ITEM 1. BUSINESS

General

PMCC Financial Corp. (the "Company") is a specialty consumer financial services company providing a broad array of residential mortgage products to primarily prime credit borrowers seeking "conventional" or FHA/VA loans. Beginning in mid-1996, the Company had expanded and diversified its mortgage banking activities by opening a fully-staffed wholesale division, increasing its sub-prime mortgage originations, establishing a program to provide short-term funding to independent real estate contractors for one to four family residential rehabilitation properties, acquiring a wholesale origination company in Florida and expanding its retail loan operations geographically throughout the United States. Due to continuing adverse conditions in the sub-prime market, the Company closed its sub-prime division during 1999.

The Company is a holding company that conducts all of its business through its wholly owned subsidiary, PMCC Mortgage Corp. (formerly Premier Mortgage Corp.) ("PMCC"). On February 18, 1998, the shareholders of PMCC exchanged all of their outstanding common stock for shares of the Company, and the Company completed an initial public offering of new shares of common stock.

The Company's primary mortgage banking business objectives are to stabilize the Company's operations, to continue to offer a full range of mortgage products to qualified borrowers and to generate positive cash flow by selling substantially all originated loans for cash to institutional investors, usually without recourse, within a short period after such loans are originated, thereby reducing exposure to interest rate and credit risks.

In the five years prior to 1999, the Company experienced growth in its mortgage banking activities, originating $47 million in mortgage loans in 1994, $71 million in mortgage loans in 1995, $133 million in mortgage loans in 1996, $315 million in mortgage loans in 1997 and $582 million in mortgage loans in 1998. In 1999, due to closing its sub-prime division and increasing mortgage interest rates, PMCC experienced a decline in loan originations, originating $561 million in mortgage loans. For its fiscal years ended December 31, 1997, 1998 and 1999, the Company had revenues from its mortgage banking activities of $14.2 million, $22.9 million, and $16.7 million, respectively.

The Company originates residential first mortgages on a retail basis primarily in New York and New Jersey by a staff of experienced retail loan officers who obtain customers through referrals from local real estate agents, builders, accountants, financial planners and attorneys, as well as from direct customer contact via advertising, direct mail and promotional materials. The Company's wholesale divisions in New Jersey and Florida originate mortgage loans through independent mortgage bankers and brokers, who submit applications to the Company on behalf of a borrower. For the year ended December 31, 1999, approximately 50% of the Company's mortgage originations were derived from its retail mortgage operations and approximately 50% were derived from its wholesale operations.

The Company's revenues from mortgage banking activities are primarily generated from the premiums it receives on the sale of mortgage loans it originates, and from interest earned during the period the Company holds mortgage loans for sale. The Company's mortgage loans, together with servicing rights to these mortgages, are usually sold on a non-recourse basis to institutional investors, in each case within approximately 7 to 30 days of the date of origination of the mortgage. In general, when the Company establishes an interest rate at the origination of a mortgage loan, it attempts to contemporaneously lock in an interest yield to the institutional investor purchasing that loan from the Company. By selling these mortgage loans at the time of or shortly following origination, the Company limits its exposure to interest rate fluctuations and credit risks. Furthermore, by selling its mortgage loans on a "servicing-released" basis, the Company avoids the administrative and collection expenses of managing and servicing a loan portfolio and it avoids a risk of loss of anticipated future servicing revenue due to mortgage prepayments in a declining interest rate environment.

The Company also generates income by charging fees for short-term funding to independent real estate contractors ("rehab partners") for the purchase, rehabilitation and resale of vacant one-to-four family residences primarily in New York City and Long Island, New York. The Company provides this funding to several rehab partners that specialize in the rehabilitation and marketing of these properties. As security for providing the rehab partners with the funding to accomplish the purchase, rehabilitation and resale of the property, the Company holds title to the properties. The Company's income from this activity is limited to the fees and interest charged in connection with providing the funding and is not related to any gain or loss on the sale of the property. Since the Company holds the title to these properties, for financial reporting purposes the Company records as revenue the gross sales price of these properties when the properties are sold to the ultimate purchasers and it records cost of sales equal to the difference between such gross sales price and the amount of its contracted income pursuant to its contracts with the rehab partners. From the commencement of this activity on September 1, 1996 through December 31, 1996, the Company completed 35 transactions and recorded revenues of $5.1 million and cost of sales of $4.8 million. For the year ended December 31, 1997, the Company completed 169 such transactions. The Company's revenues and costs of sales from this activity for the year ended December 31, 1997 were $25.1 million and $23.6 million, respectively. For the year ended December 31, 1998, the Company completed 231 transactions and recorded revenues and costs of sales of $35.7 million and $32.9 million, respectively. For the year ended December 31, 1999, the Company completed 216 transactions and recorded revenues and costs of sales of $36.0 million and $33.0 million, respectively. At December 31, 1999, the Company had 130 properties in various stages of rehabilitation awaiting resale. Due to conditions described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - Liquidity and Capital Resources", the Company has accelerated efforts to cause the sale of existing properties and has temporarily halted the purchase of new properties.

In April 1997, the Company established a sub-prime lending division to meet increased customer demand for sub-prime mortgage products and the availability of capital to the Company for these mortgage banking products. In many cases, sub-prime credit borrowers have substantial equity in their residences and while some of these sub-prime customers have impaired credit, such customers also include individuals who seek an expedited mortgage process, and persons who are self-employed or, due to other circumstances, have difficulty verifying their income. The Company believed that the demand for loans by sub-prime credit customers was less dependent on general levels of interest rates or home sales and may be less cyclical than conventional mortgage originations. Such lending is subject to other risks, however, including risks related to the significant growth in the number of sub-prime lenders in recent years, risks related to certain potential competition and risks related to credit-impaired borrowers. High delinquencies and an oversaturation of lenders led to adverse conditions in the sub-prime mortgage market beginning in late 1998 and continuing into 1999. Because of this, the Company closed its Roslyn, New York sub-prime division during the second quarter of 1999 and transferred its remaining operations to the New Jersey sub-prime office. This office was likewise subsequently closed in December 1999. While the Company's conservative posture on these loans has reduced loss exposure to almost zero, originations of sub-prime loans were reduced in 1999 by approximately 80% from the prior year.

Recent Developments

As previously announced, on December 21, 1999, the Company's then Chairman of the Board, President and Chief Executive Officer, Ronald Friedman, and a loan officer were charged in separate criminal complaints with one count each of allowing false qualifications to be included in applications for FHA-backed mortgage loans in connection with an investigation (the "Investigation") by the U.S. Attorney's Office for the Eastern District of New York (the "U.S. Attorney"). The Company, which has not been informed that it is a target of the Investigation, has provided requested documents and cooperated with the Investigation. See "Item 3 - Legal Proceedings." On December 22, 1999, the American Stock Exchange suspended trading of the Company's Common Stock and commenced a review of the listing status of the Common Stock. See "Item 5 - Market For Registrant's Common Equity and Related Stockholder Matters." In addition, on January 24, 2000 the Federal Home Loan Mortgage Corporation ("Freddie Mac") suspended the eligibility of the Company to use Freddie Mac's automated underwriting system. As of the date of this Report, the trading suspension and Freddie Mac suspension remained in effect. Following the events of December 21, 1999, the following have also occurred:

o Reorganization of Management. On December 29, 1999, Mr. Friedman resigned as a Director and Chairman of the Board and was granted a leave of absence as President and Chief Executive Officer. In his place, Stanley Kreitman, an outside director, was appointed Chairman of the Board, Andrew Soskin, the Company's Executive Vice President of Operations and Sales, was appointed interim President and Keith Haffner, the Company's Executive Vice President and a Director, was appointed interim Chief Executive Officer. Mr. Soskin was also elected to the Board to replace Mr. Friedman.

o Retention of Consultants and Internal Investigation. A committee of independent directors consisting of Stanley Kreitman and Joel L. Gold was formed to conduct an investigation into the business practices of the Company and to retain counsel in connection therewith. Dorsey & Whitney LLP was retained as counsel and conducted an investigation and prepared a report for such committee and the entire Board concerning matters relating to the Investigation. See "Item 3 - Legal Proceedings." Spectrum Financial Consultants, Inc. was engaged to assist the Company in maintaining and establishing new relationships with funding sources and seeking to maintain its existing relationships with lenders.

o Staffing Changes and Streamlining of Operations. The loan officer implicated in the Investigation was terminated. In the aftermath of the events of December 1999, the Company's cash flow weakened as a result of factors such as substantial professional fees incurred by the Company in connection with the Investigation and related matters and additional collateral and fees required by its warehouse lenders. The Company also was faced with ongoing costs from the Company's expansion efforts in 1999 and reductions in the mortgage origination market due to increasing interest rates. In an effort to improve cash flow and operating efficiency, over the course of the first two months of 2000, the Company streamlined its operations to 86 employees, 27 of which were sales staff and 59 were operation staff. At December 31, 1999, there were 185 employees, 78 of which were sales staff and 107 were operations staff. As part of this streamlining effort, the Company has shifted the focus of its business primarily to wholesale mortgage banking, which relies upon mortgage loans introduced through independent mortgage bankers and brokers, from retail mortgage banking, which relies on mortgage loans placed by the Company's own loan officers. In 1998 and 1999, respectively, wholesale loans constituted approximately 43% and 50% of the dollar volume of loans originated by the Company, respectively. During the first three months of 2000, the Company estimates that approximately 85% of the dollar volume of loans it originated was attributable to wholesale business. To further improve cash flow, the Company temporarily halted the acquisition of residential rehabilitation properties and almost $9 million in rehabilitation properties have been sold to date in 2000, generating over $3 million in cash. The Company is seeking to sell approximately $7 million of such properties in the near future. As a result of the Company's efforts to streamline its operations and business focus, the Company has reduced its annualized expenses by approximately $3.3 million. Such reduction has assisted in maintaining adequate cash flow notwithstanding lower mortgage origination and professional expenses being incurred which have contributed to net losses expected to be reported for the first quarter of 2000. See "Item 1 - Business - Business Strategy" and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

o Change in Warehouse Financing. The Company had credit lines (the "Existing Credit Lines") available aggregating $140 million with Chase Bank of Texas and PNC Bank and GMAC/RFC which lines were due to expire on December 24, 1999 and January 31, 2000, respectively. To replace the Existing Credit Lines, on November 11, 1999 the Company entered into agreement with Bank United to provide a total mortgage warehouse line of $120 million. Bank United committed to $40 million and the remaining line was to be syndicated to other banks. At December 21, 1999, the balances outstanding on mortgage lines were approximately $23 million at Bank United and an aggregate of approximately $25 million under the Existing Credit Lines. After the events of December 21, 1999, two additional banks expected to join the Bank United syndicate withdrew their verbal commitments. The events of December 21, 1999 constituted defaults under the Bank United credit line and the Existing Credit Lines due to cross default provisions. The Credit Line with Prudential was suspended and has since been paid in full. The Company negotiated forbearance arrangements and short-term extensions with Bank United and lenders of the other Existing Credit Lines. Such extensions are currently set to expire on May 31, 2000 in the case of GMAC/RFC and May 15, 2000 in the case of Chase Bank of Texas and PNC Bank and Bank United. On February 28, 2000 the Company entered into a $20 million warehouse line of credit from IMPAC Warehouse Lending Group, one of the institutional investors which purchases the Company's loans. The Company is seeking to obtain a new credit line or lines of approximately $15 million in addition to the $20 million IMPAC credit line. See "Item 1 - Business - Loan Funding and Borrowing Arrangements" and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

Business Strategy

In the past year, PMCC's growth strategy included the following:

o increase the Company's wholesale mortgage origination business. This was accomplished in July 1999 when PMCC completed its acquisition of the assets of Prime Mortgage Investors, Inc. ("Prime") which provided the Company with three wholesale origination offices in Florida;

o expand the Company's retail mortgage origination business into other states. The Company had opened retail offices in Westchester, New York and Staten Island, New York in 1998 and followed this by opening branches in Phoenix, Arizona, Las Vegas, Nevada and Deerfield Beach, Florida in 1999.

o expand the Company's residential rehabilitation activities outside of New York City and Long Island, New York. This was accomplished by adding additional residential rehabilitation partners in New Jersey, Maryland and Arizona; and

o compete more effectively by utilizing the Internet to reach consumers directly, thereby substantially reducing sales and marketing expenses. PMCC's in-house technology along with the Prime acquisition allowed the Company to establish a web-site with a service and customer call center located in Houston, Texas in November 1999.

Due to the recent developments described above, along with a significant reduction in the mortgage origination market (particularly in the Northeast) caused by increasing interest rates and a fall-off in mortgage refinancing, many of the Company's growth initiatives were suspended or closed down completely in early 2000. The following actions were taken:

o staffing at the Company's Roslyn retail office and administrative offices was reduced from 86 employees to 45. In conjunction such reduction, the Company is currently negotiating to significantly reduce its office space in Roslyn by subleasing at least half its current premises. These reductions, while costing an estimated $300,000 in termination costs, are expected to result in annualized cost savings of almost $1.6 million;

o all retail branches opened during 1998 and 1999 were closed, along with one wholesale office acquired from Prime, resulting in a staff reduction of 36 employees. This included retail branches in potential high growth areas such as Las Vegas, Phoenix and Deerfield Beach which were in start-up situations and were incurring high expenses in relation to their current origination volume. It is expected that these actions will result in annualized cost savings to the Company of approximately $800,000, while closing these branches resulted in estimated closing and termination costs of $75,000;

o staffing at the Company's New Jersey and remaining Florida wholesale locations was reduced from 61 employees to 38, and the Florida locations have moved to more cost-efficient office locations. These reductions are expected to result to result in annualized cost savings of almost $600,000;

o the Company's web-site was temporary closed down as was the Internet call center in Houston. As a start-up operation, this area was incurring high expenses in relation to the current origination volume. It is expected that this action will result in annual savings of over $300,000;

o the Company temporarily halted the acquisition of residential rehabilitation properties and began an initiative to sell the completed properties on hand as quickly as possible without incurring any losses on the sales. Assuming successful completion of proposed sales, this process is expected to bring into the Company a total of approximately $6 million in cash by the end of June 2000.

It is anticipated that the Company will continue to incur significant losses in the first quarter of 2000 primarily as a result of unusual professional fees and bank charges along with expenses incurred in closing down certain branches. Based on the above actions taken by the Company, PMCC currently estimates that it must achieve a minimum of approximately $25 million per month in new mortgage originations beginning in the second quarter of 2000 to achieve break-even profitability. Although the Company anticipates maintaining at least that level of originations from its remaining wholesale and retail operations, there can be no assurance that such origination volume will be achieved, that expected cost savings will be realized or that such originations will be sufficient to restore profitability.

At the same time the above actions are being taken, PMCC's business strategy is to stabilize and strengthen its remaining areas of business. The Company continues to believe that its broad range of mortgage alternatives for borrowers and its ability to promptly make decisions provides it with the opportunity to increase its business in the wholesale mortgage market. Prompt and consistent service to independent mortgage loan brokers who are sources of wholesale loan transactions is a key to the Company increasing its wholesale mortgage originations and establishes the basis for repeat business and referrals from these brokers. The Company plans to add new account executives in both New Jersey and Florida. It is anticipated that more than 80% of PMCC's mortgage originations in 2000 will be as a result of its wholesale operations.

The Company also expects to reopen and expand its web-site to allow borrowers to directly match their credit profile to specific products and rates offered by the Company. The previous and future investment in Internet technology is anticipated to accelerate PMCC's move back into E-commerce and to enable the Company to expand its consumer-direct market. The centerpiece of this technology will be to the ability to allow consumers to process their own loans on-line with the support of the Company's call center as needed.

The Company also expects to resume its residential rehabilitation activities and is exploring new financing sources. The Company believes that opportunities continue to exist to provide fee-based short-term funding for residential rehabilitation properties. In some cases, this funding would be provided to one of rehab partners with which the Company already does business, while in other cases, the Company may elect to work with companies with which it has not done business in the past. The Company views its residential rehabilitation activities as important sources of fee business and follow-on mortgage origination business.

There can be no assurance as to the specific time-frame concerning when the Company will implement any elements of its business strategy, whether the Company will be successful in implementing this strategy or whether the implementation of this strategy will result in increased revenue or in net income to the Company.

Operating Strategy

The Company's operating strategy includes the following elements:

o continue to provide quality service. The Company seeks to provide high levels of service to its retail customers and the broker network that is a source of wholesale loan originations. This service includes prompt preliminary approval of loans, consistent application of the Company's underwriting guidelines and prompt funding of loans. To provide this level of service, each loan is handled by a team of professionals that includes experienced loan sales personnel, processors and underwriters. The Company believes that this commitment to service provides it with a competitive advantage in establishing and maintaining a productive sales force and satisfactory broker relationships;

o maintain underwriting standards. The Company's underwriting process is designed to thoroughly, expeditiously and efficiently review and underwrite each prospective loan and to insure that each loan can be sold to a third-party investor by conforming to its requirements. The Company employs six underwriters, with an average of twelve years of relevant mortgage loan experience to ensure that all originated loans satisfy the Company's underwriting criteria. Each loan is reviewed and approved by a senior underwriter. The Company believes that its experienced underwriting staff provides it with the infrastructure required to manage and sustain the Company's growth rate while maintaining the quality of loans originated;

o broaden product offerings. The Company frequently reviews its pricing and loan products relative to its competitors and introduces new loan products in order to meet the needs of its customers who may be "retail" customers and brokers who are sources of wholesale loan originations. The Company successfully negotiates master commitments from its investors for special niche products that are only offered to a limited number of companies nationwide. The Company intends to continue to negotiate these specialized master commitments to allow the Company to offer exceptional niche products that are only offered to a limited amount of companies nationwide;

o continue delegated underwriting approval status. The Company seeks to provide a high level of service to its retail and wholesale accounts, by having internal authority to approve a large portion of the loans it sells. In addition to FNMA, FHA and jumbo loans, the Company has been delegated authority by certain institutional investors to approve many of the Company's niche products. The Company has provided training for its processors and underwriters to efficiently review each file for compliance with investor guidelines. The Company believes that its delegated authority to approve most loans provides it with a competitive advantage because it allows the Company to provide additional services to its borrowers and correspondents; and

o invest in information systems. In its continued effort to increase efficiency, the Company plans to upgrade its information systems in 2000. The Company intends to continue to look for ways to improve efficiencies through automation.

The Company does not currently intend to engage in mortgage securitization activities.

Mortgage Products Offered

The Company believes it is one of a small group of multi-state mortgage bankers that offer on a direct (or retail) basis a broad array of mortgage products to prime credit borrowers (i.e., a credit-rated borrower seeking a conventional or FHA/VA insured loan), and borrowers who are unable to qualify for conforming home mortgages. The Company's experience and expertise in numerous types of mortgage products also gives it the ability to originate a full range of mortgage products on a wholesale basis. This broad array of products allow most prospective borrowers to obtain a mortgage through the Company.

The following are examples of the more than 200 mortgage programs offered to prime credit borrowers:

o Fixed interest rate mortgages with a fixed monthly payment. This loan is fully amortizing over a given number of years (for example, 15 or 30 years); a portion of the monthly payment covers both interest and principal.

o Fixed interest rate balloon mortgages with equal monthly payments based on a long-term schedule (15 to 30 years), yet payment of the outstanding balance is due in full at an earlier date (5 to 10 years).

o Adjustable interest rate mortgages ("ARMs") repayable over 7 to 30 years with monthly payments adjusted on a periodic basis (i.e., 6 months or once a year) based upon interest rate fluctuations.

o ARMs offer additional alternatives:

o Adjustment period -- This determines when the first interest rate and payment changes will take place; an ARM could make its initial adjustments after six months, one year, three years, five years or ten years and subsequent adjustments take place either every six months or one year thereafter.

o Caps -- "Caps" place limits on payments and interest rate changes per adjustment period. For example, for an ARM that adjusts every year, the maximum increase in the interest rate on the adjustment date is typically 200 basis point per year (i.e., a mortgage would adjust from 7% to 9%) and 600 basis points for the life of the loan.

o Index -- The index is the basis upon which interest rate adjustments are made; typically, the index is related to various Treasury bill rates or another widely published rate such as LIBOR.

Mortgages are also offered with a variety of combinations of interest rates and origination fees so that its customers may elect to "buy-down" the interest rate by paying higher points at the closing or pay a higher interest rate and reduce or eliminate points payable at closing. The Company's mortgage products are further tailored, i.e., are offered with varying down payment requirements, loan-to-value ratios and interest rates, to a borrower's profile based upon the borrower's particular credit classification and the borrower's willingness or ability to meet varying income documentation standards -- the full income documentation program pursuant to which a prospective borrower's income is evaluated based on tax returns, W-2 forms and pay stubs; the stated income program pursuant to which a prospective borrower's employment, rather than income, is verified; or the no ratio loan program pursuant to which a prospective borrower's credit history and collateral values, rather than income or employment, are verified. These loan variations give the Company the flexibility to extend mortgages to a wider range of borrowers.

FHA/VA Mortgages. The Company has been designated by the United States Department of Housing and Urban Development ("HUD") as a direct endorser of loans insured by the Federal Housing Administration ("FHA") and as an automatic endorser of loans partially guaranteed by the Veterans Administration ("VA"), allowing the Company to offer so-called "FHA" or "VA" mortgages to qualified borrowers. Generally speaking, FHA and VA mortgages are available to borrowers with low/middle incomes and impaired credit classifications for properties within a specific price range (generally less than $220,000 for one-family residences or $281,000 for two-family residences located in the New York City metropolitan area). FHA and VA mortgages must be underwritten within specific governmental guidelines, which include income verification, borrower asset, borrower credit worthiness, property value and property condition. Because these guidelines require that borrowers seeking FHA or VA mortgages submit more extensive documentation and the Company perform a more detailed underwriting of the mortgage than prime credit mortgages, the Company's revenues from these mortgages are generally higher than a comparable sized mortgage for a prime credit borrower.

The following table sets forth the Company's mortgage loan production volume by type of loan for each of the five years ended December 31, 1999.

                                                                  Years Ended December 31,
                                                                    ($ in thousands)

                                            1995             1996           1997                  1998              1999
                                            ----             ----           -------               ----              ----
Conventional Loans:
  Volume                                 $51,300          $75,400          $177,825           $359,143          $379,462
  Percentage of total volume                 73%              57%               57%                62%               68%
FHA/VA Loans:
  Volume                                 $19,400          $57,700           $75,060           $146,628          $167,153
  Percentage of total volume                 27%              43%               24%                25%               30%
Sub-Prime Loans
  Volume                                       *                *           $61,675            $76,645           $14,083
  Percentage of total volume                   *                *               19%                13%                2%
Total Loans:
  Volume                                 $70,700         $133,100          $314,560           $582,416          $560,698
  Number of Loans                            470              890             2,160              3,793             3,662
  Average Loan Size                         $150             $150              $146               $154              $153
------------
*For the referenced periods,  sub-prime loans represented less than five percent
of  the  Company's  loan   originations   and  are  included  in  the  Company's
conventional loans.

Operations

Markets. The Company currently services mortgage customers in New York State (particularly in New York City and throughout Long Island), New Jersey and Florida through 4 offices. Additionally, the Company has mortgage banking licenses in 44 additional states. These offices allow the Company to focus on developing contacts with individual borrowers, local brokers and referral sources such as accountants, attorneys and financial planners.

Retail Mortgage Originations. The Company's typical retail customer is assigned to one of the Company's mortgage loan officers working at one of the Company's offices who spends approximately one hour interviewing the applicant about his/her mortgage borrowing needs and explaining the Company's mortgage product alternatives. Following this interview, the mortgage loan officer assists the customer in completing an application and gathering supporting documentation (a "loan file"). Once the loan file is submitted, a sales manager reviews the file to verify that the loan complies with a specific product that the Company can resell to institutional investors. The Company assigns a loan processor to review a loan file for completeness and requests missing documentation from the borrower. The Company's review of a loan file and the related underwriting process generally includes matters such as verification of an applicant's sources of down payment, review of an applicant's credit report from a credit reporting agency, receipt of a real estate appraisal, verification of the accuracy of the applicant's income and other information, and compliance with the Company's underwriting criteria and those of either FHA and/or institutional investors. The Company's review/underwriting process allows it to achieve efficiency and uniformity in processing, as well as quality control over all loans. In the case of prime and FHA/VA mortgages, the underwriting process occurs at the Company's offices in Roslyn Heights, New York and Union, New Jersey.

When a loan reaches the underwriting department, the Company's goal is to promptly evaluate the loan file to reach preliminary decisions within 24 to 48 hours of receipt. After a loan has been approved, the Company issues a written loan commitment to the applicant which sets forth, among other things, the principal amount of the loan, interest rate, origination and/or closing fees, funding conditions and approval expiration dates.

Approved applicants have a choice of electing to "lock-in" their mortgage interest rate as of the application date or thereafter or to accept a "prevailing" interest rate. A "prevailing" interest rate is subject to change in accordance with market interest rate fluctuations and is set by the Company three to five days prior to closing. At the closing, a Company-retained attorney or closing agent is responsible for completing the mortgage transaction in accordance with applicable law and the Company's operating procedures and completion of appropriate documentation.

As a retail mortgage originator, the Company performs all the tasks required in the loan origination process, thereby eliminating any intermediaries from the transaction. This permits the Company to maximize fee income and to be a low cost provider of mortgage loans. The Company believes that this structure provides it with a competitive advantage over mortgage brokers, who must outsource a significant portion of the loan origination process, and over banks, which usually have greater overhead expenses than the Company. In addition, handling the entire loan origination process in-house leads to effective quality control and better communication among the various personnel involved.

Wholesale Mortgage Operations. Wholesale mortgage originations are the responsibility of the Company's wholesale division, which solicits referrals of borrowers from a network of independent mortgage bankers and brokers located throughout New York, New Jersey and Florida. In wholesale originations, these mortgage bankers and brokers deal directly with the borrowers by assisting the borrower in collecting all necessary documents and information for a complete loan application, and serving as a liaison to the borrower throughout the lending process. The mortgage banker or broker submits this fully processed loan application to the Company for underwriting determination.

The Company reviews the application of a wholesale originated mortgage with the same underwriting standards and procedures used for retail loans, issues a written commitment, and upon satisfaction of all lending conditions, closes the mortgage with a Company-retained attorney or closing agent who is responsible for completing the transaction as if it were a retail originated loan. Mortgages originated from the wholesale division are sold to institutional investors similar to those that purchase loans originated from the Company's retail operation.

Because mortgage brokers may submit individual loan files to several prospective lenders simultaneously, the Company attempts to respond to an application as quickly as possible. Since the Company has been delegated authority from institutional investors to approve most loans, the Company generally issues an underwriting decision within 24 to 48 hours of receipt of a file.

The Company has approved approximately 650 independent mortgage bankers and brokers and works with of these on a regular basis. The Company conducts due diligence on potential mortgage bankers and brokers, including verifying financial statements of the company and credit checks of principals, business references provided by the bankers or brokers and verifying through the banking department that the mortgage banker or broker is in good standing. Once approved, the Company requires that each mortgage banker or broker sign an agreement of purchase and sale in which the mortgage banker or broker makes representations and warranties governing both the mechanics of doing business with the Company and the quality of the loan submissions. In addition, the Company regularly reviews the performance of loans originated through mortgage bankers and brokers.

Through the wholesale division, the Company can increase its loan volume without incurring the higher marketing, labor and other overhead costs associated with increased retail originations because brokers conduct their own marketing and employ their own personnel to attract customers, to assist the borrower in completing the loan application and to maintain contact with borrowers.

Residential Rehabilitation Activities. In September 1996, the Company commenced a program of providing short-term fee-based funding to several rehab partners with specialized expertise in the acquisition, rehabilitation and resale of vacant one-to-four family residential properties in New York City and Long Island, New York. These properties are generally offered to the rehab partners by banks or other mortgage companies that have acquired title and possession through a foreclosure proceeding. The Company's process of providing this short-term funding commences when a rehab partner submits information about a property to the Company which the rehab partner believes meets the Company's rehabilitation financing criteria. If the Company agrees to fund the rehabilitation of the property, it will advance the purchase of the property at up to 70% of the appraised value. The Company generally does not fund properties when the purchase price of the property is greater than 70% of the appraised value. As security for providing these rehab partners with the funding to accomplish the purchase, residential rehabilitation and resale of the property, title to these properties is held by the Company. The Company's income from this activity is limited to the fees and interest charged in connection with providing the financing and not from any gain or loss on the sale of the property. The terms of these financing agreements with the rehab partners (the "Agent Agreement") provide that all risks relating to the ownership, marketing and resale of the property are borne by the rehab partners, including obtaining insurance on the property, maintaining the property and arranging for all aspects of offering and selling the property to potential buyers and renovating the property to the satisfaction of the buyer. The Agent Agreements also provide that the Company's fee, which averaged approximately $15,000 per property sold in 1999, is a priority payment after payment of the funds advanced by the Company, over any monies paid to the rehab partners. The rehab partners and their principals personally guaranty reimbursement of all costs and the total fee payable to the Company. The properties funded by the Company through the residential rehabilitation program are generally acquired at prices between $60,000 and $150,000 each, and the renovation/rehabilitation expenses (which are borne by the rehab partners) are usually between $10,000 and $30,000 per property. The period during which these properties are financed generally ranges from three to six months. For financial reporting purposes, because the Company holds title to these properties, revenues are recorded at the gross sales price of these properties when the properties are sold to the ultimate purchasers and it records cost of sales equal to the difference between such gross sales price and the amount of its contracted income pursuant to its contracts with the rehab partners.

The Company's arrangement with these rehab partners is not exclusive, although the Company does encourage the rehab partners to provide the Company with a "first right" of funding each property that each rehab partner has identified. The Company has investigated each rehab partner and is satisfied that their financial condition and business reputation is acceptable. As the Company opens additional retail offices, it will consider funding residential rehabilitation properties in the areas served by such offices.

The Company believes that its residential rehabilitation program serves as an additional source of mortgage originations since purchasers of such properties typically seek mortgage financings and are encouraged to submit applications to the Company. Approximately 90% of the buyers of such properties obtained mortgages originated by the Company. The process by which these mortgages were processed and underwritten was identical to the Company's procedures for reviewing and underwriting mortgages originated from retail or wholesale sources, and each of these mortgages was sold to third party investors in the normal course of the Company's business.

As discussed above, the Company has temporarily halted the acquisition of residential rehabilitation properties and has accelerated the sale of existing properties to improve cash flow.

Loan Funding and Borrowing Arrangements

The Company funds its mortgage banking and residential rehabilitation financing activities in large part through warehouse lines of credit, gestation agreements and its ability to continue to originate mortgage loans and provide residential rehabilitation financings is dependent on continued access to capital on acceptable terms. The warehouse facilities require the Company to repay the amount it borrows to fund a loan generally within 30 to 90 days after the loan is closed or when the Company receives payment from the sale of the funded loan, whichever occurs first. These borrowings are repaid with the proceeds received by the Company from the sale of its originated loans to institutional investors or, in the case of residential rehabilitation activities, from the proceeds from the sale of the properties. Until the loan is sold to an investor and repayment of the loan is made under the warehouse lines, the warehouse line provides that the funded loan is pledged to secure the Company's outstanding borrowings. The warehouse lines of credit contain certain covenants limiting indebtedness, liens, mergers, changes in control and sales of assets and requires the Company to maintain minimum net worth and other financial ratios.

On August 7, 1998, the Company entered into a Senior Secured Credit Agreement (the "Chase Line") with Chase Bank of Texas, National Association ("Chase") and PNC Bank ("PNC"). The Chase Line provided a warehouse line of credit of $120 million ($90 million committed at August 11, 1998) for its mortgage originations and residential rehabilitation purchases. The Chase Line is secured by the mortgage loans and residential rehabilitation purchases funded with the proceeds of such borrowings. The Company has also pledged the stock of its residential rehabilitation subsidiaries as additional collateral. The Company is required to comply with certain financial covenants and the borrowings for residential rehabilitation properties are guaranteed by Ronald Friedman and by Robert Friedman, the Company's former Chief Operating Officer, Secretary, Treasurer and Chairman of the Board of Directors. The Chase Line originally was set to expire in August 1999 but was extended through November 8, 1999. Chase and PNC informed the Company that they had decided to curtail their involvement in mortgage warehouse lending and had decided not to renew the facility for that reason. The Chase Line was further extended to December 24, 1999 on a declining basis in order to complete the funding of all loans and properties on the line on November 8, 1999. No new loans or properties were added to this line subsequent to November 8, 1999. Chase and PNC have agreed to continue to extend the line on a specified declining basis through a series of short term extensions. The banks and PMCC are in the process of extending the Chase Line through May 15, 2000, at which time the Company anticipates paying down the entire facility or renewing the extension under similar terms and conditions as the extensions granted since December 24, 1999. The balance outstanding on the Chase Line was $51.2 million on November 8, 1999, $10.7 million on December 31, 1999 and $4.4 million on April 13, 2000. Interest payable on the Chase Line is variable based LIBOR plus 1.25% to 3.00% based upon the underlying collateral. Minimal fees were paid for the extensions and there was no change in the method of calculating interest.

The Company also maintained a warehouse line of credit with GMAC/RFC (the "RFC Line") of $20 million that was used primarily for sub-prime loans and residential rehabilitation properties. The RFC Line was set to expire on January 31, 2000. RFC had decided not to renew the warehouse line due to low usage as a result of the Company's exiting the sub-prime business and RFC's curtailment of their involvement in residential rehabilitation lending. RFC has agreed to continue to extend the line on a declining basis through a series of short term extensions, the most recent of which will expire on May 31, 2000, at which time the Company anticipates paying down the entire facility or renewing the extension under similar terms and conditions as the extensions granted since January 31, 2000. The balance outstanding on the RFC Line was $2.2 million on December 31, 1999, $1.3 million on January 31, 2000 and $0.7 million on April 13, 2000. Interest payable on the RFC Line is variable based on LIBOR plus 1.35% to 2.25% based upon the underlying collateral. Minimal fees were paid for the extensions and there was no change in the method of calculating interest.

To replace the expiring Chase Line, the Company entered into a one-year Mortgage Warehousing Loan and Security Agreement (the "Bank United Line") with Bank United, a federally chartered savings bank, as lending bank and agent. The Bank United Line provided a warehouse line of credit of $120 million ($40 million of which was committed by Bank United and the remainder of which was not committed) for its mortgage originations and residential rehabilitation purchases. The Bank United Line is secured by the mortgage loans and residential rehabilitation purchases funded with the proceeds of such borrowings. The Company has also pledged the stock of its residential rehabilitation subsidiaries as additional collateral. Interest payable on the Bank United Line was variable based on LIBOR plus 1.50% to 3.00% based upon the underlying collateral.

Due to the events relating to the Investigation, on December 22, 1999 Bank United declared a default of the Bank United Line agreement and suspended funding under the agreement. Bank United continued to fund new mortgage loans only on a limited day to day basis and only with the personal guarantee of Ronald Friedman and additional collateral in the form a $500,000 cash deposit by the Company at Bank United. On January 18, 2000, Bank United agreed to a limited extension of the warehouse agreement through January 28, 2000 and to waive the existing default relating to the Investigation. In return for this, Bank United required additional collateral pledged to the bank in the form of the $500,000 cash deposit previously noted and $1.5 million in marketable titles to residential rehabilitation properties owned by PMCC, an additional 3% cash reduction in the funding amount of all loans funded on the Bank United Line, the continued personal guarantee of Ronald Friedman and an Amendment Fee of $250,000. The Commitment amount of the line was reduced from $40 million to $33 million and the interest rate was increased to LIBOR plus 2.00% to 3.50% based upon the underlying collateral. On February 1, 2000, for an additional Amendment Fee of $100,000, Bank United agreed to an extension on similar terms through February 28, 2000. On March 1, 2000, Bank United agreed to an extension through March 31, 2000 on similar terms, with a reduction of the commitment from $20 million on March 13 to $13 million on March 31. Additional collateral held was returned in proportion to the reduction of the amount committed. On April 1, 2000, Bank United agreed to an extension on similar terms with a reduction of the commitment to $7 million through April 30, 2000. On April 25, 2000, Bank United agreed to a verbal extension on similar terms through May 15, 2000, at which time the Company anticipates paying down the entire facility or renewing the extension under similar terms and conditions as the extensions granted since January 2000. The balance outstanding on the Bank United Line was $22.9 million on December 22, 1999, $31.0 million on December 31, 1999 and $5.5 million on April 13, 2000.

To replace a portion of the Bank United Line, on February 28, 2000, the Company entered into a Master Repurchase Agreement that provides the Company with a warehouse facility (the"IMPAC Line") through IMPAC Warehouse Lending Group ("IMPAC"). The IMPAC Line provides a committed warehouse line of credit of $20 million for the Company's mortgage originations only. The IMPAC Line is secured by the mortgage loans funded with the proceeds of such borrowings. Interest payable on the IMPAC Line is variable based on the Prime Rate as posted by Bank of America, N.A. plus 0.50%. The IMPAC Line has no stated expiration date but is terminable by either party upon written notice. The balance outstanding on the IMPAC Line was $6.9 million on April 13, 2000.

The Company supplemented its warehouse facilities through a gestation agreement with Prudential Securities Corp. (the "Gestation Agreement"), which for financial reporting was characterized by the Company as a borrowing transaction. The Gestation Agreement provided the Company with up to $30 million of additional funds for loan originations through the Company's sale to this bank of originated mortgage loans previously funded under the warehouse facilities and committed to be sold to institutional investors. The Gestation Agreement does not have an expiration date but is terminable by either party upon written notice. Interest payable under the Gestation Agreement was variable based on LIBOR plus 0.0% to 1.00% based upon the underlying collateral. Due to the events regarding the Investigation, on December 22, 1999 Prudential suspended funding new loans under the agreement. At December 31, 1999, the balance due was $4.3 million. As of March 21, 2000, all loans funded under the Gestation Agreement have been sold to the final investors. The Company believes that other financial institutions provide similar gestation lines of credit.

During 1999, the Company entered into revolving line of credit agreements with total credit available of $3.1 million. The interest rate on these lines is 10% per annum. The lines are secured by mortgage loans held for investment by the Company that are not pledged under the Company's warehouse facilities. The total outstanding under these lines at December 31, 1999 was $2.3 million. These funds were used primarily for the cash expenditure in removing the underlying loans from the warehouse facilities and for general operating expenses.

From time to time, the Company had borrowed funds from a corporation owned by Robert Friedman. As of December 31, 1998, $1.2 million remained outstanding, all of which was secured by a mortgage against certain residential properties in rehabilitation pursuant to a mortgage agreement. As the residential property was sold, proceeds were used to repay the mortgage on the particular property. Interest payable pursuant to this agreement is 10% per year. This loan was repaid in full during February 1999 and no further borrowings were made or are anticipated from this source.

Sale of Loans

The Company follows a strategy of selling all of its originated loans for cash to institutional investors, usually on a non-recourse basis. This strategy allows the Company to (i) generate near-term cash revenues, (ii) limit the Company's exposure to interest rate fluctuations and (iii) substantially reduce any potential expense or loss in the event the loan goes into default after the first month of its origination. The non-recourse nature of the majority of the Company's loan sales does not, however, entirely eliminate the Company's default risk since the Company may be required to repurchase a loan from the investor or indemnify an investor if the borrower fails to make its first mortgage payment or if the loan goes into default and the Company is found to be negligent in uncovering fraud in connection with the loan origination process.

Quality Control

In accordance with HUD regulations, the Company is required to perform quality control reviews of its FHA mortgage originations. The Company's quality control department examines branch offices and approximately 10% of all conventional mortgage originations and 30% of all FHA mortgage originations for compliance with federal and state lending standards, which may involve reverifying employment and bank information and obtaining separate credit reports and property appraisals. Quality control reports are submitted to senior management monthly.

As a result of the Investigation and the subsequent internal investigation by Dorsey & Whitney (See " Recent Developments" and "Item 3 - Legal Proceedings"), PMCC has instituted additional quality control procedures to bolster the integrity of its loan underwriting process. The cornerstone of these new measures is a 100% review of all prospective loan applicants that are underwritten under any government program prior to closing. PMCC's quality control department "reunderwrites" each prospective loan application, which entails a reverification of all the pertinent creditworthiness information provided by the prospective borrower before the scheduled closing and a thorough review of the Residential Appraiser Report. Reverification includes a thorough review of all gifts received by the borrower that contribute to the down payment, including documentation from the gift giver, an executed IRS Form 4506 to verify accuracy and validity of income stated on the application and verification of employment 24 hours prior to closing the loan. Additionally, the Board of Directors has decided that it will be necessary to create the office of Vice President, Regulatory Compliance. This position will have dual reporting responsibility to the Chief Executive Officer and the Audit Committee of the Board of Directors. This position will be responsible for designing and implementing a new quality control program and will be required to submit a written compliance report bi-annually to the Audit Committee for review and action as necessary.

Marketing and Sales

The Company has developed numerous marketing programs at both the corporate and the branch office level. These programs include, among others, public relations, promotional materials customized for consumers and real estate professionals, collateral materials supporting particular product promotions, educational seminars, trade shows, and sponsoring or promoting other special events. The Company also conducts seminars in conjunction with other real estate professionals targeting potential home buyers. The Company is active with local boards of realtors, Better Business Bureaus and the Builders Association of America. All of the Company's loan representatives support these activities with extensive personal contact.

Competition

The mortgage banking industry is highly competitive in the states where the Company conducts business. The Company's competitors include financial institutions, such as other mortgage bankers, state and national commercial banks, savings and loan associations, credit unions, insurance companies and other finance companies. Many of these competitors are substantially larger and have considerably greater financial, technical and marketing resources than the Company.

Competition in the mortgage banking industry is based on many factors, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of the loan and interest rates. The Company believes that its competitive strengths include providing prompt, responsive service and flexible underwriting to independent mortgage bankers and brokers. The Company's underwriters apply its underwriting guidelines on an individual basis but have the flexibility to deviate from such guidelines when an exception or upgrade is warranted by a particular loan applicant's situation, such as evidence of a strong mortgage repayment history relative to a weaker overall consumer-credit repayment history. This provides independent mortgage bankers and brokers working with the Company the ability to offer loan programs to a diversified class of borrowers.

Since there are significant costs involved in establishing retail mortgage offices, there may be potential barriers to market entry for any company seeking to provide a full range of mortgage banking services. No single lender or group of lenders has, on a national level, achieved a dominant or even a significant share of the market with respect to loan originations for first mortgages.

The Company believes that it is able to compete on the basis of providing prompt and responsive service and offering competitive loan programs to borrowers.

Information Systems

The Company continues to design and integrate into its operations the ability to access critical information for management on a timely basis. The Company uses various software programs designed specifically for the mortgage lending industry. Each branch office provides senior management with mortgage originations and other key data. The information system provides weekly and monthly detailed information on loans in process, fees, commissions, closings, financial statements and all other aspects of running and managing the business.