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. In 2000, as a result of reductions in the mortgage origination market due to increasing interest rates along with the Investigation described in "Item 3 - Legal Proceedings", PMCC experienced a further significant decline in loan originations, originating $207 million in mortgage loans. For its fiscal years ended December 31, 1998, 1999 and 2000, the Company had revenues from its mortgage banking activities of $22.9 million, $16.7 million, and $2.7 million, respectively.

The Company's wholesale divisions in Florida and New Jersey originate mortgage loans through independent mortgage bankers and brokers, who submit applications to the Company on behalf of a borrower. 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. For the year ended December 31, 2000, approximately 24% of the Company's mortgage originations were derived from its retail mortgage operations and approximately 76% 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. For the year ended December 31, 2000, the Company completed 120 transactions and recorded revenues and costs of sales of $17.0 million and $16.6 million, respectively. At December 31, 2000, the Company had 9 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 halted the purchase of new properties.

See Note 12 in the consolidated financial statements for additional segment information.

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 has provided requested documents and cooperated with the Investigation. See "Item 3 - Legal Proceedings."

On December 22, 1999, the American Stock Exchange (the "Amex") 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. The Freddie Mac suspension was rescinded in the third quarter of 2000. In connection with the Amex review process, the Company met with the Amex staff on March 7, 2000 to present information in support of continued listing. On September 22, 2000, PMCC was advised by the "Amex" that it was its intention to proceed with the filing of an application with the Securities and Exchange Commission to strike the Company's common stock from listing and registration on the Exchange. The Company exercised its right to appeal the decision of the Exchange. On December 15, 2000, PMCC was advised by the Amex that, after the appeal hearing to its Committee on Securities by Company management and outside counsel held on November 6, 2000, the Amex Adjudicatory Council agreed with and affirmed the Amex's staff decision to strike the Company's common stock from listing and registration on the Exchange. On December 22, 2000, Amex filed an application with the Securities and Exchange Commission to do so effective with the opening of the trading session on January 4, 2001. The Company's common stock is currently trading on the Pink Sheets under the symbol "PMCF".

Effective July 28, 2000, PMCC Financial Corp. announced that Internet Business's International, Inc. ("IBUI") purchased the 2,460,000 shares of the Company held by Ronald Friedman, Robert Friedman and the Ronald Friedman 1997 Guarantor Retained Annuity Trust (collectively, the "Sellers") in a private transaction (the "Transaction"). This purchase represents 66.36% of the 3,707,000 shares of common stock of the Company outstanding. IBUI is a holding company with a variety of internet subsidiaries that trades publicly under the symbol IBUI on the NASDAQ Bulletin Board. The aggregate purchase price of $3,198,000 was to be paid in cash to the Sellers by IBUI over a period of nine months from the date of closing. According to provisions of the Transaction agreement, the purchase price was reduced because the Company's common stock was not trading on either the Amex or NASDAQ and there was no merger of the Company with IBUI or any of its affiliates within time periods specified by the agreement. At the closing, all shares purchased by IBUI from the Sellers were deposited in escrow with the Sellers' attorney. These shares will be released to IBUI upon receipt of the scheduled installment payments.

Simultaneous with the Transaction, the Company's Board of Directors passed a resolution to amend the Company's By-laws to provide for an increase in the number of directors from four to seven. Keith Haffner, the Company's then Executive Vice President and Interim Chief Executive Officer, resigned from the Board. Albert Reda, IBUI's Chief Executive Officer, Louis Cherry, IBUI's President and David Flyer, a consultant to IBUI, were elected to the Company's Board. The seventh Board member, Carl Carstensen, President IBM Solutions, European Divisions, is be elected to the Board effective at the earliest time such election is permitted pursuant to Rule 14f-1 of the Rules and Regulations under the Securities Exchange Act of 1934.

The Company has been informed by the Sellers that certain payments due under the agreement by IBUI to purchase shares of the Company's stock from the Sellers were not made and that an event of default has been declared against IBUI under this purchase agreement and the shares held in escrow have been returned to the sellers. At this time, negotiations and discussions are being held among the involved parties, however, no definitive revised agreement has been reached that would cure the default.

Following the events of December 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. Mr. Friedman's Employment Agreement was terminated in May 2000 and he continues to serve the Company as a general business consultant under a Consulting Agreement that began at that time. In September 2000, as part of the "Staffing Changes and Streamlining of Operations" discussed below, Mr. Haffner's employment was terminated and Mr. Soskin was appointed interim Chief Executive Officer while keeping the position of interim President.

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 along with 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 2000, the Company streamlined its operations including permanently closing its office in Roslyn Heights, NY. At December 31, 2000, there were 43 employees, 16 of which were sales staff and 27 were operations 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. In 2000, approximately 74% of the dollar volume of loans it originated was attributable to wholesale business. To further improve cash flow, the Company halted the acquisition of residential rehabilitation properties. During 2000, the Company sold $14.5 million of the $15.2 million of properties on hand at December 31, 1999. All the remaining properties are expected to be sold before June 30, 2001. Such reductions and sales of properties have assisted in maintaining adequate cash flow notwithstanding lower mortgage originations and professional expenses being incurred which have contributed to net losses reported for 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."

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. As of June 2000, the lines with GMAC/RFC and Bank United were paid in full. The total amount outstanding on the Chase Line at December 31, 2000 was approximately $161,000, all of which was related to remaining residential rehabilitation properties. This line is expected to be paid in full no later than June 30, 2001. 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. 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

Due to developments regarding the Investigation referred to in "Item 3 - Legal Proceedings", 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 from prior year's were suspended or closed down completely in the year ended December 31, 2000. The following actions were taken:

o In a continuing effort to reduce the Company's overhead and expenses and achieve profitability, PMCC Mortgage Corp. at its Board of Directors meeting on September 18, 2000 determined that on October 1, 2000, the Company would permanently close its office in Roslyn Heights, NY. PMCC Mortgage Corp. and PMCC Financial Corp. have relocated their corporate offices to the location of the existing branch office and former corporate office at 1767 Morris Avenue, Union, NJ 07083. In conjunction with this closing, the Company has negotiated with its landlord at 3 Expressway Plaza to terminate the remaining 4.5 years of its lease at that location. Certain post-closing and administrative functions were absorbed by the existing personnel in the Company's New Jersey and Florida locations. Remaining New York staff was relocated to a 1,000 square foot office in Rockville Centre, NY. The cost for terminating employees and the lease in Roslyn is approximately $875,000. After all reductions noted herein, it is anticipated that the Company will experience annualized cost savings of approximately $1.5 million. The Company's Roslyn retail office and administrative offices had previously been reduced in January 2000 from 86 employees to 45 and again in June 2000 to 17.

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.

o staffing at the Company's New Jersey and remaining Florida wholesale locations was reduced from 61 employees to 38 in January 2000 and to 36 in December 2000. The Florida locations have moved to more cost-efficient office locations. In 2001, the New Jersey wholesale operation was absorbed into the Florida wholesale operation.

o the Company's web-site was 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.

o the Company halted the acquisition of residential rehabilitation properties and began an initiative to sell the completed properties on hand as quickly as practicable.

At the same time the above actions were taken, PMCC's business strategy is to stabilize and strengthen its remaining areas of business. The Company added new account executives in its Florida wholesale office. More than 90% of mortgage loan applications taken by the Company in the 4th quarter of 2000 were as a result of its wholesale operations. Although the Company does not expect to reopen its own web site in the near future, it has made application to be listed on "lendingtree.com" to provide additional leads to potential borrowers. Additional loan officers have been hired in 2001 in the retail and wholesale areas to increase the Company's volume of loan applications and to take advantage of current low interest rates.

It is anticipated that the Company will incur only small losses in the first quarter of 2001 primarily as the Company sees the full results of its cost cutting initiatives. PMCC currently estimates that it must achieve a minimum of approximately $16 million per month in new mortgage originations beginning in the second quarter of 2001 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.

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; and

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.

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).

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, 2000.

                                               Years Ended December 31,
                                                   ($ in thousands)
                                -------------------------------------------------------
                                 1996        1997        1998        1999        2000
                                 ----        ----        ----        ----        ----

Conventional Loans:
  Volume ...................   $ 75,400    $177,825    $359,143    $379,462    $191,312
  Percentage of total volume        57%         57%         62%         68%         92%
FHA/VA Loans:
  Volume ...................   $ 57,700    $ 75,060    $146,628    $167,153    $ 15,788
  Percentage of total volume        43%         24%         25%         30%          8%
Sub-Prime Loans
  Volume ...................          *    $ 61,675    $ 76,645    $ 14,083    $   --
  Percentage of total volume          *         19%         13%          2%          0%
Total Loans:
  Volume ...................   $133,100    $314,560    $582,416    $560,698    $207,100
  Number of Loans ..........        890       2,160       3,793       3,662       1,437
  Average Loan Size ........   $    150    $    146    $    154    $    153    $    144

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.

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 Florida, New York and New Jersey. 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.

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 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.

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 discussed above, during 2000, the Company 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. 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 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 $11.9 million on December 31, 2000 and $8.4 million on April 4, 2001.

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 was secured by the mortgage loans and residential rehabilitation purchases funded with the proceeds of such borrowings. The Company had 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 Company anticipates paying down the entire facility no later than May 31, 2001. The balance outstanding on the Chase Line was $161,000 on December 31, 2000 and April 4, 2001. 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. Prior to the line expiring 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 RFC Line was paid in full in June 2000. Interest payable on the RFC Line was 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, in November 1999, 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 was secured by the mortgage loans and residential rehabilitation purchases funded with the proceeds of such borrowings. The Company had 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. The Bank United Line was paid in full in June 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 did not have an expiration date but was 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. As of March 21, 2000, all loans funded under the Gestation Agreement have been sold to the final investors.

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 was 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, 2000 was $155,000. These funds were used primarily for the cash expenditure in removing the underlying loans from the warehouse facilities and for general operating expenses. These lines of credit have been terminated and the outstanding balance is expected to be paid in full in 2001.

On June 8, 2000, the Company borrowed $275,000 from a company wholly owned by Robert Friedman. This loan is evidenced by a promissory note due and payable in one year. The interest rate on the note is 16% per annum payable monthly. The note is secured by properties and a mortgage, which the Company owns. Under the same note, the Company borrowed an additional $50,000 in July 2000. The Company repaid $80,000 in August 2000 and $175,000 in October 2000 when a portion of the underlying collateral was sold by the Company. The balance due on the note at December 31, 2000 is $70,000.

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 outsources these reviews to a third party with expertise in performing such reviews. They examine 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 reviewer "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.

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.

Regulation

The Company's business is subject to extensive and complex rules and regulations of, and examinations by, various federal, state and local government authorities. These rules and regulations impose obligations and restrictions on the Company's loan originations and credit activities. In addition, these rules limit the interest rates, finance charges and other fees the Company may assess, mandate extensive disclosure to the Company's customers, prohibit discrimination and impose qualification and licensing obligations on the Company. The Company's loan origination activities are subject to the laws and regulations in each of the states in which those activities are conducted. The Company's lending activities are also subject to various federal laws, including the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, the Homeownership and Equity Protection Act of 1994, the Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, the Fair Credit Reporting Act of 1970, the Real Estate Settlement Procedures Act of 1974 and Regulation X promulgated thereunder, the Fair Housing Act, the Home Mortgage Disclosure Act and Regulation C promulgated thereunder and the Federal Debt Collection Practices Act, as well as other federal and state statutes and regulations affecting the Company's activities.

These rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for mortgage loans, prohibit discrimination, provide for inspections and appraisals of properties, require credit reports on prospective borrowers, regulate payment features, mandate certain disclosures and notices to borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to comply with these requirements can lead to loss of approved status by the banking regulators of the various state governments where the Company operates, demands for indemnification or mortgage loan repurchases, certain rights of rescission for mortgage loans, class action lawsuits and administrative enforcement actions by federal and state governmental agencies. As discussed elsewhere in this report, on December 21, 1999 the Company's then President and a loan officer were charged with allowing false qualifications to be included in applications for FHA-backed mortgage loans in connection with the Investigation. See "- Recent Developments" and "Item 3 - Legal Proceedings."

As described above, in connection with the Investigation, the Company has implemented additional quality control procedures to safeguard against similar occurrences in the future. Although the Company believes that it has systems and procedures to insure compliance with these requirements and believes that it is currently in compliance in all material respects with applicable federal, state and local laws, rules and regulations, there can be no assurance of full compliance with current laws, rules and regulations or that more restrictive laws, rules and regulations will not be adopted in the future that could make compliance substantially more difficult or expensive. In the event that the Company is unable to comply with such laws or regulations, its business, prospects, financial condition and results of operations may be materially adversely affected.

Members of Congress, government officials and political candidates have from time to time suggested the elimination of the mortgage interest deduction for federal income tax purposes, either entirely or in part, based on borrower income, type of loan or principal amount. Because many of the Company's loans are made to borrowers for the purpose of consolidating consumer debt or financing other consumer needs, the competitive advantage of tax deductible interest, when compared with alternative sources of financing, could be eliminated or seriously impaired by such government action. Accordingly, the reduction or elimination of these tax benefits could have a material adverse effect on the demand for mortgage loans of the kind offered by the Company.

Seasonality

The mortgage banking industry is generally subject to seasonal trends. These trends reflect the general pattern of resales of homes, which sales typically peak during the spring and summer seasons and decline from January through March. Refinancings tend to be less seasonal and more closely related to changes in interest rates.

Environmental Matters

In the course of its business, the Company takes title (for security purposes) to residential properties intended for near term rehabilitation and resale. Additionally, the Company may foreclose on properties securing its mortgage loans. To date the Company has not been required to perform any investigation or remediation activities, nor has it been subject to any environmental claims relating to these activities. There can be no assurance, however, that this will remain the case in the future. Although the Company believes that the risk of an environmental claim arising from its ownership of a residential property (whether through residential rehabilitation financing or through foreclosure) is immaterial, the Company could be required to investigate and clean up hazardous or toxic substances or chemical releases at a property, and may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and clean up costs incurred by such parties in connection with the contamination, which costs may be substantial. In addition, the Company, as the owner or former owner of a contaminated site, may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from such property.

Employees

As of April 4, 2001, the Company has 43 employees, combined at all locations, substantially all of whom are employed full-time. None of the Company's employees are represented by a union. The Company considers its relations with its employees to be satisfactory.