to regulation under the ---------------------- Investment Company Act of 1940 or the Public Utility Holding Company Act of 1935. 22 6.17 INSURANCE. Each Company maintains with financially sound, --------- responsible, and reputable insurance companies or associations (or, as to workers' compensation or similar insurance, with an insurance fund or by self- insurance authorized by the jurisdictions in which it operates) insurance concerning its properties and businesses against casualties and contingencies and of types and in amounts (and with co-insurance and deductibles) as is customary in the case of similar businesses. 6.13 APPRAISALS. With respect to the property the subject of any Mortgage ---------- Loan, each Approved Originator has obtained Appraisals in material compliance with all Appraisal Laws. 6.19 FULL DISCLOSURE. Each material fact or condition relating to the Loan --------------- Documents or the financial condition, business, or property of the Companies that is a Material-Adverse Event has been disclosed in writing to Agent and Lenders. All information previously furnished by any Company to Agent or any Lender in connection with the Loan Documents was (and all information furnished in the future by any Company to Agent or any Lender will be) true and accurate in all material respects or based on reasonable estimates on the date the information is stated or certified. SECTION 7. AFFIRMATIVE COVENANTS. For so long as any Lender is committed to - --------- --------------------- lend under this agreement and until the Obligation has been fully paid and performed, Borrower covenants and agrees with Agent and Lenders that, without first obtaining Determining Lenders' consent to the contrary: 7.1 REPORTING REQUIREMENTS. Borrower shall cause to be furnished to Agent ---------------------- the following, all in form and detail reasonably satisfactory to Agent, and reasonably promptly after receiving them Agent shall provide copies of them to Lenders: (a) ANNUALLY. Promptly after preparation but no later than 90 days -------- after the last day of each fiscal year of Borrower (i) Financials showing Borrower's consolidated and consolidating financial condition and results of operations as of, and for the year ended on, that last day, (ii) solely with respect to the consolidated portion of those Financials, the opinions, without material qualification, of Arthur Andersen, L.L.P. or of another firm of nationally-recognized independent certified public accountants reasonably acceptable to Determining Lenders, based on audits using generally accepted auditing standards, that the consolidated portion of those Financials were prepared in accordance with GAAP and present fairly, in all material respects, Borrower's consolidated financial condition and results of operations, and (iii) a quarterly Compliance Certificate. (b) QUARTERLY. Promptly after preparation but no later than 60 days --------- after the last day of the first three fiscal quarters of Borrower each year (i) Financials showing Borrower's consolidating financial condition and results of operations for that fiscal quarter and for the period from the beginning of the current fiscal year to the last day of that fiscal quarter, and (ii) a quarterly Compliance Certificate. (c) MONTHLY. Within 45 days affer the last day of each month, a ------- monthly Compliance Certificate. (d) INVESTOR AND ORIGINATOR INFORMATION. Promptly affer the request ----------------------------------- by Agent or Determining Lenders, financial information about any investor (other than FNMA, FHLMC, and GNMA) or any Originator for purposes of determining "approved" status under the Loan Documents. 23 (e) OTHER REPORTS. Promptly after preparation and distribution, ------------- accurate and complete copies of all reports and other material communications about material financial matters or material corporate plans or projections by or for any Company for distribution to the Securities Exchange Commission, any other Tribunal, or any creditor. (f) NOTICES. Notice, promptly after any Company knows or has reason ------- to know, of (i) the existence and status of any Litigation that, if determined adversely to any Company, would be a Material-Adverse Event, (ii) any change in any material fact or circumstance represented or warranted by any Company in any Loan Document that constitutes a Material- Adverse Event, (iii) the receipt by any Company of notice of any violation or alleged violation of ERISA or any Environmental Law or other Law if that violation is a Material-Adverse Event, or (iv) a Default or Potential Default specifying the nature thereof and what action the Companies have taken, are taking, or propose to take with respect to it. (g) OTHER INFORMATION. Promptly upon reasonable request by Agent or ----------------- Determining Lenders (through Agent), information (not otherwise required to be furnished under the Loan Documents) respecting the business affairs, assets, and liabilities of any Company and opinions, certifications, and documents in addition to those mentioned in this agreement. 7.2 USE OF PROCEEDS. The Companies shall use the proceeds of Borrowings --------------- only for the purposes represented in this agreement. 7.3 BOOKS AND RECORDS. Each Company shall maintain books, records, and ----------------- accounts necessary to prepare Financials in accordance with GAAP. 7.4 INSPECTIONS. Upon reasonable request, each Company shall allow Agent, ----------- any Lender, or their respective Representatives to inspect any of its properties, to review reports, files, and other records and to make and take away copies, to conduct tests or investigations, and to discuss any of its affairs, conditions, and finances with its directors, officers, employees, or representatives from time to time during reasonable business hours. 7.5 TAXES. Each Company shall promptly pay when due any and all Taxes ----- other than Taxes of which the failure to pay is not a Material-Adverse Event or which are being contested in good faith by lawful proceedings diligently conducted, against which reserve or other provision required by GAAP has been made, and in respect of which levy and execution of any Lien have been and continue to be stayed. 7.6 EXPENSES. Each Company shall pay (a) all reasonable legal fees and -------- expenses incurred by Agent in connection with the preparation, negotiation, and execution of the Loan Documents, (b) all reasonable legal fees and expenses incurred by Agent in connection with each separate future amendment, consent, waiver, or approval executed in connection with any Loan Document, (c) all fees, charges, or Taxes for the recording or filing of any Loan Document to create or perfect Lender Liens, (d) all other reasonable out-of-pocket expenses of Agent or any Lender in connection with the preparation, negotiation, execution, or administration of the Loan Documents -- including, without limitation, courier expenses incurred in connection with the Mortgage Collateral, (e) all amounts expended, advanced, or incurred by Agent or any Lender to satisfy any obligation of any Company under any Loan Document, to collect the Obligation, or to enforce the Rights of Agent or any Lender under any Loan Document -- including, without limitation, all court costs, reasonable attorneys' fees (whether for trial, appeal, other proceedings, or otherwise), reasonable fees of auditors and accountants, and investigation expenses reasonably incurred by Agent or any Lender in connection with any such matters, (f) interest at an annual interest rate equal 24 to the Default Rate on each item specified in clause (e) above from 30 days after the date of written demand or request for reimbursement to the date of reimbursement, and (g) any and all stamp and other Taxes payable or determined to be payable in connection with the execution, delivery, or recordation of any loan document -- IN CONNECTION WITH WHICH THE COMPANIES SHALL INDEMNIFY AND SAVE AGENT AND EACH LENDER HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES WITH RESPECT TO OR RESULTING FROM ANY DELAY IN PAYING OR OMISSION TO PAY THOSE TAXES TO THE EXTENT THOSE LIABILITIES ARISE SOLELY BECAUSE THE COMPANIES FAILED TO PAY THE TAXES UPON DEMAND BY AGENT OR ANY LENDER, WHICH INDEMNITY SURVIVES THE PAYMENT AND PERFORMANCE OF THE OBLIGATION AND TERMINATION OF THE LOAN DOCUMENTS. 7.7 MAINTENANCE OF EXISTENCE, ASSETS, AND BUSINESS. Each Company shall (a) ---------------------------------------------- except as permitted by Section 8.5, maintain its corporate existence and good standing in its state of incorporation and its authority to transact business in all other states where failure to maintain its authority to transact business is a Material-Adverse Event, and (b) maintain all licenses, permits, and franchises necessary for its business where failure to do so is a Material-Adverse Event. 7.8 INSURANCE. Each Company shall (a) maintain with financially sound and --------- reputable insurers, insurance with respect to its assets and business against such liabilities, casualties, risks, and contingencies and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated, and (b) upon Agent's request, furnish to Agent from time to time (i) a summary of its insurance coverage, in form and substance satisfactory to Agent, and (ii) originals or copies of the applicable policies. 7.9 TAKE-OUT COMMITMENTS. Borrower shall perform and observe (and shall -------------------- cause each Approved Originator to perform and observe) in all material respects each of the provisions of each Take-Out Commitment on its or their part to be performed or observed and cause all things to be done that are necessary to have each item of Mortgage Collateral and the Collateral Documents covered by a Take- Out Commitment comply with its requirements. 7.10 APPRAISALS. Borrower shall (and shall cause each Approved Originator ---------- to) promptly (a) permit Agent's and any Lender's authorized Representatives to discuss with its officers or with the appraisers furnishing Appraisals the procedures for preparation, review, and retention of (and to review and obtain copies of) all Appraisals pertaining to any Mortgage Collateral, and (b) upon Agent's or any Lender's request, cooperate with it to ascertain that the Appraisals comply with all Appraisal Laws. 7.11 INDEMNIFICATION. IN CONSIDERATION OF THE COMMITMENTS BY AGENT AND --------------- LENDERS UNDER THE LOAN DOCUMENTS, EACH COMPANY SHALL INDEMNIFY AND DEFEND EACH AGENT, LENDER, AND THEIR RESPECTIVE AFFILIATES AND REPRESENTATIVES (COLLECTIVELY, THE "INDEMNIFIED PARTIES") -- AND DEFEND THEM AND HOLD EACH OF THEM HARMLESS -- AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, DEFICIENCIES, INTEREST, JUDGMENTS, COSTS, OR EXPENSES -- INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES --INCURRED BY ANY OF THEM ARISING FROM OR BECAUSE OF (A) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING BROUGHT OR THREATENED IN CONNECTION WITH ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, ANY USE BY ANY COMPANY OF THE PROCEEDS OF BORROWINGS, (B) ANY IMPOUNDMENT, ATTACHMENT, OR RETENTION OF ANY MORTGAGE COLLATERAL OR ANY FAILURE OF ANY INVESTOR TO PAY THE ENTIRE PURCHASE PRICE OF ANY MORTGAGE COLLATERAL UNDER ANY TAKE-OUT COMMITMENT, (C) ANY ALLEGED VIOLATION OF ANY FEDERAL OR STATE LAW RELATING TO USURY IN CONNECTION WITH ANY MORTGAGE COLLATERAL, AND (D) ANY REPRESENTATION MADE BY ANY 25 COMPANY UNDER ANY LOAN DOCUMENT ALTHOUGH EACH INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION FOR ANY INDEMNIFIED PARTY'S ORDINARY NEGLIGENCE, NO INDEMNIFIED PARTY IS ENTITLED TO INDEMNIFICATION FOR ITS OWN GROSS NEGLIGENCE, WILLFUL MISCONDUCT, OR FRAUD. THIS INDEMNITY SURVIVES THE PAYMENT AND PERFORMANCE OF THE OBLIGATION AND TERMINATION OF THE LOAN DOCUMENTS. SECTION 8. NEGATIVE COVENANTS. For so long as any Lender is committed to lend - --------- ------------------ under this agreement and until the Obligation has been fully paid and performed, Borrower covenants and agrees with Agent and Lenders that, without first obtaining Determining Lenders' consent to the contrary, the Companies designated in the following sections of this Section 8 may not directly or indirectly do any of the following or commit (other than a commitment that is not binding on any Company until any prior written consent of Determining Lenders is first obtained) to do any of the following: 8.1 DEBT. No Company may directly or indirectly create, incur, or suffer ---- to exist (a) any Debt except Permitted Debt, (b) any Debt in the nature of Dry Borrowings except in connection with this agreement, or (b) any Debt in the nature of Wet Borrowings except in connection with this agreement. 8.2 LIENS. No Company may directly or indirectly (a) create, incur, or ----- suffer to exist any Lien on any of its assets except Permitted Liens or (b) enter into or permit to exist any arrangement or agreement (except the Loan Documents) that directly or indirectly prohibits any Company from creating or incurring any Lien on any of its assets. 8.3 INVESTMENTS. No Company may make any Investments except Permitted ----------- Investments. 8.4 [Intentionally Blank] 8.5 MERGER OR CONSOLIDATION. No Company may directly or indirectly merge ----------------------- or consolidate with or into any other Person except that any Company may merge into or be consolidated with any other Company so long as Borrower is the surviving corporation if it is involved. 8.6 LIQUIDATIONS AND DISPOSITIONS OF ASSETS. No Company may directly or --------------------------------------- indirectly dissolve or liquidate or sell, transfer, lease, or otherwise dispose of any material portion of its assets or business except for sales or other dispositions by any Company, in the ordinary course of business, of (a) subject to Section 4, Originator Loans, Mortgage Loans, or Mortgage Securities that are Collateral, or (b) Originator Loans, Mortgage Loans, or Mortgage Securities that are not Collateral. 8.7 USE OF PROCEEDS. No Company may directly or indirectly use the --------------- proceeds of Borrowings for any purpose other than to loan them to Approved Originators under Eligible-Originator Loans. 8.8 TRANSACTIONS WITH AFFILIATES. No Company may directly or indirectly ---------------------------- enter into any transaction with any of its Affiliates other than transactions in the ordinary course of business or upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm's- length transaction with a Person that was not its Affiliate. 8.9 EMPLOYEE PLANS. Except where a Material-Adverse Event would not -------------- result, no Company may directly or indirectly permit any of the events or circumstances described in Section 6.12 to exist or occur. 26 8.10 COMPLIANCE WITH LAWS AND DOCUMENTS. No Company may directly or ---------------------------------- indirectly (a) violate the provisions of any Laws applicable to it or of any Material Agreement to which it is a party if that violation alone or with all other violations is a Material-Adverse Event or (b) violate the provisions of its charter, articles of incorporation, bylaws, or partnership agreement, as applicable, or repeal, replace or amend any provision of its charter, articles of incorporation, bylaws, or partnership agreement, as applicable. if any such action is a Material-Adverse Event. 8.11 GOVERNMENT REGULATIONS. No Company may directly or indirectly conduct ---------------------- its business in a way that it becomes regulated under the Investment Company Act of 1940. 8.12 SUBORDINATED DEBT. ----------------- (a) No Company may prepay or cause to be prepaid any principal of, or any interest on, any of its Subordinated Debt (including, without limitation, any optional redemption or payments due upon certain designated events) except (i) conversions of Subordinated Debt to equity of Borrower that is not mandatorily redeemable, (ii) exchanges of Subordinated Debt for Subordinated Debt, and (iii) prepayment of Subordinated Debt with the proceeds of the issuance of additional Subordinated Debt or common stock issued by Borrower. (b) No Company may amend or modify the terms of any Subordinated Debt to any extent that (i) any of the applicable subordination, payment blockage, or standstill provisions are less favorable to Lenders than exists for the Subordinated Debt theretofore approved by Determining Lenders, (ii) the applicable representations, covenants, events of default, and other provisions are significantly more onerous to the obligor than exists for the Subordinated Debt theretofore approved by Determining Lenders, or (iii) scheduled or mandatory principal or sinking fund payment obligations before one year after the then-effective Stated-Termination Date are made applicable to any Subordinated Debt. 8.13 NEW BUSINESSES. No Company may directly or indirectly engage in any -------------- business except the businesses in which it or any of its Affiliates is presently engaged and any other reasonably-related business. 8.14 ASSIGNMENT. Except as allowed in Section 11.12(a), no Company may ---------- directly or indirectly assign or transfer any of its Rights, duties, or obligations under any of the Loan Documents. SECTION 9. FINANCIAL COVENANTS. For so long as any Lender is committed to lend - --------- ------------------- under this agreement and until the Obligation has been fully paid and performed, Borrower covenants and agrees with Agent and Lenders, without first obtaining Determining Lender's consent to the contrary, it may not directly or indirectly permit any of the following to occur or to exist, as measured at the end of each of the Companies' fiscal quarters included below: 9.1 ADJUSTED-NET WORTH. For each quarter ending on or after June 30, ------------------ 1997, the Companies' Adjusted-Net Worth to be less than the sum of (a) $5,000,000 plus (ii) 100% of the Companies' cumulative Net Income (without deduction for losses) after April 30, 1997, plus (iii) 100% of the net (i.e., gross proceeds less usual and customary underwriting, placement, and other related costs and expenses) proceeds of the issuance (upon sale, conversion, or otherwise other than conversion of Subordinated Debt to equity) of any equity securities by Borrower after February 28, 1997. 27 9.2 ADJUSTED DEBT/ADJUSTED-NET WORTH. For each quarter ending on or --------------------------------- after September 30, 1997, the ratio of the Companies' total Debt (less any Subordinated Debt not due within one year from the date of determination) to Adjusted-Net Worth to exceed 6.0 to 1.0. 9.3 EBITDA/INTEREST EXPENSE. For each quarter ending on or after September ----------------------- 30, 1997, the ratio of the Companies' EBITDA to its Interest Expense to be less than 1.4 to 1.0 for (a) the quarter ending June 30, 1997, (b) the two quarters ending September 30, 1997, (c) the three quarters ending December 31, 1997, and (d) for each four-consecutive-quarterly periods ending after December 31, 1997. 9.4 PRODUCTION. The amount of new loans to its customers booked by ---------- Borrower during any calendar month ending at least 90 days after the Closing Date to be less than $13,000,000. SECTION 10. DEFAULTS AND REMEDIES. - ---------- --------------------- 10.1 Default. The term "Default" means the existence or occurrence of any ------- one or more of the following: (a) OBLIGATION. Any Company fails to pay (i) any interest on the ---------- Obligation when due under the Loan Documents and that failure continues for five days or (ii) any other part of the Obligation when due under the Loan Documents. (b) COVENANTS. Any Company's failure or refusal to punctually and --------- properly perform, observe, and comply with any covenant -- other than as described in clause (a) above -- applicable to it in: (i) Sections 7.2, 7.7(a), 8.5, 8.6, 8.7, 8.12, 9.1, 9.2, 9.3, or 9.4; (ii) Sections 7.9, 8.1, 8.2, 8.3, or 8.8 if that failure or refusal was inadvertent, is not a Material-Adverse Event, is susceptible of cure, and is cured within ten days after the earlier of either any Company knows of it or any Company is notified of it by either Agent or any Lender; or (iii) Any other provision of any Loan Document, if that failure or refusal continues for 20 days after the earlier of either any Company knows of it or any Company is notified of it by either Agent or any Lender. (c) MISREPRESENTATION. Any material statement, warranty, or ----------------- representation by or on behalf of any Company in any Loan Document or other writing authored by any Company and furnished in connection with the Loan Documents, proves to have been incorrect or misleading in any material respect as of the date made or deemed made. (d) DEBTOR LAW. Any Company (i) is not Solvent, (ii) fails to pay its ---------- Debts generally as they become due, (iii) voluntarily seeks, consents to, or acquiesces in the benefit of any Debtor Law, or (iv) becomes a party to or is made the subject of any proceeding provided for by any Debtor Law (other than as a creditor or claimant) that could suspend or otherwise adversely affect the Rights of Agent or any Lender granted in the Loan Documents unless, if the proceeding is involuntary, the applicable petition is dismissed within 60 days after its filing. 28 (e) OTHER DEBT. Any Company fails to make any payment due on any Debt ---------- or security (with respect to which any Company has redemption, sinking fund, or other purchase obligations) or any event occurs or any condition exists in respect of any Debt or security of any Company, the effect of which is (i) to cause or to permit any holder of that Debt or security or a trustee to cause (whether or not it elects to cause) any of that Debt or security to become due before its stated maturity or its regularly scheduled payment dates, or (ii) to permit a trustee or the holder of any security (other than common stock of any Company) to elect (whether or not it does elect) a majority of the directors on the board of directors of that Company. (f) JUDGMENTS. Any Company fails to pay any money judgment against it --------- at least ten days prior to the date on which any of the assets of that Company may be lawfully sold to satisfy that judgment. (g) ATTACHMENTS. The failure to have discharged within a period of 30 ----------- days after the commencement of any attachment, sequestration, or similar proceeding against any of the assets of any Company. (h) UNENFORCEABILITY. Any material provision of any Loan Document for ---------------- any reason ceases to be in full force and effect or is fully or partially declared null and void or unenforceable or the validity or enforceability of any Loan Document is challenged or denied by any Company. (i) CHANGE OF CONTROL. Except as otherwise approved by Agent in ----------------- writing prior to any such change, any change in the ownership or management of Borrower from that ownership and management as it exists on the date of this agreement. (j) CONVERTIBLE PROMISSORY NOTES. The Convertible Promissory Notes ---------------------------- described on SCHEDULE 8.1 are not fully converted to 1,800,000 shares of Borrower's Common Stock, $0.01 par value per share, by no later than May 31, 1997. 10.2 REMEDIES. -------- (a) DEBTOR LAW. Upon the occurrence of a Default under SECTION ---------- 10.1(D), the commitments of Lenders to extend credit under this agreement automatically terminate and the full Obligation is automatically due and payable, without presentment, demand, notice of default, notice of the intent to accelerate, notice of acceleration, or other requirements of any kind, all of which are expressly waived by Borrower. (b) OTHER DEFAULTS. While a Default exists -- other than those -------------- described in CLAUSE (A) above -- Agent may and, upon the direction of Determining Lenders, shall declare the Obligation to be immediately due and payable, whereupon it shall be due and payable, whereupon the commitments of Lenders to extend credit under this agreement are then automatically terminated. (c) OTHER REMEDIES. Following the termination of the commitments of -------------- Lenders to extend credit under this agreement and the acceleration of the Obligation, Agent may (and, at the direction of Determining Lenders, shall) do any one or more of the following: Reduce any claim to judgment; foreclose upon or otherwise enforce any Lender Liens; and exercise any other Rights in the Loan Documents, at Law, in equity, or otherwise that Determining Lenders may direct. Should any Default continue that, in Agent's opinion, materially and adversely affects the Collateral or the interests of the Lenders under this agreement, Agent may, in a notice to the 29 Lenders of that Default set forth one or more actions that Agent, in its opinion, believes should be taken. Unless otherwise directed by Determining Lenders (excluding the Lender serving as Agent) within ten days following the date of the notice setting forth the proposed action or actions, Agent may, but shall not be obligated to, take the action or actions set forth in that notice. 10.3 RIGHT OF OFFSET. Each Company hereby grants to Agent and to each --------------- Lender a right of offset, to secure the repayment of the Obligation, upon any and all monies, securities, or other property of each Company, and the proceeds therefrom now or hereafter held or received by or in transit to Agent or such Lender from or for the account of each Company, whether for safekeeping, custody, pledge, transmission, collection, or otherwise, and also upon any and all deposits (general or special, time or demand, provisional or final) and credits of each Company, and any and all claims of any Company against Agent or such Lender, at any time existing. Upon the occurrence of any Default, Agent and each Lender are authorized at any time and from time to time, without notice to any Company, to offset, appropriate, and apply any and all of those items against the Obligation, subject to SECTION 3.6. Notwithstanding anything in this section or elsewhere in this agreement to the contrary, neither Agent nor any other Lender shall have any right to offset, appropriate, or apply any accounts of any Company which consist of escrowed funds (except and to the extent of any beneficial interest which any Company has in such escrowed funds) which have been so identified by any Company in writing at the time of deposit thereof. 10.4 WAIVERS. Each Company waives any right to require Agent to (a) ------- proceed against any Person, (b) proceed against or exhaust any of the Collateral or pursue its Rights and remedies as against the Collateral in any particular order, or (c) pursue any other remedy in its power. Agent shall not be required to take any steps necessary to preserve any Rights of any Company against any Person from which any Company purchased any Mortgage Loans or to preserve Rights against prior parties. Each Company and each surety, endorser, guarantor, pledgor, and other party ever liable or whose property is ever liable for payment of any of the Obligation jointly and severally waive presentment and demand for payment, protest, notice of intention to accelerate, notice of acceleration, and notice of protest and nonpayment, and agree that their or their property's liability with respect to the Obligation, or any part thereof, shall not be affected by any renewal or extension in the time of payment of the Obligation, by any indulgence, or by any release or change in any security for the payment of the Obligation, and hereby consent to any and all renewals, extensions, indulgences, releases, or changes, regardless of the number thereof. 10.5 PERFORMANCE BY AGENT. Should any covenant, duty, or agreement of any -------------------- Company fail to be performed in accordance with the terms of this agreement or of any document delivered under this agreement (and any applicable grace period shall have expired), Agent may, at its option, after notice to Borrower, perform, or attempt to perform, such covenant, duty, or agreement on behalf of that Company and shall notify each Lender that it has done so. In such event, any Company shall jointly and severally, at the request of Agent, promptly pay any amount expended by Agent in such performance or attempted performance to Agent at its principal place of business, together with interest thereon at the Maximum Rate from the date of such expenditure by Agent until paid. Notwithstanding the foregoing, it is expressly understood that Agent does not assume and shall never have, except by express written consent of Agent, any liability or responsibility for the performance of any duties of any Company under this agreement or under any other document delivered under this agreement. 10.6 NO RESPONSIBILITY. Except in the case of fraud, gross negligence, or ----------------- willful misconduct, neither Agent nor any of its officers, directors, employees, or attorneys shall assume -- or ever have any liability or responsibility for -- any diminution in the value of the Collateral or any part of the Collateral. 30 10.7 NO WAIVER. The acceptance by Agent or any Lender at any time and from --------- time to time of partial payment or performance by any Company of any of their respective obligations under this agreement or under any Loan Document shall not be deemed to be a waiver of any Default then existing. No waiver by Agent or any Lender shall be deemed to be a waiver of any other then existing or subsequent Default. No delay or omission by Agent or any Lender in exercising any right under this agreement or under any other document required to be executed under or in connection with this agreement shall impair such right or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof, or the exercise of any other right under this agreement or otherwise. 10.8 CUMULATIVE RIGHTS. All Rights available to Agent and the Lenders ----------------- under this agreement or under any other document delivered under this agreement shall be cumulative of and in addition to all other Rights granted to Agent and the Lenders at Law or in equity, whether or not the Notes be due and payable and whether or not Agent shall have instituted any suit for collection, foreclosure, or other action in connection with this agreement or any other document delivered under this agreement. 10.9 RIGHTS OF INDIVIDUAL LENDERS. No Lender shall have any right by ---------------------------- virtue of, or by availing itself of, any provision of this agreement to institute any actions or proceedings at Law, in equity, or otherwise (excluding any actions in bankruptcy), upon or under or with respect to this agreement, or for the appointment of a receiver, or for any other remedy under this agreement, unless (a) the Determining Lenders previously shall have given to Agent written notice of a Default and the continuance thereof, including a written request upon Agent to institute such action or proceedings in its own name and offering to indemnify Agent against the costs, expenses and liabilities to be incurred therein or thereby, (b) Agent, for ten Business Days after its receipt of such notice, shall have failed to institute any such action or proceeding, and (c) no direction inconsistent with such written request shall have been given to Agent by Determining Lenders. It is understood and intended, and expressly covenanted by the taker and holder of every Note with every other taker and holder and Agent, that no one or more holders of Notes shall have any right in any manner whatever by virtue, or by availing itself, of any provision of this agreement to affect, disturb or prejudice the Rights of any other Lenders, or to obtain or seek to obtain priority over or preference to any other such Lender, or to enforce any right under this agreement, except in the manner herein provided and for the equal, ratable and common benefit of all Lenders. For the protection and enforcement of the provisions of this SECTION 10.9, each and every Lender and Agent shall be entitled to such relief as can be given either at law or in equity. 10.10 NOTICE TO AGENT. Should any Default or Potential Default occur and --------------- be continuing, any Lender having actual knowledge thereof shall notify Agent and Borrower of the existence thereof, but the failure of any Lender to provide that notice shall not prejudice that Lender's Rights under this agreement. 10.11 COSTS. All court costs, reasonable attorneys' fees, other costs of ----- collection, and other sums spent by Agent or any Lender in the exercise of any Right provided in any Loan Document is payable to Agent or that Lender, as the case may be, on demand, is part of the Obligation, and bears interest at the Default Rate from the date paid by Agent or any Lender to the date repaid by any Company. 31 SECTION 11. MISCELLANEOUS. - ----------- ------------- 11.1 NONBUSINESS DAYS. Any action that is due under any Loan Document on a ---------------- non-Business Day may be delayed until the next Business Day. However, interest accrues on any payment until it is made. 11.2 COMMUNICATIONS. Unless otherwise stated, a communication under any -------------- Loan Document to a party to this agreement must be written to be effective and is deemed given: . For Borrowing Requests, Collateral Delivery-Notices, Shipping Requests, and Release Requests, only when actually received by Agent. . Otherwise, if by fax, when transmitted to the appropriate fax number -- but, without affecting the date deemed given, the fax must be promptly confirmed by telephone. . Otherwise, if by mail, on the third Business Day after enclosed in a properly addressed, stamped, and sealed envelope deposited in the appropriate official postal service. . Otherwise, when actually delivered. Until changed by written notice to each other party to this agreement, the address and fax number are stated for (a) Borrower and Agent, beside their names on the signature pages below, and (b) each Lender, beside its name on SCHEDULE 2. 11.3 FORM AND NUMBER OF DOCUMENTS. The form, substance, and number of ---------------------------- counterparts of each writing to be furnished under the Loan Documents must be satisfactory to Agent and its counsel. 11.4 EXCEPTIONS TO COVENANTS. An exception to any Loan Document covenant ----------------------- does not permit violation of any other Loan Document covenant. 11.5 SURVIVAL. All Loan Document provisions survive all closings and are -------- not affected by any investigation made by any party. 11.6 GOVERNING LAW. Unless otherwise stated, each Loan Document must be ------------- construed -- and its performance enforced -- under the Laws of the State of Texas and the United States of America. 11.7 INVALID PROVISIONS. If any provision of a Loan Document is judicially ------------------ determined to be unenforceable, all other provisions of it remain enforceable. If the provision determined to be unenforceable is a material part of that Loan Document, then, to the extent lawful, it shall be replaced by a judicially- construed provision that is enforceable but otherwise as similar in substance and content to the original provision as the context of it reasonably allows. 11.8 CONFLICTS BETWEEN LOAN DOCUMENTS. The provisions of this agreement -------------------------------- control if in conflict (i.e., the provisions contradict each other as opposed to a Loan Document containing additional provisions not in conflict) with the provisions of any other Loan Document. 11.9 DISCHARGE AND CERTAIN REINSTATEMENT. The Companies' obligations under ----------------------------------- the Loan Documents remain in full force and effect until no lender has any commitment to extend credit under the 32 Loan Documents and the Obligation is fully paid (except for provisions under the Loan Documents which by their terms expressly survive payment of the Obligation and termination of the Loan Documents). If any payment under any Loan Document is ever rescinded or must be restored or returned for any reason, then all Rights and obligations under the Loan Documents in respect of that payment are automatically reinstated as though the payment had not been made when due. 11.10 AMENDMENTS, CONSENTS, CONFLICTS, AND WAIVERS. An amendment of -- or -------------------------------------------- an approval, consent, or waiver by Agent or by one or more Lenders under -- any Loan Document must be in writing and must be: (a) Executed by Borrower and Agent if it purports to reduce or increase any fees payable to Agent by Borrower. (b) Executed by Borrower and Agent and executed or approved in writing by all Lenders if action of all Lenders is specifically provided in any Loan Document or if it purports to (i) except as otherwise stated in this SECTION 11.10, extend the due date or decrease the scheduled amount of any payment under -- or reduce the rate or amount of interest, fees, or other amounts payable to Agent or any Lender under -- any Loan Document, (ii) change the definition of Borrowing Base (or any component of it), Commitment Percentage, Determining Lenders, Eligible-Mortgage Collateral, Market Value, Stated-Termination Date, or Termination Percentage, or (iii) partially or fully release any Guaranty or any Collateral except releases of Collateral contemplated in this agreement. (c) Otherwise (i) for this agreement, executed by Borrower, Agent, and Determining Lenders, or (ii) for other Loan Documents, approved in writing by Determining Lenders and executed by Borrower, Agent, and any other party to that Loan Document. No course of dealing or any failure or delay by Agent, any Lender, or any of their respective Representatives with respect to exercising any Right of Agent or any Lender under the Loan Documents operates as a waiver of that Right. An approval, consent, or waiver is only effective for the specific instance and purpose for which it is given. The Loan Documents may only be supplemented by agreements, documents, and instruments delivered according to their respective express terms. 11.11 MULTIPLE COUNTERPARTS. Any Loan Document may be executed in any --------------------- number of counterparts with the same effect as if all signatories had signed the same document, and all of those counterparts must be construed together to constitute the same document. This agreement is effective when counterparts of it have been executed and delivered to Agent by each Lender, Agent, and Borrower or, in the case only of those Lenders, when Agent has received faxed or other evidence satisfactory to it that each Lender has executed and is delivering to Agent a counterpart of it. 11.12 PARTIES. This agreement binds and inures to Borrower, each Lender, ------- Agent, and their respective successors and permitted assigns. Only those Persons may rely upon or raise any defense about this agreement. (a) ASSIGNMENT BY COMPANIES; ASSUMPTIONS BY NEW COMPANIES. No Company ----------------------------------------------------- may assign any Rights or obligations under any Loan Document without first obtaining the written consent of Agent. 33 (b) ASSIGNMENT BY LENDER. Any Lender may assign, pledge, and -------------------- otherwise transfer all or any of its Rights and obligations under the Loan Documents either (i) to a Federal Reserve Bank without the consent of any party to this agreement so long as that Lender is not released from its obligations under the Loan Documents, or (ii) otherwise in the ordinary course of its lending business and in accordance with all Laws, with the Lenders' Agreement, and with SECTION 11.13 or 11.14 so long as (A) except for assignments, pledges, and other transfers by a Lender to its Affiliates, the written consent of Borrower, and Agent, which may not be unreasonably withheld, must be first obtained, (B) the assignment or transfer (other than a pledge) does not involve a purchase price that directly or indirectly reflects a discount from face value unless that Lender first offered that assignment or transfer to the other Lenders on ratable basis according to their Commitment Percentages, (C) neither Borrower nor Agent are required to incur any cost or expense incident to any assignment, pledge, or other transfer by any Lender, all of which are for the account of the assigning, pledging, or transferring Lender and its assignee, pledgee, or transferee as they may agree, and (D) if the Participant or Purchaser is organized under the Laws of any jurisdiction other than the United States of America or any of its states, it complies with SECTION 3.9. (c) OTHERWISE VOID. Any purported assignment, pledge, or other -------------- transfer in violation of this section is void from beginning and not effective. 11.13 PARTICIPATIONS. Subject to SECTION 11.12(B) and this section and -------------- only if no Default exists, a Lender may at any time sell to one or more Persons (each a "Participant") participating interests in its Commitment and its share of the Obligation. (a) ADDITIONAL CONDITIONS. For each participation (i) the selling --------------------- Lender must remain -- and the Participant may not become -- a "Lender" under this agreement, (ii) the selling Lender's obligations under the Loan Documents must remain unchanged, (iii) the selling Lender must remain solely responsible for the performance of those obligations, (iv) the selling Lender must remain the holder of its one or more Notes and its share of the Obligation for all purposes under the Loan Documents, and (v) Borrower and Agent may continue to deal solely and directly with the selling Lender in connection with those Rights and obligations. (b) PARTICIPANT RIGHTS. The selling Lender may obtain for each of its ------------------ Participants the benefits of the Loan Documents related to participations in its share of the Obligation, but Borrower are never obligated to pay any greater amount that would be due to the selling Lender under the Loan Documents calculated as though no participation had been made. Otherwise, Participants have no Rights under the Loan Documents except certain permitted voting Rights described below. (c) PARTICIPATION AGREEMENTS. An agreement for a participating ------------------------ interest (i) may only provide to a Participant voting Rights in respect of any amendment of or approval, consent, or waiver under any Loan Document related to the matters in SECTION 11.10(B) if it also provides for a voting mechanism that a majority of that selling Lender's Commitment Percentage or Termination Percentage, as the case may be (whether directly held by that selling Lender or Participant) controls the vote for that selling Lender, and (ii) may not permit a Participant to assign, pledge, or otherwise transfer its participating interest in the Obligation to any Person except any Lender or its Affiliates. 34 11.14 TRANSFERS. Subject to SECTION 11.12(b) and this section and only if --------- no Default exists, a Lender may at any time sell to one or more financial institutions (each a "PURCHASER") all or part of its Rights and obligations under the Loan Documents. (a) ADDITIONAL CONDITIONS. The sale (i) must be accomplished by the --------------------- selling Lender and Purchaser executing and delivering to Agent and Borrower an assignment and assumption agreement provided for by the Lenders' Agreement, and (ii) may not occur until the selling Lender pays to Agent an administrative-transfer fee of $2,500. (b) PROCEDURES. Upon satisfaction of the foregoing conditions and as ---------- of the Effective Date in the assignment and assumption agreement, which may not be before delivery of that document to Agent and Borrower, then (i) a Purchaser is for all purposes a Lender party to -- with all the Rights and obligations of a Lender under -- this agreement, with a Commitment as stated in the assumption agreement, (ii) the selling Lender is released from its obligations under the Loan Documents to a corresponding extent, (iii) SCHEDULE 2 is automatically deemed to reflect the name, address, and Commitment of the Purchaser and the reduced Commitment of the selling Lender, and Agent shall deliver to Borrower and Lenders an amended SCHEDULE 2 reflecting those changes, (iv) Borrower shall execute and deliver to each of the selling Lender and the Purchaser a Note, each based upon their respective Commitments following the transfer, (v) upon delivery of the one or more Notes under CLAUSE (iv) above, the selling Lender shall return to the appropriate Company all Notes previously delivered to it under this agreement, and (vi) the Purchaser is subject to all the provisions in the Loan Documents, the same as if it were a Lender that executed this agreement on its original date. 11.15 ENTIRE AGREEMENT. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT ---------------- BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGE(S) FOLLOW. 35 EXECUTED as of the date first stated in this agreement. (address) Pioneer Commercial Funding Corp. PIONEER COMMERCIAL FUNDING 6650 Reseda Blvd., Suite 108 CORP. as Borrower Reseda, CA 91335 Attn: Glenda S. Klein, Senior By /s/ M.A. Nissim Vice President ------------------------------- Tel: (818) 776-0590 M. Albert Nissim, President FAX: (818) 776-0004 (wire transfer) Account # 1825160334 Bank: Bank One, Dallas ABA# 111000614 Attn: Gloria Sadler (214) 290-6069 Ref: Pioneer Commercial Funding Corp. Funding Account (address) BANK ONE, TEXAS, N.A., as Agent and the sole Lender BANK ONE, TEXAS, N.A. 1717 Main Street Dallas, TX 75201 By /s/ Paul J. Lazusky Attn: Paul J. Lazusky, Vice President -------------------------------------- Tel: (214) 290-2153 Paul J. Lazusky, Vice President Fax: (214) 290-2054 (wire transfer) Account # 1825160375 Bank: Bank One, Dallas ABA# 111000614 Attn: Gloria Sadler (214) 290-6069 Ref: Pioneer Commercial Funding Corp. Settlement Account
SIGNATURE PAGE EX-21 4 LIST OF SUBSIDIARIES EXHIBIT 21 ---------- LIST OF SUBSIDIARIES -------------------- Pioneer Home Funding, L.L.C, a California limited liability company doing business as Pioneer Home Funding. EX-27 5 FINANCIAL DATA SCHEDULE -- ARTICLE 5
5 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. 1 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 2,704,076 0 2,456,154 0 0 5,221,854 600,896 414,100 5,433,650 378,055 0 0 0 36,423 12,525,952 5,433,650 0 329,425 0 279,756 702,801 0 4,712 (653,132) 3,169 (617,754) 0 614,459 0 (1,232,213) (.88) (.88)
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