As Filed with the Securities and Exchange Commission on May 21, 1998
Registration No. 333-39447
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PERFORMANCE ASSET MANAGEMENT COMPANY
(Exact name of registrant as specified in its charter)
Delaware 33-0755516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 Newport Place
Suite 400
Newport Beach, California 92660
(714) 566-3400
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
Vincent E. Galewick, President
Performance Asset Management Company
4100 Newport Place
Suite 400
Newport Beach, California 92660
(714) 566-3400
(Name, address, including ZIP Code, and telephone number, including area code,
of agent for service)
Copies to: Soliciting Agent:
Thomas E. Stepp, Jr., Esq. Income Network Company
White and Stepp LLP 4100 Newport Place
4100 Newport Place Suite 400
Suite 800 Newport Beach, California 92660
Newport Beach, California 92660 (714) 566-3400
(714) 660-9700
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of each class Amount maximum maximum
of securities to be offering price aggregate Amount of
to be registered Registered(1) per share(2) offering price(2) registration fee
- ------------------------ ------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Common Stock............ 7,511,500 $10.00 $75,115,000 $22,762.12
======================== ============= ============== ================= =================
</TABLE>
(1) Represents the maximum number of shares to be issued in exchange for the
assets of the Partnerships and shares of PCM pursuant to the Merger
Agreement.
(2) The filing fee has been computed based on the $10.00 per share exchange
value of the shares of common stock of Performance Asset Management Company
to be issued pursuant to the Merger Agreement.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8 (a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
<TABLE>
<CAPTION>
Form S-4 Registration Statement item and Heading Location in Prospectus
------------------------------------------------ ----------------------
<S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus .................................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus ................... Table of Contents; Available
Information; Incorporation of Certain
Documents by Reference
3. Risk Factors, Ratio of Earnings to Fixed Charges,
and Other Information ..................................................... Summary; Risk Factors; Selected
Historical and Pro Forma Financial Data
and Comparative Per Share Date; The
Merger; Dissolutions and Liquidations of
the Partnerships; Management's
Discussion and Analysis of Financial
Condition and Results of Operations; Pro
Forma Condensed Financial Information
4. Terms of the Transaction .................................................. Summary; The Merger; Dissolutions and
Liquidations of the Partnerships;
Determination of the Exchange Value;
Allocation of the Shares; Voting
Procedures; Summary Comparison of Units
and Common Shares; Rights of Dissenting
Shareholders and Dissenting Limited
Partners; Merger Agreement.
5. Pro Forma Financial Information ........................................... Summary; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Pro Forma
Condensed Financial Information.
6. Material Contacts with the Company Being Acquired ......................... Summary; The Merger; Dissolutions and
Liquidations of the Partnerships;
Principal Shareholders and Limited
Partners; Management; Certain
Relationships and Related Transactions.
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters ............................. Not Applicable
8. Interests of Named Experts and Counsel .................................... Experts; Legal Matters
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities ............................................ Limitation on Liability of Officers and
Directors of the Company
(B. Information About the Registrant)
10. Information with Respect to S-3 Registrants ............................... Not Applicable
11. Incorporation of Certain Information by Reference ......................... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants ........................ Not Applicable
13. Incorporation of Certain Information by Reference ......................... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Form S-4 Registration Statement item and Heading Location in Prospectus
------------------------------------------------ ----------------------
<S> <C>
14. Information with Respect to Registrants Other than
S-2 or S-3 Registrants .................................................... Summary; Risk Factors; Incorporation of
Certain Documents by Reference;
Description of the Common Shares;
Summary Comparison of Units and Common
Shares; Federal Income Tax
Considerations; Principal Shareholders
and Limited Partners; Management
(C. Information about the Companies Being Acquired)
15. Information with Respect to S-3 Companies ................................. Not Applicable
16. Information with Respect to S-2 or S-3 Companies .......................... Not Applicable
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies ...................................................... Summary; Risk Factors; Incorporation of
Certain Documents by Reference; Voting
Procedures; Summary Comparison of
Existing Securities and Common Shares;
Rights of Dissenting Limited Partners;
Federal Income Tax Considerations; Other
Tax Consideration.
(D. Voting and Management Information)
18. Information if Proxies, Consents or Authorizations are
to be Solicited ........................................................... Front Cover Page; Incorporation of
Certain Documents by Reference; Summary;
The Merger; Dissolutions and
Liquidations of the Partnerships; Voting
Procedures; Summary Comparison of
Existing Securities and Common Shares;
Rights of Dissenting Limited Partners;
Management
19. Information if Consent or Authorizations are
not to be Solicited or in an Exchange Offer ............................... Certain Relationships and Related
Transactions
</TABLE>
<PAGE>
CAUTIONARY STATEMENT FOR FORWARD LOOKING STATEMENTS
THIS DOCUMENT SPECIFIES FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF THE
COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE HAPPENING
OF FUTURE EVENTS, ARE NOT BASED ON HISTORICAL FACT AND THE OCCURRANCE OF THE
EVENTS WHICH ARE THE SUBJECTS OF THOSE FORWARD-LOOKING STATEMENTS CAN NOT BE AND
ARE NOT GUARANTEED. FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY, SUCH AS "POSSIBLE", "MAY", "WILL", "EXPECT",
"SHOULD", "COULD","ESTIMATE", "ANTICIPATE", "PROBABLE", "CONTINUE", OR SIMILAR
TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE "RISK
FACTORS" SET FORTH IN THIS DOCUMENT CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THIS DOCUMENT HAVE BEEN COMPILED BY MANAGEMENT OF THE COMPANY ON
THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BE
REASONABLE. FUTURE OPERATING RESULTS OF THE COMPANY, HOWEVER, ARE IMPOSSIBLE TO
PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY IS TO BE INFERRED FROM
THOSE FORWARD-LOOKING STATEMENTS.
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THIS DOCUMENT REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT
TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND
OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA
AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM
AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE
EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY
FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED
ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS.
IN ADDITION, THOSE FORWARD-LOOKING STATEMENTS HAVE BEEN COMPILED AS OF THE
DATE OF THIS DOCUMENT AND SHOULD BE EVALUATED WITH CONSIDERATION OF ANY CHANGES
OCCURRING AFTER THE DATE OF THIS DOCUMENT. NO ASSURANCE CAN BE GIVEN THAT ANY OF
THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THIS
DOCUMENT ARE ACCURATE OR THAT THEY WILL PROVE TO BE APPLICABLE TO A PARTICULAR
LIMITED PARTNER. IT IS THE RESPONSIBILITY OF THE LIMITED PARTNERS TO REVIEW
THOSE FORWARD-LOOKING STATEMENTS TO CONSIDER THE ASSUMPTIONS ON WHICH THOSE
FORWARD-LOOKING STATEMENTS ARE BASED AND TO ASCERTAIN THEIR REASONABLENESS.
<PAGE>
SUBJECT TO COMPLETION MARCH ____, 1998
PRELIMINARY COPY
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PERFORMANCE DEVELOPMENT, INC.
4100 NEWPORT PLACE
SUITE 400
NEWPORT BEACH, CALIFORNIA 92660
Dear Limited Partner:
I am pleased to announce that the Board of Directors of Performance
Development, Inc., a California corporation, as General Partner ("General
Partner") of your limited partnership ("Partnership"), has approved a proposal
for and on behalf of the Partnership to merge the Partnership with Performance
Asset Management Company, a Delaware corporation ("Company"); Performance
Capital Management, Inc., a California corporation ("PCM"); and other related
proposed transactions whereby the Company shall acquire, by merger, all of the
assets of PCM, the assets of the Partnership, and the assets of other affiliated
California limited partnerships ("Affiliated Partnerships"). For convenience,
the Partnership and the Affiliated Partnerships shall be referred to herein as
the "Partnerships". The proposed merger transaction contemplates that each of
the Partnerships shall receive shares of $.001 par value common stock of the
Company in exchange for the assets of the Partnerships. Additionally, by
amending the provisions of the Agreements of Limited Partnership for the
Partnerships, the Partnerships shall be wound up and dissolved and the shares of
$.001 par value common stock of the Company received by the Partnerships in
exchange for their assets shall be distributed to the General Partner and the
limited partners of the Partnerships ("Limited Partners"). The Partnerships are:
Performance Asset Management Fund, Ltd.,
A California Limited Partnership;
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership;
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership;
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership; and
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership.
The Merger Proposal will not be approved unless at least 75% of the Units
of each Partnership vote to approve the Merger Proposal. If the Merger is
consummated, the Partnerships shall cease to exist by operation of law upon
completion of their winding up and dissolution, and an appropriate application
shall be submitted to the National Association of Securities Dealers, Inc.
("NASD") for listing on the appropriate NASDAQ exchange or participation in the
Over-The-Counter Electronic Bulletin Board ("OTC") for those shares of $.001 par
value common stock of the Company; provided, however, that any such application
is subject to the approval of the NASD and there can be no assurance that those
shares shall be so listed or that the Company will participate in the OTC.
In accordance with the Agreements of Limited Partnership of the
Partnerships, the General Partner hereby calls for a vote, without a meeting, of
the Limited Partners, and requests you, as a Limited Partner, to consider and
vote upon a number of interrelated proposals that would permit the ultimate
conversion of interests in the Partnerships to corporate form by the merger of
the Partnerships with and into the Company. I believe that this conversion to
corporate form, as contemplated by the Merger Proposal, is fair, from a
financial point of view, to the Partnerships, and may be advantageous to
individual Limited Partners.
These proposals represent the culmination of a great deal of thought and
effort during a period of many months by the General Partner, the shareholders
of PCM and the Company. The Board of Directors of the Company and the
shareholders of PCM have unanimously approved each of these proposals. The Board
of Directors of the General Partner has unanimously approved each of these
proposals, subject to approval by the Limited Partners, and has concluded that
these proposals provide a number of significant advantages that should enhance
the value of the investments by the Limited Partners in the future. The Merger
would provide Limited Partners with the opportunity to participate in the growth
of PCM, while also increasing the liquidity of their investments. Additional
potential benefits of the Merger include the possibility of greater access to
capital markets; greater flexibility regarding capital resources; the ability to
provide employees with incentive performance compensation through a stock option
plan; the opportunity to offer greater employee ownership; more simplified
record keeping, accounting and tax reporting; and to permit the Merger Stock
eventually to be eligible to be approved for quotation on a regional or national
market quotation system, as discussed above.
<PAGE>
Limited Partners should also consider the potential disadvantages of the
Merger Proposal, particularly the significant reduction in distributions which
Limited Partners will receive if the Merger Proposal is approved. The Company
does not intend to pay cash dividends. Moreover, the Merger Stock may trade at a
price substantially below the value assigned to it in the Merger Proposal.
Limited Partners should also consider the potential price volatility of common
stock, the possible dilution of their common stock, and the possible adverse tax
consequences of the Merger to individual Limited Partners. Finally, Limited
Partners currently have the ability to replace the General Partner by a majority
vote. In the event the Merger is consummated, I will hold a majority interest in
the Company and will have significant influence over its operations.
The Joint Consent Statement/Prospectus that is being provided to you
explains each element of these proposals in detail and attempts to answer many
of the questions you may have regarding these proposals. I urge you to read this
material carefully. In order to answer any questions you might have regarding
the Merger Proposal, or to provide you with any additional documentation you
might wish to review relevant to the Merger Proposal, the General Partner has
designated Bud Webb as the contact person and information agent for you
regarding the Merger Proposal ("Information Agent"). You should not hesitate to
call the Information Agent at (888) 754-4145 with any questions you have about
these proposals.
I encourage you to complete and return the enclosed Letter of Transmittal
and Consent Statement in the enclosed envelope as soon as possible. The consent
forms must be returned no later than 5:00 P.M., Pacific Time, on
_______________, 1998. Thank you for your patience and cooperation during the
consent solicitation period.
Sincerely,
PERFORMANCE DEVELOPMENT, INC.,
a California corporation
Vincent E. Galewick,
Chairman of the Board of Directors
<PAGE>
NOTICE OF CALL FOR VOTE WITHOUT MEETING
TO: The limited partners ("Limited Partners") of the following California
limited partnerships ("Partnerships"):
PERFORMANCE ASSET MANAGEMENT FUND, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND II, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND IV, LTD.,
A California Limited Partnership; and
PERFORMANCE ASSET MANAGEMENT FUND V, LTD.,
A California Limited Partnership.
NOTICE IS HEREBY GIVEN that the Limited Partners are hereby called upon to
provide their written consents, without a meeting, pursuant to the Agreements of
Limited Partnership of the Partnerships ("Partnership Agreements") and in
accordance with terms and provisions of the enclosed Joint Consent
Statement/Prospectus, to (a) approve and adopt the Merger Proposal (defined
hereinafter); and (b) to approve and adopt certain amendments to the Partnership
Agreements.
The Merger Proposal shall mean and be defined as a transaction that
contemplates (i) that the assets of the Partnerships and (ii) the shares of no
par common stock currently issued and outstanding and, ultimately, the assets of
Performance Capital Management, Inc., a California corporation ("PCM"), will be
acquired, by merger, by Performance Asset Management Company, a Delaware
corporation ("Company"), in consideration for the issuance to the Partnerships
and the shareholders of PCM of certain shares of the Company's $.001 par value
common stock. Additionally, the Merger Proposal contemplates that the
Partnership Agreements shall be amended so that the Partnerships, after they
receive those shares of the Company's $.001 par value common stock, shall be
wound up and dissolved and those shares of that common stock shall be
distributed to the General Partner and the Limited Partners.
Approval of the Merger Proposal requires consent by Limited Partners
holding 75% of the units in the Partnerships. If the Merger Proposal is
approved, the Partnerships will be wound up and dissolved. Limited Partners will
receive from the Partnerships, upon dissolution, shares of the Company's $.001
common stock, unless they exercise dissenters' rights to receive an unsecured
subordinated debenture issued pursuant to an indenture agreement.
If you vote to approve the Merger Proposal, you are voting to (a) transfer
the assets of the Partnerships to the Company, on terms and conditions specified
in the Merger Agreement and Plan of Reorganization, in exchange for the issuance
by the Company to the Partnerships of shares of $.001 par value common stock;
(b) to merge the Partnerships with PCM into the Company, as a result of which
the Company would be the surviving corporation; and (c) for the termination,
winding up and dissolution of the Partnerships by operation of law and, as
liquidating distributions, the distribution by the Partnerships to the Limited
Partners and General Partner of those shares of the Company's $.001 par value
common stock.
If you vote to approve those amendments to the Partnership Agreements, you
are voting (a) to eliminate restrictions on the transfer and conveyance of all
the assets and liabilities of the Partnerships to the Company in exchange for
certain of the Company's shares of $.001 par value common stock; (b) to exchange
the Partnerships' assets and liabilities for those shares of the Company's
common stock; (c) to wind up and dissolve the Partnerships; and (d) to authorize
the General Partner to execute, acknowledge, verify, deliver, file and record
any and all documents necessary to effect the Merger Proposal.
The Limited Partners of record at the close of business on June 30, 1997,
are entitled to notice of and to vote on the above matters in accordance with
the terms and provisions of the Joint Consent Statement/Prospectus.
By order of the Board of Directors
of the General Partner
PERFORMANCE DEVELOPMENT, INC.,
a California corporation
Vincent E. Galewick, President
<PAGE>
IMPORTANT
THE CONSENT SOLICITATION PERIOD WILL CLOSE AT 5:00 P.M., PACIFIC TIME, ON
______________, 1998. THE VOTES WILL THEN BE TABULATED ON THAT DATE. PLEASE
MARK, SIGN, DATE AND RETURN THE ENCLOSED LETTER OF TRANSMITTAL AND CONSENT
STATEMENT IN THE ENCLOSED SELF-ADDRESSED ENVELOPE ON OR BEFORE 5:00 P.M. ON
______________, 1998. TO ASSURE THAT YOUR UNITS ARE REPRESENTED IN THE VOTE, YOU
ARE URGED TO RETURN THE COMPLETED LETTER OF TRANSMITTAL AND CONSENT STATEMENT
PROMPTLY. YOU MAY WITHDRAW OR CHANGE YOUR CONSENT ONLY IN A WRITING, WHICH MUST
BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE CLOSE OF THE SOLICITATION PERIOD
SET FORTH ABOVE.
INFORMATION SPECIFIED IN THIS DOCUMENT IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM S-4 RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO PURCHASE THESE SECURITIES BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT ON FORM S-4 BECOMES EFFECTIVE. THE JOINT CONSENT
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL SECURITIES OR THE
SOLICITATION OF AN OFFER TO PURCHASE SECURITIES NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION _______________, 1998
PRELIMINARY COPY
- ----------------
PERFORMANCE ASSET MANAGEMENT COMPANY
4100 Newport Place
Suite 400
Newport Beach, California 92660
________________ , 1998
Dear Shareholder:
We are pleased to announce that the Board of Directors of Performance Asset
Management Company, a Delaware corporation ("Company"), has approved a proposal
to merge with Performance Capital Management, Inc., a California corporation
("PCM"), and certain California limited partnerships ("Partnerships"), and has
also approved other related proposed transactions whereby the Company would
acquire all of the issued and outstanding common stock of PCM and all of the
assets of the Partnerships and issue to the shareholders of PCM and to the
Partnerships shares of the Company's $.001 par value common stock in exchange
for that stock and those assets, respectively. After the issuance by the Company
of its $.001 par value common stock to the Partnerships in exchange for their
assets, the Partnerships shall be wound up and dissolved and those shares of the
Company's common stock shall be distributed by the Partnerships to Performance
Development, Inc., a California corporation and the General Partner of the
Partnerships ("General Partner"), and the limited partners ("Limited Partners")
in exchange for their interests in the Partnerships. Similarly, PCM would be
wound up and dissolved. The Partnerships are:
PERFORMANCE ASSET MANAGEMENT FUND, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND II, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND IV, LTD.,
A California Limited Partnership; and
PERFORMANCE ASSET MANAGEMENT FUND V, LTD.,
A California Limited Partnership.
PCM and the Partnerships would cease to exist by operation of law upon
completion of the proposed merger. The shares of $.001 par value common stock of
the Company would then be registered pursuant to appropriate filings with the
Securities and Exchange Commission. Additionally, the Company intends to file
with the National Association of Securities Dealers, Inc. ("NASD") the
appropriate application to cause the shares of the Company's common stock to be
listed on the appropriate NASDAQ exchange or, alternatively, enable the Company
to participate in the Over-The-Counter Bulletin Board Electronic Quotation
Service ("OTC"); provided, however, that any such application is subject to the
approval of the NASD and there can be no assurance that those shares shall be so
listed or that the Company will participate in the OTC.
In accordance with Section 228 of the Delaware General Corporation Law, the
Board of Directors of the Company hereby solicits the written consents of the
shareholders of the Company without a meeting to approve a number of
interrelated proposals that would permit the acquisition by the Company of the
issued and outstanding common stock of PCM and the assets of the Partnerships
and the merger of the Partnerships and PCM with and into the Company. We believe
that the Merger Proposal is desirable so as to increase the value of and provide
liquidity for your investments in the Company.
These proposals represent the culmination of a great deal of thought and
effort over a period of many months by (i) the General Partner, (ii) PCM and
(iii) the Company. The Boards of Directors of PCM and the Company have both
unanimously approved each of these proposals. The Board of Directors of the
General Partner has unanimously approved each of these proposals, subject to
approval by the Limited Partners, and has concluded that these proposals provide
a number of significant advantages that should serve to enhance the value of the
investments by the shareholders of PCM, the shareholders of the Company, and the
Limited Partners during the coming years.
The Joint Consent Statement/Prospectus that is being provided to you
explains each element of the proposals in detail and attempts to answer many of
the questions you may have regarding those proposals. We urge each of you to
read this material carefully. The Company has designated Bud Webb as a contact
person for all of the shareholders of the Company regarding the Merger Proposal
("Information Agent"). Please call the Information Agent at (888) 754-4145 with
any questions you have about the proposals.
<PAGE>
We encourage each of you to complete and return the enclosed Letter of
Transmittal and Consent Statement in the enclosed envelope as soon as possible.
The consent forms must be returned to U.S. Stock Transfer Corporation, 1745
Gardena Avenue, Suite 200, Glendale, California 91204, the Exchange Agent, no
later than 5:00 P.M., Pacific Time, on __________, 1998. Thank you for your
patience and cooperation during the consent solicitation period.
Sincerely,
PERFORMANCE ASSET MANAGEMENT COMPANY,
a Delaware corporation
Vincent E. Galewick,
Chairman of the Board of Directors
<PAGE>
SOLICITATION OF WRITTEN CONSENTS WITHOUT MEETING
TO: The shareholders of Performance Asset Management Company:
NOTICE IS HEREBY GIVEN that the shareholders ("Shareholders") of
Performance Asset Management Company, a Delaware corporation ("Company"), are
hereby solicited to provide their written consents without a meeting regarding
the following matters pursuant to the provisions of Section 228 of the Delaware
General Corporation Law in accordance with the terms and provisions of the
enclosed Joint Consent Statement/Prospectus to approve and adopt the Merger
Proposal (defined hereinafter).
The Merger Proposal shall mean and be defined as a transaction that
contemplates that (a) the assets of (i) Performance Asset Management Fund, Ltd.,
A California Limited Partnership; (ii) Performance Asset Management Fund II,
Ltd., A California Limited Partnership; (iii) Performance Asset Management Fund
III, Ltd., A California Limited Partnership; (iv) Performance Asset Management
Fund IV, Ltd., A California Limited Partnership; (v) Performance Asset
Management Fund V, Ltd., A California Limited Partnership; ("Partnerships") and
(b) the issued and outstanding common stock of Performance Capital Management,
Inc., a California corporation ("PCM"), will be acquired, by merger, by
Performance Asset Management Company, a Delaware corporation ("Company"), in
consideration for the issuance to the Partnerships and the shareholders of PCM
of certain shares of the Company's $.001 par value common stock. Additionally,
the Merger Proposal contemplates that the Agreements of Limited Partnership for
the Partnerships shall be amended so that the Partnerships, after they receive
those shares of the Company's $.001 par value common stock, shall be wound up
and dissolved and those shares of that common stock shall be distributed to the
General Partner and the Limited Partners.
If you vote to approve the Merger Proposal, you are voting to (a) issue
shares of $.001 par value common stock to the Partnerships in exchange for the
transfer of the assets of the Partnerships to the Company, on terms and
conditions specified in the Merger Agreement and Plan of Reorganization; (b)
issue shares of $.001 par value common stock to the shareholders of PCM in
exchange for the transfer of the issued and outstanding stock of PCM to the
Company, on terms and conditions specified in the Merger Agreement and Plan of
Reorganization; and (c) merge the Partnerships and PCM with and into the Company
as a result of which the Company would be the surviving corporation.
The shareholders of record at the close of business on June 30, 1997, are
entitled to notice of, and to vote on, the above matters in accordance with the
terms and provisions of the Joint Consent Statement/Prospectus.
By order of the Board of Directors of the Company
PERFORMANCE ASSET MANAGEMENT COMPANY,
a Delaware corporation
Vincent E. Galewick, President
<PAGE>
IMPORTANT
THE CONSENT SOLICITATION PERIOD WILL CLOSE AT 5:00 P.M., PACIFIC TIME, ON
________________, 1998. THE VOTES WILL THEN BE TABULATED ON THAT DATE. PLEASE
MARK, SIGN, DATE AND RETURN THE ENCLOSED CONSENT STATEMENT IN THE ENCLOSED
SELF-ADDRESSED ENVELOPE ON OR BEFORE 5:00 P.M. ON ________________, 1998. TO
ASSURE THAT YOUR SHARES ARE REPRESENTED IN THE VOTE, YOU ARE URGED TO RETURN
PROMPTLY THE COMPLETED CONSENT STATEMENT. YOU MAY WITHDRAW OR CHANGE YOUR
CONSENT ONLY IN A WRITING, WHICH MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO
THE CLOSE OF THE SOLICITATION PERIOD SET FORTH ABOVE.
INFORMATION SPECIFIED IN THIS DOCUMENT IS SUBJECT TO COMPLETION OR
AMENDMENT. A REGISTRATION STATEMENT ON FORM S-4 RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO PURCHASE THESE SECURITIES BE ACCEPTED PRIOR TO THE
TIME THE REGISTRATION STATEMENT ON FORM S-4 BECOMES EFFECTIVE. THE JOINT CONSENT
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL SECURITIES OR THE
SOLICITATION OF AN OFFER TO PURCHASE SECURITIES NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION ________________, 1998
PRELIMINARY COPY
- ----------------
PERFORMANCE CAPITAL MANAGEMENT, INC.
4100 Newport Place
Suite 400
Newport Beach, California 92660
______________________, 1998
Dear Shareholder:
We are pleased to announce that the Board of Directors of Performance
Capital Management, Inc., a California corporation ("PCM"), has approved a
proposal to merge with certain California limited partnerships ("Partnerships")
into Performance Asset Management Company, a Delaware corporation ("Company"),
and has also approved other related proposed transactions whereby the Company
would acquire all of the issued and outstanding stock of PCM and the assets of
the Partnerships and issue to the shareholders of PCM and to the Partnerships
shares of the Company's $.001 par value common stock in exchange for that stock
and those assets, respectively. Additionally, after the issuance by the Company
of its $.001 par value common stock to the Partnerships in exchange for their
assets, the Partnerships shall be wound up and dissolved and those shares of the
Company's common stock shall be distributed by the Partnerships to Performance
Development, Inc., a California corporation and the General Partner of the
Partnerships ("General Partner"), and the limited partners of the Partnerships
("Limited Partners") in exchange for their interests in the Partnerships.
Similarly, PCM would be wound up and dissolved. The Partnerships are:
PERFORMANCE ASSET MANAGEMENT FUND, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND II, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND IV, LTD.,
A California Limited Partnership; and
PERFORMANCE ASSET MANAGEMENT FUND V, LTD.,
A California Limited Partnership.
PCM and the Partnerships would cease to exist by operation of law upon
completion of the proposed merger. Additionally, the shares of the Company's
$.001 par value common stock would then be registered pursuant to appropriate
filings with the Securities and Exchange Commission. Additionally, the Company
intends to file with the National Association of Securities Dealers, Inc.
("NASD") the appropriate application to cause the shares of the Company's common
stock to be listed on the appropriate NASDAQ exchange or, alternatively, enable
the Company to participate in the Over-The-Counter Bulletin Board Electronic
Quotation Service ("OTC"); provided, however, that any such application is
subject to the approval of the NASD and there can be no assurance that those
shares shall be so listed or that the Company will participate in the OTC.
In accordance with Section 603 of the California General Corporation Law,
PCM hereby solicits the written consents of its shareholders to approve a number
of interrelated proposals that would permit the acquisition by the Company of
the issued and outstanding common stock of PCM and the assets of the
Partnerships and the merger of PCM and the Partnerships with and into the
Company. We believe that the Merger Proposal is desirable so as to enhance the
liquidity of investments in the shares of PCM.
These proposals represent the culmination of a great deal of thought and
effort during a period of many months by (a) the General Partner; (b) PCM; and
(c) the Company. The Boards of Directors of PCM and of the Company have both
unanimously approved each of these proposals. The Board of Directors of the
General Partner has unanimously approved each of these proposals, subject to
approval by the Limited Partners. Those Boards of Directors have concluded that
these proposals provide a number of significant advantages that should serve to
enhance the value of the investments by the shareholders of PCM, the
shareholders of the Company, and the Limited Partners during the coming years.
The Joint Consent Statement/Prospectus that is being provided to you
explains each element of the proposals in detail and attempts to answer many of
the questions you may have regarding the proposals. We urge each of you
<PAGE>
to read this material carefully. PCM has designated Bud Webb as the Information
Agent for all PCM shareholders. Please call the Information Agent at (888)
754-4145 with any questions you have about these proposals.
We encourage each of you to complete and return the enclosed consent forms
in the enclosed envelope as soon as possible. The consent forms must be returned
to U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Suite 200, Glendale,
California 91204, the Exchange Agent, no later than 5:00 P.M., Pacific Time, on
____________, 1998. Thank you for your patience and cooperation during the
consent solicitation period.
Sincerely,
PERFORMANCE CAPITAL MANAGEMENT, INC.,
a California corporation
Vincent E. Galewick,
Chairman of the Board of Directors
<PAGE>
SOLICITATION OF WRITTEN CONSENTS WITHOUT MEETING
TO: The shareholders of Performance Capital Management, Inc.:
NOTICE IS HEREBY GIVEN that the shareholders ("Shareholders") of
Performance Capital Management, Inc., a California corporation ("PCM"), are
hereby solicited to provide their written consents approving the following
matters without a meeting pursuant to Section 603 of the California General
Corporation Law in accordance with the terms and provisions of the enclosed
Joint Consent Statement/Prospectus to approve and adopt the Merger Proposal
(defined hereinafter).
The Merger Proposal shall mean and be defined as a transaction that
contemplates that (a) the assets of (i) Performance Asset Management Fund, Ltd.,
A California Limited Partnership; (ii) Performance Asset Management Fund II,
Ltd., A California Limited Partnership; (iii) Performance Asset Management Fund
III, Ltd., A California Limited Partnership; (iv) Performance Asset Management
Fund IV, Ltd., A California Limited Partnership; (v) Performance Asset
Management Fund V, Ltd., A California Limited Partnership; ("Partnerships") and
(b) the issued and outstanding common stock of PCM, will be acquired, by merger,
by Performance Asset Management Company, a Delaware corporation ("Company"), in
consideration for the issuance to the Partnerships and the shareholders of PCM
of certain shares of the Company's $.001 par value common stock. Additionally,
the Merger Proposal contemplates that the Agreements of Limited Partnership for
the Partnerships shall be amended so that the Partnerships, after they receive
those shares of the Company's $.001 par value common stock, shall be wound up
and dissolved and those shares of that common stock shall be distributed to the
General Partner and the Limited Partners, and that PCM will also be wound up and
dissolved.
If you vote to approve the Merger Proposal, you are voting to (a) exchange
all issued and outstanding shares of PCM's common stock for certain shares of
the Company's $.001 par value common stock , on terms and conditions specified
in the Merger Agreement and Plan of Reorganization; and (b) merge the
Partnerships and PCM with and into the Company, as a result of which the Company
would be the surviving corporation.
The shareholders of record at the close of business on June 30, 1997, are
entitled to notice of, and to vote on, the above matters in accordance with the
terms and provisions of the Joint Consent Statement/Prospectus.
By order of the Board Of Directors of the Company
PERFORMANCE CAPITAL MANAGEMENT, INC.,
a California corporation
Vincent E. Galewick, President
<PAGE>
IMPORTANT
THE CONSENT SOLICITATION PERIOD WILL CLOSE AT 5:00 P.M., PACIFIC TIME, ON
______, 1998. THE VOTES WILL THEN BE TABULATED ON THAT DATE. PLEASE MARK, SIGN,
DATE AND RETURN THE ENCLOSED CONSENT STATEMENT IN THE ENCLOSED SELF-ADDRESSED
ENVELOPE ON OR BEFORE 5:00 P.M. ON __________ , 1998. TO ASSURE THAT YOUR SHARES
ARE REPRESENTED IN THE VOTE, YOU ARE URGED TO RETURN THE COMPLETED CONSENT
STATEMENT PROMPTLY. YOU MAY WITHDRAW OR CHANGE YOUR CONSENT ONLY IN A WRITING,
WHICH MAY BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE CLOSE OF THE
SOLICITATION PERIOD SET FORTH ABOVE.
INFORMATION SPECIFIED IN THIS DOCUMENT IS SUBJECT TO COMPLETION OR
AMENDMENT. A REGISTRATION STATEMENT ON FORM S-4 RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO PURCHASE THESE SECURITIES BE ACCEPTED PRIOR TO THE
TIME THE REGISTRATION STATEMENT ON FORM S-4 BECOMES EFFECTIVE. THE JOINT CONSENT
STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL SECURITIES OR THE
SOLICITATION OF AN OFFER TO PURCHASE SECURITIES NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THE JOINT CONSENT STATEMENT/ PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF
THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
SUBJECT TO COMPLETION, DATED _______________, 1998
PERFORMANCE ASSET MANAGEMENT COMPANY,
a Delaware Corporation;
PERFORMANCE CAPITAL MANAGEMENT, INC.,
a California Corporation;
PERFORMANCE ASSET MANAGEMENT FUND, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND II, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
A California Limited Partnership;
PERFORMANCE ASSET MANAGEMENT FUND IV, LTD.,
A California Limited Partnership; and
PERFORMANCE ASSET MANAGEMENT FUND V, LTD.,
A California Limited Partnership.
JOINT CONSENT STATEMENT/PROSPECTUS
7,511,500 Common Shares
$.001 Par Value
The maximum aggregate merger consideration is $75,115,000. Approximately
98.5% of the aggregate merger consideration will actually be available for
investment after the deduction of all fees, commissions, expenses and
compensation incurred in connection with this offering. Dissenting limited
partners are entitled to receive an unsecured subordinated debenture bearing
interest at a variable interest rate equal to the federal rate, as determined in
accordance with Section 1274 of the Internal Revenue Code of 1986, payable on
January 1 and July 1 of each year and based on a 365-day year, with the
principal balance due January 31, 2005.
Shareholders and limited partners should carefully consider the matters set
forth under the Caption "RISK FACTORS" beginning on Page 18. Significant risk
factors include:
o PCM and the Partnerships Have History of Losses
o Significant Reduction in Distributions
o Shares May Trade at a Price Substantially Below the Value Assigned in the
Merger Proposal
o Limited Public Market for Shares
o Potential Price Volatility of Shares
o Possible Dilution
o Uncertainty of Future Financial Results
o Dependence on Key Personnel
o Control by Principal Shareholder
o Possible Adverse Tax Consequences
o The Company may fail to become compliant with Year 2000 computer
programming issues
NEITHER THE MERGER PROPOSAL AND RELATED TRANSACTIONS NOR THESE SECURITIES
HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS JOINT CONSENT STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The primary purpose of the merger transaction is to provide limited
partners with the opportunity to participate in the growth of Performance
Capital Management, Inc., a California corporation, while also increasing the
liquidity of their investments. Additional purposes include the possibility of
greater access to capital markets; greater flexibility regarding capital
resources; the ability to provide employees with incentive performance
compensation by a stock option plan; the opportunity to offer greater employee
ownership; more simplified record keeping, accounting and tax reporting; and to
permit the common stock received by the limited partners in the merger
transaction to be eligible for listing on a regional or national exchange or
market quotation system. No prediction can be made, however, as to the price at
which that common stock will trade, or if it will trade at all, or if the
application for such listing will be approved.
<PAGE>
This Joint Consent Statement/Prospectus is the joint consent statement of
(a) Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM"); (b) Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II"); (c) Performance Asset Management Fund III, Ltd., A
California Limited Partnership ("PAM III"); (d) Performance Asset Management
Fund IV, Ltd., A California Limited Partnership ("PAM IV"); (e) Performance
Asset Management Fund V, Ltd., A California Limited Partnership ("PAM V") (those
limited partnerships specified in Items (a) through (e), inclusive, are the
"Partnerships"); (f) Performance Capital Management, Inc., a California
corporation ("PCM"); and (g) Performance Asset Management Company, a Delaware
corporation ("Company"). This Joint Consent Statement/Prospectus is being
furnished to the limited partners of the Partnerships ("Limited Partners") and
the shareholders of PCM ("PCM Shareholders") and the shareholders of the Company
("Company Shareholders"), in each case of record as of June 30, 1997
("Determination Date"), in connection with the solicitation on behalf of the
Board of Directors of the Company of the written consents of the Limited
Partners and the PCM Shareholders and the Company Shareholders (obtained without
meetings) to consider and approve a proposed merger of PCM and the Partnerships
with and into the Company ("Merger Proposal") pursuant to the Merger Agreement
and Plan of Reorganization dated as of October 31, 1997, between the
Partnerships, the Company, and the PCM Shareholders ("Merger Agreement"), and to
consider such other matters as may be set forth in this Joint Consent
Statement/Prospectus.
A vote in favor of the Merger Proposal would have the effect of a vote in
favor of a series of interrelated changes to the current organizational forms of
PCM, the Partnerships and the Company, including (a) merging PCM and the
Partnerships with and into the Company, as a result of which the Company would
be the surviving corporation; (b) terminating PCM's legal existence and the
Partnerships' legal existences by operation of law, and (c) exchanging each PCM
Shareholder's interest in PCM and the General Partner's interest and each
Limited Partner's interest in each Partnership for an appropriate number of
shares of $.001 par value common stock of the Company ("Merger Stock").
The Board of Directors of the Company recommends that each Company
Shareholder consent to the Merger Proposal. The Board of Directors of PCM
recommends that each PCM Shareholder consent to the Merger Proposal. The Board
of Directors of the General Partner recommends that each Limited Partner consent
to the Merger Proposal.
This Joint Consent Statement/Prospectus and the accompanying material and
consent forms will first be mailed to the PCM Shareholders, the Company
Shareholders and Limited Partners on or about _____________. Section 15510 of
the California Corporations Code provides the Limited Partners with the same
rights as the General Partner to inspect and copy all Partnership books and
records, including the Partnerships' lists of their Limited Partners.
----------
THE ABOVE MATTERS ARE SPECIFIED IN DETAIL IN THIS JOINT CONSENT
STATEMENT/PROSPECTUS. THE MERGER PROPOSAL AND RELATED TRANSACTIONS ARE COMPLEX.
THE PCM SHAREHOLDERS, THE COMPANY SHAREHOLDERS AND LIMITED PARTNERS ARE STRONGLY
URGED TO READ AND CONSIDER CAREFULLY THIS JOINT CONSENT STATEMENT/PROSPECTUS IN
ITS ENTIRETY, PARTICULARLY THE MATTERS SPECIFIED IN THAT PORTION OF THIS JOINT
CONSENT STATEMENT/PROSPECTUS ENTITLED "RISK FACTORS."
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., PACIFIC TIME, ON _________,
1998, UNLESS EXTENDED.
----------
THE TRANSACTION DESCRIBED IN THIS JOINT CONSENT STATEMENT/PROSPECTUS WILL BE
SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED ("SECURITIES ACT").
----------
NO PERSON HAS BEEN AUTHORIZED TO FURNISH ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED OR INCORPORATED IN THIS JOINT CONSENT
STATEMENT/PROSPECTUS IN CONNECTION WITH THE MATTERS REFERRED TO HEREIN AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN SO AUTHORIZED BY THE COMPANY, PCM, THE GENERAL PARTNER OR THE
PARTNERSHIPS. THE DELIVERY OF THIS JOINT CONSENT STATEMENT/PROSPECTUS SHALL NOT,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS JOINT CONSENT
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS JOINT CONSENT
STATEMENT/PROSPECTUS OR THE SOLICITATION OF A CONSENT STATEMENT IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER,
SOLICITATION OF SUCH AN OFFER, OR SUCH A CONSENT SOLICITATION.
THE DATE OF THIS JOINT CONSENT STATEMENT/PROSPECTUS IS _______________,
1998.
This Joint Consent Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to purchase any securities other than the
shares of the Merger Stock, nor does it constitute an offer to sell or a
solicitation of an offer to purchase any of the Merger Stock to any person in
any jurisdiction in which it is unlawful to make such an offer or solicitation.
Neither the delivery of this Joint Consent Statement/Prospectus nor any sale
made hereunder shall under any circumstances imply that the information
contained herein is correct as of any time subsequent to the date hereof.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the State of California Department of
Corporations ("Department") an Application for Qualification of Securities
("Application") under the California Corporate Securities Law of 1968, as
amended, with respect to the Merger Stock. This Joint Consent
Statement/Prospectus does not contain all the information set forth in the
Application. Copies of the exhibits and schedules attached to the Application
may be examined at the Department, 3700 Wilshire Boulevard, Los Angeles,
California. The Company has also filed with the securities commissioners and
administrators of the various other states in which the Limited Partners reside
applications to register or qualify the Merger Stock in those states. This Joint
Consent Statement/Prospectus does not contain all of the information set forth
in those applications. Copies of the exhibits and schedules attached to those
applications may be examined at the offices of those securities commissioners
and administrators.
The Company will be required to file reports and other information with the
Securities and Exchange Commission ("Commission") pursuant to the Securities
Exchange Act of 1934, as amended ("Exchange Act"). Shareholders of the Company
will receive annual reports containing audited financial statements with a
report thereon by the Company's independent certified public accountants and
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 ("Registration
Statement") under the Securities Act of 1933 ("Securities Act") with the
Commission relating to the Merger Stock. As permitted by the rules and
regulations of the Commission, this Joint Consent Statement/Prospectus omits
certain information, exhibits and undertakings contained in the Registration
Statement. For further information pertaining to the Merger Stock reference is
made to the Registration Statement, including the exhibits filed as part
thereof. PAM III and PAM IV are subject to the reporting requirements of the
Exchange Act and, in accordance therewith, file reports and other information
with the Commission. These reports can be inspected and copies at the public
reference facilities maintained by the Commission in Washington, D.C., and
copies of all documents filed by PAM III and PAM IV with the Commission can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission's website also
contains information regarding PAM III and PAM IV. The address of that website
is http://www.sec.gov.
A separate supplement has been prepared for each Partnership and shall be
delivered with this Joint Consent Statement/Prospectus to the Limited Partners.
Each supplement contains a brief description of each material risk and effect of
the Merger Proposal, a description of the method used to calculate the value of
the Partnerships and allocate interests in the Company pursuant to the Merger
Proposal, and other appropriate financial information. Any Limited Partner may
obtain a copy of any supplement, including supplements for Partnerships in which
he or she is not a limited partner, at no charge, by written request to the
Information Agent. The Information Agent is Bud Webb and his telephone number is
(888) 754-4145.
This Joint Consent Statement/Prospectus incorporates documents by reference
which are not presented herein or delivered herewith. The documents incorporated
by reference in this Joint Consent Statement/Prospectus are:
1. The Soliciting Agent Agreement which will be entered into by and between
the Company and Income Network Company, an affiliate of the General
Partner, PCM and the Company, pursuant to which Income Network Company
serves as the Soliciting Agent in connection with the Merger Proposal.
2. Certificate of Incorporation for the Company and an amendment thereto.
3. Articles of Incorporation for PCM and an amendment thereto.
4. Bylaws of the Company.
5. Certificate of Designations, Preferences, and Relative Rights,
Qualifications and Restrictions of the Series A Convertible Preferred Stock
of the Company.
6. Form of Legal Opinion regarding legality.
7. Legal Opinion regarding tax matters.
8. Agreements for Indemnification between PCM and certain of its officers.
9. Agreements for Indemnification between Performance Development, Inc., the
General Partner of the Partnerships, and certain of its officers and
directors.
10. Joint Venture Agreements between PCM, on the one hand, and the
Partnerships, on the other hand.
11. Indemnification Agreements between the Company and its officers and
directors.
12. A statement regarding computation of per share earnings.
2
<PAGE>
13. A statement regarding computation of ratios.
14. A letter regarding unaudited financial information.
15. Independent auditor's consent.
16. Consent of fairness expert.
17. Power of Attorney.
18. Statement of eligibility of Trustee.
19. Financial Data Schedule.
20. Agreements of Limited Partnership of the Partnerships.
21. Certificates of Limited Partnership for the Partnerships.
Copies of these documents are available upon request from the Information Agent
at 4100 Newport Place, Suite 400, Newport Beach, California 92660. In order to
ensure timely delivery of the documents, any request should be made by
___________, 1998.
3
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY.......................................................................6
The Parties.................................................................8
The Merger.................................................................10
Fairness Opinion...........................................................12
The Company................................................................13
Nominally Foreign Corporations.............................................16
Certain Advantages of the Merger Proposal
and Related Transactions...................................16
Certain Disadvantages of the Merger Proposal
and Related Transactions...................................17
RECOMMENDATIONS ............................................................18
RISK FACTORS.................................................................18
History of Losses..........................................................19
No Operating History ......................................................19
Year 2000 Computer Compliance..............................................19
Significant Reduction in Distributions.....................................19
Significant Growth.........................................................20
Change in Nature of Investment.............................................20
Change in Voting Rights....................................................20
Change in Duties Owed by
General Partner............................................20
Changes in Compensation Arrangements.......................................20
Future Portfolio Acquisitions..............................................20
Integration of Acquired Operations.........................................21
Taxation...................................................................21
Uncertainty Regarding Trading and Market
Price of Common Shares.....................................21
Limited Public Market......................................................21
Potential Price Volatility.................................................21
Possible Dilution..........................................................21
Shares Eligible for Future Sale............................................22
Control by Principal Shareholder;
Anti-Takeover Measures.....................................22
Addition of Provisions That May Discourage
Changes of Control.........................................22
Conflicts of Interest......................................................22
No Arm's Length Agreements.................................................23
Common Relationships.......................................................23
Nature of Distressed-debt
Acquired by Company........................................23
Company May Acquire
Unspecified Assets.........................................23
Speculative Investment.....................................................23
Dependence on Management...................................................24
Dependence on Key Personnel................................................24
Dependence on Independent Contractors
and Consultants............................................24
Dependence on Labor Force..................................................24
Government Regulation......................................................24
Compliance with and Approval from
Federal and State Authorities..............................24
Additional Financing May Be Required.......................................24
Uncertainty of Future Financial Results,
Fluctuations in Operating Results..........................24
Limited Resources of the Company...........................................24
Substantial Competition....................................................24
Limitation on Liability of Officers and
Directors of the Company...................................25
DISCLOSURE OF COMMISSION'S POSITION
ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES............................................................25
No Limitation on Indebtedness..............................................25
Loss on Dissolution of the Company.........................................25
Remuneration of Directors, Officers
and Employees..............................................25
Receipt of Compensation Regardless of
Profitability..............................................25
Ability of the Company to
Implement its Business Strategy............................25
Business Interruption; Reliance on
Computer and Telecommunications
Infrastructure.............................................25
Uninsured Loss; Acts of God................................................26
Fairness Opinion Will Not Be Updated.......................................26
THE MERGER...................................................................26
Background of the Merger Proposal..........................................26
Conditions of the Merger...................................................27
Effects of the Merger......................................................28
The Merger Agreement.......................................................28
Approval of All of the Partnerships
Is Required ...............................................28
Merger Stock Will Be Restricted............................................28
Consummation of the Merger.................................................28
Costs of the Merger........................................................28
ALTERNATIVES TO THE MERGER...................................................29
Fairness Opinion...........................................................30
Recommendations............................................................30
DESCRIPTION OF THE COMMON SHARES.............................................30
Merger Stock...............................................................31
Unsecured Subordinated Debentures..........................................31
Preferred Stock............................................................32
Anti-Takeover Provisions of the Surviving
Corporation's Organizational Documents.....................32
Fair Price provision.......................................................32
Business Combinations......................................................33
Control Share Acquisitions.................................................33
Transactions with Interested Shareholders..................................33
Shareholder Action; Special Meetings.......................................33
Number of Directors; Removal; Vacancies....................................34
Shareholder Proposals and Nominations 34
Action by Shareholders Without a Meeting...................................34
Amendment of Bylaws........................................................34
Indemnification of Officers and Directors..................................34
Delaware Anti-Takeover Law.................................................34
DETERMINATION OF EXCHANGE VALUE
AND ALLOCATION OF COMMON SHARES ...........................................35
Exchange Value.............................................................35
Fairness Opinion...........................................................36
Exchange of Shares.........................................................36
RESALE OF THE COMMON SHARES..................................................36
DISTRIBUTION POLICY..........................................................37
Historical Distributions of the Partnerships...............................37
BUSINESS AND ASSETS..........................................................37
The Partnerships and PCM...................................................37
Competition in the Bad Debt Industry.......................................39
Background of the Distressed Consumer
Indebtedness Industry......................................39
Bulk Portfolios............................................................40
Acquisition and Analysis of Portfolios.....................................40
Servicing and Collection ..................................................40
VOTING PROCEDURES............................................................41
Distribution of Solicitation Materials.....................................41
No Special Meetings........................................................41
Required Vote..............................................................41
Voting Procedures and Consents.............................................42
Completion Instructions....................................................42
Solicitation and Tabulation of Consents....................................43
Failure of Limited Partners to
Return Consent Forms.......................................43
4
<PAGE>
Special Requirements for Certain Limited
Partners or Shareholders....................................43
Dissenting Limited Partners and Dissenting
Shareholders................................................43
Compliance with Approval from
Federal and State Authorities...............................44
SUMMARY COMPARISON OF UNITS
AND MERGER STOCK............................................................44
Form of Organization and Purpose............................................44
Length of Investment........................................................45
Properties and Diversification..............................................45
Additional Equity...........................................................46
Borrowing Policies..........................................................46
Management Control..........................................................46
Management Liability and Indemnification....................................46
Anti-Takeover Provisions....................................................46
Voting Rights...............................................................46
Compensation, Fees and Distributions........................................49
Liability of Investors......................................................50
Nature of Investment........................................................50
Potential Dilution of Payment Rights........................................51
Liquidity...................................................................51
Taxation....................................................................52
Passive v. Portfolio Income.................................................52
Benefits from Distributions.................................................52
Fiduciary Duties............................................................53
Reporting Procedures........................................................53
State Taxation..............................................................53
THE COMPANY AS A NOMINALLY
FOREIGN CORPORATION.........................................................53
Factors to Determine Foreign Corporations
Subject to California Laws..................................53
California Laws Which Supersede
Foreign Laws for Nominally
Foreign Corporations........................................53
Directors...................................................................54
Distributions...............................................................54
Shareholders Meetings.......................................................54
Sales of Assets, Mergers and
Reorganizations.............................................54
Records.....................................................................54
COMMENCEMENT AND CESSATION
OF "NOMINALLY FOREIGN" STATUS...............................................55
Commencement................................................................55
Cessation...................................................................55
Exemptions..................................................................55
RIGHTS OF DISSENTING
LIMITED PARTNERS............................................................55
Dissenting Limited Partners and Appraisal
Rights......................................................55
RIGHTS OF DISSENTING
SHAREHOLDERS................................................................56
Dissenting Shareholders and Appraisal
Rights......................................................56
FEDERAL INCOME TAX
CONSEQUENCES................................................................57
Introduction................................................................57
Difference between Units and Common Shares..................................57
The Partnerships............................................................58
The Company ................................................................59
The Limited Partners and Shareholders.......................................59
OTHER TAX CONSEQUENCES........................................................60
PRINCIPAL SHAREHOLDERS AND
LIMITED PARTNERS............................................................60
MANAGEMENT OF THE GENERAL PARTNER,
PCM AND THE COMPANY.........................................................61
Additional Key Personnel....................................................62
SUMMARY COMPENSATION TABLE (PCM)..............................................64
SUMMARY COMPENSATION TABLE
(GENERAL PARTNER)...........................................................64
Committees of the Board of Directors........................................64
Stock Option Plan...........................................................64
Stock Options Pursuant to Employment
Relationships...............................................65
Indemnification
Arrangements................................................65
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................................66
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................68
Delinquent Consumer Indebtedness Business....................................68
Overview....................................................................69
PCM's Operations............................................................70
PAM.........................................................................70
PAM II......................................................................70
PAM III.....................................................................71
PAM IV......................................................................71
PAM V.......................................................................71
Acquisition of Portfolios...................................................72
Servicing and Collections...................................................72
Employees...................................................................73
Expansion...................................................................73
Year 2000 Computer Issues...................................................73
RESULTS OF OPERATIONS.........................................................74
Overview....................................................................74
Partnership Revenues........................................................74
Other Partnership Income....................................................74
PCM's Revenues..............................................................74
Partnerships' Operating Costs
and Expenses................................................75
Management and Other Fees Incurred by the
Partnerships................................................74
PCM's Operating Costs and Expenses..........................................75
PCM's Liquidity and Capital Resources.......................................76
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA AND COMPARATIVE
PER SHARE DATA..............................................................77
GLOSSARY......................................................................78
APPENDIX A- AGREEMENT AND PLAN
OF MERGER..................................................................A-1
APPENDIX B- SUPPLEMENT FOR
PERFORMANCE ASSET MANAGEMENT
FUND, LTD. A CALIFORNIA LIMITED
PARTNERSHIP................................................................B-1
APPENDIX C- SUPPLEMENT FOR
PERFORMANCE ASSET MANAGEMENT
FUND II, LTD. A CALIFORNIA LIMITED
PARTNERSHIP................................................................C-1
APPENDIX D- SUPPLEMENT FOR
PERFORMANCE ASSET MANAGEMENT
FUND III, LTD. A CALIFORNIA LIMITED
PARTNERSHIP................................................................D-1
APPENDIX E- SUPPLEMENT FOR
PERFORMANCE ASSET MANAGEMENT
FUND IV, LTD. A CALIFORNIA LIMITED
PARTNERSHIP................................................................E-1
APPENDIX F- SUPPLEMENT FOR
PERFORMANCE ASSET MANAGEMENT
FUND V, LTD. A CALIFORNIA LIMITED
PARTNERSHIP................................................................F-1
APPENDIX G- FAIRNESS OPINION.................................................G-1
APPENDIX H- LETTER OF TRANSMITTAL
AND CONSENT STATEMENT (PAM I)...............................................H-1
APPENDIX I- LETTER OF TRANSMITTAL
AND CONSENT STATEMENT (PAM II).............................................I-1
APPENDIX J- LETTER OF TRANSMITTAL
AND CONSENT STATEMENT (PAM III)............................................J-1
APPENDIX K- LETTER OF TRANSMITTAL
AND CONSENT STATEMENT (PAM IV).............................................K-1
APPENDIX L- LETTER OF TRANSMITTAL
AND CONSENT STATEMENT (PAM V)..............................................L-1
APPENDIX M- INDENTURE AGREEMENT..............................................M-1
APPENDIX N- UNSECURED SUBORDINATED
DEBENTURE....................................................................N-1
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[ORGANIZATIONAL CHART]
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SUMMARY
Overview. The primary purpose of the Merger is to provide the Limited
Partners with the opportunity to participate in the growth of PCM while also
increasing the liquidity of their investments. Additional potential benefits of
the Merger include the possibility of greater access to capital markets, greater
flexibility regarding capital resources, the potential to provide employees with
incentive performance compensation, including shares of the Company's $.001 par
value common stock, the opportunity to offer greater employee ownership, and
more simplified record keeping, accounting and tax reporting. The most
significant potential adverse effects of the Merger to the Limited Partners are
the significant reduction in distributions (the Company does not intend to pay
cash dividends); the possibility that the Merger Stock will trade at a price
substantially below the value assigned in the Merger Proposal; the limited
public market for the Merger Stock; the potential price volatility of the Merger
Stock; possible dilution of the Merger Stock; and the significant influence of
Vincent E. Galewick, in his capacity as the majority shareholder of the Company.
There are also possible adverse tax consequences to individual Limited Partners
which could result from their particular financial circumstances.
Glossary. A glossary of defined terms is located at Page 78 of this Joint
Consent Statement/Prospectus.
Rights of Dissenting Limited Partners. The Merger Proposal has been
evaluated by an independent Fairness Analyst, Willamette Management Associates,
Inc., which has determined that the Merger Proposal is fair, from a financial
point of view, to the Partnerships. Dissenting Limited Partners, as an
alternative to participating in the Merger, may elect to receive an unsecured
subordinated debenture bearing interest at a variable interest rate equal to the
federal rate, as determined in accordance with Section 1274 of the Internal
Revenue Code of 1986, payable on January 1 and July 1 of each year and based on
a 365-day year, with the principal balance due January 31, 2005 ("Debenture")
secured by an Indenture Agreement ("Indenture Agreement"). A copy of the
Indenture Agreement is attached as Appendix M to this Joint Consent
Statement/Prospectus and a copy of the Debenture is attached as Appendix N to
this Joint Consent Statement/Prospectus. Each Limited Partner may obtain a list
of the other limited partners in the Partnership in which such Limited Partner
holds an interest, or any other documents of such Partnership relevant to the
Merger Proposal, by contacting the Information Agent.
Alternatives to the Merger. The General Partner, the Company, and the
shareholders of PCM considered several alternatives to the Merger, which are
discussed in more detail under the caption "Alternatives to the Merger" on Page
29 of this Joint Consent Statement/Prospectus. Briefly, the alternatives
included (i) filing the appropriate Registration Statements with the Securities
and Exchange Commission ("Commission") and submitting to the National
Association of Securities Dealers, Inc. ("NASD") the appropriate application to
enable the Partnerships to participate in the Over-The-Counter Bulletin Board
Electronic Quotation Service; (ii) winding up and dissolving the Partnerships,
and distributing their assets to the Limited Partners; (iii) continuing PCM and
the Partnerships in accordance with their current business plans and joint
venture agreements; and (iv) going forward with the Merger Proposal with the
approval of less than all of the Partnerships. As discussed in more detail on
Page 30 of this Joint Consent Statement/Prospectus, the General Partner
determined that none of these proposed alternatives is as beneficial to the
Limited Partners as the Merger Proposal.
Summary of Risk Factors. There are certain disadvantages of the Merger
Proposal and related transactions. If the Merger Proposal is approved, those
Limited Partners who elect to participate in the Merger will not receive
distributions from the Company during the foreseeable future, in that, the
Company does not contemplate paying dividends in the foreseeable future. There
can be no assurance that the Company will operate profitably. The Merger Stock
may not be listed or approved for listing on any regional or national securities
exchange or otherwise approved for participation in the Over-The-Counter
Bulletin Board Electronic Quotation Service. Even if so listed or approved, the
Merger Stock may trade at a price substantially below the value assigned in the
Merger Proposal, or may not trade at all. There may be a limited public market
for the Merger Stock, which may be subject to significant price volatility and
possible dilution. Those Limited Partners who approve of the Merger Proposal
will have their voting rights changed to the extent that those Limited Partners,
who formerly had ultimate control of their respective Partnerships, will, upon
consummation of the Merger, be minority shareholders in the Company, with a
corresponding decrease in control over the business of the Company. The majority
shareholder of the Company, Vincent E. Galewick, will exert substantial control
over the Company, including the election of the Board of Directors. Management
compensation, including the compensation paid to Mr. Galewick as Chief Executive
Officer of the Company, will be determined by the Company's Board of Directors.
Moreover, as opposed to the Partnerships, the Company, as a corporation, will be
a taxable entity.
Actual or Potential Material Conflicts of Interest Between the General
Partner and the Limited Partners. The General Partner is the general partner of
each Partnership, and some Limited Partners have subscribed to more than one
Partnership. The General Partner has an independent obligation to ensure that
each Partnership's participation in the Merger is fair and equitable, without
regard to whether the Merger is fair and equitable to the other participants in
the Merger Proposal, including the other Partnerships. The General Partner has
sought to discharge faithfully this obligation to each Partnership; however,
Limited Partners should consider that the General Partner has separate
obligations to each of the Partnerships. If each of the Partnerships had a
separate unaffiliated general partner, those unaffiliated general partners may
have had independent and different perspectives which might have caused them to
advocate terms and conditions during negotiating and structuring the Merger
Proposal different than the terms and conditions advocated by the General
Partner.
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Moreover, there are significant common relationships between Affiliates of
the General Partner and directors and officers of the Company. Most
significantly, Vincent E. Galewick owns all of the issued and outstanding common
stock of the General Partner and, currently, the Company. Additionally, Mr.
Galewick holds a significant majority, i.e., 98.5%, of the issued and
outstanding common stock of PCM. Additionally, Mr. Galewick owns all of the
issued and outstanding preferred stock of the Company, which, subject to certain
conditions precedent, is convertible to additional shares of the Company's
common stock. Additionally, Mr. Galewick will own beneficially approximately 62%
of the Company's common stock, if the Merger Proposal is approved. Therefore,
Mr. Galewick will exert significant control over the business affairs of the
Company. Michael Cushing, an Affiliate of the General Partner, will also exert
significant influence as Chief Financial Officer of the Company.
Pursuant to each of the Partnership Agreements, upon the winding up,
dissolution and liquidation of the Partnerships, the General Partner is entitled
to a percentage of the distributions of the Partnerships. Generally, interest of
the General Partner is 10% until such time as the Limited Partners recover their
contributions to the capital of each Partnership and thereafter the General
Partner's interest increases to 30%. Accordingly, the General Partner's
percentage interest in the Merger Stock allocated to each Partnership will be
based on the distribution principles specified in the respective Partnership
Agreements.
Vision Capital Services Corporation, a California corporation and an
Affiliate of the General Partner, Income Network Company, PCM and the Company
("Vision"), currently employs all of the persons providing human resource
(personnel) services to PCM and certain of its Affiliates, including the General
Partner. Specifically, Vision employs the persons utilized by PCM to manage,
service and collect the portfolios of indebtedness owned by the joint ventures
to which PCM and the Partnerships are parties. Vision receives from PCM and
those Affiliates fees equal to the salaries and costs of all employee benefits
and other normal and routine employee costs, plus a service fee similar and
equal in amount to that which would be charged by an unaffiliated third party
personnel service provider. If the Merger is consummated, all of the assets of
the Partnerships will be acquired by the Company and, because the Company will
employ its own human resources (employees), the acquired assets will be managed
by employees of the Company, and Vision will not receive any fees from the
Partnerships, PCM or the Company. Moreover, if the Merger is consummated, PCM,
an Affiliate of the General Partner, will no longer receive portfolio
acquisition fees.
Many of the potential conflicts of interest arising from current related
party transactions will be eliminated if the Merger is consummated, because PCM
will merge with and into the Company and will no longer provide such services to
the Company. Prior to the Merger, the General Partner's Certified Public
Accountants retained an independent Fairness Analyst to evaluate the Merger
Proposal and opine as to its fairness to each of the Partnerships. The Fairness
Analyst is Willamette Management Services, Inc., and the Fairness Analyst has
determined that the Merger Proposal is fair to each of the Partnerships. The
opinion of the Fairness Analyst is included with this Joint Consent
Statement/Prospectus as Appendix G. Also prior to the Merger, the General
Partner retained an appraiser to appraise the assets of each Partnership. The
appraiser's reports concerning the assets of the Partnerships are attached to
the Partnership Supplements, which are included with this Joint Consent
Statement/Prospectus as Appendices B, C, D, E and F.
Anti-takeover Provisions of the Company's Organizational Documents. Certain
provisions of the amended Certificate of Incorporation and the Bylaws of the
Company may have the effect of discouraging unsolicited takeover proposals.
These provisions include those which require the approval by holders of
two-thirds (2/3) of the Company's common stock for certain actions, including
mergers, sales of all or substantially all of the Company's assets, or the
adoption of amendments to the Company's Certificate of Incorporation or Bylaws;
a fair price provision which requires a potential acquiror to pay the Company's
shareholders the highest price paid during a specified time prior to the
commencement of a tender offer; a control share acquisition provision which
requires approval by the shareholders of the Company prior to certain
acquisitions of controlling portions of the Company's common stock; a provision
requiring certain shareholder or Board of Directors approval in the event of
transactions between the Company and certain interested shareholders; the
conversion of certain preferred stock held by Vincent E. Galewick into common
stock subject to certain conditions precedent; and certain other provisions
relating to the taking of action by shareholders of the Company. For more
detailed information regarding the anti-takeover provisions of the Company's
organizational documents, refer to the portion of this Joint Consent
Statement/Prospectus captioned "DESCRIPTION OF THE COMMON SHARES --
Anti-Takeover Provisions of the Company's Organizational Documents."
Elimination of Cumulative Voting. At such time as the Company (a) has
issued and outstanding equity securities listed on the (i) New York Stock
Exchange or (ii) the American Stock Exchange or (b) has issued and outstanding
securities designated as qualified for trading as a national market system
security on the National Association of Securities Dealers Automatic Quotation
System ("NASDAQ") (or any successor national market system) and has at least
eight hundred (800) holders of its equity securities as of the record date of
the Company's most recent annual meeting of shareholders, the Company shall be a
"listed corporation." At such time as the Company shall be a listed corporation
the directors of the Company shall be divided into two (2) classes, designated
Class I and Class II. Each class shall consist, as nearly as may be possible, of
one-half of the total number of directors constituting the entire Board of
Directors. At such time as the directors are divided into two (2) classes, the
total number of directors constituting the entire Board of Directors shall be
seven (7). The term of each class of directors shall be two (2) years. The term
of the initial Class I directors shall terminate on the date of the second (2nd)
annual meeting of shareholders following the annual meeting of shareholders at
which those directors were elected; and the terms of the initial Class II
directors shall terminate on the date of the second (2nd) annual meeting of
shareholders following the annual meeting of shareholders at which those
directors were elected. At each annual meeting of shareholders during a year in
which the termination of the term of a class of directors occurs, successors to
that class of directors shall be elected for a two (2) year term. If the number
of directors is changed, any increase or decrease in directorships shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible, and
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any additional directors of any class elected to fill a vacancy resulting from
an increase in such class shall hold office only until the next election of
directors by the shareholders, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. Directors shall hold
office until the annual meeting for the year in which their terms expire and
until their successors shall be elected and shall qualify, subject, however, to
prior death, resignation, retirement, disqualification or removal from office.
Any vacancy on the Board of Directors, howsoever resulting, may be filled by the
affirmative vote of a majority of the remaining directors then in office, even
if less than a quorum. Any director elected to fill a vacancy shall hold office
only until the next election of directors by the shareholders, and (ii) the
shareholders of the Company shall not be entitled to cumulate their votes for
directors of the Company.
THE PARTIES
The Company. Performance Asset Management Company is a Delaware corporation
and was incorporated on May 7, 1996. The Company was formed to do business and
participate in the distressed financial debt industry. The Company has been
inactive since its formation. The Company currently has one holder of its voting
$.001 par value common stock, which is Vincent E. Galewick. The Board of
Directors of the Company contemplates 5 members. The current directors of the
Company are Vincent E. Galewick, Michael Cushing and William Savage. There are 2
vacancies on the Company's Board of Directors. The Company is an Affiliate of
(i) Performance Development, Inc., a California corporation, which is the
General Partner of the Partnerships; (ii) PCM; (iii) Vision, and (iv) Income
Network Company, a California corporation and the Soliciting Agent of written
consents of the Limited Partners regarding the Merger Proposal. The address of
the Company is 4100 Newport Place, Suite 400, Newport Beach, California 92660
and its telephone number is (714) 566-3400.
After consummation of the Merger, the Company will be the surviving
corporation. If the Merger Proposal is approved by 75% in interest of the
holders of interests in each Partnership ("Units"), PCM and the Partnerships
will cease to exist by operation of law upon completion of the Merger. The
Company, as the surviving corporation, will possess all of the assets,
properties, rights and privileges of the Company, PCM and the Partnerships
existing on the Closing Date and will be subject to all of their liabilities and
obligations existing at such time. The Company would acquire the interests of
the Partnerships and PCM in any and all joint ventures between PCM and the
Partnerships existing on the Closing Date. By operation of law, those joint
ventures would then cease to exist and the Company would own the assets of those
joint ventures.
The Shareholders of PCM. Performance Capital Management, Inc., a California
corporation ("PCM") currently has two holders of its no par value common stock,
Vincent E. Galewick, who holds 98.5% of such common stock, and Michael Cushing,
who holds 1.5% of such common stock ('PCM Shareholders"). PCM was incorporated
in February, 1993 to perform services related to locating, evaluating,
negotiating, acquiring, servicing, and collecting distressed loan portfolio
assets. PCM acquires portfolio assets from third-party financial institutions
and sells those portfolios to the Partnerships and another similar California
limited partnership, Performance Asset Management Fund VI, Ltd., A California
Limited Partnership ("PAM VI"), which is an Affiliate of the Company, PCM, the
General Partner, the Partnerships, Vision and the Soliciting Agent, at purchase
prices generally equal to PCM's cost plus an acquisition fee of as much as
approximately 37% , as provided in the related purchase agreements. The
Partnerships enter into joint ventures with PCM by way of servicing agreements
with PCM to collect and service the portfolio assets. The servicing agreements
generally provide that all proceeds generated from the collection of portfolio
assets shall be shared by the venturers in proportion to their respective
percentage interests, generally, 55% to 65% for the Partnerships and 35% to 45%
for PCM. The Partnerships also reimburse PCM for certain costs associated with
the collection and servicing of portfolio assets. PCM, the General Partner, the
Soliciting Agent, Vision and the Company have common shareholders, directors and
officers. The PCM Shareholders can be contacted care of PCM at 4100 Newport
Place, Suite 400, Newport Beach, California 92660. PCM's telephone number is
(714) 261-7300.
General Partner. Performance Development, Inc., a California Corporation,
is the General Partner of the Partnerships and was incorporated in June, 1990.
The General Partner currently has one holder of its no par value common stock,
which is Vincent E. Galewick. The General Partner has been engaged in various
aspects of the distressed financial services industry since March, 1991. The
General Partner is an Affiliate of PCM, Vision, the Soliciting Agent and the
Company. The General Partner, PCM, Vision, the Soliciting Agent and the Company
have common shareholders, directors and officers. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS." The General Partner is also the general partner for other
California limited partnerships. The address of the General Partner is 4100
Newport Place, Suite 400, Newport Beach, California 92660 and its telephone
number is (714) 261-2400. The General Partner is not a party to the Merger;
however, the General Partner will receive shares of the Merger Stock in
accordance with the provisions of the Agreements of Limited Partnership for the
Partnerships ("Partnership Agreements") due to the liquidation, winding up and
dissolution of the Partnerships, if the Merger is consummated. The General
Partner currently would receive 10% of the distributions of the Partnerships
upon their liquidation, winding up and dissolution, pursuant to the Partnership
Agreements.
Performance Asset Management Fund, Ltd., A California Limited Partnership.
Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM"), was formed on April 1, 1991, as a limited partnership in California
under the Revised Limited Partnership Act of the State of California, as enacted
and in effect on or after July 1, 1984. PAM sold 1,052 Units at the price of
$5,000.00 per Unit. The total gross amount received by PAM from purchasers of
its Units is $5,260,000. As of June 30, 1997 ("Determination Date"), PAM had 369
Limited Partners. Units in PAM were offered and sold pursuant to the exemption
from the registration requirement of the Securities Act of 1933 ("Securities
Act") provided by the provisions of Regulation D promulgated pursuant thereto
and similar exemptions from registration and qualifications specified by the
provisions of the various states (Blue Sky) securities laws. PAM was formed to
provide funding to acquire assets from federal banking and savings
9
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and loan agencies, the Federal Deposit Insurance Corporation ("FDIC") and the
Resolution Trust Corporation ("RTC"), and other sources of distressed assets,
for the purpose of generating income and distributable cash from collecting on
the assets or reselling those assets. The assets in which PAM has an interest
consist primarily of charged off credit card indebtedness acquired from banks
and lending institutions. The investment objectives of PAM are to (a) preserve
and protect PAM's invested capital; and (b) to achieve income by purchase and
collection or resale of FDIC and RTC assets and distressed assets from other
sources. The address and telephone number of PAM are the same as those of the
General Partner.
Performance Asset Management Fund II, Ltd., A California Limited
Partnership. Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II"), was formed on April 1, 1992, as a limited partnership in
California under the Revised Limited Partnership Act of the State of California,
as enacted and in effect on or after July 1, 1984. PAM II sold 1,568 Units at
the price of $5,000.00 per Unit. The total gross amount received by PAM II from
purchasers of its Units is $7,840,000. As of the Determination Date, PAM II had
489 Limited Partners. Units in PAM II were offered and sold pursuant to the
exemption from the registration requirement of the Securities Act provided by
the provisions of Regulation D promulgated pursuant thereto and similar
exemptions from registration and qualifications specified by the provisions of
the various states (Blue Sky) securities laws. PAM II was formed to acquire
various assets from federal and state banking and savings and loan agencies, the
FDIC, the RTC, and other sources, for the purpose of generating income and
distributable cash from collecting any and all indebtedness evidenced by or
constituting those assets or selling or otherwise disposing of those assets. The
assets of the joint ventures in which PAM II has an interest consist primarily
of consumer debt acquired from banks and lending institutions. The specific
investment objectives of PAM II are to (a) preserve and protect PAM II's
invested capital; and (b) to achieve income by purchase and collection or resale
of FDIC and RTC assets and distressed assets from other sources. The address and
telephone number of PAM II are the same as those of the General Partner.
Performance Asset Management Fund III, Ltd., A California Limited
Partnership. Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III"), was formed on October 13, 1992, as a limited
partnership in California under the Revised Limited Partnership Act of the State
of California, as enacted and in effect on or after July 1, 1984. PAM III sold
1,998 Units at the price of $5,000.00 per Unit. The total gross amount received
by PAM III from purchasers of its Units is $9,990,000. As of the Determination
Date, PAM III had 596 Limited Partners. Units in PAM III were offered and sold
pursuant to the exemption from the registration requirement of the Securities
Act provided by the provisions of Regulation D promulgated pursuant thereto and
similar exemptions from registration and qualifications specified by the
provisions of the various states (Blue Sky) securities laws. As a result of the
number of limited partners of PAM III and the total amount of PAM III's assets,
PAM III caused to be prepared and filed with the Securities and Exchange
Commission ("Commission") a Registration Statement on Form 10-SB and, as a
result, PAM III is required to and does file the periodic reports required by
the provisions of the Securities Exchange Act of 1934 ("Exchange Act"). PAM III
was formed to acquire various assets from federal and state banking and savings
and loan agencies, the FDIC, the RTC, and other sources, for the purpose of
generating income and distributable cash from collecting any and all
indebtedness evidenced by or constituting those assets or selling or otherwise
disposing of those assets. The assets in which PAM III has an interest consist
primarily of secured and unsecured commercial and consumer loans, credit card
debt, as well as real and personal property, loans, notes receivable, and other
indebtedness. The specific investment objectives of PAM III are to (a) preserve
and protect PAM III's invested capital; and (b) to realize income by the
acquisition, managing, operating, servicing and selling of assets acquired from
federal and state banking and savings and loan agencies, the FDIC, the RTC and
other sources. The address and telephone number of PAM III are the same as those
of the General Partner.
Performance Asset Management Fund IV, Ltd., A California Limited
Partnership. Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM IV"), was formed on October 21, 1992, as a limited partnership
in California under the Revised Limited Partnership Act of the State of
California. PAM IV sold 11,488 Units at the price of $2,500.00 per Unit. The
total gross amount received by PAM IV from purchasers of its Units is
$28,720,000. As of the Determination Date, PAM IV had 1,442 Limited Partners.
The offer and sale of Units of PAM IV were not registered pursuant to the
provisions of the Securities Act, as those Units were offered and sold in
reliance on the exemption provided by the provisions of Section 3(a)(10) of the
Securities Act and Rule 147 promulgated pursuant thereto. Specifically, those
Units were offered and sold in a transaction which qualified for the intrastate
exemption specified by the provisions of that Section 3(a)(10). Those Units were
offered and sold only to residents of the State of California. The offer and
sale of those Units were qualified with the State of California Department of
Corporations. As a result of the number of limited partners of PAM IV and the
total amount of PAM IV's assets, this partnership caused to be prepared and
filed with the Commission a Registration Statement on Form 10-SB and, as a
result, PAM IV is required to and does file the periodic reports required by the
provisions of the Exchange Act. PAM IV was formed to acquire various assets from
federal and state banking and savings and loan agencies, the FDIC, the RTC, and
other sources, for the purpose of generating income and distributable cash from
collecting any and all indebtedness evidenced by or constituting those assets or
selling or otherwise disposing of those assets. The assets in which PAM IV has
an interest consist primarily of secured and unsecured commercial and consumer
loans and real and personal property, loans, notes and accounts receivable, and
other indebtedness. The specific investment objectives of PAM IV are to (a)
preserve and protect PAM IV's invested capital; and (b) realize income by the
acquisition, managing, operating, servicing and selling of assets acquired from
federal and state banking and savings and loan agencies, the FDIC, the RTC and
other sources. The address and telephone number of PAM IV are the same as those
of the General Partner.
Performance Asset Management Fund V, Ltd., A California Limited
Partnership. Performance Asset Management Fund V, Ltd., A California Limited
Partnership ("PAM V"), was formed on May 1, 1994, as a limited partnership in
California pursuant to the Revised Limited Partnership Act of the State of
California. PAM V sold 1,194 Units at the price of $5,000.00 per Unit. The total
gross amount received by PAM V from purchasers of its
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Units is $5,970,000. As of the Determination Date, PAM V had 305 Limited
Partners. Units in PAM V were offered and sold pursuant to the exemption from
the registration requirement of the Securities Act provided by the provisions of
Regulation D promulgated pursuant thereto and similar exemptions from
registration and qualifications specified by the provisions of the various
states (Blue Sky) securities laws.
PAM V was formed to acquire various assets from various sources, including,
but not limited to, federal and state banking and savings and loan agencies and
consumer finance lenders for the purpose of generating income and gains by
collecting, selling, or otherwise disposing of acquired assets. The assets in
which PAM V has an interest consist primarily of secured and unsecured
commercial and consumer loans, credit card obligations, real and personal
property loans, notes and accounts receivable, and other indebtedness. The
specific investment objectives of PAM V are to (a) preserve and protect PAM V's
invested capital; and (b) realize income and gains from the collecting,
managing, operating, servicing and selling of assets acquired from federal and
state banking and savings and loan agencies, consumer finance lenders and other
sources. The address and telephone number of PAM V are the same as those of the
General Partner.
Present Business of the Company. Since its formation, the Company has
conducted little, if any, business.
Present Business of PCM and the Partnerships. PCM and the Partnerships are
engaged in business in the financial services industry. PCM performs collection
and other services for the Partnerships and, as a result of various joint
ventures with the Partnerships, conducts the specific business of purchasing,
managing, servicing, collecting and selling discounted portfolios of debt
instruments and obligations. Those portfolios consist of instruments evidencing
secured and unsecured commercial and consumer loans, credit card debt, as well
as real and personal property, loans, notes receivable, and other indebtedness.
The various joint ventures either service and collect the underlying obligations
or sell the obligations, either individually or in portfolios. The Company, as
the surviving corporation, will continue to engage in the same business
conducted by PCM and the Partnerships with regard to the assets acquired by the
Company in the Merger.
The Merger
Purpose of Joint Consent Statement/Prospectus. This Joint Consent
Statement/Prospectus is furnished to (a) Limited Partners, (b) PCM Shareholders;
and (c) shareholders of the Company ("Company Shareholders"), in each case of
record as of June 30, 1997 ("Determination Date"), in connection with the
solicitation on behalf of the Board of Directors of the Company ("Board of
Directors") of their written consents (obtained without meetings) to consider
and approve the Merger Proposal.
Vincent E. Galewick owns 98.5% of the issued and outstanding shares of
PCM's common stock and 100% of the Company's issued and outstanding shares of
common stock. Mr. Galewick is in favor of and will consent to the Merger
Proposal. Michael Cushing owns 1.5% of the issued and outstanding shares of
PCM's common stock. Mr. Cushing is in favor of and will consent to the Merger
Proposal.
A vote in favor of the Merger Proposal would have the effect of a vote in
favor of a series of interrelated changes to the current ownership and structure
of PCM, the Partnerships and the Company. If, and only if, at least 75% of the
Units of each Partnership approve the Merger Proposal and the Merger Proposal is
approved by the requisite federal and state regulatory agencies, the Merger will
be consummated, and the Limited Partners would cease to be limited partners in
the Partnerships and become shareholders of the Company, and the Company would
own all of the former assets, properties, rights and interests of PCM and the
Partnerships. The General Partner would also then become a shareholder of the
Company. The PCM Shareholders would also then become shareholders of the
Company, and PCM would cease to exist by operation of law. The Company would be
the surviving corporation. The Merger Stock will be registered in accordance
with the provisions of the Securities Act pursuant to a Registration Statement
on Form S-4 filed by the Company with the Commission.
Terms of the Merger. Pursuant to the Merger Agreement, a true and correct
copy of which has been filed as an exhibit to the Registration Statement and
included in this Joint Consent Statement/Prospectus as Appendix A, upon the date
upon which all of the conditions precedent to the obligations of each of the
parties, as specified in the Merger Agreement, shall have been satisfied or
shall have been waived ("Closing Date"), the PCM Shareholders will exchange all
of the issued and outstanding common stock of PCM for shares of Merger Stock,
and PCM will merge with and into the Company. The Partnerships (if 75% of the
Units of each Partnership approves the Merger Proposal) will exchange their
assets for shares of the Company. On the Closing Date the PCM Shareholders will
receive 4,452,300 shares of Merger Stock for their shares of PCM's common stock.
On the Closing Date the Partnerships, collectively, will receive 3,059,200
shares of Merger Stock for the assets of the Partnerships. Moreover, pursuant to
the Merger Agreement, the Partnerships will be wound up and dissolved, and the
Merger Stock will be distributed to the Limited Partners and the General Partner
in accordance with the provisions of the Partnership Agreements. Cash will be
paid for any resulting fractional shares.
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The following table summarizes the valuation conclusions and the value
("Exchange Value") determined by the Company, PCM and the General Partner for
Units, shares of PCM's common stock and shares of the Company's common stock, as
reviewed and determined to be fair from a financial point of view by Willamette
Management Associates, Inc. ("Fairness Analyst"), as to the Partnerships and
PCM, respectively, based on 7,511,500 allocable shares of Merger Stock.
Percentage of
Aggregate Number of
Indicated Value Indicated Value Common Shares
(Rounded to the (Rounded to the Allocated
Nearest $1,000) Nearest 1/10 of 1% to Entity
--------------- ------------------ ---------
PAM $934,000 1.2% 93,400
PAM II 3,112,000 4.1 311,200
PAM III 6,000,000 8.0 600,000
PAM IV 15,846,000 21.1 1,584,600
PAM V 4,700,000 6.3 470,000
----------- ----- -----------
Sub-total $30,592,000 40.7% 3,059,200
----------- ----- -----------
PCM $44,523,000 59.3% 4,452,300
----------- ----- -----------
Total $75,115,000 100.0% 7,511,500
=========== ===== ===========
The Company shall promptly furnish a copy of the Fairness Opinion, without
charge, upon the request of any Limited Partner, PCM Shareholder or Company
Shareholder. All such requests should be addressed as follows:
Performance Asset Management Company
Attn: Information Agent -- Fairness Opinion
4100 Newport Place
Suite 400
Newport Beach, California 92660
The General Partner has suspended distributions made by the Partnerships to
the Limited Partners from and after the Determination Date. This is necessary to
assure that the Limited Partners' capital accounts do not change after the
Determination Date. The Company has the authority to postpone the Determination
Date and establish a new Determination Date, in its sole and absolute
discretion. The Company may exercise this authority in the event that the
matters contemplated in this Joint Consent Statement/Prospectus are postponed
for any reason.
Immediately after consummation of the Merger, the PCM Shareholders, the
General Partner, the Limited Partners and the Company Shareholders will hold
100% of the outstanding shares of the $.001 par value common stock of the
Company. The Merger Proposal is structured so that neither the PCM Shareholders,
the General Partner, the Limited Partners, nor the Company Shareholders, on the
one hand, nor the Company, on the other hand, should recognize any taxable gain
or loss in connection with the Merger. See "FEDERAL INCOME TAX CONSEQUENCES" and
"CERTAIN STATE AND LOCAL INCOME TAX CONSEQUENCES."
The Merger Proposal is also structured to afford those Limited Partners who
dissent ("Dissenting Limited Partners") the dissenter's rights specified in the
Thompson-Killea Limited Partnership Protection Act of 1992 of California
("Thompson-Killea Act"). The Thompson-Killea Act requires that the Dissenting
Limited Partners receive the appraised value of their Units in cash, freely
tradeable securities, or secured or unsecured debt instruments satisfying
certain statutory requirements or, in the alternative, receive or retain a
security with substantially the same terms and conditions as the security
originally held by them, i.e., units of limited partnership interests; provided,
however, that the receipt or retention of that security is not a step in a
series of subsequent transactions that directly or indirectly involves future
combinations or reorganizations of one or more "roll-up" participants. For these
purposes, a "roll-up" is defined as a transaction involving the combination or
reorganization of one or more limited partnerships, directly or indirectly, in
which some or all of the limited partners in any of such limited partnerships
will receive new securities, or securities in another entity. Securities
received or retained will be considered to have the same terms and conditions as
the security originally held if (a) there is no material adverse change to
Dissenting Limited Partners' rights, including, but not limited to, rights with
respect to voting, the business plan, or the investment, distribution,
management compensation and liquidation policies of the limited partnership or
resulting entity; and (b) the Dissenting Limited Partners receive the same
preferences, privileges, rights, and priorities as they had pursuant to the
security originally held.
The Company will satisfy this requirement by offering to purchase each
Dissenting Limited Partner's Units with an unsecured subordinated debenture
("Debenture") issued under an indenture agreement ("Indenture Agreement"),
subject to the terms and conditions set forth in this Joint Consent
Statement/Prospectus. A copy of the Debenture is included with this Joint
Consent Statement/Prospectus as Appendix N and a copy of the Indenture Agreement
is included with this Joint Consent Statement/Prospectus as Appendix M. The
Merger Proposal and the related transactions, including the dissolutions and
liquidations of the Partnerships ("Dissolutions" and "Liquidations") are
structured to comply with the other rights and privileges provided by the
Thompson-Killea Act. See "RIGHTS OF DISSENTING SHAREHOLDERS AND LIMITED
PARTNERS."
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The Merger Proposal is structured so as to comply with the provisions of
the California General Corporation Law pertaining to mergers (Chapter 11,
commencing with Section 1100) and the rights of dissenting shareholders
("Dissenting Shareholders") (Chapter 13, commencing with Section 1300), to the
extent applicable. Chapter 13 of the California General Corporation Law requires
that PCM and the Company, as to their respective Dissenting Shareholders, if
any, purchase for cash, at their fair market value the shares of common stock
owned by dissenting PCM Shareholders and dissenting Company Shareholders,
respectively. Neither Vincent E. Galewick, in his capacity as a PCM Shareholder
and Company Shareholder, nor Michael Cushing, the other PCM Shareholder, intends
to exercise rights as a Dissenting Shareholder. See "RIGHTS OF DISSENTING
SHAREHOLDERS AND LIMITED PARTNERS."
Effect of Elimination of Cumulative Voting. Cumulative voting allows a
shareholder to accumulate the number of votes he or she would be permitted to
cast in favor of or against all directors and direct those votes for or against
a single director or in any manner he or she desires. Where cumulative voting is
permitted, a stockholder is entitled to cast all of his or her votes for a
single director or to distribute those votes among any two or more directors as
he or she desires. A rough measure of the minimum number of votes a stockholder
must have to elect a target number of directors by cumulating his or her votes
can be determined by multiplying the total number of voting shares by a number
equal to the target number of directors, dividing this by a number equal to the
total number of directors to be elected plus one, and adding one to the result.
Although cumulative voting is intended to provide minority shareholders
with an opportunity to elect directors, it does not provide a guarantee of
minority representation.
FAIRNESS OPINION
No Limitations Imposed on Scope of Investigation. Kelly & Company,
independent auditors for the Company, Income Network Company, the General
Partner and PCM, retained the services of Willamette Management Associates, Inc.
("Fairness Analyst") to determine the fairness from a financial point of view of
the Exchange Value in connection with the Merger Proposal. The Fairness Analyst
has provided valuation and related financial consulting services throughout the
United States since 1969. As a result, the Fairness Analyst has performed
valuations of companies operating in a wide variety of industries, including
numerous entities operating within the financial institutions industry which
provide the type of credit relationships similar to those of the portfolios of
the Partnerships. Employees of the Fairness Analyst who reviewed the Merger
Proposal and contributed to the Fairness Opinion include a former employee of
KPMG Peat Marwick, who specialized in audits of entities participating in the
financial institutions industry (banks, mortgage companies and savings and loan
companies); and a co-author of two of the most frequently-cited texts regarding
business valuation, Valuing a Business (3rd Edition, Irwin, 1996) and Valuing
Small Business and Professional Practices (2nd Edition, Business One Irwin,
1993). The Fairness Analyst is accepted in the financial institutions industry
as a national authority with regard to economic analysis and valuation issues.
There were no limitations or restrictions placed on the scope of the
Fairness Analyst's analysis, and the Fairness Analyst performed its due
diligence by, among other things, visiting PCM's facilities in Newport Beach,
California; interviewing the President and Vice-President of PCM; interviewing
the President, Chief Financial Officer, Director of Business Development, and
Secretary of the General Partner; and interviewing accountants employed by Kelly
& Company. The Fairness Analyst was allowed complete access to all financial
records of PCM, the General Partner, the Partnerships, and all service providers
to those entities, including privileged documents such as tax returns and audit
workpapers. The Fairness Analyst determined the amount of consideration to be
paid in regard to its investigation, analysis, and opinion. A copy of the
opinion of the Fairness Analyst ("Fairness Opinion") is included with this Joint
Consent Statement/Prospectus as Appendix G.
No Instructions From General Partner, PCM Shareholders or the Company.
Neither the General Partner, the PCM Shareholders nor the Company provided
instructions to the Fairness Analyst. Kelly & Company instructed the Fairness
Analyst to conduct an independent investigation and analysis and thereafter
render a written opinion to the General Partner, as of the Determination Date,
as to whether the Exchange Value established by the General Partner, PCM and the
Company regarding the exchange of Partnership assets and shares of PCM common
stock for Merger Stock is fair from a financial point of view to the
Partnerships. Kelly & Company also instructed the Fairness Analyst to prepare an
opinion (i) satisfying the requirements of the Thompson-Killea Act; and (ii)
sufficient to support an opinion regarding the fairness from a financial point
of view of the Merger Proposal and related transactions, addressing the fairness
from a financial point of view of the Merger Proposal and related transactions
as a whole and to each Partnership. A copy of that opinion ("Fairness Opinion")
is included with this Joint Consent Statement/Prospectus as Appendix G. Kelly &
Company instructed the Fairness Analyst to perform a due diligence investigation
and analysis and to review all pertinent documents, including, but not limited
to, financial statements; tax returns; audit work papers; banking records;
balance sheets; income statements; reports filed with the Securities and
Exchange Commission ("Commission"); corporate documents, such as Certificates
and Articles of Incorporation, Bylaws and minutes; furniture and equipment
schedules; insurance policies and coverages; PCM and Partnership operating
budgets and financial forecasts through December 31, 2008; office leases;
management profiles; distressed loan portfolio stratification reports; and daily
productivity and cash collection reports. Kelly & Company also instructed the
Fairness Analyst to research industry sources and databases and economic outlook
sources regarding the financial services and distressed debt industry.
Procedures Followed. As set forth above, the Fairness Analyst conducted a
complete independent investigation and analysis focusing on the fairness issues
relating to the "adequate consideration" rule. "Adequate consideration" is
generally understood to represent the fair market value of an asset.
Accordingly, in order to arrive at its opinion
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<PAGE>
regarding the fairness from a financial point of view of the Exchange Value, the
Fairness Analyst performed its research and analyses with the intent of
establishing whether the Limited Partners would ultimately receive at least fair
market value in exchange for their Units. "Fair market value" is defined as the
price at which an asset would change hands between a willing buyer and a willing
seller when the former is not under any compulsion to buy and the latter is not
under any compulsion to sell, both parties are able, as well as willing, to
trade, and both parties are well informed about the asset and the market for
that asset. The Fairness Analyst performed an analysis of the material features
and characteristics of the Partnerships and PCM, as well as an analysis of the
financial statements and results of operations of each entity. The Fairness
Analyst assumed that PCM will continue its current business plan and structure,
and made other reasonable assumptions and estimates regarding distressed debt
portfolio acquisition and pricing, operating expenses, and partnership
distribution policies.
In completing the analysis required to form a basis for its opinion, the
Fairness Analyst performed independent economic, industry, and market research,
and performed its own financial analysis with regard to the business operations,
assets and value of each Partnership and PCM. The Company, PCM and the General
Partner provided the Fairness Analyst with operating budgets and financial
forecasts regarding the operations of PCM and the Partnerships through December
31, 2008, and selected historical daily productivity and cash collection
reports. The Fairness Analyst performed certain procedures regarding the
information provided, including (i) reviewing historical data regarding the
purchase and sale of distressed loan portfolios; (ii) reviewing historical
collection rates and costs regarding the distressed loan portfolios; (iii)
interviewing representatives of the Company, PCM and the Partnerships regarding
historical purchases, sales, collection rates and costs, and projected
purchases, sales, collection rates and costs relating to distressed loan
portfolios; and (iv) conducting independent research regarding the projected
growth rate of the distressed loan segment of the financial services industry
and operating costs of entities operating within the industry. Based upon the
independent research performed by the Fairness Analyst, and the representations
provided by the Company, PCM and the General Partner regarding the historical
and projected operations of PCM and the Partnerships, it was the opinion of the
Fairness Analyst that reasonable reliance could be placed upon the projected
operating budgets and financial forecasts provided ("Fairness Opinion"). A copy
of the Fairness Opinion is included with this Joint Consent Statement/Prospectus
as Appendix G.
There were no contacts in connection with the Merger Proposal between the
Company, the PCM Shareholders, PCM, or the General Partner, or any of their
Affiliates, on the one hand, and any outside party, other than the Fairness
Analyst, on the other hand, with respect to the preparation of the Fairness
Opinion, the valuation of the Partnerships or their assets, or any other report
with respect to the Merger Proposal.
Basis for and Methods of Arriving at Findings. The Company, the PCM
Shareholders and the General Partner valued the respective value of each entity
by determining the combined value of each entity's assets, including the value
of such entity's cash receipts and the terminal value of such entity's
distressed loan portfolios. The Fairness Analyst considered, in consideration of
the Fairness Opinion, the asset liquidation value of each entity and the
allocation of assets of each Partnership between the General Partner and the
Limited Partners of such Partnership based on such Partnership's Partnership
Agreement. Additional factors considered by the Fairness Analyst in making its
fairness determination included discount factors based on the age and
composition of the various debt portfolios and the Fairness Analyst's evaluation
and analysis of the present value of the respective cash receipts of each
entity, as well as the historical and projected collection costs of distressed
loan portfolios.
Determination of Values. The Company, PCM and the General Partner have
determined the (i) Exchange Value and (ii) amounts specified in the table below
after reviewing selected financial information, both historical and forecasted.
The Fairness Analyst determined, in the Fairness Opinion, that the Exchange
Value is fair from a financial standpoint to the Partnerships. A copy of the
Fairness Opinion is included with this Joint Consent Statement/Prospectus as
Appendix G. The total values for PCM and each of the Partnerships are:
NAME OF PARTNERSHIP TOTAL VALUE OR COPORATION
- ------------------- -------------------------
Performance Asset Management Fund, Ltd.,
A California Limited Partnership $ 934,000
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership 3,112,000
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership 6,000,000
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership 15,846,000
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership 4,700,000
Performance Capital Management, Inc.,
a California corporation 44,523,000
-----------
Total $75,115,000
===========
THE COMPANY
Description of the Company's Capital Stock. The authorized capital of the
Company is 100,000,000 shares of voting common stock, $.001 par value per share,
and 10,000,000 shares of non-voting preferred stock, $.001 par value per share.
There are currently 1,000 shares of the Company's common stock and 100,000
shares of the
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Company's preferred stock issued and outstanding, held by Vincent E. Galewick,
an Affiliate of PCM, the Soliciting Agent and the General Partner. The shares of
the Company's preferred stock owned by Mr. Galewick are convertible to shares of
the Company's common stock at a ratio of one share of such preferred stock for
20 shares of such common stock, subject to certain conditions precedent. The
Company does not anticipate issuing any additional shares of preferred stock or
any other equity securities of any class, designation or series. The Company's
Certificate of Incorporation, which specifies the authorization for the
Company's capital stock, and the Company's Bylaws are attached as exhibits to
the Registration Statement. If 75% of the Units of each Partnership approve the
Merger Proposal, and after the dissolutions and liquidations of the Partnerships
and distribution by the Partnerships to their Limited Partners of the Merger
Stock, there will be 7,512,500 shares of the Company's common stock issued and
outstanding, which will be owned by the General Partner, the Limited Partners,
the PCM Shareholders, and the Company Shareholders. There will also be 100,000
shares of the Company's preferred stock owned by Vincent E. Galewick. Upon
distribution of the Merger Stock, the Partnerships and PCM will wind up and
dissolve.
After the Merger and the dissolution and liquidation of PCM and the
Partnerships, the issued and outstanding shares of Merger Stock will be validly
issued, fully paid and nonassessable. Holders of the Merger Stock will be
entitled to receive dividends from funds legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine, in its sole and absolute discretion. The Company intends not to pay
dividends in the foreseeable future. See "RISK FACTORS -- Significant Reduction
in Distributions." The Company has no plans, at the current time, to issue any
additional shares of its preferred stock. The Merger Stock will be neither
redeemable nor convertible and the holders thereof will have no preemptive or
subscription rights to purchase any securities of the Company. Upon the
liquidation, dissolution or winding up of the Company, subject to the rights of
holders of any shares of preferred stock of the Company, holders of shares of
the Company's common stock will be entitled to receive a pro rata distribution
of the assets of the Company which are legally available for distribution, after
payment of all debts and other liabilities of the Company. Each outstanding
share of the Company's common stock will be entitled to one vote on all matters
submitted to a vote of the shareholders of the Company.
Resale of the Merger Stock Common Shares. The shares of Merger Stock will
be registered under the Securities Act by the Registration Statement. The
registration of the Merger Stock in this manner should allow holders of the
Merger Stock to transfer the Merger Stock without any restriction under the
Securities Act, if such holder is not an Affiliate of the Company, as defined by
Rule 144 promulgated pursuant to the Securities Act; provided, however, that
various states also have registration requirements which may restrict trading of
the Merger Stock. Moreover, the Company intends to stabilize the price of its
common stock by restricting the sale of the Merger Stock.
During that period that the Registration Statement is being reviewed by the
Commission, the Company intends to submit to the National Association of
Securities Dealers, Inc. ("NASD") an application for listing the Company's
common stock on an appropriate NASDAQ exchange or, in the alternative,
submitting an application to the NASD for participation by the Company in the
Over-The-Counter Bulletin Board Electronic Quotation Service ("Bulletin Board").
If the Merger Stock is eligible and accepted for listing on such an exchange or
the Company is able to participate in the Bulletin Board, there might be a
readily acceptable market for selling the Merger Stock and a readily
determinable market price for the Merger Stock; provided, however, if the Merger
Stock is not approved for listing on the national exchange for NASDAQ, the
Merger Stock will be required to be registered or qualified by the appropriate
state securities regulatory agencies before trading of the Merger Stock can
occur in any such state. There can be no assurance that any application to the
NASD or to any state securities regulatory agency will be approved.
Restrictions on Resale of Merger Stock. The Company intends to stabilize,
maintain, or otherwise affect the price of the Merger Stock by restricting the
sale of the Merger Stock after the Merger is consummated. The Company believes
that such restrictions are necessary to limit possible speculation in the Merger
Stock and to mitigate the potential price volatility such speculation might
create in the Merger Stock. The Company further believes that the restrictions
on the resale of the Merger Stock will inure to the benefit of the Limited
Partners who participate in the Merger and become shareholders of the Company.
25% of the Merger Stock will be unrestricted immediately after the consummation
of the Merger. 25% of the Merger Stock will be restricted until the end of the
Company's first full fiscal quarter following the Closing Date. 25% of the
Merger Stock will be restricted until the end of the Company's second full
fiscal quarter following the Closing Date. The remaining 25% of the Merger Stock
will be restricted until the end of the Company's third full fiscal quarter
following the Closing Date. The Company believes that the effect of such
restrictions will be to mitigate, for a limited time, market forces which may
adversely affect the trading price of the Merger Stock.
Dividend Policy. Although holders of the Company's common stock shall have
the right to receive dividends paid on that common stock, subject to the
dividend policy of the Company, the Company shall not pay any cash dividends on
its common stock or its preferred stock for the foreseeable future, as all
available cash will be utilized to continue the growth of the Company's business
subsequent to the Closing Date for the foreseeable future thereafter. The
payment of dividends will be at the discretion of the Board of Directors and
will depend on the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board of
Directors.
Business and Assets. PCM and the Partnerships are engaged in business in
the delinquent consumer indebtedness industry. Specifically, PCM and the
Partnerships engage in the business of purchasing discounted portfolios of
distressed financial debt instruments and obligations. Such portfolios typically
consist of instruments evidencing secured and unsecured commercial and consumer
loans, credit card debt, debt related to real and personal property, loans,
notes receivable, and other indebtedness. PCM and the Partnerships either
collect the underlying obligations or sell the debt instruments alone or in
portfolios. The Company will engage in the same business.
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<PAGE>
The primary purpose for the formation of each Partnership was to generate
income and profits to such Partnership by utilizing net proceeds from the
offerings to purchase, hold, service, collect and dispose of various
debt-related assets. The Company will hold, manage, service, collect and dispose
of the distressed loan portfolios of the Partnerships in much the same manner as
did the Partnerships. Additionally, the shareholders of the Company should
benefit from the growth of PCM's collection and servicing facilities, as PCM
will merge with and into the Company.
Voting Procedures. Limited Partners, the PCM Shareholders, and the Company
Shareholders can only vote by providing to U.S. Stock Transfer Corporation, 1745
Gardena Avenue, Suite 200, Glendale, California 91204 ("Exchange Agent") the
Letters of Transmittal and Consent Statements provided to them with this Joint
Consent Statement/Prospectus. Those Letters of Transmittal and Consent
Statements are defined in this Joint Consent Statement/Prospectus as the
"Consent Forms." Therefore, each Limited Partner, PCM Shareholder and Company
Shareholder should complete and provide to the Exchange Agent a completed
Consent Form no later than the latter of (i) 60 calendar days after the initial
delivery of this Joint Consent Statement/Prospectus or (ii) such later date as
may be designated by the Board of Directors of the Company, the Board of
Directors of PCM, and the Board of Directors of the General Partner
("Solicitation Period").
Approval of the Merger Proposal will require the affirmative vote of 75% of
the Units entitled to vote in each Partnership, voting on a one-vote-per-Unit
basis. As of the Determination Date, none of the directors or executive officers
of the General Partner, or any of their Affiliates, held any Units and are,
therefore, not entitled to vote regarding any Partnership's approval of the
Merger Proposal. See "VOTING PROCEDURES." Approval of the Merger Proposal will
also require the affirmative vote or, in the alternative, written consents to
such action, of a majority of the PCM Shareholders entitled to vote, in
accordance with the provisions of Section 1201 of the California General
Corporation Law, and the Company Shareholders entitled to vote, in accordance
with the provisions of Section 228 of the Delaware General Corporation Law. A
majority of the PCM Shareholders and the Company Shareholders plan to approve
the Merger Proposal.
Only Company Shareholders, PCM Shareholders and Limited Partners as of the
close of business on the Determination Date will be entitled to notice of and to
vote in accordance with this Joint Consent Statement/Prospectus, together with
the accompanying appropriate Consent Forms, which are being distributed jointly
to the Limited Partners, the PCM Shareholders and the Company Shareholders to
obtain their votes "for" or "against" the Merger Proposal and related
transactions ("Solicitation Materials"). As of the Determination Date, there
were 17,259 Units outstanding and entitled to vote. None of the Units were held
by Affiliates of PCM or the General Partner. Vincent E. Galewick owns all of the
issued and outstanding shares of common stock issued by the Company. Mr.
Galewick owns 98.5% and Michael Cushing owns 1.5% of the issued and outstanding
shares of the common stock issued by PCM. Mr. Galewick and Mr. Cushing are in
favor of the Merger Proposal and, therefore, intend to vote "for" the Merger
Proposal.
If Units, shares of PCM's common stock or shares of the Company's common
stock are transferred after the Determination Date but before the expiration of
the Solicitation Period (and the holders of those transferred shares or Units,
respectively, become Company Shareholders, PCM Shareholders or are admitted as
substitute Limited Partners) such substitution will terminate the right of the
prior holder of the Units or shares to vote regarding the Merger Proposal and
related transactions, and any votes as to the transferred interests must be made
by the substitute Limited Partner, new PCM Shareholder or new Company
Shareholder. Solicitation Materials will be sent to substitute Limited Partners
(along with notice of their admission as substitute Limited Partners), new PCM
Shareholders and new Company Shareholders.
The Solicitation Period is the time period during which the Limited
Partners, PCM Shareholders and Company Shareholders may return their Consent
Forms to vote "for" or "against" the Merger Proposal and related transactions in
accordance with the Solicitation Materials. The Solicitation Period will
commence upon the delivery of the Solicitation Materials to the Limited
Partners, PCM Shareholders and Company Shareholders and will continue until 5
p.m., Pacific Time, on the latter of (i) 60 calendar days after the initial
delivery of this Joint Consent Statement/Prospectus or (ii) such later date as
may be designated by the Board of Directors of the Company, the Board of
Directors of PCM, and the Board of Directors of the General Partner. See "VOTING
PROCEDURES."
Included with this Joint Consent Statement/Prospectus is a Consent Form.
Limited Partners, PCM Shareholders and Company Shareholders may mark the Consent
Form to vote "for" or "against" as to their participation in the Merger and
related transactions. A Limited Partner electing to vote "for" or "against"
participation in the Merger and related transactions must vote the Units owned
by such Limited Partner in each Partnership. PCM Shareholders and Company
Shareholders must vote the shares owned by such shareholders and entitled to
vote.
Votes will be counted by the Exchange Agent, which is U.S. Stock Transfer
Corporation, an independent third party unaffiliated with any of the parties to
the Merger Proposal. The General Partner recommends that the Merger Proposal be
approved. Therefore, abstentions and non-votes, if any, will be counted as votes
"for" the Merger Proposal and related transactions in conformance with the
Partnership Agreements, which provide that failure of a Limited Partner to
respond to matters to be voted on by Limited Partners without a meeting
constitutes a vote of approval of the General Partner's recommendation.
A LIMITED PARTNER OR SHAREHOLDER WHO SUBMITS A SIGNED CONSENT FORM BUT FAILS TO
MAKE ONE OR MORE OF THE ELECTIONS REQUIRED BY THE CONSENT FORM WILL BE DEEMED TO
HAVE VOTED "FOR" THE MERGER PROPOSAL AND RELATED TRANSACTIONS. IF
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THE CONSENT FORM IS UNDATED, THE SIGNATURE OF THE LIMITED PARTNER OR SHAREHOLDER
WILL BE AUTHORITY FOR THE COMPANY TO ENTER THE DATE OF RECEIPT.
CONSENT OF A LIMITED PARTNER OR SHAREHOLDER (I.E., A VOTE "FOR") CONSTITUTES
APPROVAL OF THE MERGER PROPOSAL AND ALL THE MATTERS CONTEMPLATED IN THE RELATED
TRANSACTIONS.
ANY LIMITED PARTNER OR SHAREHOLDER WHO FAILS TO SUBMIT A CONSENT FORM WILL BE
CONCLUSIVELY PRESUMED TO HAVE VOTED "FOR" THE MERGER PROPOSAL.
No Special Meetings. Neither the Company nor the General Partner has
scheduled or noticed, or intends to schedule or notice, any special meetings of
the Company Shareholders or the Limited Partners to discuss or vote upon the
Solicitation Materials or the Merger Proposal and related transactions. The
General Partner intends to call for votes without meetings pursuant to the
provisions of the Partnership Agreements. The Company intends to call for votes
without a meeting pursuant to Section 228 of the Delaware General Corporation
Law.
The Company and the General Partner intend to actively solicit the support
of the Company Shareholders and the Limited Partners, respectively, for the
Merger Proposal and related transactions, subject to federal and state
securities laws, by answering questions about the Merger Proposal and related
transactions and explaining the reasons for the recommendation that the Company
Shareholders and Limited Partners vote to approve the Merger Proposal and
related transactions. Additionally, the Company has entered into an agreement
with Income Network Company, which is an Affiliate of PCM, the Company and the
General Partner, to serve as the Soliciting Agent and, therefore, solicit and
encourage, but not influence, the Limited Partners to furnish the Consent Forms
to the Exchange Agent.
Nominally Foreign Corporations. Although the Company is a Delaware
corporation, its principal office is located in the state of California. Certain
provisions of the California General Corporate Law specify that certain foreign
corporations are in a special category, if those corporations have
characteristics of ownership and operation that indicate that, while nominally
foreign (not organized under California law), they are in reality less than half
foreign. For example, a corporation organized under the laws of Delaware, such
as the Company, may be subject to California corporate regulatory statutes, if
such corporation is owned and operated in California. Corporations of this type
are called "nominally foreign" corporations and are subject to a number of the
key provisions of the California General Corporation Law applicable to domestic
corporations. In general, the provisions are those that are most important to
the protection of rights of shareholders and creditors. As the Company may be
classified as a nominally foreign corporation, and to ensure that the rights of
the Company's Shareholders are fully protected, the Company will undertake to
comply with the California General Corporation Law regarding, among other
things, mergers, reorganizations, and dissenters' rights. Limited Partners will,
therefore, be provided with all the rights specified in the California General
Corporation Law relating to reorganizations, rights of inspection of Partnership
records, and dissenters' rights. For a more detailed discussion of the
provisions relating to the designation of the Company as a nominally foreign
corporation, see the section of this Joint Consent Statement/Prospectus
captioned "THE COMPANY AS A NOMINALLY FOREIGN CORPORATION."
Certain Advantages of the Merger Proposal and Related Transactions
Liquidity and Market Valuation. The Units and currently issued and
outstanding shares of common stock of PCM are not publicly traded and have
limited liquidity. The primary means of liquidity for holders of the Units has
been requesting the Partnerships to redeem their Units. Although the
Partnerships are not obligated to comply with any such request, such redemptions
have occurred from time to time, using available cash to redeem Units at a
percentage of book value. As set forth above (see "Resale of the Common
Shares"), after consummation of the Merger, the Merger Stock may be made
eligible for trading on a regional or national stock exchange and there may be a
readily accessible market for selling the Merger Stock and a readily
determinable market price for the Merger Stock. With a readily accessible market
for Merger Stock, Unit holders would no longer be required to rely solely on the
Partnerships as a source of liquidity, and the Company would not be required to
use its cash to provide such liquidity. Instead, it is expected that holders of
Merger Stock will be able to sell their Merger Stock publicly from time to time,
subject to certain restrictions, at a fair market price. See "Restrictions on
Resale of Merger Stock."
Access to Equity Markets. Although the Company currently has no plans for
any equity offerings, the existence of publicly traded equity securities is
expected to provide the Company with future access to the public equity markets.
Greater Flexibility Regarding Capital Resources. The Company should have
greater flexibility with respect to the use of capital resources, because it
will not have to use available cash to redeem shares of its common stock. As
discussed above, the Partnerships have from time to time used their cash to
redeem Units when requested to do so by Limited Partners. There are also
potential tax advantages (and corresponding financial advantages) to conducting
a business as a corporation that should allow the Company greater flexibility
with respect to the management of its capital resources. Shareholders of the
Company will defer the payment of taxes on income earned by the Company until
the Company distributes such income in the form of dividends. Limited Partners,
by contrast, are taxed at such time as the Partnerships' recognize taxable
income. Limited Partners are taxed on such income at their individual federal,
state and, sometimes, municipal tax rates, which may exceed the maximum
corporate tax rates. Therefore, the Company, as a corporation, can accumulate
income for business expansion without adversely affecting a shareholder's tax
liability.
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Acquisition Consideration. After consummation of the Merger, the Company
may be able to use shares of its common stock as consideration in its
acquisition of assets or other businesses. The use of equity securities as an
acquisition currency is advantageous because it may be more tax efficient to the
seller of a business than a cash transaction and it allows the Company to
consummate acquisitions without depleting cash resources. It also allows a
seller to continue to hold an equity interest in the business acquired by the
Company, by equity ownership in the Company after such acquisition. The use of
common stock in acquisitions can also enable the Company to use advantageous
pooling accounting methods, if certain conditions are satisfied.
Incentive Compensation. The availability of shares of the Company's common
stock will permit the Company to provide its key employees with equity based
incentive compensation. The Company believes providing equity based incentive
compensation by the use of common stock will allow greater employee
participation in the Company's ownership, provide a more accurate measure of the
Company's performance as a result of common stock having a readily ascertainable
value, and provide the Company with more flexibility in designing equity based
incentive compensation. The Company believes that this method of compensation
conserves the Company's cash and promotes management stability.
Greater Employee Ownership. As a result of the complex tax reporting
requirements associated with being a limited partner and the administrative
burden placed on the Partnerships, as a result of having a significant number of
additional limited partners, it has not been feasible for the Partnerships to
offer ownership opportunities to a broad range of employees. By having the
shares of its common stock available, however, the Company will be able to offer
ownership opportunities to its employees. The Board of Directors of the Company
believes that employee ownership is in the best interests of the Company and its
shareholders.
Simplified Record Keeping, Accounting and Tax Reporting. Limited Partners
will not continue to be burdened with the cumbersome and complex tax reporting
requirements imposed on them under federal and multiple state partnership tax
laws, or with the related record keeping and accounting requirements.
Certain Disadvantages of the Merger Proposal and Related Transactions
Taxation. The Partnerships do not pay any federal income taxes. After
consummation of the Merger, the Company will be subject to federal and state
income tax. Shareholders of the Company will also be required to pay federal,
state and, in some circumstances, municipal income taxes on any dividends that
they receive from the Company and on any gain from the sale or exchange of their
Merger Stock. Therefore, while in partnership form income taxes are imposed only
once (i.e., on the Limited Partners), in corporate form income taxes are imposed
twice (i.e., once on the Company and once on its shareholders, to the extent
they receive dividends or recognize gain on the sale or exchange of securities).
See "FEDERAL INCOME TAX CONSEQUENCES" and "CERTAIN STATE AND LOCAL INCOME TAX
CONSEQUENCES."
Significant Reduction in Distributions. The dividends distributed by the
Company to its shareholders after consummation of the Merger may be
significantly less that the distributions historically made by the Partnerships
to the Limited Partners. Moreover, the Company shall not pay any cash dividends
on its common stock or preferred stock during the foreseeable future. See
"Distribution Policy" and "DISTRIBUTION POLICY -- HISTORICAL DISTRIBUTIONS OF
THE PARTNERSHIPS."
Uncertainty Regarding Trading and Market Price of Common Shares. The Merger
Stock may not be listed or approved for listing on any regional or national
securities exchange or otherwise designated or approved for designation upon
notice of issuance as a national market system security on an interdealer
quotation system maintained by the National Association of Securities Dealers,
Inc. To the extent that the Merger Stock may trade, trading prices for the
Merger Stock will be influenced by many factors, including the market for the
Merger Stock, the Company's dividend policy, the possibility of future sales by
the Company or its shareholders of shares of the Company's common stock,
investors' perception of the Company and its businesses, and general economic
and stock market conditions. No prediction can be made as to the price at which
the Merger Stock will trade, if it will trade at all. Moreover, there is a
probability that the Merger Stock may trade at a price below the value per share
assigned in the Merger Proposal. Limited Partners and PCM Shareholders have not
previously had access to an active trading market for the Units and shares of
PCM's common stock, respectively. Therefore, it is possible that they may wish
to sell their Merger Stock from time to time after the consummation of the
Merger. The sale of Merger Stock after the consummation of the Merger might have
an adverse effect on the market price of the Merger Stock; provided, however, to
mitigate as much as possible any such adverse effect, trading of the Merger
Stock shall be limited during the first one year period following the Closing
Date.
Dissenting Shareholders and Limited Partners. The Merger Proposal and
related transactions have been structured to provide dissenting Company
Shareholders ("Dissenting Shareholders") and dissenting Limited Partners
("Dissenting Limited Partners") certain dissenters' rights. The rights
applicable to Dissenting Limited Partners are contained in the Thompson-Killea
Act, as enacted in California. The Thompson-Killea Act requires that the
Dissenting Limited Partners receive either the appraised value of their Units
or, in the alternative, a substitute security equal in value to their Units. The
Company will satisfy this requirement by offering to purchase any Dissenting
Limited Partner's Units with an unsecured subordinated debenture ("Debenture")
issued under an indenture agreement ("Indenture Agreement"). A copy of the
Debenture is included with this Joint Consent Statement/Prospectus as Appendix N
and a copy of the Indenture Agreement is included with this Joint Consent
Statement/Prospectus as Appendix M. The Merger Proposal and related transactions
have also been structured to comply with the other protections afforded in the
Thompson-Killea Act.
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Dissenting shareholders in California corporations have a statutory right
to request that a corporate party to a merger repurchase any dissenting shares.
Mr. Galewick, who owns 98.5% of the issued and outstanding shares of PCM's
common stock and 100% of the Company's issued and outstanding common stock, will
vote his shares of PCM's common stock and shares of the Company's common stock
for approval of the Merger Proposal. Michael A. Cushing, who owns 1.5% of PCM's
common stock, will vote his shares of PCM common stock for approval of the
Merger Proposal. Therefore, although Dissenting Shareholders are provided with
certain rights as a matter of law, if the Merger Proposal is approved by the
Limited Partners, there will be no Dissenting Shareholders.
DISSENTING LIMITED PARTNERS AND DISSENTING SHAREHOLDERS MUST CAREFULLY READ AND
FOLLOW THE DIRECTIONS SET FORTH AT THE SECTION OF THIS JOINT CONSENT
STATEMENT/PROSPECTUS ENTITLED "VOTING PROCEDURES -- DISSENTING LIMITED PARTNERS
AND DISSENTING SHAREHOLDERS."
RECOMMENDATIONS
After considering the advantages and disadvantages of the Merger Proposal
described above, the General Partner believes that the Merger Proposal is fair
to, and in the best interests of, the Limited Partners and each of the
Partnerships. The General Partner recommends that each Limited Partner vote to
approve the Merger Proposal.
In reaching its conclusions as to the fairness of the Merger Proposal, the
General Partner gave significant consideration to the Fairness Opinion prepared
by the Fairness Analyst. To determine the values of PCM and the Partnerships,
the Fairness Analyst considered an asset-based approach and an income-based
approach to value. Therefore, the amount of capital contributed by the Limited
Partners to each of the Partnerships, and the returns on investment experienced
by each Partnership, were factors in determining the Exchange Value of each
Partnership. The extent to which each Partnership achieved its investment
objectives was another factor. PCM's value was calculated based on the present
value of debt-free net cash flow and the present value of the terminal value of
PCM's cash flows.
In the asset-based approach, the Fairness Analyst considered the total
expected net proceeds (i.e., after consideration of interim operating and
liquidation costs) which would accrue to the Limited Partners of each
Partnership as a result of the orderly liquidation of the assets of such
Partnership. The Fairness Analyst determined that the liquidation equity values
of the Partnerships are $28,256 for PAM; $2,404,533 for PAM II; $3,826,861 for
PAM III; $11,865,592 for PAM IV; and $2,594,885 for PAM V. The present value of
PCM's terminal value of cash flows was determined to be $38,764,000.
For the income-based approach, the Fairness Analyst considered the expected
annual cash flows which would be generated by PCM and each Partnership over a
projected, finite operating period, primarily as a result of collection efforts
and the sale of distressed loan portfolios. The expected cash flows, including
the terminal value, or projected cash flows resulting from the sale of assets or
business at the end of the projection period, were then discounted to a present
value by a rate of return deemed to be indicative of the risks inherent within
projected cash flows generated by assets such as distressed loan portfolios.
The projected cash distributions from 1997 through the life each
Partnership were $2,718,150 for PAM; $6,560,773 for PAM II; $8,625,225 for PAM
III; $25,117,113 for PAM IV; and $5,618,400 for PAM V. Present value of the
projected cash distributions was calculated using a discount rate based on a
weighted average yield to maturity of 14 high yield situations in fiscal 1996,
as specified in Exhibit A-12 to the Fairness Opinion. This amount was added to
the terminal value of the portfolios of the Partnerships, to determine a total
present value of each Partnership. The Fairness Analyst determined that the
present values of the Partnerships as of the date of the Fairness Opinion are
$1,432,934 for PAM; $1,571,591 for PAM II; $3,357,876 for PAM III; $9,737,878
for PAM IV; and $3,786,364 for PAM V. These values were added to each
Partnership's adjusted net asset value, for a combined portfolio and adjusted
net asset value of $933,609 for PAM; $3,111,728 for PAM II; $5,999,944 for PAM
III; $15,846,278 for PAM IV; and $4,699,954 for PAM V.
The present value of PCM was determined to be the sum of its terminal value
of cash flows, $38,764,000, plus the present value of its debt free net cash
flow, $5,759,000, for a total present value of $44,523,211.
These values formed the basis for the Exchange Value for each Partnership
and PCM.
The only material difference in the Partnership Agreements of the
Partnerships is Section 6.2 of the Agreement of Limited Partnership of PAM IV,
which provides that, until such time as the Limited Partners of PAM IV have
received a cash return equal to their capital contributions, plus an amount
equal to 6% of their capital contributions, those Limited Partners IV will
receive 90% of the cash available for distribution, and the General Partner will
receive the remaining 10% of the cash available for distribution. After the
Limited Partners of PAM IV have received the specified cash return, the
distribution ratio changes to 70% to those Limited Partners and 30% to the
General Partner. The Fairness Analyst considered this provision in calculating
the income-based value of PAM IV.
The General Partner has not received any offer made during the preceding
eighteen months for (a) a merger, consolidation, or combination of any of the
Partnerships; (b) an acquisition of any of the Partnerships or a material
portion of their assets; (c) a tender offer for or other acquisition of
securities of any class issued by any of the Partnerships; or (d) a change in
control of any of the Partnerships. Other than as specified in this Joint
Consent Statement/Prospectus, the General Partner is not aware of any factors
which may materially affect the value of the
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Merger Stock, the analysis of each Partnership performed by the Fairness
Analyst, or the fairness of the Merger Proposal to Limited Partners.
RISK FACTORS
THE CONVERSION OF UNITS AND SHARES OF PCM'S COMMON STOCK TO MERGER STOCK
INVOLVES A SUBSTANTIAL NUMBER OF SIGNIFICANT RISKS, WHICH EACH PROSPECTIVE
HOLDER OF THE MERGER STOCK SHOULD CONSIDER PRIOR TO MAKING A DECISION TO APPROVE
THE MERGER PROPOSAL. EACH PROSPECTIVE HOLDER OF THE MERGER STOCK SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS. THIS JOINT CONSENT
STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE ACTUAL RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM THE
RESULTS SPECIFIED IN THE FORWARD-LOOKING STATEMENTS BECAUSE OF CERTAIN FACTORS,
INCLUDING THOSE SPECIFIED IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
JOINT CONSENT STATEMENT/PROSPECTUS. PROSPECTIVE HOLDERS OF THE MERGER STOCK MUST
BE PREPARED FOR THE POSSIBLE LOSS OF THEIR ENTIRE INVESTMENTS IN THE COMPANY.
THE FOLLOWING RISK FACTORS ARE PRESENTED IN WHAT THE COMPANY BELIEVES IS THE
ORDER OF MATERIALITY, WITH RISKS POSED BY THE MERGER PROPOSAL PRESENTED BEFORE
MORE GENERIC RISKS. PROSPECTIVE HOLDERS OF THE MERGER STOCK SHOULD NOT CONCLUDE,
BECAUSE OF THE ORDER OF PRESENTATION OF THE FOLLOWING RISK FACTORS, THAT ONE
RISK FACTOR IS MORE SIGNIFICANT THAN ANOTHER RISK FACTOR.
IT IS IMPOSSIBLE TO PREDICT ACCURATELY THE RESULTS TO EITHER THE PCM
SHAREHOLDERS OR THE LIMITED PARTNERS OF A CONVERSION OF SHARES OF PCM'S COMMON
STOCK OR UNITS TO MERGER STOCK, AS THE COMPANY DOES NOT HAVE AN OPERATING
HISTORY. MOREOVER, FUTURE CONDITIONS IN THE BANK AND THRIFT AND LENDING INDUSTRY
ARE UNFORESEEABLE, AND THE COMPANY MAY ENCOUNTER SIGNIFICANT COMPETITION IN
ACQUIRING CERTAIN ASSETS. BEFORE VOTING ON THE MERGER PROPOSAL AND THE OTHER
MATTERS TO BE VOTED ON PURSUANT TO THE SOLICITATION MATERIALS, EACH LIMITED
PARTNER AND EACH PCM SHAREHOLDER SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS.
History of Losses. The Partnerships have a history of losses, because the
Partnerships' accounting is predicated on return of capital. For financial
statement purposes, the cash received from collections on distressed loan
portfolios does not appear as revenue, but goes to offset the particular
entity's basis in the respective portfolios. This has the effect of reducing the
respective entity's assets as presented on the financial statements.
No Operating History. Since its formation, the Company has had no
operations. The only historical financial information presented in this Joint
Consent Statement/Prospectus relates to the business operations of the
Partnerships and PCM.
Year 2000 Computer Compliance. Over the next two years, most large
companies will face a potentially serious business problem because many computer
software applications and computer equipment developed in the past may not
properly recognize calendar dates beginning in the Year 2000. As the century
date change occurs, date-sensitive systems may recognize the Year 2000 as the
Year 1900, or not at all. This inability to recognize or treat properly the Year
2000 may cause computer systems to process financial and operational information
incorrectly, which could have a material adverse effect on the results of
operations of all of the parties to the Merger. There can be no assurance that
PCM (or, if the Merger Proposal is approved and the Merger is consummated, the
Company) will complete the necessary modifications and conversions to the
computer software and operating systems necessary to properly operate or manage
date-sensitive information beyond December 31, 1999. Even if PCM (or, if the
Merger Proposal is approved and the Merger is consummated, the Company)
completes all necessary modifications and conversions to its computer software
and operating systems, there can be no assurance that the necessary
modifications and conversions by those third party institutions and entities
with which PCM and the Partnerships conduct business will be completed in a
timely manner, which could have a material adverse effect on the results of
operations of PCM and the Partnerships (or, if the Merger Proposal is approved
and the Merger is consummated, on the results of operations of the Company).
Significant Reduction in Distributions. The Partnerships historically made
monthly cash distributions to the Limited Partners until those distributions
were suspended in preparation for the Merger Proposal. THE COMPANY CURRENTLY
ANTICIPATES THAT IT WILL NOT PAY CASH DIVIDENDS. See "Dividend Policy" and
"SUMMARY -- Disadvantages of the Merger and Related Transactions."
In contrast to the Partnerships, the Company will be subject to federal and
state income taxes imposed on its income. Holders of Merger Stock will not be
subject to federal or state income taxes imposed on such income, except to the
extent dividends are paid by the Company. See "FEDERAL INCOME TAX CONSEQUENCES."
Additionally, the Company expects to pay no dividends in the foreseeable future.
It is important for each Limited Partner to realize that the actual amount of
dividends, if any, to be paid will be determined by the Board of Directors of
the Company, in its sole and absolute discretion, generally taking into account
a number of factors, including operating performance, liquidity, capital
requirements, and the Company's business plan and growth strategies. There can
be no assurance that the Company's anticipated policy in regard to dividend
payments will not be modified by the Board of Directors of the Company.
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DIVIDEND DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE IN THE SOLE AND ABSOLUTE
DISCRETION OF THE COMPANY'S BOARD OF DIRECTORS AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE COMPANY'S CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S
FINANCIAL CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS
AS THE COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Significant Growth. Although the Partnerships have had a history of losses,
as specified above, they have also experienced significant growth during the
past several years, which has placed significant demands on their
administrative, operational and financial resources. After consummation of the
Merger, the Company will seek to continue such growth, which could place
additional demands on its resources. Future growth of the Company will depend on
a number of factors, including the effective and timely initiation and
development of relationships, the Company's ability to maintain the quality of
services provided previously and the recruitment, motivation and retention of
qualified personnel. Sustaining such growth will also require the implementation
of enhancements to the Company's operational and financial systems and will
require additional management, operational and financial resources. There can be
no assurance that the Company will be able to manage expanding operations
effectively or that it will be able to maintain or accelerate any growth, and
any failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Change in Nature of Investment. The Partnerships are limited partnerships
organized under California law. The Company is a Delaware corporation. The
Partnerships have finite terms of existence and are structured to dissolve when
the assets of the Partnerships are liquidated. In contrast, the Company has a
perpetual term and intends to continue its operations for an indefinite time
period. To the extent the Company sells or refinances its assets, the net
proceeds therefrom generally will be retained by the Company for working capital
and new investments, rather than being distributed to shareholders in the form
of dividends.
Change in Voting Rights. Under the Partnership Agreements and applicable
California law, the Limited Partners have voting rights only as to major
transactions of the Partnerships (e.g., amendment of the Partnership Agreements,
removal of the General Partner, election of a new General Partner, sale of all
the assets of the Partnerships, and dissolution of the Partnerships). Otherwise,
all decisions relating to the operation and management of the Partnerships are
made by the General Partner. Certain major transactions of the Company,
including most amendments to the Company's Certificate of Incorporation, may not
be consummated without the approval of shareholders holding at least a majority
of the outstanding voting stock entitled to vote. Notwithstanding the foregoing,
certain transactions of the Company, such as the sale of all of the assets of
the Company to an Affiliate of the Company, must be approved by at least 90% of
the issued and outstanding voting stock of the Company entitled to vote. To the
extent that the Company will have issued and outstanding shares of its voting
stock held of record by 100 or more persons, adoption of additional
anti-takeover provisions may require a supermajority (i.e., two thirds) vote to
adopt. Subject to the provisions of the Company's Certificate of Incorporation,
as amended, and Bylaws regarding certain anti-takeover provisions specified in
the portion of this Joint Consent Statement/Prospectus captioned "Anti-Takeover
Provisions," each share of the Company's common stock will have one vote, and
the Company's Certificate of Incorporation, as amended, permits the Board of
Directors of the Company to classify and issue capital stock in one or more
classes having voting power which may differ from that of the Merger Stock. See
"COMPARISON OF UNITS AND MERGER STOCK."
Change in Duties Owed by General Partner. Regarding the Partnerships and
the Company, the General Partner and the Board of Directors of the Company,
respectively, owe fiduciary duties to their constituent parties. Some courts
have interpreted the fiduciary duties of members of a board of directors in the
same manner as the duties of a general partner in a limited partnership. Other
courts, however, have indicated that the fiduciary obligations of a general
partner to limited partners are greater than those owed by a director to
stockholders. Therefore, although it is unclear whether, or to what extent,
there are differences in such fiduciary duties, it is possible that the
fiduciary duties of the directors of the Company to its shareholders may be less
than those of the General Partner to the Limited Partners. See "COMPARISON OF
UNITS AND COMMON SHARES".
Changes in Compensation Arrangements. Under the Partnership Agreements,
distributions payable to the General Partner are specified and cannot be changed
by the General Partner without the approval of the Limited Partners. If the
Merger is consummated, the compensation paid to officers and directors of the
Company will be determined by a Compensation Committee for the Company
established by the Company's Board of Directors, and the terms and conditions of
employment of those officers and directors, including changes in compensation
arrangements, will not be subject to the direct approval or control of the
shareholders of the Company. See the summary compensation tables under the
caption "Executive Compensation" in the portion of this Joint Consent
Statement/Prospectus captioned"MANAGEMENT OF THE GENERAL PARTNER, PCM AND THE
COMPANY".
Future Portfolio Acquisitions. A significant aspect of the Company's growth
strategy is to acquire additional discounted portfolios of debt instruments and
obligations. The Company will regularly review various strategic acquisition
opportunities and will periodically engage in discussions and analysis regarding
such possible acquisitions. Currently, the Company is not a party to any
agreements, understandings, arrangements or negotiations regarding any material
acquisitions; however, negotiations may occur from time to time if appropriate
opportunities arise. There can be no assurance that the Company will be able to
locate and identify portfolios on terms favorable to the Company or, in a timely
manner, enter into acceptable agreements or close any such transactions. There
can be no assurance that the Company will be able to achieve its acquisition
strategy, and any failure to do so could have a material adverse effect on the
Company's business, financial condition, results of operations and ability to
sustain growth. In addition, the Company believes that it will compete for
qualified portfolios with other, larger companies, consolidators or
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investors in the discounted debt portfolio acquisition, collection and servicing
industry. Increased competition for such portfolios could have the effect of
increasing the costs to the Company of pursuing this growth strategy or could
reduce the number of qualified portfolios to be acquired. Future portfolio
acquisitions could require additional management and operational and financial
resources.
Integration of Acquired Operations. The Company intends to integrate the
operations of the Partnerships and PCM with its own operations. No assurance can
be given that the benefits expected from such integration will be realized. In
addition, the Company will be subject to the risks that the operations acquired
as a result of the Merger will not perform as expected and that the earnings
from such operations will not be sufficient to support the capital expenditures
needed to develop such operations in conformity with the Company's business and
growth strategies. Any delays or unexpected costs incurred in connection with
such integration could have a material adverse effect on the Company's business,
operating results or financial condition. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Taxation of Corporation and Shareholders. The Partnerships do not pay any
federal or state income taxes. After consummation of the Merger, the Company
will be subject to federal and state income taxes. Shareholders of the Company
will also be required to pay federal and state income taxes on any dividends
that they may receive from the Company and on any gain from the sale or exchange
of the Company's common stock, including the Merger Stock. Therefore, while in
partnership form the income of the Partnerships will be subject to federal state
and state income tax only once (i.e., on the Limited Partners) in corporate form
the income of the Company will be subject to federal and state income taxes
twice (i.e., once on the Company and once on its shareholders to the extent they
receive dividends or recognize gain on the sale or exchange of securities). See
"FEDERAL INCOME TAX CONSEQUENCES" and "OTHER TAX CONSEQUENCES."
Uncertainty Regarding Trading and Market Price of Merger Stock. There is a
probability that the Merger Stock may initially trade at prices substantially
below the value assigned to the Merger Stock in the Merger Proposal. Moreover,
the Merger Stock may not be listed or approved for listing on any regional or
national securities exchange or otherwise designated or approved for designation
upon notice of issuance as a national market system security on an interdealer
quotation system maintained by the National Association of Securities Dealers,
Inc. To the extent that the Merger Stock may trade, trading prices for the
Merger Stock will be influenced by many factors, including the market for the
Merger Stock, the Company's dividend policy, the possibility of future sales by
the Company or its shareholders of the Company's common stock, investors'
perception of the Company and its businesses, and general economic and stock
market conditions. No prediction can be made as to the price at which the Merger
Stock will trade, or if it will trade at all. Limited Partners and PCM
Shareholders have not previously had access to an active trading market for the
Units and shares of PCM's common stock, respectively. Therefore, it is possible
that they may wish to sell their Merger Stock from time to time after
consummation of the Merger. There can be no assurance that the Company's efforts
to stabilize the price of the Merger Stock by limiting the sale of the Merger
Stock will be successful. The sale of the Merger Stock after the Merger might
have an adverse effect on the market price of the Merger Stock. Moreover,
various state regulatory agencies may require further limitations on the
transfer of the Merger Stock.
Limited Public Market. There has been no public trading market for the
Company's securities. Although the Company intends to apply for listing of the
Merger Stock on a regional or national securities exchange, there is no
assurance that the Merger Stock will be so listed. If the Merger Stock is so
listed, such a listing provides no assurance that an active, receptive trading
market will develop for the Merger Stock or, if developed, will be sustained.
Potential Price Volatility. If a public market develops for the Merger
Stock, there may be significant volatility in the market price of the Merger
Stock. Period-to-period fluctuations in the Company's revenues and financial
results may have a significant impact on the perceived value of the Company and,
therefore, on the market price of the Merger Stock. The price of the Merger
Stock may be significantly affected by such factors as the financial results and
operating performance of the Company. Additionally, in recent years, the stock
market has experienced significant price and volume volatility and market prices
for many companies, particularly small and emerging growth companies, have
experienced significant price fluctuations not necessarily related to the
operating performance of those companies. The market price for the Merger Stock
may be affected by general stock market volatility.
Possible Dilution. The percentage interest of holders of Merger Stock in
the assets, liabilities, cash flow and results of operations of the Company, as
well as the percentage voting power of such holders, may be diluted (a) if the
Company has, prior to solicitation of consents to the Merger Proposal, issued
either preferred shares or common shares which are currently outstanding and
held by existing shareholders of the Company, or (b) by the issuance of shares
of the Company's common stock in any future offering. Vincent E. Galewick owns
100,000 shares of the Company's preferred stock, which is all of the issued and
outstanding shares of that preferred stock. Each share of that preferred stock
is convertible into 20 shares of the Company's common stock, subject to certain
conditions precedent relating to the acquisition, by any single shareholder, of
10% or more of the issued and outstanding shares of the Company's common stock.
(See the risk factor under the caption "Control by Principal Shareholder;
Antitakeover Measures", below). In addition, the Company may issue additional
equity securities in the future (for example, in a public offering), which would
dilute the percentage ownership of the then current shareholders of the Company.
Under NASDAQ National Market rules, the Company may not issue shares of its
common stock equal to 20% or more of the then outstanding shares of its common
stock in connection with the acquisition of the shares or assets of another
entity without shareholder approval. Issuances by the Company of additional
shares of its common
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stock or preferred stock could adversely affect existing shareholders' equity
interests in the Company and the market price of the Merger Stock.
Shares Eligible for Future Sale. Sales of shares of the Company's common
stock in the public market after consummation of the Merger could adversely
affect the market price of the Merger Stock and could impair the Company's
future ability to raise capital through the sale of equity securities. Upon
consummation of the Merger, the Company will have 7,512,500 shares of common
stock outstanding. The transfer of the Merger Stock shall be limited. See the
portion of this Joint Consent Statement/Prospectus entitled "Merger Stock Will
Be Restricted."
Control by Principal Shareholder; Anti-takeover Measures. If the Merger
Proposal is approved and the Merger is consummated, Vincent E. Galewick shall
beneficially own approximately 62% of the then issued and outstanding shares of
the Company's common stock. As a result, Vincent E. Galewick, in his capacity as
a shareholder of the Company, would be able to significantly influence or
control many matters requiring approval by the shareholders of the Company,
including the election of directors. The Company's Certificate of Incorporation
provides for preferred stock, the terms of which may be fixed by the Board of
Directors of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock. Each share of that preferred stock is convertible into 20
shares of the Company's common stock, subject to certain conditions precedent
relating to the acquisition, by any single shareholder, of 10% or more of the
issued and outstanding shares of the Company's common stock. The conversion of
that preferred stock into common stock could be used to delay, defer or prevent
a change in control of the Company. Moreover, if the Company becomes a "listed
corporation", as that term is defined in the portion of this Joint Consent
Statement/Prospectus entitled "Elimination of Cumulative Voting", the directors
of the Company will be divided into 2 classes, and the holders of the Merger
Stock will not be permitted to cumulate their votes for directors. Those
provisions could have the effect of delaying, deferring or preventing a change
in control of the Company.
Additional Provisions That May Discourage Changes of Control. The Company's
organizational documents and Delaware law contain additional provisions that may
delay, defer or prevent a takeover attempt that a shareholder might consider to
be in such shareholder's best interest, including offers that might result in a
premium over the market price for Merger Stock.
Conflicts of Interest. The General Partner has a fiduciary duty to each of
the Partnerships. However, the General Partner is also affiliated with the
Soliciting Agent, Vision, PCM and the Company. The Company, Vision, the
Soliciting Agent, PCM and the General Partner share common shareholders,
directors, and officers, some of whom are also individual parties to the Merger
Proposal. Several of the directors of the Company are employed independently of
the Company and those persons may continue to engage in other activities. The
persons serving as officers and directors of the Company shall have conflicts of
interest in allocating time, services, and functions between the other business
ventures in which those persons may be or become involved and, also, the affairs
of the Company. As a result, conflicts of interest between the Company and the
other activities of those persons may occur from time to time.
The Company will attempt to resolve any such conflicts of interest in favor
of the Company. The officers and directors of the Company are accountable to the
Company and the shareholders of the Company as fiduciaries (subject to the
restrictions set forth in the paragraph headed "Limitation on Liability of
Officers and Directors of the Company" above), which requires that such officers
and directors exercise good faith and integrity in handling the Company's
affairs. Moreover, the officers and directors of the Company believe that the
Company will have sufficient staff, consultants, employees, agents, contractors,
and managers to adequately conduct the business of the Company.
The General Partner has not retained an unaffiliated representative to act
on behalf of the Limited Partners for purposes of negotiating the Merger
Proposal, nor have the PCM Shareholders retained an unaffiliated representative
to act on behalf of the PCM Shareholders for purposes of negotiating the Merger
Proposal. The General Partner and the PCM Shareholders, respectively, do not
believe retaining such a representative is necessary because an unaffiliated
third party, Willamette Management Associates, Inc., as the Fairness Analyst,
has been retained to provide the Fairness Opinion as to the fairness of the
Merger Proposal to the Company, the PCM Shareholders and the Partnerships. A
copy of the Fairness Opinion is included with this Joint Consent
Statement/Prospectus as Appendix G. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
However, because there has been no separate unaffiliated representation of
the Limited Partners in the negotiation of the Merger Proposal, the Limited
Partners are presented with risks inherent in multiple representation.
Specifically, the persons negotiating the Merger Proposal may have attempted to
balance the interests of the Partnerships and the Limited Partners with the
interests of the PCM Shareholders and the Company. Aggressive advocacy solely on
behalf of the Limited Partners in the negotiations relating to the Merger
Proposal might have resulted in more favorable treatment for the Limited
Partners compared to the approach which was followed in negotiating the Merger
Proposal.
The General Partner and the Limited Partners have conflicts of interest
relating to the Merger Proposal because, if the Merger Proposal is approved, the
General Partner will cease providing management services to the Partnerships,
with a resulting loss of income. The Merger Stock which the General Partner
receives upon the winding up and dissolution of the Partnerships may be less
valuable than the participation in the distributions of the Partnerships which
the General Partner currently receives.
A more significant conflict of interest exists between Vincent E. Galewick,
the sole shareholder of the General Partner, on the one hand, and the Limited
Partners, on the other hand, because Mr. Galewick is also the majority
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shareholder of PCM and the sole shareholder of the Company. The allocation of
Merger Stock pursuant to the Merger Proposal creates a conflict between all the
parties included in the Merger Proposal, including the Limited Partners, on the
one hand, and Mr. Galewick and the General Partner, on the other hand. If the
Merger Proposal is approved, Mr. Galewick will own approximately 62% of the then
issued and outstanding common stock of the Company. Because of this conflict of
interest, Mr. Galewick did not participate in the negotiations regarding the
Merger Proposal.
No Arm's Length Agreements. Certain agreements and arrangements, including
those relating to compensation and payments between the Company and its
Affiliates, are not the result of arm's length negotiations. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS". Most significantly, PCM and the
Partnerships are parties to joint venture agreements pursuant to which PCM
provides collection and servicing activities to the Partnerships. The joint
venture agreements between PCM and the Partnerships have been filed as exhibits
to the Company's Registration Statement on Form S-4, of which this Joint Consent
Statement/Prospectus is a part. PCM also identifies and acquires distressed loan
portfolios and sells them to the Partnerships at negotiated prices, which
typically include a mark-up of as much as 37%. Vision, an affiliate of PCM and
the Company, provides human resources to PCM, the Partnerships and the General
Partner pursuant to an arrangement not the result of arm's-length negotiations.
In the event the Merger is consummated, Vision will no longer provide human
resources to the Company.
Common Relationships. The independent auditors for the Company are and may
continue to be the independent auditors for the Company's Affiliates. The
attorneys for the Company are also the attorneys for PCM, the Soliciting Agent
and the General Partner. Those attorneys are not, and have never been, the
attorneys for any Limited Partner, or for the Limited Partners collectively.
Joint representation of different parties creates certain potential conflicts of
interest, because the interests and objectives of the various parties regarding
certain issues relating to the conduct of the business of the Company are, or
may become, inconsistent with the interests and objectives of each other.
Representation by counsel of multiple interests has significant
implications, which each Limited Partner should consider. For example, rather
than vigorously asserting a single client's interest on an issue, it is probable
that counsel will balance interests between the parties it represents. Because
different parties may have different talents, energy, personal goals, and
financial resources, aggressive advocacy for one party could result in more
favorable treatment for that party compared to the more even-handed approach
counsel will follow in representing multiple interests.
Each party to the Merger Proposal represented by counsel has been advised
of the provisions of Rule 3-310 of the Rules of Professional Conduct of the
State Bar of California and of the conflicts associated with the various
interests of those parties, and each such party has signed a waiver of the
conflict of interests and a consent to the multiple representation by counsel of
each such party. However, if any controversy occurs following the consummation
of the Merger in which the interests of one party represented by such counsel
conflicts irreconcilably with the interests of any other party represented by
such counsel other attorneys, as appropriate, may be retained for one or all of
the parties in connection with such controversy. Instances may occur where the
interests of the Company and its shareholders may diverge and in such instances
a conflict of interest may exist. Additionally, in the event of a dispute among
the various parties, including the shareholders of the Company, counsel may be
precluded from representing any party without first obtaining the consent of all
parties.
Each Limited Partner remains completely free to seek independent counsel
before voting on the Merger Proposal.
Nature of Distressed-debt Assets Acquired by Company. The assets held by
the Partnerships and PCM and proposed to be acquired by the Company pursuant to
the Merger Proposal are, by their nature, non-performing. Specifically, those
assets were available for acquisition by the Partnerships and PCM because the
obligors of the indebtedness comprising those assets have failed to pay that
indebtedness and there is not sufficient security or collateral available for
disposition which would generate proceeds sufficient to pay that indebtedness.
For that reason, the assets which the Partnerships and PCM have acquired and the
Company intends to acquire by the Merger Proposal may be completely
unproductive; that is, those assets may generate no income to the Company.
Company May Acquire Unspecified Assets. While the Company proposes to
acquire the issued and outstanding common stock of PCM (and, ultimately, the
existing assets of PCM) and the existing assets of the Partnerships, the Company
expects (as true with regard to the current utilization of the assets of PCM and
the Partnerships) to dispose of certain of those assets from time to time and to
purchase replacement assets. The Company has not yet identified the specific
assets which the Company may from time to time acquire. With respect to the
unspecified assets, there is no information available to the Limited Partners as
to the terms of the acquisitions of those assets, the kind or type of those
assets and other relevant facts concerning those assets. As with PCM and the
Partnerships, there can be no assurance that the Company will be successful in
obtaining suitable assets which satisfy the Company's objectives, or that such
assets will be available, or can be acquired on acceptable terms and conditions,
or that any acquired asset will increase in value or generate cash to the
Company. Moreover, shareholders of the Company must depend upon the ability of
the officers and employees of the Company to select and manage the assets.
Speculative Investment Due to Market Factors. The business objectives of
the Company must be considered speculative because the market for distressed
consumer indebtedness will have a significant influence on the operations of the
Company. As there can be no assurance that changing market factors will not
adversely affect the operations of the Company, no assurance can be given that
PCM Shareholders and Limited Partners will realize a return on their exchange of
shares of common stock of PCM or Units, respectively, for Merger Stock, or that
Company Shareholders will not ultimately lose their investments in the Company
completely.
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Dependence on Management. All decisions regarding management of the
Company's affairs will be made exclusively by the officers and directors of the
Company. Accordingly, no person should vote in favor of the Merger Proposal
unless that person has carefully evaluated the personal experience and business
performance of the officers and directors of the Company and is willing to
entrust all aspects of management to the officers and directors of the Company,
or their successors.
Dependence on Key Personnel. The Company is dependent upon the efforts and
abilities of its senior management, particularly those of Vincent E. Galewick.
The loss of Mr. Galewick could have a material adverse affect on the business
and prospects of the Company. The officers of the Company believe that all
commercially reasonable efforts have been made to minimize the risks attendant
with such dependence on Mr. Galewick and the loss or departure of Mr. Galewick.
The General Partner currently maintains a key person life insurance policy in
the amount of $2,000,000 on Mr. Galewick and, if the Merger is consummated, the
Company anticipates maintaining such a policy on Mr. Galewick. Moreover, as the
prospective owner of a significant portion of the issued and outstanding common
stock of the Company, Mr. Galewick will have an incentive to remain with the
Company. However, there is no assurance that Mr. Galewick will remain with the
Company or that, if he should elect to leave the Company, his replacement would
cause the Company to operate profitably.
Dependence on Independent Contractors and Consultants. From time to time,
the Company may incur professional fees for the services of independent
contractors or consultants relating to locating or evaluating certain portfolio
acquisitions. The Company is not currently a party to any such consulting or
subcontracting agreements.
Dependence on Labor Force. The financial services industry, including the
business of purchasing, holding, servicing, collecting and selling discounted
portfolios of debt instruments and obligations, is labor intensive and subject
to significant personnel turnover. A significant turnover rate among the
Company's employees would increase the Company's recruiting and training costs
and could adversely impact the Company's costs in collecting discounted
portfolios. If the Company were unable to recruit and train a sufficient number
of employees, it would be forced to limit its growth or possibly curtail its
operations. Growth in the Company's business will require it to recruit and
train qualified personnel at an accelerated rate from time to time. There can be
no assurance that the Company will be able to continue to hire, train and retain
a sufficient number of qualified employees. Additionally, an increase in hourly
wages, costs of employee benefits or employment taxes could materially adversely
affect the Company.
Government Regulation. The debt collection industry is regulated under
various federal and state statutes. In particular, the Company may be subject to
certain provisions of the federal Fair Debt Collection Practices Act which
establishes specific guidelines and procedures which debt collectors must follow
in communicating with consumer debtors, including the time, place, and manner of
such communications. The Company is also subject to the Fair Credit Reporting
Act which regulates the consumer credit reporting industry and which may impose
liability on the Company to the extent that the adverse credit information
reported on a consumer to a credit bureau is false or inaccurate. The accounts
receivable management business is also subject to state regulation, and some
states require that the Company be licensed as a debt collection company. The
failure to comply with applicable regulations and statutes could have a material
adverse effect on the Company. There can be no assurance that additional federal
or state legislation, or changes in regulatory implementation, would not limit
the activities of the Company in the future or significantly increase the cost
of regulatory compliance.
Compliance with and Approval from Federal and State Authorities. The Merger
Proposal and related transactions will not be consummated if any moratorium on
transactions of its type are imposed by federal, state or regulatory
authorities, or if any state Blue Sky or securities authority imposes any
restriction upon, or prohibits any aspect of the Merger Proposal and related
transactions, which, in the judgment of the Company, renders the Merger Proposal
and related transactions undesirable or impractical.
Additional Financing May Be Required. There is no assurance that additional
funds will be available from any source should those funds be required by the
Company for expansion; and, if not available, the Company may not be able to
expand its operations as rapidly as if such funds were available.
Uncertainty of Future Financial Results, Fluctuations in Operating Results.
The results of operations of the Company may vary from period to period due to a
variety of factors, including, but not limited to, cost increases from
third-party manufacturers or suppliers, supply interruptions, the availability
and costs of materials, changes in marketing or sales expenditures, acceptance
of the services of the Company, competitive pricing pressures, and general
economic and industry conditions that affect the various business operations of
the Company.
Limited Resources of the Company. The Company believes it has the financial
resources to serve and satisfy its obligations to its shareholders, including
the commitment of the Company to meet the ongoing administrative and business
expenses of the Company. As with PCM and the General Partner, in regard to the
Partnerships, a significant financial reversal for the Company could adversely
affect the ability of the Company to meet and satisfy typical business
obligations and to conduct the business of the Company with regard to the assets
acquired from the Partnerships and PCM.
Substantial Competition. There is substantial competition for the
acquisition and management of certain financial assets. Numerous competitors
have resources and organizations which are substantially larger or greater than
those of the Company. Although the Company believes that its staff, facilities,
organization, and the assets and properties received by the Company as a result
of the Merger will be sufficient to enable the Company to compete
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with other companies, there can be no assurances that other companies will not
preclude the ability of the Company to acquire and manage assets.
Limitation on Liability of Officers and Directors of the Company. Section
145 of the Delaware General Corporation Law specifies that the Certificate of
Incorporation of a Delaware corporation may include a provision eliminating or
limiting the personal liability of a director or officer to that corporation or
its shareholders for damages for breach of fiduciary duty as a director or
officer, but such a provision must not eliminate or limit the liability of a
director or officer for (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) unlawful distributions
to stockholders. The Certificate of Incorporation of the Company includes a
provision eliminating or limiting the personal liability of the officers and
directors of the Company to the Company and its shareholders for damages for
breach of fiduciary duty as a director or officer. Moreover, the Company's
Bylaws provide certain indemnification to a controlling person, director or
officer which affects such a person's liability while acting in a corporate
capacity. The Company entered into various indemnification agreements with its
officers and directors, copies of which are attached to the Registration
Statement as exhibits thereto. Moreover, the Merger Agreement provides
indemnification for directors and officers of the Company. Accordingly, the
officers and directors of the Company may have no liability to the shareholders
of the Company for any mistakes or errors of judgment or for any act or
omission, unless such act or omission involves intentional misconduct, fraud, or
a knowing violation of law or results in unlawful distributions to the
shareholders of the Company.
DISCLOSURE OF POSITION OF SECURITIES AND EXCHANGE COMMISSION
REGARDING INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT
OF 1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND
IS, THEREFORE, UNENFORCEABLE.
No Limitation on Indebtedness. The Certificate of Incorporation and Bylaws
of the Company do not contain any limitation on the amount or percentage of
indebtedness, funded or otherwise, the Company might incur. The Indenture
Agreement provides that the assets of the Partnerships will not be leveraged
more than 70% in relation to any unsecured subordinated debentures issued
pursuant to the Merger Agreement. Accordingly, the Company could become
leveraged to the extent permitted by the Indenture Agreement, resulting in an
increase in debt service that could adversely affect the Company's ability to
make distributions to its stockholders and result in an increased risk of
default on its obligations. The Company does not believe that the debt
limitations imposed by the Indenture Agreement will have a significant impact on
the operations of the Company. However, if the Merger is consummated, the Board
of Directors of the Company will determine policies with respect to financing or
refinancing of assets and policies with respect to borrowings by the Company.
Loss on Dissolution of the Company. In the event of a dissolution of the
Company, the proceeds realized from the liquidation of the Company's assets, if
any, will be distributed to holders of the Company's common stock only after
satisfaction of claims of the Company's creditors and, in some situations,
holders of the Company's preferred stock. The ability of a holder of Merger
Stock to recover any monies whatsoever in that event will depend on the amount
of funds realized and the claims to be satisfied therefrom.
Remuneration of Directors, Officers and Employees. Compensation received by
officers, directors and employees of the Company will be determined from time to
time by the Board of Directors of the Company. Officers, directors, and
employees of the Company will be reimbursed for any out-of-pocket expenses
incurred on behalf of the Company.
Receipt of Compensation Regardless of Profitability. The officers,
directors and employees of the Company may receive significant compensation,
payments, and reimbursements regardless of whether the Company operates at a
profit or at a loss.
Ability of the Company to Implement its Business Strategy. Although the
Company is committed to various strategies in the delinquent consumer
indebtedness industry, implementation of these strategies will depend in large
part on the ability of the Company to (i) maintain appropriate procedures,
policies and systems in regard to compliance with federal, state and local
regulatory agencies; (ii) hire, train, and retain skilled employees; (iii)
continue to operate profitably in the face of increasing competition; and (iv)
obtain adequate financing on favorable terms to fund the business and growth
strategies of the Company. The inability of the Company to obtain or maintain
any or all of these factors could impair the ability of the Company to implement
its business strategies successfully, which could have a material adverse effect
on the results of operations and financial condition of the Company.
Business Interruption; Reliance on Computer and Telecommunications
Infrastructure. The Company's success is dependent in large part on its
continued investment in sophisticated telecommunications and computer systems,
including predictive dialers, automated call distribution systems and digital
switching. The Company has made significant investments in the acquisition,
development, and maintenance of such technologies in an effort to remain
competitive and anticipates that such expenditures will be necessary on an
on-going basis. Moreover, computer and telecommunication technologies are
evolving rapidly and are characterized by short product lifecycles, which
requires the Company to anticipate technological developments. There can be no
assurance that the Company will be successful in anticipating, managing or
adopting such technological changes on a timely basis or that the Company will
have the
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capital resources available to invest in new technologies. In addition, the
Company's business is highly dependent on its computer and telecommunications
equipment and software systems, the temporary or permanent loss of which,
through physical damage or operating malfunction, could have a material adverse
effect on the Company's business. While neither the Company nor any of its
Affiliates anticipates any problems with their computer software relating to the
year 2000, operating malfunctions in the software systems of financial
institutions and other parties who sell distressed loan portfolios might have an
adverse affect on the operations of the Company. The Company's business is
materially dependent on service provided by various local and long distance
telephone companies. A significant increase in the cost of telephone services
that is not recoverable through an increase in the price of the Company's
services, or any significant interruption in telephone services, could have a
material adverse effect on the Company.
Uninsured Loss; Acts of God. The Company may maintain comprehensive
liability and other business insurance of the types customarily carried by
similar businesses. However, there are certain types of extraordinary
occurrences which may be either uninsurable or not economically insurable. For
example, the Company is located in Southern California. In the event of a major
earthquake, the Company's telecommunications and computer systems could be
rendered inoperable for protracted periods of time, which would adversely affect
the Company's financial condition. In the event of a major civil disturbance,
the Company's operations could be adversely affected. Should such an uninsured
loss occur, the Company could lose significant revenues and financial
opportunities in amounts which would not be partially or fully compensated by
insurance proceeds.
Fairness Opinion Will Not Be Updated. The Fairness Opinion will not be
updated. A copy of the Fairness Opinion is included with this Joint Consent
Statement/Prospectus as Appendix G. While the General Partner is not aware of
any factors that may materially affect the fairness of the Merger Proposal or
the determination of the Exchange Value referenced in the Fairness Opinion, it
is possible that changes in the financial markets between the date of the
Fairness Opinion and the date the Merger, if approved, is consummated, might
affect the conclusions of the Fairness Analyst as specified in the Fairness
Opinion. If the Fairness Opinion were to be updated by the Fairness Analyst at
or near the date of the consummation of the Merger, there can be no assurances
that the Fairness Analyst's opinions and conclusions would not be materially
amended or revised.
THE MERGER
The Board of Directors of the Company, with the approval of the Board of
Directors of PCM and the approval of the General Partner, on behalf of the
Partnerships, is soliciting the consent of Limited Partners, PCM Shareholders
and Company Shareholders to approve the Merger Proposal.
On the Closing Date, the PCM Shareholders and the Partnerships (if, and
only if, the PCM Shareholders, the Company, and all of the Partnerships approve
the Merger Proposal) will merge with and into the Company. Pursuant to the
Merger Agreement and Plan of Reorganization ("Merger Agreement"), the
Partnerships and PCM Shareholders will receive the Merger Stock. Subsequent
thereto, the Partnerships and PCM will be wound up and dissolved and, as part of
that winding up and dissolution, the Partnerships will distribute the Merger
Stock to the partners of the Partnerships in a manner consistent with the
Exchange Value. The Exchange Value has been reviewed by Willamette Management
Associates, Inc. ("Fairness Analyst") and the Fairness Analyst has determined
that the Exchange Value is fair to the Company, PCM and the Partnerships.
Background of the Merger Proposal. Because the Partnerships' accounting is
based on the cost-recovery method, cash distributions to Limited Partners are
designated as a return of capital, as opposed to income or capital gains.
Therefore, until Limited Partners recover all of their contributions to the
Partnerships, they do not pay income taxes on distributions from the
Partnerships. In the summer of 1995, Vincent E. Galewick began considering a
reorganization of the Partnerships to corporate form. At that time PCM and the
Partnerships were both experiencing growth. Mr. Galewick concluded that such a
reorganization might provide a number of significant advantages that might
enhance the value of the investments by the Limited Partners. Mr. Galewick
believed that such a reorganization would provide the Limited Partners with the
opportunity to participate in the growth of PCM, while, at the same time,
increase the liquidity of their investments. Mr. Galewick also thought that such
a reorganization might provide the consolidated entity with greater access to
capital markets; greater flexibility regarding capital resources; the ability to
provide employees with incentive performance compensation by a stock option
plan; the opportunity to offer greater employee ownership; and more simplified
record keeping, accounting and tax reporting. Mr. Galewick also considered the
possibility that such a reorganization might permit the securities issued
pursuant to such a reorganization to be approved for listing or quotation on a
regional or national market securities quotation system.
Mr. Galewick realized that such a reorganization would provide him with
substantial benefits, while, at the same time, create a potential conflict of
interest between him, on the one hand, and Limited Partners, on the other hand.
Therefore, he directed the Company's independent auditing firm and the Company's
corporate and securities counsel to meet and confer with the Company's Chief
Financial Officer, Michael Cushing, to determine the advantages and
disadvantages of such a reorganization. In response, Mr. Cushing and
representatives of that accounting firm and the Company's corporate and
securities counsel met on numerous occasions to determine and discuss the
advantages and disadvantages of such a reorganization.
Generally, the persons attending the meetings at which such a
reorganization was discussed considered and discussed the background of each
Partnership and the effect of a reorganization of the Partnerships pursuant to a
rollup transaction on the Limited Partners. PAM was formed in 1991 with total
capital contributions of $5,245,000 and historical distributions of $787,500 in
1994; $210,000 in 1995; and $154,650 in 1996, with total historical
distributions through March, 1997 of $3,521,182. PAM II was formed in 1992 with
total capital contributions of $7,740,000 and historical distributions of
$1,144,600 in 1994; $309,950 in 1995; and $230,023 in 1996, with total
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historical distributions through March, 1997 of $3,840,200. PAM III was formed
in 1992 with total capital contributions of $9,990,000 and historical
distributions of $1,336,200 in 1994; $399,700 in 1995; and $295,925 in 1996,
with total historical distributions through March, 1997 of $3,164,115. PAM IV
was formed in 1992 with total capital contributions of $28,675,000 and
historical distributions of $1,530,263 in 1994; $1,547,025 in 1995; and
$1,433,425 in 1996, with total historical distributions through March, 1997 of
$5,410,838. PAM V was formed in 1994 with total capital contributions of
$5,970,000 and historical distributions of $14,250 in 1994; $88,050 in 1995; and
$179,100 in 1996, with total historical distributions through March, 1997 of
$460,500.
The net proceeds from the offerings by the Partnerships were invested, as
planned, in the acquisition of distressed debt portfolios. Each Partnership
achieved its original investment objectives of acquiring such portfolios and
thereafter realizing income from servicing those portfolios through joint
venture agreements with PCM.
During the Merger Proposal discussions, the possibility of including
Performance Asset Management Fund VI, Ltd., A California Limited Partnership
("PAM VI"), in the Merger Proposal was considered briefly, but rejected because
PAM VI was still in the process of being funded at the Determination Date and
the formula for distributions of available cash from operations and from the
winding up and dissolution of PAM VI are different than those of the
Partnerships. Moreover, because PAM VI had no operating history and was, in
fact, not completely funded at the Determination Date, it would have no assets
other than the initial capital contributions of its limited partners. Even if
the General Partner thought it would be appropriate to include PAM VI in the
Merger Proposal, it would have been difficult to apply the valuation criteria
used to determine the Exchange Value to PAM VI because of that partnership's
lack of portfolio assets and lack of operating history, and because the
allocation of partnership available cash and distributions to its limited
partners differs from the allocation of income and distributions to Limited
Partners in the Partnerships.
Several alternatives to the Merger were discussed, which are specified in
more detail under the caption "Alternatives to the Merger" on Page 29 of this
Joint Consent Statement/Prospectus. Briefly, the alternatives included (a) a
filing by the General Partner of appropriate Registration Statements for the
Units, and filing with the National Association of Securities Dealers. Inc. an
application for participation in the Over-The-Counter Bulletin Board Electronic
Quotation Service by the Partnerships in an effort to provide to the Limited
Partners a readily accessible market in which to trade their Units; (b) winding
up and dissolving the Partnerships, and distributing the assets to the Limited
Partners; (c) continuing PCM and the Partnerships in accordance with their
current business plans and joint venture agreements; and (d) going forward with
the Merger Proposal with the approval of less than all of the Partnerships. As
discussed in more detail on Page 29 of this Joint Consent Statement/Prospectus,
it was determined that none of these proposed alternatives was as beneficial to
the Limited Partners as the Merger Proposal.
After several months of financial analysis of the respective values of PCM
and the Partnerships, consideration of the various methods of reorganization of
the Partnerships, and consideration of various alternatives to a merger or
consolidation, it was determined that a rollup of the Partnerships into
corporate form, as specified in the Merger Proposal, would be the most
advantageous means of reorganization. Vincent E. Galewick directed the Company's
independent auditing firm to locate and retain a nationally recognized valuation
firm acceptable to the Company's independent auditing firm, to render an opinion
regarding the fairness of the valuation which the Company, the General Partner
and PCM ascribed to each party participating in the proposed reorganization,
including the Partnerships. As a result, that independent auditing firm selected
Willamette Management Associates, Inc. ("Fairness Analyst"). Mr. Galewick did
not negotiate any terms and conditions of the engagement of the Fairness
Analyst.
In or about July, 1997, the General Partner advised the Limited Partners
that it was suspending distributions in order to complete the valuation of each
Partnership. This was necessary to assure that the Limited Partners' capital
accounts did not change after the Determination Date. Neither the General
Partner nor any of its Affiliates nor any Partnership experienced or probably
will experience any material adverse financial developments after the
Determination Date which might have a material affect on the terms and
conditions of the Merger Proposal.
Conditions of the Merger. The Merger will not be consummated unless it
receives the requisite approval of the Limited Partners of each Partnership, the
approval of PCM Shareholders, the approval of the Company Shareholders, and all
approvals required from all state and federal regulatory agencies. Consummation
of the Merger is also subject to the receipt of the tax opinion described in
"FEDERAL INCOME TAX CONSEQUENCES." Receipt of this tax opinion may be waived in
whole or in part by the Partnerships, the PCM Shareholders and the Company, in
each respective party's sole discretion.
Prior to the consummation of the Merger, the obligations of the parties to
the Merger Agreement may be terminated at any time (including after approval of
the Merger Proposal by the Limited Partners and the respective shareholders) if,
among other things, (a) the Board of Directors of the General Partner, the Board
of Directors of PCM or the Board of Directors of the Company adopts a resolution
terminating the Merger Agreement or (b) a final injunction, order, or other
action of a court or other governmental agency prevents the consummation of the
Merger.
The Determination Date is June 30, 1997, a date determined by the Company.
The General Partner has suspended distributions by the Partnerships to the
Limited Partners effective as of the Determination Date. This was necessary to
assure that the Limited Partners' capital accounts did not change after the
Determination Date. The Company has the authority to postpone the Determination
Date and declare a new Determination Date, in its sole and absolute discretion.
The Company may postpone the Determination Date and declare a new Determination
Date if the matters contemplated in this Joint Consent Statement/Prospectus are
postponed for any reason.
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Effects of the Merger. As a result of the Merger, all of the issued and
outstanding common stock of PCM, and all of the assets and properties now held
directly or indirectly by the Partnerships, will be acquired and held by the
Company, and PCM and the Partnerships will cease to exist by operation of law.
The Company, as the surviving corporation, will possess all of the assets,
properties, rights and privileges, and will be subject to all the liabilities
and obligations, of PCM, the Partnerships and the Company existing at the
Closing Date. The directors and executive officers of the Company on the Closing
Date will remain as the directors and executive officers of the Company.
The Merger Agreement. The Merger Proposal will be consummated pursuant to
the Merger Agreement, if the Merger Proposal receives the requisite approval of
the Limited Partners of each Partnership, the approval of the PCM Shareholders,
the approval of the Company Shareholders, and if the other applicable conditions
to the Merger Proposal are satisfied or waived, including any approvals required
from all state and federal regulatory agencies. The Merger Agreement is
incorporated by reference as an exhibit to the Registration Statement and is
included with this Joint Consent Statement/Prospectus as Appendix A.
Until such time as the Merger Agreement has been approved and adopted by
all the parties thereto, it may be amended or terminated by the Board of
Directors of the General Partner, on behalf of any of the Partnerships; the PCM
Shareholders; or the Board of Directors of the Company, on behalf of the
Company; provided, however, that at any time after the Merger Proposal has been
adopted by the Limited Partners, neither the PCM Shareholders nor the Board of
Directors of the Company may amend, modify or supplement the Merger Proposal to
change the amount or kind of interests to be received by the Limited Partners,
the PCM Shareholders or the Company Shareholders or to make any change if such
change would, alone or in the aggregate, materially adversely affect the Limited
Partners.
Approval by All of the Partnerships Is Required. The Merger may be
consummated only if all of the Partnerships approve the Merger Proposal. The
Merger Proposal provides that those Limited Partners that reject the Merger
Proposal shall not bear an unfair portion of the transaction costs of the Merger
Proposal. A Limited Partner which rejects the Merger Proposal shall not be
required to pay any of the costs of the Merger Proposal in accordance with the
provisions of Section 25014.7(e)(3) of the Thompson-Killea Act. The General
Partner, the PCM Shareholders and the Company have considered the possibility of
approval of the Merger Proposal and related transactions by less than all of the
Partnerships and do not believe that the Merger can be fairly consummated unless
all of the Partnerships approve the Merger Proposal because, among other things,
(a) it would be unduly burdensome or impossible to evaluate and apportion the
value of the various services provided to the Partnerships by PCM, considering
the complexity and scope of the various joint ventures between the Partnerships
and PCM; and (b) if the Merger Proposal is approved, PCM will cease to exist by
operation of law, and would no longer be available to provide the same services
to a dissenting Partnership. The General Partner's independent auditing firm
engaged Willamette Management Associates, Inc. ("Fairness Analyst") to render a
fairness opinion concerning the Merger ("Fairness Opinion"). A copy of the
Fairness Opinion is included with this Joint Consent Statement/Prospectus as
Appendix G. See "DETERMINATION OF THE EXCHANGE PRICE AND ALLOCATION OF THE
COMMON SHARES."
Each Limited Partner will be provided with a separate supplement pertaining
to each Partnership in which such Limited Partner has an interest. Each
Partnership supplement includes, among other things, brief descriptions of each
material risk and the effect of the Merger Proposal and related transactions as
they may pertain uniquely to such Partnership. Each Limited Partner is strongly
urged to carefully read and consider the appropriate Partnership supplement.
Merger Stock Will Be Restricted. To accomplish the purposes of the Merger,
the transfer, assignment, sale, conveyance, hypothecation, encumbrance, or other
alienation of the shares of the Merger Stock shall be restricted as follows: 25%
of the Merger Stock will be unrestricted immediately after the consummation of
the Merger. 25% of the Merger Stock will be restricted until the end of the
Company's first full fiscal quarter following the Closing Date. 25% of the
Merger Stock will be restricted until the end of the Company's second full
fiscal quarter following the Closing Date. The remaining 25% of the Merger Stock
will be restricted until the end of the Company's third full fiscal quarter
following the Closing Date.
Consummation of the Merger. If the Merger Proposal is approved and the
other conditions of the Merger Proposal are waived or satisfied, the Closing
Date will be selected by agreement of the Board of Directors of the General
Partner, the PCM Shareholders and the Board of Directors of the Company. The
Company currently anticipates that the Merger will be consummated in September,
1998. Upon consummation of the Merger, the Partnerships and the PCM Shareholders
will receive from the Company certificates evidencing and representing the
Merger Stock. Subsequent thereto, upon the winding up and dissolution of the
Partnerships, the General Partner and the Limited Partners will receive
certificates for their respective shares of the Merger Stock.
Costs of the Merger. For purposes of the Thompson-Killea Act, the costs of
the Merger will be divided into two categories (a) transaction costs; and (b)
solicitation expenses. Transaction costs are those costs of printing and mailing
this Joint Consent Statement/Prospectus and other documents; legal fees not
related to the solicitation of votes, consents, or tenders; financial advisory
fees, investment banking fees; appraisal fees; accounting fees; independent
committee fees; travel expenses; and all other fees related to the preparatory
work of the Merger. Transaction costs do not include (a) those costs that would
have otherwise been incurred by the Partnerships in the ordinary course of
business or (b) solicitation expenses. Solicitation expenses include direct
marketing expenses, such as telephone calls, broker dealer fact sheets, legal
and other expenses related to the solicitation of written consents and direct
solicitation compensation to brokers and dealers.
In the event the Merger Proposal is rejected, the Limited Partners shall
not bear an unfair portion of the transaction costs of the Merger Proposal. In
the event the Merger Proposal is rejected, the transaction costs will be
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apportioned between the Company and the Limited Partners according to the final
vote regarding the Merger Proposal as follows (a) the Company shall bear all
transaction costs in proportion to the number of votes of the Limited Partners
that vote to reject the Merger Proposal; and (b) each Partnership shall bear the
transaction costs in proportion to the number of votes of the Limited Partners
of such Partnership that voted to approve the Merger Proposal.
In the event the Merger Proposal is rejected, the Company shall pay all of
the solicitation expenses. In the event the Merger Proposal is approved, the
Partnerships shall bear the transaction costs in proportion to the number of
votes of the Limited Partners that vote to approve the Merger Proposal. In the
event the Merger Proposal is approved, the Partnerships shall bear the
solicitation costs in proportion to the number of votes of the Limited Partners
that vote to approve the Merger Proposal.
ALTERNATIVES TO THE MERGER
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal and related transactions. Some of
these alternatives would not constitute a reorganization. The General Partner
considered filing with the Securities and Exchange Commission the appropriate
Registration Statements regarding the Units and submitting the National
Association of Securities Dealers, Inc. the applications and other information
required to enable the Partnerships to participate in the Over-The-Counter
Bulletin Board Electronic Quotation Service, in an effort to provide to the
Limited Partners a readily accessible market to trade their Units. In the
opinion of the General Partner, this possibility would fail to provide the
Limited Partners with the liquidity that the Merger Proposal might provide,
because of the unsatisfactory market for publicly traded limited partnership
units. The PCM Shareholders and the Company have also considered the possibility
of merging PCM and the Company without merging with any of the Partnerships and
thereafter causing the surviving corporation to make an initial public offering
of its securities. In the event the Merger is not consummated, the PCM
Shareholders and the Company may elect this alternative.
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal, each of which constitutes a
reorganization. The General Partner considered the possibility of selling all of
the Units to the Company, and the Company considered purchasing all such Units,
in exchange for shares of common stock of the Company. This alternative would
require the Company and the Partnerships to comply with certain tender offer
requirements which would make the proposed reorganization more complicated in
terms of statutory compliance. Alternatively, the General Partner considered
winding up and dissolving the Partnerships and distributing the proceeds of
liquidation to the Limited Partners. Although a dissolution would provide the
Limited Partners with immediate liquidity, the General Partner believes that,
because of the type of assets held by the Partnerships, even an orderly
liquidation would result in a prohibitive discount on the value of the debt
portfolios. Such a dissolution would also result in additional legal,
accounting, appraisal, advertising and sales costs to the Partnerships, further
diminishing the value of the Partnerships' assets.
The General Partner believes that the value of the consideration to be
received by the Partnerships in the Merger would far exceed any of the
alternatives specified above, specifically because the Partnerships' assets
consist primarily of distressed loan portfolios and such portfolios have
liquidation values significantly less than their values to the Partnerships or
the Company, which can generate substantial revenues from collection activities
on the portfolios.
The PCM Shareholders and the General Partner considered the results of
continuing PCM and the Partnerships in accordance with their current business
plans and joint venture agreements. A continuation of the Partnerships in
accordance with their existing business plans would benefit Limited Partners to
the extent that they would continue to receive cash distributions from the
proceeds of the Partnerships' collection of debt portfolios. If the Merger is
consummated, Limited Partners would no longer receive such cash distributions.
Moreover, the Company currently does not anticipate paying cash dividends to its
shareholders. Therefore, a continuation of the Partnerships could provide to the
Limited Partners more cash than they could receive if the Merger is consummated.
If the Merger Proposal is approved, Limited Partners will be minority
shareholders in the Company and will lose the ultimate control over Partnership
affairs which they currently hold.
Alternatively, PCM, the Partnerships' servicing entity, currently has the
capacity to service portfolios in excess of those owned by the Partnerships and
has the potential for significant growth. PCM has been offered access to
commercial lines of credit and its growth is not contingent upon a continuing
relationship with the Partnerships. After consummation of the Merger, Limited
Partners who approve the Merger Proposal will participate in this growth.
Moreover, after consummation of the Merger, the Company will be able to compete
for available portfolios by taking advantage of economies of scale not available
to PCM and the Partnerships acting individually. The General Partner believes
that Limited Partners should have the opportunity to consider and vote regarding
their participation in the ownership of the Company.
The General Partner believes that the value of the consideration to be
received by the Partnerships in the Merger is equal to the present value of the
Partnerships, which assumes that PCM and the Partnerships continue with their
current business plans and joint venture agreements. However, the Company, with
access to commercial lines of credit, will be able to compete more effectively
with its competitors in the marketplace for debt portfolios. The General Partner
believes that there will be increased competition for debt portfolios as finance
companies, collection agencies, and even Wall Street firms, which offer
asset-backed securities, enter the market. Therefore, the General Partner
believes that the Merger Proposal, if approved, would ultimately provide Limited
Partners with a greater
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return on their investments than they would obtain if the Partnerships continued
in their present business arrangements, and would increase the longevity, and
the ultimate return, on the Limited Partners' investment.
The PCM Shareholders and the General Partner also considered going forward
with the Merger Proposal with the approval of less than all of the Partnerships,
but rejected this alternative because of economies of scale, the scope and
complexity of existing joint ventures between PCM and the Partnerships, and the
economics of purchasing, holding, servicing, collecting and selling distressed
debt portfolios. Specifically, as presented in detail in the section of this
Joint Consent Statement/Prospectus captioned "Approval by All of the
Partnerships Is Required," the General Partner does not believe that the Merger
can be fairly consummated unless all of the Partnerships approve the Merger
Proposal, because it would be unduly burdensome or impossible to evaluate and
apportion the value of the various services provided to the Partnerships by PCM,
considering the complexity and scope of the various joint ventures between the
Partnerships and PCM; and, if the Merger Proposal is approved, PCM will cease to
exist by operation of law, and would no longer be available to provide the same
services to a dissenting Partnership. The elimination of PCM as a separate
entity would result in the elimination of the acquisition fees PCM currently
charges the Partnerships. Existing joint ventures, and the management and
servicing fees related to various separate joint ventures between PCM and the
Partnerships, would similarly merge into a single large business venture,
reducing management and servicing fees. Because PCM would not continue to exist
as an independent entity, Partnerships which did not participate in the Merger
Proposal will lose their present source of portfolio acquisitions. PCM, which
currently has access to commercial lines of credit, has the right to assign such
commercial lines to a successor entity, allowing for the Company, if the Merger
is consummated, to enjoy the benefits of increased credit lines for portfolio
acquisitions which are not currently available to the Partnerships individually.
Moreover, one of the primary benefits of the Merger Proposal is the
consolidation of record keeping and simplification of the complex accounting
requirements imposed on the Partnerships under federal and numerous state
partnership tax laws. See "Approval by All of the Partnerships Is Required"
above.
The General Partner is not aware of any offers made during the 18 months
immediately preceding the date of this Joint Consent Statement/Prospectus for a
merger, consolidation, or combination of any of the Partnerships; an acquisition
of any of the Partnerships or a material amount of their assets; a tender offer
for or other acquisition of securities of any class issued by any of the
Partnerships; or a change in control of any of the Partnerships. Other than as
set forth herein, the General Partner is not aware of any factors which may
affect materially the value of the consideration to be received by the
Partnerships in the Merger or the fairness of the Merger Proposal to the
Partnerships.
Fairness Opinion. There is no material relationship between the General
Partner, the Partnerships, Vision, the Soliciting Agent, PCM, the Company, or
any Affiliate thereof, on the one hand, and the Fairness Analyst, on the other
hand, nor is any such material relationship contemplated. A copy of the Fairness
Opinion is included with this Joint Consent Statement/Prospectus as Appendix G.
A detailed discussion of the Fairness Opinion is set forth under the caption
"Fairness Opinion" beginning on Page 36 of this Joint Consent
Statement/Prospectus.
Recommendations. After considering the alternatives and the advantages and
disadvantages of the Merger Proposal described above, the Company, the PCM
Shareholders and the General Partner have determined that the Merger Proposal is
fair to, and in the best interests of, the Partnerships, the PCM Shareholders,
and Company Shareholders. The Board of Directors of the Company recommends that
each of the Company Shareholders vote to approve the Merger Proposal. The Board
of Directors of PCM recommends that each PCM Shareholder vote to approve the
Merger Proposal. The Board of Directors of the General Partner recommends that
each Limited Partner vote to approve the Merger Proposal.
DESCRIPTION OF THE MERGER STOCK
The authorized capital stock of the Company is (i) 100,000,000 shares of
$.001 par value common stock, 1,000 shares of which are issued and outstanding
and held by Vincent E. Galewick (which is all of the issued and outstanding
common stock of the Company) and (ii) 10,000,000 shares of $.001 par value
preferred stock, 100,000 shares of which are issued and outstanding and held by
Vincent E. Galewick. The shares of the Company's preferred stock owned by Mr.
Galewick are convertible to shares of the Company's common stock at a ratio of a
one share of such preferred stock for 20 shares of such common stock, subject to
certain conditions precedent relating to the acquisition, by any single
shareholder, of 10% or more of the issued and outstanding shares of the
Company's common stock. All of the issued and outstanding shares of the
Company's common stock and preferred stock are duly authorized, validly issued,
fully paid and non assessable, and were not issued in violation of the
preemptive rights of any person. The Merger Stock, when issued in accordance
with the terms of the Merger Agreement, shall be duly authorized, validly
issued, fully paid and nonassessable. Other than as specified in Section 5.2 of
the Merger Agreement, there are no outstanding subscriptions, options, warrants,
calls or rights of any nature whatsoever issued or granted by, or obligating,
the Company, to purchase or otherwise acquire any shares of capital stock of the
Company, or other equity securities or equity interests of the Company or any
debt securities of the Company. A copy of the Merger Agreement is included with
this Joint Consent Statement/Prospectus as Appendix A.
Upon consummation of the Merger there will be 7,512,500 shares of the
Company's common stock issued and outstanding, each of which will be owned by
the General Partner, the Limited Partners, the PCM Shareholders and the Company
Shareholders. There will be 100,000 shares of the Company's preferred stock
issued and outstanding and held by Vincent E. Galewick upon consummation of the
Merger.
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Merger Stock. After the Merger, the Merger Stock will be validly issued,
fully paid and nonassessable. Subject to any prior rights, if any such prior
rights exist as an operation of law, holders of the Merger Stock will be
entitled to receive dividends, if any, out of assets legally available thereof
at such times and in such amount as the Board of Directors of the Company may
from time to time determine. See "RISK FACTORS -- Significant Reduction in
Distributions." The Merger Stock will be neither redeemable nor convertible and
the holders thereof will have no preemptive or subscription rights to purchase
any securities of the Company. Upon the liquidation, dissolution or winding up
of the Company, subject to the rights of holders of the Company's preferred
stock, holders of the Company's common stock, including the Merger Stock, will
be entitled to receive pro rata the assets of the Company which are legally
available for distribution, after payment of all debts and other liabilities.
Each issued and outstanding share of the Company's common stock will be entitled
to one vote on all matters submitted to a vote of holders of the Company's
common stock.
Unsecured Subordinated Debentures. Dissenting Limited Partners who perfect
their dissenters' rights will receive unsecured subordinated debentures
("Debenture") under an Indenture Agreement ("Indenture Agreement"). The
Indenture Agreement provides for a trustee ("Trustee") and specifies that (1)
the title of the Debenture shall be "Unsecured Subordinated Debenture Due
January 31, 2005"; (2) the price at which the Debenture will be issued shall be
the value, in United States currency, of any Dissenting Limited Partner's
interest in any Partnership, determined in accordance with the Exchange Value,
as of the Determination Date, of any Dissenting Limited Partner who perfects his
or her dissenter's rights pursuant to the terms of the Merger; (3) the date on
which the principal of the Debenture is payable shall be January 31, 2005, which
date or dates may be fixed or extendible; (4) the rate or rates at which the
Debenture shall bear interest, which shall be a variable interest rate equal to
the federal rate as determined in accordance with Section 1274 of the Internal
Revenue Code of 1986, payable on January 1 and July 1 of each year and based on
a 365-day year; (5) the Debenture shall be issued within 30 days of the closing
date of the Merger; (6) the Debenture shall limit total indebtedness of the
Company to 70 percent of the appraised value of the assets previously owned by
the Partnerships; and (7) the Debenture shall be prepaid with 80 percent of the
net proceeds of any sale or refinancing of the assets previously owned by the
Partnerships. The Indenture Agreement does not provide for a sinking fund. A
copy of the Debenture is included with this Joint Consent Statement/Prospectus
as Appendix M. A copy of the Indenture Agreement is included with this Joint
Consent Statement/Prospectus as Appendix N.
Pursuant to the Indenture Agreement, an event of default means the
occurrence, or in some cases the continuance, of one of the following events (a)
default in the payment of all or any part of the principal of the Debenture as
and when the same shall become due and payable either at maturity, or otherwise;
or (b) default in the payment of any installment of interest upon any Debenture
as and when the same shall become due and payable, and continuance of such
default for a period of 30 days; or (c) default in the performance, or breach,
of any covenant or warranty of the Company in respect of the Debenture (other
than a covenant or warranty in respect of the Debenture a default in whose
performance or whose breach is specifically dealt with differently), and
continuance of such default or breach for a period of 60 days after there has
been given, by registered or certified mail, to the Company by the Trustee or to
the Company and the Trustee by the holders of at least 25% in principal amount
of the outstanding Debentures affected thereby, a written notice specifying such
default or breach and requiring it to be remedied and specifying that such
notice is a "Notice of Default" thereunder; or (d) the Company shall commence a
voluntary case under any applicable bankruptcy, insolvency or other similar law
now or hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment of or taking
possession by a receiver, liquidator, assignee, custodian, trustee or
sequestrator (or similar official) of the Company or for any substantial part of
its property, or make any general assignment for the benefit of creditors; or
(e) a court having jurisdiction shall enter a decree or order for relief in
respect of the Company in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or appointing a
receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar
official) of the Company or for any substantial part of its property or ordering
the winding up or liquidation of its affairs, and such decree or order shall
remain unstayed and in effect for a period of 60 consecutive days; or (f) any
other event of default provided in the resolution of the Board of Directors of
the Company under which the Debentures are issued or in the Debenture.
Pursuant to the Indenture Agreement, the Company is required to furnish to
the Trustee on or before April 30 in each year (beginning with the first April
30 to occur after the initial issuance of Debentures under the Indenture
Agreement) a brief certificate from the Company's principal executive, financial
or accounting officer as to his or her knowledge of the Company's compliance
with all conditions and covenants under the Indenture Agreement. The Company is
also required, under the Indenture Agreement, to give the Trustee notice of any
failure by the Company to make any payment of the principal of or interest on
the Debentures when the same shall be due and payable. The Company must also
provide the Trustee with copies of the annual reports and of the information,
documents, and other reports which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934.
In the event of a default, either the Trustee or the holders of not less
than 25% in aggregate principal amount of the outstanding Debentures may declare
the entire principal of all Debentures and the interest accrued thereon, if any,
to be due and payable immediately, and upon any such declaration the same shall
become immediately due and payable.
The indebtedness evidenced by the Debentures is, to the extent provided in
the Indenture Agreement, subordinate and subject in right of payment to the
prior payment in full of all Senior Debt. The term "Senior Debt" means the
principal of, interest on and other amounts due on indebtedness of the Company,
whether outstanding on the Closing Date or thereafter created, incurred, assumed
or guaranteed by the Company; unless, in the instrument creating or evidencing
or pursuant to which indebtedness is outstanding, it is expressly provided that
such indebtedness is not senior in right of payment to the Debentures. Senior
Debt includes, with respect to the obligations described
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above, interest accruing on or after the filing of any petition in bankruptcy or
for reorganization relating to the Company, whether or not post-filing interest
in allowed in such proceedings at the rate specified in the instrument governing
the relevant obligation, as well as all expenses and reimbursements due the
Trustee. Notwithstanding anything to the contrary in the foregoing, Senior Debt
shall not include (a) indebtedness of or amount owed by the Company for
compensation to employees, or for goods, services or materials purchased in the
ordinary course of business; (b) indebtedness of the Company to a subsidiary or
Affiliate of the Company or any officer, director or employee of the Company;
(c) any liability for federal, state, local or other taxes, owed or owing by the
Company; or (d) indebtedness evidenced by any other class of securities of the
Company.
Preferred Stock. The Company has no present intention to issue any shares
of its preferred stock. Therefore, the only shares of the Company's preferred
stock which shall be issued and outstanding after consummation of the Merger are
those 100,000 shares presently owned by Vincent E. Galewick. As set forth above,
the conversion of those shares of preferred stock into common stock may have the
effect of deferring, delaying or preventing a change in control of the Company.
Anti-Takeover Provisions of the Company's Organizational Documents. The
Company's Certificate of Incorporation, as amended, contains several provisions
that may make the acquisition of control of the Company by means of a tender
offer, open market purchase, proxy fight or otherwise more difficult. The
primary purpose of these provisions is not to prevent a takeover of the Company.
In that regard, they are intended to deter coercive and unfair takeover tactics,
to provide time for the Board of Directors of the Company to negotiate for and
on behalf of the Company's shareholders and to enhance the probability of
continuity and stability in the composition of the Board of Directors of the
Company and in the strategies established by such Board of Directors for
maximizing long-term shareholder value.
The Company believes that, as a general rule, the interests of the
Company's shareholders would be best served if any change in control results
from negotiations by its Board of Directors based upon careful consideration of
the proposed terms, such as the price to be paid to the Company's shareholders,
the form of consideration to be paid, the anticipated tax effects of the
transaction, and of certain long-term or strategic considerations, including the
risk that the shares of the Company's capital stock might be undervalued in the
market at any given time and the risk that an offer, although representing a
premium to current market prices, may not take into account the long-term values
that are expected to be realized by the Company's investments or by the
Company's commitment to pursuing its business with an emphasis on long-term
relationships with customers, suppliers and employees. The Company believes that
certain unsolicited acquisitions would be inconsistent with the Company's
fundamental values and would have an adverse impact on the Company's long-term
shareholder value, which the Company believes is based, in large part, on its
long-term, enduring relationships with its customers, suppliers, employees,
owners and the communities in which it conducts business.
To the extent that these provisions discourage takeover attempts, however,
they could deprive the Company's shareholders of opportunities to realize
takeover premiums for their shares of the Company's capital stock. These
provisions could also discourage accumulations of large blocks of shares of the
Company's common stock, thus depriving Company Shareholders of any advantages
which large accumulations of shares of the Company's common stock might provide.
Additionally, while these provisions are commonplace among public companies,
there is a risk that the existence of these provisions will have an adverse
impact on the market price of the Merger Stock, as certain potential investors
may acquire shares of the Merger Stock, in part, to take advantage of such
potential takeover premiums, or might otherwise be discouraged from investing in
the Company by the existence of such anti-takeover provisions.
Fair Price Provision. Article Nine of the Company's Certificate of
Incorporation, as amended, provides certain protections for the Company's
shareholders in the event that a person becomes a "controlling person" and seeks
to implement a "business combination" of the Company with such person. Article
Nine requires a special vote, in addition to whatever other vote may be
required, of two-thirds of the issued and outstanding shares of the Company's
common stock not held by the controlling person in order to approve any such
transaction. This special vote will not be required, however, if a "minimum
price per share" is to be paid to those holders of shares of the Company's
common stock who do not vote in favor of the business combination and whose
proprietary interest will be terminated in connection with such business
combination and a consent statement is distributed for purposes of soliciting
approval of the Company's shareholders of the business combination. This special
vote will also not be required if the then current Board of Directors of the
Company, by a vote of at least two-thirds of the directors then in office,
approves the proposed business combination as being in the best interests of the
Company.
A controlling person is defined as any person who "beneficially owns" more
than 10% of the issued and outstanding shares of the Company's voting
securities, e.g., common stock. "Beneficially owns" is defined broadly to
include all forms of ownership and all types of arrangements that give a person,
either directly or indirectly, actual or potential voting rights or investment
decision authority with respect to the securities of the Company. "Business
combination" includes virtually every transaction between a controlling person
(and certain Affiliates and associates) and the Company (or a subsidiary of the
Company) which would involve a combination of the business operations or assets
of such persons. The phrase also encompasses reclassifications and
recapitalizations involving those securities while a person is a controlling
person.
"Minimum price per share" is defined as the greater of (i) the highest
gross per share price paid or agreed to be paid within three years of the record
date for the business combination to acquire any security beneficially owned by
a controlling person, or (ii) the highest per share market price of the security
during such three-year period.
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<PAGE>
By its terms, Article Nine cannot be amended, altered, changed or repealed
in any respect without the affirmative vote of the holders of at least
two-thirds of the issued and outstanding shares of the Company's common stock
that are not owned by a controlling person. Article Nine is intended to prevent
unfair pricing or other tactics that might occur if a person in control of the
Company negotiates a business combination with the Company. Under such
circumstances, a controlling person could in effect control both sides of the
negotiation. Article Nine is intended to require the controlling person to
either negotiate directly with the Company's Board of Directors and obtain the
approval of the Company's Board of Directors or to offer a fair price to all
shareholders of the Company's common stock.
Business Combinations. Article Ten of the Company's Certificate of
Incorporation, as amended, provides that if a proposal is made that the Company
enter into a merger or consolidation with any other corporation (other than a
direct or indirect wholly-owned subsidiary of the Company), or sell or otherwise
dispose of all or substantially all of its assets or business in one transaction
or a series of transactions, or liquidate or dissolve, the affirmative vote of
the holders of not less than two-thirds of the issued and outstanding voting
shares of the Company will be required for the approval of such proposal. The
foregoing does not apply to any such merger, consolidation, sale, disposition,
liquidation or dissolution which is approved by resolution of two-thirds of the
directors of the Company then in office, if the majority of the members of the
Board of Directors of the Company adopting such resolution were members of such
Board of Directors prior to the public announcement of the proposed merger,
consolidation, sale, disposition, dissolution or liquidation and prior to the
public announcement of any transaction relating to such merger, consolidation,
sale, disposition, dissolution or liquidation. If such approval is granted, then
such transaction will only require such additional approval, if any, as is
otherwise required under the other articles of the Company's Certificate of
Incorporation and under law.
Control Share Acquisitions. Article Eleven of the Company's Certificate of
Incorporation, as amended, provides that any "control share acquisition" of
shares of the Company can only be made with the prior approval of the
shareholders of the Company. A "control share acquisition" is defined as any
acquisition of shares of the Company that, when added to all other shares of the
Company owned by the acquiror, would entitle the acquiror to exercise levels of
voting power in the following ranges (a) one fifth or more but less than one
third, (b) one third or more but less than a majority, or (c) a majority.
The acquiror may make the proposed control share acquisition only if both
of the following occur (a) the Company's shareholders authorize the acquisition
by an affirmative vote of (i) a majority of the voting power of the Company
represented at the meeting in person or by proxy and (ii) a majority of the
portion of such voting power, excluding the voting power of shares of the
Company's common stock that may be voted by the acquiror, by any officer of the
Company elected or appointed by the directors, and by any employee of the
Company who is also a director; and (b) the proposed control share acquisition
is consummated no later than 360 days following the authorization by the holders
of the Company's common stock of the control share acquisition.
Article Eleven does not apply to an acquisition of shares by any
shareholder of the Company or group of shareholders of the Company who were
holders of shares of the Company's common stock immediately after the Merger or
to any acquisition of such shares by certain Affiliates of any such shareholder
or group of such shareholders. Article Eleven will begin to apply to such
shareholders and Affiliates, however, from and after the point at which they
collectively own less than 25% of the issued and outstanding shares of the
Company's common stock.
Transactions With Interested Shareholders. Article Twelve of the Company's
Certificate of Incorporation, as amended, prevents an "interested shareholder"
(defined generally as a person owning 10% or more of the Company's outstanding
voting shares) from engaging in an "interested shareholder transaction"
(generally, a merger, consolidation, sale, lease or other disposition of
substantial assets either by the Company to the interested shareholder, or vice
versa, including certain reclassifications of the Company's common stock, or a
loan or other financial benefit to the interested shareholder not shared pro
rata with other shareholders of the Company) with the Company for three years
following the date that person became an interested shareholder unless (i)
before that person became an interested shareholder, the Board of Directors of
the Company approved the transaction in which the interested shareholder became
an interested shareholder or (ii) the Board of Directors approves the interested
shareholder transaction.
Article Twelve does not apply to an acquisition of shares by any
shareholder or group of shareholders of the Company who were holders of the
Company's common stock immediately after the Merger or to any acquisition of the
Company's common stock by certain Affiliates of any such shareholder or group of
such shareholders. Article Twelve will begin to apply to shareholders of the
Company and their Affiliates, however, from and after the point at which they
collectively own less than 25% of the Company's common stock.
By its terms, Article Twelve cannot be amended, altered, changed or
repealed in any respect without the affirmative vote of the holders of at least
two-thirds of the issued and outstanding shares of the Company's common stock
that are not owned by the interested shareholder.
Shareholder Action; Special Meetings. Article Two, Section Two of the
Bylaws of the Company provides that a special meeting of the Company's
shareholders, for any purpose or purposes, unless otherwise prescribed by
statute, may be called at any time and shall be called by the President or
Secretary of the Company, upon the direction of the Board of Directors of the
Company, or upon the written request of a shareholder or shareholders of the
Company holding of record at least ten percent (10%) of the outstanding shares
of the Company entitled to vote at such a meeting. Article Two, Section Eleven
of those Bylaws provides that any action required or permitted to be taken at a
meeting of the Company's shareholders under any provisions of the Delaware
General Corporation Law, the Company's Certificate of Incorporation, or any
amendments thereto, or the Company's Bylaws may be taken
34
<PAGE>
without a meeting if all of the Company's shareholders entitled to vote thereon
consent in writing to such action being taken, or, subject to the provisions of
Section 228 of the Delaware General Corporation Law, if the Company's
shareholders who would have been entitled to cast the minimum number of votes
which would be necessary to authorize such action at a meeting at which all of
the Company's shareholders entitled to vote thereon were present and voting
shall consent in writing to such action being taken.
Number of Directors; Removal; Vacancies. Article Three, Section Two of the
Bylaws of the Company provides that there shall be five (5) directors
constituting the Board of Directors of the Company. The directors shall be
elected annually at the annual meeting of the Company's shareholders, and each
director holds office until his or her successor has been elected and qualified,
until his or her death, until he or she resigns, or until he or she shall have
been removed. Any director elected to fill a vacancy on the Board of Directors
of the Company shall be deemed elected for the unexpired portion of the term of
his or her predecessor on such Board of Directors. Each director, at the time of
his or her election, shall be at least eighteen (18) years of age.
The Bylaws of the Company also provide for two classes of directors at such
time as the Company becomes a "listed corporation." Additionally, those Bylaws
provide that at such time as the Company becomes a listed corporation, the
number of authorized directors of the Company shall, without additional action
of the Company's shareholders, increase to seven. See "Elimination of Cumulative
Voting."
Shareholder Proposals and Nominations. The Bylaws of the Company establish
an advance notice procedure for shareholder proposals to be brought before an
annual or special meeting of the Company's shareholders, including proposed
nominations of persons for election to the Company's Board of Directors. To be
properly brought before any annual meeting of the Company's shareholders,
business must be either (a) specified in the notice of such meeting (or any
supplement thereto) given by or at the direction of such Board of Directors, (b)
otherwise be properly brought before such meeting by or at the direction of such
Board of Directors, or (c) otherwise be properly brought before such meeting by
a shareholder of the Company. In addition to any other applicable requirements,
including, but not limited to, requirements imposed by federal and state
securities laws pertaining to proxies or consents, for business to be properly
brought before any meeting by a shareholder, such shareholder must have given
timely notice thereof in writing to the Secretary of the Company. To be timely,
a shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not later than the close of business
on the 15th day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made, whichever first occurs. A
shareholder's notice to the Secretary of the Company shall set forth as to each
matter such shareholder proposes to bring before any meeting of the shareholders
(i) a brief description of the business desired to be brought before the meeting
and the reasons for conducting such business at the meeting, (ii) the name and
record address of the shareholder proposing such business, (iii) the class and
number of shares of the Company which are beneficially owned by such
shareholder, and (iv) any material interests of such shareholder in such
business.
Action By Shareholders Without A Meeting. Any action required or permitted
to be taken at a meeting of the Company's shareholders under any provisions of
the Delaware General Corporation Law, the Company's Certificate of
Incorporation, or the Bylaws of the Company may be taken without a meeting if
all of the Company's shareholders entitled to vote thereon consent in writing to
such action being taken, or, subject to the provisions of Section 228 of the
Delaware General Corporation Law, if the Company's shareholders who would have
been entitled to cast the minimum number of votes which would be necessary to
authorize such action at a meeting at which all of the Company's shareholders
entitled to vote thereon were present and voting shall consent in writing to
such action being taken.
Amendment of Bylaws. Certain provisions in the Bylaws of the Company may
only be amended or repealed by the affirmative vote of the holders of two-thirds
of the issued and outstanding shares of the Company's common stock entitled to
vote thereon. These provisions make it more difficult to amend the Bylaws of the
Company for the purpose of gaining control of the Company.
Indemnification of Officers and Directors. The Certificate of Incorporation
and Bylaws of the Company permit the Company to indemnify its officers and
directors to the greatest extent permitted by the Delaware General Corporation
Law.
Delaware Anti-Takeover Law. Section 203 of the Delaware General Corporation
Law ("Section 203") provides, in general, that a shareholder acquiring more than
15% of the outstanding voting shares of a corporation subject to the statute
("Interested Shareholder") but less than 85% of such shares may not engage in
certain "business combinations" with that corporation for a period of three
years subsequent to the date on which such shareholder became an Interested
Shareholder unless (a) prior to such date the Board of Directors of such
corporation approved either the business combination or the transaction in which
such shareholder became an Interested Shareholder, or (b) the business
combination is approved by such corporation's Board of Directors and authorized
by a vote of at least two-thirds of the outstanding voting stock of such
corporation not owned by the Interested Shareholder.
Section 203 defines the term "business combination" to encompass a wide
variety of transactions with or caused by an Interested Shareholder in which
such Interested Shareholder receives or could receive a benefit on other than a
pro rata basis with other shareholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Shareholder,
transactions with such corporation which increase the proportionate interest of
the Interested Shareholder, or transactions in which the Interested Shareholder
receives certain other benefits.
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<PAGE>
DETERMINATION OF EXCHANGE VALUE AND ALLOCATION OF MERGER STOCK
Exchange Value. The net equity values of PCM, the Company and the
Partnerships determined by the PCM Shareholders, the Company and the General
Partner, respectively, have been used to establish the Exchange Value. The
Fairness Analyst has opined, by the Fairness Opinion, that the Exchange Value is
fair from a financial standpoint to the Partnerships. The Fairness Analyst is
unaffiliated with PCM, the PCM Shareholders, Vision, the Soliciting Agent, the
Company, the General Partner and each of their Affiliates. Kelly & Company, the
independent auditors for the Company, PCM, the General Partner and the
Partnerships, were referred to the Fairness Analyst by an accountant
unaffiliated with PCM, the Company, Vision, the Soliciting Agent, the General
Partner and each of their Affiliates and with whom neither PCM, Vision, the
Soliciting Agent, the Company, the General Partner nor any of their Affiliates
has conducted any business. The Fairness Analyst was selected by Kelly & Company
entirely on the basis of the Fairness Analyst's qualifications.
The General Partner and the PCM Shareholders valued the assets and
properties of the Partnerships and PCM, respectively, as if sold in an orderly
manner in a reasonable period of time, adding or subtracting other balance sheet
items, and subtracting the anticipated costs of such sale. The compensation to
Dissenting Limited Partners and Dissenting Shareholders entitled to compensation
for their Units and shares of common stock, respectively, is based upon the
Fairness Opinion. See "RIGHTS OF DISSENTING SHAREHOLDERS AND DISSENTING LIMITED
PARTNERS."
Qualifications of the Fairness Analyst. The Fairness Analyst has performed
the following types of valuation assignments: merger and acquisition appraisals,
postacquisition purchase price allocation appraisals, business and stock
valuations, real estate valuations and evaluations, tangible personal property
appraisals, real estate feasibility and investment analyses, ad valorem
assessment appeal appraisals, construction cost segregation appraisals,
insurance appraisals, litigation support, ESOP appraisals, forensic valuation
analyses, and expert witness testimony. Those appraisals have been performed for
the following purposes: transaction (acquisition, divestiture, reorganization),
taxation (federal income, gift, and estate), financing (securitization,
recapitalization, restructuring), litigation support and dispute resolution, and
management information and planning.
The Fairness Analyst performs business and stock appraisals in the
following industries: accounting and consulting, advertising, apparel,
appraisal, automobile dealerships, automobile manufacturing, aviation, banking,
bottling, brokerage, cement, chemical, computer services, construction and
contracting, consumer finance, cosmetics, distribution, education,
entertainment, equipment leasing, fast food, food service, forest products,
health care, hotel and hospitality, insurance, leasing, manufacturing, medical
and dental practice, mining and mineral extraction, petrochemical,
pharmaceuticals, plastics, printing, publishing, radio broadcasting, railroads,
real estate development, recreational services, restaurant, retailing, shipping,
steel, television broadcasting, textiles, transportation and trucking,
vocational training, and wholesaling.
In addition, the Fairness Analyst has quantified the value of, remaining
useful life of, transfer price for, or license/royalty rate for the following
types of intangible assets: advertising campaigns and programs; bank
customers--deposit, loan, trust, and credit card; certificates of need; chemical
formulations; computer software; computerized data bases; cooperative
agreements; copyrights; credit information files; customer contracts; customer
lists; customer relationships; designs; distribution networks; easements;
employment contracts; engineering drawings; environmental rights; FCC license;
favorable leases; film libraries; food flavorings and recipes; franchise
agreements; franchise ordinances; going concern; goodwill; government contracts;
government programs; historical documents; HMO enrollment lists; insurance
expirations; joint ventures; know-how; laboratory notebooks; licenses; literary
works; litigation awards and damages; loan portfolios; management contracts;
manual databases; manuscripts; marketing and promotional materials; masks and
masters; medical charts and records; mineral rights; musical compositions;
newspaper morgue files; noncompete covenants; open orders; options; warrants;
grants; rights; patent applications; patents--both product and process; permits;
prizes and awards; procedural manuals; production backlogs; product designs;
property use rights; proprietary processes; technology; publications; regulatory
approvals; royalty agreements; schematics and diagrams; securities portfolios;
solicitation rights; stock and bond instruments; subscription lists; supplier
contracts; technical and specialty libraries; technical documentation; trade
secrets; trained and assembled workforce; trademarks and trade names; training
manuals; unpatented technology; use rights--air, water. and land.
Two principal employees of the Fairness Analyst were involved in providing
the Fairness Opinion. One such employee is Robert Schweihs, who is the founder,
national partner, and national director of valuation services for Valuation
Engineering Associates, a business unit of Deloitte & Touche, the international
accounting and consulting firm who also served as regional manager of the
valuation division of Arthur D. Little, Inc. and who is an Accredited Senior
Appraiser, certified in business valuation, of the American Society of
Appraisers; a member of The ESOP Association, the Institute of Property
Taxation, and the Association for Corporate Growth (ACG).
The other employee, Charles Wilhoite, has performed the following types of
valuation assignments: merger and acquisition appraisals, postacquisition
purchase price allocation studies, business and stock valuations, ad valorem
assessment appeal appraisals, litigation support services, ESOP feasibility
studies and appraisals, economic damage calculations, and forensic accounting
analyses, and has performed business and stock appraisals in the following
industries: accounting and consulting, alcoholic and non-alcoholic beverage,
apparel, automobile dealerships, automobile parts distribution, banking and
finance, construction and contracting, consumer finance, distribution,
education, equipment leasing, food service, forest products, health care,
insurance, leasing, manufacturing, medical and dental practice, printing,
publishing, railroads, retailing, shipping, television broadcasting, textiles,
transportation and trucking, and wholesaling. In addition, Mr. Wilhoite has been
involved with engagements requiring the quantification of the value and/or
remaining useful life for the following types of intangible assets: bank
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customers--deposit, loan, trust, and credit card, certificates of need, computer
software, customer relationships, employment contracts, favorable leases,
franchise agreements, going concern, goodwill, medical charts and records,
non-compete covenants, patent applications, royalty agreements, trained and
assembled workforce, and trademarks and service marks, and trade names. Mr.
Wilhoite was a senior auditor for KPMG Peat Marwick, the international
accounting and consulting firm, specializing in audits in, among other
industries, the banking and financial institution industry. Mr. Wilhoite is a
Certified Public Accountant, designated by the American Institute of Certified
Public Accountants; a Certified Management Accountant, designated by the
Institute of Management Accountants; a member of the Association for Investment
Management and Research; a member of the Illinois and Oregon Society of CPAs; a
member of the Business Valuation Association of Chicago; and a member of the
American Society of Appraisers.
Fairness Opinion. The Exchange Value was determined by the Company, the PCM
Shareholders and the General Partner, as was the consideration to be paid by the
Company to each Partnership for such Partnership's assets and the PCM
Shareholders for PCM's common stock. The Fairness Analyst has determined that
the Exchange Value and such consideration are fair from a financial point of
view to each Partnership, as specified in the Fairness Opinion. The compensation
paid to the Fairness Analyst was not contingent upon the findings of the
fairness of Exchange Value, such consideration, the Merger Proposal or the
consummation or approval of the Merger Proposal or related transactions. The
Fairness Opinion relates to the fairness from a financial point of view of the
Merger Proposal and related transactions, considering the fairness from a
financial point of view of the Merger Proposal and related transactions as a
whole and to each of the Partnerships. Because the Merger is contingent upon the
approval of the Merger Proposal by all of the Partnerships, the Fairness Opinion
did not consider possible combinations of less than all of the Partnerships in
the Merger.
To determine the value of PCM and the Partnerships, the Fairness Analyst
considered an asset-based approach and an income-based approach to value. In the
asset-based approach, the Fairness Analyst considered the total expected net
proceeds (i.e., after consideration of interim operating and liquidation costs)
which would accrue to the partners of each Partnership as a result of the
orderly liquidation of the assets on hand. In the income-based approach, the
Fairness Analyst considered the expected annual cash which would be received by
PCM and each Partnership over a projected, finite operating period primarily as
a result of collection efforts and the sale of distressed loan portfolios. The
expected cash receipts, including the terminal value, or projected cash receipts
resulting from the sale of assets or business at the end of the projection
period, were then discounted to a present value by a rate of return deemed to be
reflective of the risks inherent with projected cash receipts from assets, such
as distressed loan portfolios.
The purpose of the Fairness Opinion is to confirm to the General Partner
the fairness from a financial point of view of the Merger Proposal and related
transactions to the Partnerships. Neither the Company, the PCM Shareholders, nor
the General Partner furnished the Fairness Analyst with any specific
instructions. The assets of the Partnerships were valued as if sold in an
orderly manner in a reasonable period of time, plus or minus other balance sheet
items, and less the costs of sale. Pursuant to the provisions of Section 1300 of
the California General Corporation Law, the fair market value of the shares held
by Dissenting Shareholders shall be determined as of the day before the first
announcement of the terms of the Merger Proposal and related transactions,
excluding any appreciation or depreciation in consequence of the proposed Merger
Proposal or related transactions, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter. As set forth
previously, however, because the PCM Shareholders and Company Shareholders will
approve the Merger Proposal, there will be no Dissenting Shareholders.
The Fairness Opinion will not be updated. A copy of the Fairness Opinion is
included with this Joint Consent Statement/Prospectus as Appendix G.
Exchange of Shares for Partnerships' Assets. On the Closing Date, if at
least 75% of the Limited Partners of all of the Partnerships approve the Merger
Proposal, and subject to any restrictions on the Merger Proposal imposed by
appropriate federal or state securities regulatory agencies, the Partnerships
will transfer their assets to the Company, on terms and conditions specified in
the Merger Agreement, in exchange for the issuance by the Company to the
Partnerships of Merger Stock. The Partnerships will terminate, wind up and
dissolve by operation of law and, as liquidating distributions, the Partnerships
will distribute their Merger Stock to their partners. The Partnerships and PCM
will merger with and into the Company, as a result of which the Company will be
the surviving corporation. The Merger Agreement contemplates that the
proportionate interest of each Limited Partner and the interest of the General
Partner in the Partnerships, determined as of the Determination Date, will be
exchanged for shares of Merger Stock pursuant to the Exchange Value, and the
General Partner and each Limited Partner shall be paid cash for any fractional
shares of Merger Stock.
RESALE OF THE MERGER STOCK
The Merger Stock will be registered under the Securities Act of 1933
("Securities Act") pursuant to the Registration Statement of which this Joint
Consent Statement/Prospectus is a part. The registration of the Merger Stock in
this manner should allow holders of the Merger Stock to trade the Merger Stock
without any restriction under the Securities Act, if such holder is not an
"Affiliate" of the Company; provided, however, that various states also have
registration requirements which may restrict trading of the Merger Stock.
Moreover, the Company intends to stabilize the price of the Merger Stock by
limiting the sale of Merger Stock. See "Restriction on Resale of Merger Stock."
If a holder of Merger Stock is an Affiliate of the Company, Rule 144
promulgated pursuant to the Securities Act, as currently in effect, provides
that such holder (together with all other persons who may under such rule be
aggregated with such holder) is entitled to sell, within any three-month period,
that number of shares of Merger Stock that does not exceed the greater of (i) 1%
of the then issued and outstanding common stock of the Company or (ii)
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the average weekly trading volume of the common stock of the Company during the
four calendar weeks preceding the date on which notice of sale (Form 144) is
filed with the Securities and Exchange Commission. Any such sale is also subject
to (i) certain provisions relating to the manner in which such sale must be
made, (ii) notices that must be filed in connection with any such sale, and
(iii) the availability of current public information about the Company.
The provisions of Rule 144 and related regulations under the Securities Act
are complex and the foregoing summary is not intended to be a complete
description thereof. Therefore, any holder of Merger Stock that might be
considered to be an Affiliate of the Company should consult with his or her
legal counsel prior to selling any Merger Stock.
One purpose of the Merger Proposal is to permit the Merger Stock to be
eligible eventually for listing on a regional or national securities exchange.
No prediction can be made, however, as to the price at which the Merger Stock
will trade or if it will trade at all. See "RISK FACTORS -- Uncertainty
Regarding Trading and Market Price for Merger Stock."
DISTRIBUTION POLICY
Historical Distributions of the Partnerships
Until distributions were suspended pursuant to the Merger Proposal, the
Partnerships made monthly cash distributions to Limited Partners. In 1996, the
total amounts distributed to Limited Partners were approximately as set forth as
follows:
<TABLE>
<CAPTION>
Total Distributions to
Partnership Distributions the General Partner
----------- ------------- -------------------
<S> <C> <C>
Performance Asset Management Fund, Ltd., ............. $ 172,133 $ 17,483
A California Limited Partnership
Performance Asset Management Fund II, Ltd., .......... $ 255,833 $ 25,810
A California Limited Partnership
Performance Asset Management Fund III, Ltd., ......... $ 331,700 $ 35,775
A California Limited Partnership
Performance Asset Management Fund IV, Ltd., .......... $1,592,759 $ 159,334
A California Limited Partnership
Performance Asset Management Fund V, Ltd., ........... $ 199,066 $ 19,966
A California Limited Partnership
</TABLE>
The total amount distributed by the Partnerships in 1996 was $2,551,491.
All of the distributions by the Partnerships to Limited Partners were cash. The
General Partner accrued the distributions set forth above.
As opposed to the Partnerships, the Company will be subject to federal and
state taxes on its income. Holders of Merger Stock will not be subject to
federal or state tax on such income, except to the extent dividends are paid.
See "FEDERAL INCOME TAX CONSEQUENCES." The Company expects to make significantly
lower distributions to its shareholders than the Partnerships have made to
Limited Partners.
The Company currently anticipates that it will not pay cash dividends.
However, this policy may change, and the amount of dividends, if any, to be paid
will be determined by the Board of Directors of the Company, in its sole and
absolute discretion, generally taking into account a number of factors,
including operating performance, liquidity and capital requirements. There can
be no assurance that any cash dividends will, in fact, be paid, just as there
can be no assurance that, if the Merger is not consummated, Partnership
distributions will resume in previous amounts, or at all.
DISTRIBUTIONS BY THE COMPANY WILL BE AT THE DISCRETION OF ITS BOARD OF DIRECTORS
AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE COMPANY'S CASH AVAILABLE
FOR DISTRIBUTION, THE COMPANY'S FINANCIAL CONDITION, THE COMPANY'S CAPITAL
REQUIREMENTS, AND SUCH OTHER FACTORS AS THE COMPANY'S BOARD OF DIRECTORS DEEMS
RELEVANT.
BUSINESS AND ASSETS
The Partnerships and PCM. The Partnerships and PCM are engaged in the
delinquent consumer indebtedness industry. The Partnerships, by joint ventures
exclusively with PCM, and PCM, by joint ventures with the Partnerships and for
its own account, purchase, manage, service, collect and sell portfolios of
distressed financial debt instruments and obligations. These debt instruments
include secured and unsecured commercial and consumer loans, credit card debt,
real and personal property loans, notes receivable, and other indebtedness.
From the date of formation of PAM through June 30, 1997 (the Determination
Date), PAM has purchased a total of 16 distressed debt portfolios with an
aggregate original principal value of $305,438,442. PAM entered into a Joint
Venture Agreement with PCM for the collection of those portfolios, which
agreement was later amended. True and correct copies of that Joint Venture
Agreement and Amended and Restated Joint Venture Agreement are filed as
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Exhibit 10.8 and Exhibit 10.11 to the Registration Statement, of which this
Joint Consent Statement/Prospectus is a part. The Joint Venture Agreement
provides for, among other things, the collection of charged off retail sales
contracts from various lenders, with cash collected on behalf of the joint
venture, less fees for collection services and funds set aside for operations,
distributed 55% to PAM and 45% to PCM. The Amended and Restated Joint Venture
Agreement provided for certain amendments and additions to the joint venture
between the parties, including the allocation of 85% of distributable funds
generated from the sale or other disposition of debt portfolios to PAM, with the
remaining 15% distributed to PCM. The net book value of those portfolios as of
December 31, 1996 was $1,269,586. The estimated value of PAM's cash receipts for
1997 was $235,488. The estimated present value of the portfolios owned by PAM at
the date of the non premature expiration of its term (as specified by PAM's
Partnership Agreement ("Termination Date")), which is also referred to as the
"terminal value", is $307,316. This figure was calculated by the Fairness
Analyst by multiplying the estimated balance of the portfolios at PAM's
Termination Date by an estimated selling price of $.01 per $1.00 of portfolio
balance, for a terminal sales value of $429,002. This terminal sales value was
then multiplied by a present value factor of 0.7164, a present value adjustment
determined by the Fairness Analyst. Based on historical distributions, the
Fairness Analyst's analysis of the age and composition of the portfolios held by
PAM, and estimated operating expenses based on past expenses, the Fairness
Analyst projected total cash distributions to the Limited Partners of PAM in the
amount of $2,718,150 during the remaining term of PAM.
From the date of formation of PAM II through June 30, 1997, PAM II has
purchased a total of 19 distressed debt portfolios with an aggregate original
principal value of $433,632,566. PAM II entered into a Joint Venture Agreement
with PCM for the collection of those portfolios, which agreement was later
amended. True and correct copies of that Joint Venture Agreement and Amended and
Restated Joint Venture Agreement are filed as Exhibit 10.9 and Exhibit 10.12 to
the Registration Statement, of which this Joint Consent Statement/Prospectus is
a part. The Joint Venture Agreement provides for, among other things, the
collection of charged off retail sales contracts from various lenders, with cash
collected on behalf of the joint venture, less fees for collection services and
funds set aside for operations, distributed 55% to PAM II and 45% to PCM. The
Amended and Restated Joint Venture Agreement provided for certain amendments and
additions to the joint venture between the parties, including the allocation of
85% of distributable funds generated from the sale or other disposition of debt
portfolios to PAM II, with the remaining 15% distributed to PCM. The net book
value of those portfolios as of December 31, 1996 was $1,371,176. The estimated
value of PAM II's cash receipts for 1997 was $212,597, with $1,020,000 spent on
new portfolio acquisitions. The terminal value of the portfolios owned by PAM II
is $277,219. This figure was calculated by the Fairness Analyst by multiplying
the estimated balance of the portfolios at PAM II's Termination Date,
$50,831,284, by an estimated selling price of $.0125 per $1.00 of portfolio
balance, for a terminal sales value of $635,391. This terminal sales value was
then multiplied by a present value factor of 0.4363, a present value adjustment
determined by the Fairness Analyst. Based on historical distributions, the
Fairness Analyst's analysis of the age and composition of the portfolios held by
PAM II, and estimated operating expenses based on past expenses, the Fairness
Analyst projected total cash distributions to the Limited Partners of PAM II in
the amount of $6,560,773 during the remaining term of PAM II.
From the date of formation of PAM III through June 30, 1997, PAM III has
purchased a total of 21 distressed debt portfolios with an aggregate original
principal value of $521,408,657. PAM III entered into a Joint Venture Agreement
with PCM for the collection of those portfolios, which agreement was later
amended. True and correct copies of that Joint Venture Agreement and Amended and
Restated Joint Venture Agreement are filed as Exhibit 10.10 and Exhibit 10.13 to
the Registration Statement, of which this Joint Consent Statement/Prospectus is
a part. The Joint Venture Agreement provides for, among other things, the
collection of charged off retail sales contracts from various lenders, with cash
collected on behalf of the joint venture, less fees for collection services and
funds set aside for operations, distributed 55% to PAM III and 45% to PCM. The
Amended and Restated Joint Venture Agreement provided for certain amendments and
additions to the joint venture between the parties, including the allocation of
85% of distributable funds generated from the sale or other disposition of debt
portfolios to PAM III, with the remaining 15% distributed to PCM. The net book
value of those portfolios as of December 31, 1996 was $2,566,546. The estimated
value of PAM III's cash receipts for 1997 was $508,777. The terminal value of
the portfolios owned by PAM III is $767,162. This figure was calculated by the
Fairness Analyst by multiplying the estimated balance of the portfolios at PAM
III's Termination Date, $140,667,911, by an estimated selling price of $.0125
per $1.00 of portfolio balance, for a terminal sales value of $1,758,349. This
terminal sales value was then multiplied by a present value factor of 0.4363, an
adjustment determined by the Fairness Analyst. Based on historical
distributions, the Fairness Analyst's analysis of the age and composition of the
portfolios held by PAM III, and estimated operating expenses based on past
expenses, the Fairness Analyst projected total cash distributions to the Limited
Partners of PAM III in the amount of $8,625,225 during the remaining term of PAM
III.
From the date of formation of PAM IV through June 30, 1997, PAM IV has
purchased a total of 57 distressed debt portfolios with an aggregate original
principal value of $709,008,534. PAM IV entered into a Joint Venture Agreement
with PCM for the collection of those portfolios, which agreement was later
amended. A true and correct copy of that Amended and Restated Joint Venture
Agreement is filed as Exhibit 10.14 to the Registration Statement, of which this
Joint Consent Statement/Prospectus is a part. The Joint Venture Agreement
provides for, among other things, the collection of charged off retail sales
contracts from various lenders, with cash collected on behalf of the joint
venture, less fees for collection services and funds set aside for operations,
distributed 55% to PAM IV and 45% to PCM. The Amended and Restated Joint Venture
Agreement provided for certain amendments and additions to the joint venture
between the parties, including the allocation of 85% of distributable funds
generated from the sale or other disposition of debt portfolios to PAM IV, with
the remaining 15% distributed to PCM. The net book value of those portfolios as
of December 31, 1996 was $9,091,186. The estimated value of PAM IV's cash
receipts for 1997 was $1,919,324, with portfolio acquisitions of $1,360,000. The
terminal value of the portfolios owned by PAM IV is $3,266,452. This figure was
calculated by the Fairness Analyst by multiplying the estimated balance of the
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<PAGE>
portfolios at PAM IV's Termination Date, 508,820,241, by an estimated selling
price of $.015 per $1.00 of portfolio balance, for a terminal sales value of
$7,632,304. This terminal sales value was then multiplied by a present value
factor of 0.4280, an adjustment determined by the Fairness Analyst. Based on
historical distributions, the Fairness Analyst's analysis of the age and
composition of the portfolios held by PAM IV, and estimated operating expenses
based on past expenses, the Fairness Analyst projected total cash distributions
to the Limited Partners of PAM IV in the amount of $25,117,113 during the
remaining term of PAM IV.
From the date of formation of PAM V through June 30, 1997, PAM V has
purchased a total of 12 distressed debt portfolios with an aggregate original
principal value of $209,901,705. PAM V entered into a Joint Venture Agreement
with PCM for the collection of those portfolios, which agreement was later
amended. A true and correct copy of that Amended and Restated Joint Venture
Agreement is filed as Exhibit 10.15 to the Registration Statement, of which this
Joint Consent Statement/Prospectus is a part. The Joint Venture Agreement
provides for, among other things, the collection of charged off retail sales
contracts from various lenders, with cash collected on behalf of the joint
venture, less fees for collection services and funds set aside for operations,
distributed 55% to PAM V and 45% to PCM. The Amended and Restated Joint Venture
Agreement provided for certain amendments and additions to the joint venture
between the parties, including the allocation of 85% of distributable funds
generated from the sale or other disposition of debt portfolios to PAM V, with
the remaining 15% distributed to PCM. The net book value of those portfolios as
of December 31, 1996 was $2,300,662. The estimated value of PAM V's cash
receipts for 1997 was $543,792, with portfolio acquisitions of $1,020,000. The
terminal value of the portfolios owned by PAM V is $849,943. This figure was
calculated by the Fairness Analyst by multiplying the estimated balance of the
portfolios at PAM V's Termination Date, $161,566,685, by an estimated selling
price of $.015 per $1.00 of portfolio balance, for a terminal sales value of
$2,423,500. This terminal sales value was then multiplied by a present value
factor of 0.3505, an adjustment determined by the Fairness Analyst. Based on
historical distributions, the Fairness Analyst's analysis of the age and
composition of the portfolios held by PAM V, and estimated operating expenses
based on past expenses, the Fairness Analyst projected total cash distributions
to the Limited Partners of PAM V in the amount of $5,618,400 during the
remaining term of PAM V.
PCM is one of the largest purchasers of consumer debt in the industry, and,
to date, has purchased in excess of $1.5 billion of consumer debt. Acquired debt
portfolios have consisted of performing and non-performing consumer and auto
loans, auto deficiencies, judgments and charged off credit cards, as well as
other types of consumer debt. PCM has acquired debt portfolios from Chase
Manhattan Bank, Chemical Bank, Bank of America, First USA, GE Card Services,
Household Bank, the FDIC, and from other sources.
In contrast to many other purchasers of this type of charged-off debt, PCM
collects and services all of the portfolios it acquires, rather than using
traditional third-party servicing. Since its formation, PCM has become a fully
operational collection facility with more than 75 full time employees supplied
by Vision. PCM's collection facilities are located in Newport Beach, California
in a facility of approximately 15,000 square feet, which is shared among a
number of affiliated companies. PCM has acquired new computer technology and
equipment that will aid in the collection and servicing of distressed loan
portfolios. PCM utilizes proprietary collection software and a "predictive
dialing" telecommunications system which allows PCM collection agents to dial up
to 50,000 calls per day. PCM believes that this technology provides PCM with
significant technological advantages in its collection operations. Moreover, PCM
continues to develop new technology to assist in both the due diligence process
of evaluating portfolios prior to purchase and the collection of portfolio
obligations. PCM currently manages, services and collects more than $1.3 billion
in face value of distressed financial debt instruments and obligations. PCM
purchases approximately $25 million in face value of collection accounts each
month. Notwithstanding the foregoing face value of collection accounts, PCM
typically purchases accounts and portfolios at significant discounts and the
face value of any such account or portfolio is not necessarily indicative of its
actual value.
Competition in the Bad Debt Industry. According to a recent report in a
1997 supplement to Collections and Credit Risk magazine, PCM is one of the top
five purchasers of bad debt in the United States. Most of the top fifty
purchasers of bad debt maintain well-established collections operations and
service and collect the bad debt which they purchase. A secondary source of
competition for distressed asset portfolios is companies that buy debt in bulk
and divide it up into smaller portfolios that are then resold to collection
agencies, private investors and attorneys. Traditional collection agencies and
attorneys purchase bad debt to diversify their operations and add debt they own
to contingency collection work for others. Moreover, industry sources estimate
that about a quarter of the buyers of bad debt in 1997 were outside investors
with no experience in the collections industry who thereafter arranged for
collection agencies to collect the debt, either through joint ventures or
contingency placement. While accurate figures are elusive, it is estimated that
the volume of bad debt purchased in the United States in 1997 ranged from $12
billion to $18 billion.
Background of the Distressed Consumer Indebtedness Industry. During the
past 10 years, the financial services industry, specifically the banking and
savings and loan industry, has undergone numerous changes due to significant
losses incurred throughout the last decade. The strain on the Federal Savings
and Loan Insurance Corporation ("FSLIC") as a result of those losses caused not
only the dissolution of the FSLIC, but, also, caused a massive government
bailout. Furthermore, the burden of insuring deposits in savings and loan
institutions was assigned to the FDIC. Billions of dollars in taxpayer loans
were granted to regulators to assist in paying depositors, as well as providing
the capital necessary to clean up the industry. In what may end up costing
taxpayers hundreds of billions of dollars, this situation, better known as the
"savings and loan crisis," forced the restructuring of the entire federal
banking and savings and loan industry.
In an attempt to curtail future losses, federal regulators revised
requirements and regulations relating to all federal institutions. Enforcement
of those revisions by regulators caused several mergers between institutions, as
well
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as the complete closure of others. An institution liquidating off-balance sheet
assets benefits to the extent that the proceeds from such a sale go directly to
the cash account on the balance sheet without the removal of an on-balance sheet
asset. Often, a sale of off-balance sheet assets may consist of several similar
assets being sold as a portfolio or in bulk.
The amount of debt available for sale in the industry continues to
increase. Financial institutions previously had forwarded all their accounts
after charge-off to collection agencies for further collection activity as
standard operating procedure. After being at an agency for six to twelve months,
accounts would be returned to the financial institutions and then forwarded to
another agency, sometime as many as five times. In order to streamline
operations and control costs, many institutions are now looking towards the sale
of some of these accounts as a means to get immediate revenue for these
accounts. Additionally, not only does the total amount of debt continue to
increase year after year, but the percentage of debt that becomes charged-off
also continues to increase. These factors continue to create market
opportunities for the purchasers of distressed financial instruments, as more
institutions discover the advantages of selling their debts.
Bulk Portfolios. Typically, loans or accounts sold by the originating
lenders are sold in bulk portfolios that range in size from tens of thousands of
dollars to multi-hundred million dollars in outstanding principal balances.
These portfolio sales usually consist of a large quantity of charged off credit
card contracts, automobile deficiencies, secured and unsecured consumer
installment loans, commercial loans, and other forms of indebtedness. Although
only a small percent of the total outstanding principal balances of most
portfolios purchased can be collected, some can be purchased at discounts
sufficient enough that, coupled with aggressive servicing efforts, a profit can
be realized and PCM and the Partnerships' joint venture objectives can be
fulfilled. Should the opportunity present itself, and if profitable, PCM
attempts to sell certain acquired portfolios, or portions thereof, to various
third parties. Profits from such sales may be used to acquire additional assets
for the benefit of PCM or the Partnerships.
In addition to purchasing assets from federal and state banking and savings
and loan institutions, PCM and the Partnerships have considered, and the Company
will continue to consider, other sources for purchasing distressed or discounted
assets. These sources may include finance companies, hospitals, collection
agencies, insurance companies, credit unions and any other businesses with
accounts receivable.
The assets of the Partnerships consist of interests in numerous joint
ventures with PCM. The Partnerships have contributed their distressed financial
debt instruments and obligations, on a portfolio by portfolio basis, to joint
ventures with PCM. PCM has contributed its servicing and collection expertise to
those joint ventures. All of the assets acquired by the Partnerships have been
contributed to those joint ventures.
Among the types of assets that are held by the Partnerships and PCM, and
are proposed to be acquired by the Company pursuant to the Merger Proposal, are
performing and non-performing consumer installment loans, secured and unsecured
consumer and commercial loans, promissory notes and accounts receivable, real
and personal property loans and charged-off credit card contracts. Among these
assets, the Partnerships' primary focus is on nonperforming consumer installment
loans and credit card contracts that, with minimum expenditure of resources, can
provide the greatest probability either to be settled or converted to a
performing status. These assets have normally been charged-off as losses due to
the debtors' delinquent payment histories and are usually held by lenders as
off-balance sheet assets.
Acquisition and Analysis of Portfolios. PCM typically locates and acquires
distressed loan portfolios for itself or for resale to the Partnerships or
others. Because of previous transactions, PCM is recognized by those
institutions selling charged off consumer indebtedness as one of the largest
purchasers of distressed consumer indebtedness. Additionally, PCM maintains a
solicitation campaign directed at those institutions which, to date, have not
sold any distressed consumer loan portfolios. If the Merger is consummated, the
Company will rely on contacts and relationships established by PCM and those of
its Affiliates for acquisitions of debt instruments.
Upon contacting or being contacted by a potential selling institution, PCM
requests that certain data be submitted to PCM on electronic media for due
diligence purposes. By utilizing the information contained on the furnished
media, PCM analyzes such information by checking for an array of information,
including data integrity, deciphering statutes by state and incorporating other
means to check individual debtor status. By completing the due diligence process
and considering other pertinent information on a potential portfolio, PCM can
approximate the value of such portfolio and extend a cost effective offer to
purchase such portfolio.
Servicing and Collection. Once a portfolio is purchased, generating cash
from receivables involves a rigorous campaign to contact and find the maximum
number of individual debtors. PCM continuously utilizes state-of-the-art
technology in its collection operations, as well as various third party data
bases, in an attempt to locate individual debtors. PCM recently completed a
hardware and software conversion that provides it with one of the most advanced
computer processing capabilities currently in use in the consumer debt industry.
PCM's proprietary collection software system provides its collection agents with
fully integrated predictive dialing capabilities, providing collection agents
with live voices as the predictive dialer locates them. This eliminates the
collection agent's calls to answering machines, wrong numbers, and disconnected
numbers. Once a debtor is contacted, the collection agent begins negotiating
various payment and settlement options. These options range from payment in full
for all outstanding obligations to discount settlements and from short term
payment plans to refinancing the old debt. Normally, because the cost basis is
extremely low for each account, collection agents can offer more attractive
settlement and payment options to debtors than those debtors have been offered
by the originating lender or contingency collection firm.
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Moreover, PCM's predictive dialing technology searches PCM's entire
database on an ongoing basis and allows each collection agent to produce his or
her own predictive dialing campaign to contact those debtors scheduled for
payment or further contact on specific accounts. This new technology also
provides PCM with the ability to capture every call that comes into PCM. By
capturing the phone number a debtor is calling from and attaching it to his or
her file, PCM creates additional information sources to contact the debtor, such
as determining the debtor's current place of employment.
VOTING PROCEDURES
Distribution of Solicitation Materials. This Joint Consent
Statement/Prospectus, together with the accompanying appropriate Consent Form,
constitute the Solicitation Materials distributed jointly to the Limited
Partners, the PCM Shareholders and the Company Shareholders to obtain their
votes "for" or "against" the Merger Proposal and related transactions.
The Solicitation Period is the time period during which the Limited
Partners, PCM Shareholders and the Company Shareholders may return their Consent
Forms to vote "for" or "against" the Merger and related transactions. The
Solicitation Period will commence upon the delivery of the Solicitation
Materials to the Limited Partners (on or about ____) and will continue until
5:00 P.M., Pacific Time, on ______. See "VOTING PROCEDURES."
If a Limited Partner or shareholder has an interest in Units or shares of
common stock in more than one capacity (e.g., (i) as husband and wife, (ii)
individually, (iii) in trust, or (iv) in an IRA), that Limited Partner or
shareholder will receive a separate Consent Form for each capacity.
The Consent Form consists of two parts. The first part is the Letter of
Transmittal, which highlights the Merger Proposal and the procedures for
completing the Consent Form. For a more detailed presentation of these
procedures, see "Voting Procedures and Consents" and "Completion Instructions"
below. The second part (the Limited Partner Consent) seeks consent to the Merger
Proposal and related transactions and certain related matters (including
amendments to the Partnership Agreements).
No Special Meetings. Neither the Company, PCM, nor the General Partner has
scheduled or noticed, or intends to schedule or notice, any special meetings of
the PCM Shareholders, the Company Shareholders, or of the Limited Partners to
discuss or vote upon the Solicitation Materials or the Merger Proposal and
related transactions. The General Partner intends to call for a vote of the
Limited Partners without meetings pursuant to the provisions of the Partnership
Agreements. Although the PCM Shareholders are parties to the Merger Proposal,
PCM intends to call for a vote of its shareholders without meeting pursuant to
Section 603 of the California General Corporation Law. The Company intends to
call for a vote of its shareholders without a meeting pursuant to Section 228 of
the Delaware General Corporation Law.
The Soliciting Agent has been retained by the Company to actively solicit
the votes of the Limited Partners regarding the Merger Proposal and related
transactions, subject to federal and state securities laws.
Required Vote. To approve the Merger Proposal and related transactions, (i)
the Limited Partners holding at least 75% in interest of the Units in each
Partnership, and (ii) the General Partner must approve the Merger Proposal and
related transactions. Moreover, although a majority of the holders of issued and
outstanding shares of the Company's common stock entitled to vote must approve
the Merger Proposal, on behalf of the Company, and the holders of a majority in
interest of the issued and outstanding shares of common stock issued by PCM must
approve the Merger Proposal, on behalf of PCM, both Vincent Galewick, the
majority shareholder of PCM and the Company, and Michael Cushing, the only other
shareholder of PCM, have approved the Merger Proposal.
Limited Partners may only vote by completing, signing and returning the
Consent Form in accordance with the instructions contained therein. Each Limited
Partner should, therefore, complete and return the completed Consent Form before
the expiration of the Solicitation Period.
The following table indicates the total Units outstanding with regard to
each Partnership and the Units of each Partnership owned by the Company, PCM,
the General Partner, or any of their Affiliates as of the Determination Date.
Some Units issued by the Partnerships have been redeemed.
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<TABLE>
<CAPTION>
Units Owned by
the Company,
PCM, the
General Partner
or Their
Partnership Total Units Affiliates
----------- ----------- -------------
<S> <C> <C>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership ....... 1,049 0
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership ....... 1,548 0
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership ....... 1,998 0
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership ....... 11,470 0
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership ....... 1,194 0
------ ------
Total ............................................... 17,259 0
====== ======
</TABLE>
Voting Procedures and Consents. Only Limited Partners, PCM Shareholders and
Company Shareholders of record as of the Determination Date will receive notice
of and be entitled to vote with respect to the Merger Proposal and related
transactions pursuant to the Consent Form. However, if Units or shares of PCM's
common stock or the shares of the Company's common stock are transferred after
the Determination Date but before the expiration of the Solicitation Period (and
the holders of the transferred Units are admitted as substitute Limited
Partners) such substitution will terminate the right of the prior holder of the
Units or such shares to vote regarding the Merger Proposal and related
transactions, and any votes as to the transferred interests must be made by the
substitute Limited Partner or new appropriate shareholder. Solicitation
Materials will be sent to substitute Limited Partners (along with notice of
their admission as substitute Limited Partners) and new shareholders.
Included with this Joint Consent Statement/Prospectus as Appendixes H
through L, inclusive, are the Consent Forms for the Partnerships. Limited
Partners may mark the Consent Form to vote "for" or "against" as to his or her
participation in the Merger Proposal and related transactions. Votes will be
counted by the Exchange Agent, U.S. Stock Transfer Corporation, an independent
third party unaffiliated with any of the parties to the Merger Proposal.
Abstentions, if any, will be counted as votes "for" the Merger Proposal and
related transactions in conformance with the Partnership Agreements, which
provide that failure of a Limited Partner to respond to matters to be voted on
by Limited Partners without a meeting constitutes a vote of approval of the
General Partner's recommendation.
A LIMITED PARTNER WHO SUBMITS A SIGNED CONSENT FORM BUT FAILS TO MAKE ONE OR
MORE OF THE ELECTIONS REQUIRED BY THE CONSENT FORM WILL BE DEEMED TO HAVE VOTED
"FOR" THE MERGER PROPOSAL AND RELATED TRANSACTIONS. IF THE CONSENT FORM IS
UNDATED, THE SIGNATURE OF THE LIMITED PARTNER WILL BE AUTHORITY FOR THE GENERAL
PARTNER TO ENTER THE DATE OF RECEIPT.
EACH PARTNER WHO FAILS TO PROVIDE THE EXCHANGE AGENT WITH A CONSENT FORM
REGARDING UNITS HELD BY THAT LIMITED PARTNER WILL BE CONCLUSIVELY PRESUMED TO
HAVE VOTED THOSE UNITS "FOR" THE MERGER PROPOSAL.
Any questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal (if permitted) of the Consent Forms will be
determined by U.S. Stock Transfer Corporation, in its capacity as the Exchange
Agent, whose determination will be final and binding. The Exchange Agent
reserves the absolute right to reject any or all Consent Forms that are not in
proper form or the acceptance of which, in the opinion of the Exchange Agent's
counsel, would be unlawful. Unless waived, any irregularities in connection with
the Consent Forms must be cured within such time as the Exchange Agent shall
determine. Neither the PCM Shareholders, the Company, the General Partner nor
the Exchange Agent shall have any duty to give notification of defects in such
Consent Forms or shall incur liabilities for failure to give such notification.
The delivery of the Consent Forms will not be deemed to have been made until
such irregularities have been cured or waived.
Completion Instructions. Each Limited Partner is requested to complete and
execute each part of the Consent Form in accordance with the instructions
contained therein. Once a Limited Partner has completed the Consent Form, that
Limited Partner must then sign and date it on the signature pages. If a Limited
Partner has questions regarding the Consent Form or how to complete it, that
Limited Partner may call Bud Webb, the Information Agent, at (888) 754-4145.
Each Limited Partner entitled to vote should deliver the executed Consent
Form at any time prior to 5:00 p.m., Pacific Time, on ___________, to the
Exchange Agent at the following address:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Attn: PAMCO Roll-up
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The Consent Forms will be effective only upon actual receipt by the
Exchange Agent at the address specified above. The method of delivery of the
Consent Form to the Exchange Agent is at the election and risk of each Limited
Partner, but if such delivery is by mail, it is suggested that the Limited
Partners use certified or registered mail return receipt requested and that the
mailing be made sufficiently in advance of 5:00 p.m., Pacific Time, __________
to permit delivery to the Exchange Agent prior to the close of the Solicitation
Period.
WITHDRAWAL OR CHANGE OF VOTE. ONCE DELIVERED TO AND ACCEPTED BY THE EXCHANGE
AGENT, CONSENT FORMS CONTINUE IN FULL FORCE AND EFFECT UNTIL REVOKED BY THE
PERSON EXECUTING THEM PRIOR TO THE VOTE PURSUANT THERETO.
CONSENT FORMS MAY NOT BE DELIVERED TO THE EXCHANGE AGENT BY FACSIMILE MACHINE.
A Consent Form may be revoked by a writing delivered to the Exchange Agent
specifying that the Consent Form is revoked. It is extremely important to date
each Consent Form to determine the order of execution and priorities of Consent
Forms.
To revoke any Consent Form, a written notice of withdrawal or change of
vote must be timely received by the Exchange Agent prior to the expiration of
the Solicitation Period at the address of the Exchange Agent set forth under
"Completion Instructions" above and must specify the name of the person who
executed the Consent Form that is to be revoked or changed and the name of the
registered holder, if different from that of the person who executed the Consent
Form.
Solicitation and Tabulation of Consents. The Soliciting Agent will use its
best efforts to solicit Limited Partners to vote regarding the Merger Proposal
and related transactions; provided however, that the Soliciting Agent will be
paid the same amount regardless of whether the Limited Partners vote
affirmatively or negatively in the Merger Proposal and related transactions and
regardless of whether the Limited Partners approve or reject the Merger Proposal
and related transactions, all in accordance with provisions of Section
25014.7(h) of the Thompson-Killea Act. The Exchange Agent will be responsible
for receipt of the Consent Forms. The Exchange Agent and independent auditors of
the Company and PCM, Kelly & Company, will tabulate the Consent Forms and the
final voting tabulation will be made available to the General Partner and any
Limited Partner upon request after the expiration of the Solicitation Period, in
accordance with the provisions of Section 25014.7(d)(4) of the Thompson-Killea
Act.
Failure of Limited Partners to Return Consent Forms. Pursuant to the
Partnership Agreements, each Limited Partner who fails to provide the Exchange
Agent with a Consent Form regarding Units held by that Limited Partner will be
presumed conclusively to have voted those Units "for" the Merger Proposal. It is
the responsibility of the Limited Partners to provide their Consent Forms to the
Exchange Agent.
Special Requirements for Certain Limited Partners or Shareholders. Some
Limited Partners may be entities rather than individuals, such as estates,
trusts, corporations, limited partnerships and general partnerships. With
respect to Consent Forms received on behalf of any such entity, the Exchange
Agent may elect, at its option, to require that each Consent Form be accompanied
by evidence (which may include an opinion of counsel acceptable to the Exchange
Agent) that such entity has met all requirements of its governing instruments,
such as applicable partnership agreements, and is authorized to execute such
Consent Form under the laws of the jurisdiction in which such entity was
organized.
Dissenting Limited Partners and Dissenting Shareholders. The Merger
Proposal is also being structured to provide Limited Partners who dissent
("Dissenting Limited Partners") the dissenter's rights specified in the
Thompson-Killea Act. The Thompson-Killea Act requires that the Dissenting
Limited Partners receive the appraised value of their Units in the form of cash,
freely tradeable securities, or secured or unsecured debt instruments satisfying
certain statutory requirements or, in the alternative, receive or retain a
security with substantially the same terms and conditions as the security
originally held, provided that the receipt or retention of that security is not
a step in a series of subsequent transactions that directly or indirectly
involves future combinations or reorganizations of one or more roll-up
participants. Securities received or retained will be considered to have the
same terms and conditions as the security originally held if (a) there is no
material adverse change to Dissenting Limited Partners' rights, including, but
not limited to, rights with respect to voting, the business plan, or the
investment, distribution, management compensation and liquidation policies of
the respective Partnership or resulting entity; and (b) the Dissenting Limited
Partners receive the same preferences, privileges, and priorities as they had
pursuant to the security originally held.
The Company is satisfying this requirement by offering to purchase the
Units of any Dissenting Limited Partner with an unsecured subordinated debenture
("Debenture") issued under an Indenture Agreement ("Indenture Agreement"). The
Merger Proposal and the related transactions, including the dissolutions and
liquidations of the Partnerships ("Dissolutions" and "Liquidations") have also
been structured to comply with the other protections afforded by the
Thompson-Killea Act. A copy of the Indenture Agreement is included with this
Joint Consent Statement/Prospectus as Appendix M. A copy of the Debenture is
included with this Joint Consent Statement/Prospectus as Appendix N. See "RIGHTS
OF DISSENTING SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
Although the majority shareholder of PCM and the sole shareholder of the
Company, Vincent E. Galewick, has approved the Merger Proposal, the Merger
Proposal has been structured to comply with provisions of the California General
Corporation Law pertaining to mergers (Chapter 11, commencing with Section 1100)
and the rights of dissenting shareholders ("Dissenting Shareholders") (Chapter
13, commencing with Section 1300), to the extent
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applicable. Chapter 13 of the California General Corporation Law requires that
PCM and the Company, as to their respective shareholders, purchase for cash at
their fair market value the shares of common stock owned by those shareholders
which are Dissenting Shareholders. Neither Mr. Galewick nor Mr. Cushing, the
other shareholder of PCM, intends to exercise dissenter's rights or become a
Dissenting Shareholder.
A Limited Partner who does not consent to the Merger Proposal may, but is
not required to, exercise his or her dissenter's rights by completing and
signing Part V of the Consent Statement. Such a non-consenting Limited Partner,
therefore, will become a "Dissenting Limited Partner". Each Dissenting Limited
Partner will be provided with an unsecured subordinated debenture ("Debenture"),
in an amount equal to the Exchange Value of that Dissenting Limited Partner's
Units. Each Debenture shall accrue interest at a variable interest rate equal to
the federal rate as determined in accordance with Section 1274 of the Internal
Revenue Code of 1986, payable on January 1 and July 1 of each year and based on
a 365-day year, with the principal balance due January 31, 2005 and shall be
secured by an Indenture Agreement. Debentures shall be provided to Dissenting
Limited Partners within 30 days following the consummation of the Merger and
related transactions.
A copy of the Indenture Agreement is attached as Exhibit M to this Joint
Consent Statement/Prospectus and a copy of the Debenture is attached as Exhibit
N to this Joint Consent Statement/Prospectus. Each Limited Partner may obtain a
list of all Limited Partners of the Partnership in which such Limited Partner
holds an interest, or any other Partnership documents relevant to the Merger
Proposal, by contacting Bud Webb, the Information Agent, at (888) 754-4145.
NEITHER THE DELIVERY OF A CONSENT FORM DIRECTING A VOTE "AGAINST" THE MERGER
PROPOSAL AND RELATED TRANSACTIONS NOR A FAILURE TO VOTE "FOR" THE MERGER
PROPOSAL AND RELATED TRANSACTIONS CONSTITUTES A WRITTEN REQUEST FOR DISSENTERS'
RIGHTS. DISSENTING LIMITED PARTNERS MUST COMPLETE PART V OF THE CONSENT
STATEMENT OR THEY WILL LOSE THEIR DISSENTERS' RIGHTS.
LIMITED PARTNERS WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS ARE CAUTIONED THAT
FAILURE TO FOLLOW THE ABOVE PROCEDURES PRECISELY MAY RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
Compliance with and Approval from Federal and State Authorities. The Merger
Proposal and related transactions will not be completed if any moratorium on
transactions similar to the Merger Proposal are imposed by federal, state or
regulatory authorities, or if any state Blue Sky or securities authority imposes
any restriction upon, or prohibits any aspect of, the transactions contemplated
by the Merger Proposal, which in the judgment of the Company, renders the Merger
Proposal and related transactions undesirable or impractical.
SUMMARY COMPARISON OF UNITS AND MERGER STOCK
The information below is intended to summarize the material differences
between the Partnerships (and the Units) and the Company (and the Merger Stock)
relating to, among other things, form of organization, investment objectives,
policies and restrictions, asset diversification, capitalization, management
structure, compensation and fees, and investor rights, and compares certain
legal rights associated with the ownership of the Units and Merger Stock,
respectively. These comparisons are intended to assist the Limited Partners in
understanding how their investments will be changed if, as a result of the
Merger and related transactions, their Units are exchanged for shares of Merger
Stock. Following some of the captioned portions is summary information regarding
the expected effects of the Merger Proposal and related transactions upon
Limited Partners receiving shares of Merger Stock in exchange for their Units.
WHILE ALL MATERIAL DIFFERENCES ARE SUMMARIZED HEREIN, THIS INFORMATION IS
SUMMARY IN NATURE, AND LIMITED PARTNERS SHOULD CAREFULLY REVIEW THE REMAINDER OF
THIS JOINT CONSENT STATEMENT/PROSPECTUS, THE PARTNERSHIP AGREEMENTS AND THE
CERTIFICATE OF INCORPORATION, AS AMENDED, AND BYLAWS OF THE COMPANY FILED AS
EXHIBITS TO THE REGISTRATION STATEMENT FOR ADDITIONAL IMPORTANT INFORMATION.
Form of Organization and Purpose
The Partnerships
----------------
The Partnerships are limited partnerships which were organized under the laws of
the State of California. The Partnerships were formed to acquire various
distressed financial assets from various sources, including, but not limited to,
federal and state banking and savings and loan agencies and consumer finance
lenders and generate income and gains by collecting, selling, or otherwise
disposing of those acquired assets. The Partnerships have been treated as
limited partnerships for federal and state income tax purposes. The Company is a
Delaware corporation.
The Company
-----------
The Company was formed to engage in the business of purchasing, holding,
servicing, collecting and selling portfolios consisting of distressed financial
debt instruments and obligations. The Company has been treated as a corporation
for federal and state income tax purposes.
Comparison. The Partnerships are limited partnerships organized under
California law. The Company is a Delaware corporation. For tax purposes, both
the Partnerships and the Company have been treated consistently with their
intended forms of organization.
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Length of Investment
The Partnerships
----------------
A purchase of Units is a finite term investment with the Limited Partners
receiving regular cash distributions from the Partnerships' net operating income
and proceeds from liquidation of the Partnerships' assets. The Partnerships will
terminate no later than the following dates (as specified in the Partnership
Agreements), PAM, no later than December 31, 2000; PAM II, no later than
December 31, 2005; PAM III, no later than December 31, 2005; PAM IV, no later
than December 31, 2005; and PAM V, no later than December 31, 2007.
The Company
-----------
The Company has a perpetual term and intends to continue its operations for an
indefinite time period. The Company has no specific plans for distribution of
the assets acquired by the Merger or those that may be subsequently acquired. To
the extent the Company sells or refinances its assets, the net proceeds
therefrom generally will be retained by the Company for working capital and new
investments, rather than being distributed to shareholders in the form of
dividends. In contrast to the Partnerships, the Company will be an entity which
will take advantage of future investment opportunities that may be available in
the distressed financial services industry.
Comparison. The Partnerships have finite terms of existence and are
structured to dissolve when the assets of the Partnerships are liquidated. In
contrast, shareholders of the Company may achieve liquidity of their investments
by trading the Merger Stock in the secondary market, and the Company will
generally reinvest the proceeds of asset dispositions, if any, in new property
or other appropriate investments consistent with the Company's objectives.
Properties and Diversification
The Partnerships
----------------
The investment portfolios of the Partnerships consist of distressed financial
instruments and obligations. The Partnership Agreements provide that the purpose
of the Partnerships is to acquire assets from federal and state banking and
savings and loan agencies and various other sources in order to derive income
from managing, servicing, operating or selling such assets or collecting monies
due and payable from those assets. In addition, the Partnership Agreement of PAM
V contemplates that PAM V may, in addition to the foregoing purpose, utilize a
portion of the net proceeds from the placement of its Units to provide expansion
capital for one or more of that Partnership's servicing entities and acquire an
ownership interest therein.
The Company
-----------
The investment portfolio of the Company will consist primarily of distressed
financial instruments and obligations. The Certificate of Incorporation of the
Company permits it to conduct any business other than the banking business, the
trust company business or the practice of a profession requiring a special
license or authorization and permitted to be incorporated by the Delaware
General Corporation Law. Specific assets have not been identified for sale,
financing, refinancing or purchase following the consummation of the Merger.
Comparison. The Partnership Agreements limited the Partnerships to
investments in certain types of assets. The Company is not so restricted. The
Company may be better able to diversify than the Partnerships.
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Additional Equity
The Partnerships
----------------
The Partnership Agreements do not provide for the Partnerships to issue equity
securities other than Units issued to the Limited Partners. However, under
California limited partnership law applicable to the Partnerships, with the
consent of all partners, the Partnerships may issue additional partnership
interests in the circumstances of the admission of one or more additional
Limited Partners.
The Company
-----------
The Board of Directors of the Company may issue, at its discretion, additional
equity securities consisting of common stock or any other class of capital stock
(which may be classified and issued as a variety of equity securities, including
one or more classes of common stock, at the discretion of the Board of
Directors), provided that the total number of shares issued does not exceed the
authorized number of shares of capital stock set forth in the Company's
Certificate of Incorporation. The Company expects to issue approximately
7,511,500 shares of common stock in the Merger Proposal and related
transactions. The Certificate of Incorporation of the Company authorizes the
issuance of only common stock and preferred stock. The Company has no current
plans to issue any additional shares of preferred stock other than the 100,000
shares of preferred stock currently issued and outstanding and held by Vincent
E. Galewick, and the Company has no current plans to issue additional shares of
common stock or other equity securities.
Comparison. In contrast to the Partnerships, the Company has substantial
flexibility to raise equity through the sale of additional shares of common
stock or preferred stock or other securities to finance the business and affairs
of the Company.
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Borrowing Policies
The Partnerships
----------------
Generally, the General Partner, on behalf of the Partnerships, is authorized to
borrow money and, if security is required therefor, to subject any Partnership
property to any security device, on such terms and in such amounts as the
General Partner, in its sole and absolute discretion, deems to be in the best
interest of such Partnership.
The Company
-----------
The Company is permitted to borrow, on a secured or unsecured basis, funds to
finance its business, without any limitations in its Certificate of
Incorporation or Bylaws. Moreover, although the Company's Bylaws and Certificate
of Incorporation do not limit the Company's incurrence of debt, if the Merger is
consummated, the Indenture Agreement provides that the Debenture shall limit
total leverage to 70 percent of the appraised value of the assets previously
owned by the Partnerships and must be prepaid with 80 percent of the net
proceeds of any sale or refinancing of the assets previously owned by the
Partnerships.
Comparison. In conducting its business, the Company may incur indebtedness
to the extent deemed appropriate by the Board of Directors, while the
Partnerships may incur indebtedness to the extent deemed appropriate by the
General Partner; provided, however, that if the Merger is consummated, the
Company may not incur indebtedness in excess of that permitted under the
Indenture Agreement.
Management Control
The Partnerships
----------------
Pursuant to the Partnership Agreements, the General Partner is, subject to
certain limitations, vested with all management authority to conduct the
business of the Partnerships, including authority and responsibility for causing
to occur all executive, supervisory and administrative services rendered to the
Partnerships. Under the Partnership Agreements, the Limited Partners have no
right to participate in the management and control of the Partnerships and have
no influence in the affairs of the Partnerships, except for certain limited
matters that may be submitted to a vote of the Limited Partners under the terms
of the Partnership Agreements. In general, the Limited Partners may, by a
majority vote, without the concurrence of the General Partner (i) amend the
Partnership Agreements; (ii) remove the General Partner; (iii) elect a new
General Partner; (iv) approve or disapprove the sale of all or substantially all
of the assets of the Partnerships; and (v) dissolve the Partnerships. Moreover,
Limited Partners are entitled to vote upon, and the General Partner may not
undertake without the concurrence of a majority vote of the Limited Partners,
amendments to the Partnership Agreements affecting the rights of the Limited
Partners.
The Company
-----------
The Board of Directors of the Company will have exclusive control over the
Company's business and affairs subject only to the restrictions in its
Certificate of Incorporation and Bylaws. The policies adopted by the Board of
Directors may be altered or eliminated without a vote of the shareholders.
Accordingly, except for their vote in the elections of directors, shareholders
will have no control of the ordinary business policies of the Company.
Comparison. Notwithstanding any anti-takeover provisions pertaining to the
number of directors, because the Board of Directors will be elected each year by
the shareholders at the Company's annual meetings, the shareholders may have
greater control over the management of the Company than the Limited Partners
have over the Partnerships.
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Management Liability and Indemnification
The Partnerships
----------------
As a matter of California law, general partners have liability for the payment
of partnership obligations and debts, unless limitations upon such liability are
expressly stated in the instrument or document evidencing the obligation. In
general, the Partnership Agreements provide that the General Partner will not be
liable to the Partnerships or the Limited Partners for any loss suffered by the
Partnerships which arises out of any action or inaction of the General Partner,
if the General Partner, in good faith, determines that such course of conduct
was in the best interests of the Partnerships and such course of conduct did not
constitute fraud, negligence or misconduct of the General Partner. In addition,
the Partnership Agreements indemnify the General Partner for any losses,
liabilities, expenses and amounts paid in settlement of any claims sustained by
it in connection with the Partnerships, provided that the same were not the
result of fraud, negligence or misconduct on the part of the General Partner,
and provided, further, that the General Partner determines, in good faith, that
such course of action was in the best interests of the Partnerships.
The Company
-----------
The Company's Bylaws provide that the liability of the Company's directors and
officers to the Company and its shareholders for money damages is limited to the
fullest extent permitted under Delaware General Corporation Law. The Company's
Bylaws and Delaware General Corporation Law provide broad indemnification to
directors and officers and indemnify any person who is, or any personal
representative of a deceased person who was, a director or officer of the
Company against any judgments, penalties, settlements and reasonable expenses.
Comparison. The General Partner generally has limited liability to the
Partnerships for acts or omissions undertaken by it when performed in good
faith, in a manner reasonably believed to be within the scope of its authority
and in the best interests of the Partnerships. In some cases, the General
Partner also has, under specified circumstances, a right to be reimbursed for
liability, loss, expenses and amounts incurred by the General Partner by virtue
of serving as General Partner. Although the standards are expressed somewhat
differently, there are similar limitations upon the liability of the directors
and officers of the Company when acing on behalf of the Company and upon the
rights of such persons to seek indemnification from the Company. The Company
believes that the scope of the liability and indemnification provisions in the
Company's Bylaws, while similar to those contained in the Partnership
Agreements, provide greater protection to the Company's directors and officers
against claims for personal liability than the protection afforded to the
General Partner under the Partnership Agreements.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN SUCH ACT AND IS, THEREFORE, UNENFORCEABLE.
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Anti-Takeover Provisions
The Partnerships
----------------
Changes in management of the Partnerships can only be effected by removal of the
General Partner. The Limited Partners have a right to vote on the removal of the
General Partner. In addition, due to transfer restrictions in the Partnership
Agreements, the General Partner may restrict transfers of the Units. Under the
Partnership Agreements, an assignee of a Limited Partner interest may not become
a substitute Limited Partner, entitling such person to vote on a matter that may
be submitted to the Limited Partners for approval, unless the General Partner
consents to such substitution. The General Partner may exercise these rights of
approval to deter, delay or hamper attempts by persons to acquire a majority
interest in the Partnerships.
The Company
-----------
The Certificate of Incorporation, as amended, and Bylaws of the Company contain
a number of provisions that may have an effect of delaying or discouraging an
unsolicited coercive proposal for the acquisition of the Company or the removal
of incumbent management. These provisions include, among others, (i)
restrictions on business combinations with persons who acquire more than a
certain percentage of the common stock of the Company; (ii) restrictions on
acquisition of the common stock of the Company which would provide the acquirer
with a controlling interest in the Company; (iii) restrictions on transactions
with Interested Shareholders or related parties, including officers and
directors of the Company; (iv) restrictions on shareholder actions without
meetings and notices of special meetings; (v) restrictions on the number of
directors and the removal of directors; (vi) restrictions on shareholder
proposals and nominations; (vii) restrictions on amendment of certain provisions
contained in the Company's Bylaws; and (viii) indemnification of the officers
and directors of the Company. Vincent E. Galewick also owns 100,000 shares of
the Company's preferred stock, which are all the issued and outstanding shares
of the Company's preferred stock. Each share of that preferred stock is
convertible into 20 shares of the Company's common stock, subject to certain
conditions precedent relating to the acquisition, by any single shareholder, of
10% or more of the issued and outstanding shares of the Company's common stock.
The conversion of part, or all, of those shares of preferred stock into common
stock could be used to delay, defer or prevent a change in control of the
Company.
Comparison. Certain provisions of the Partnership Agreements and the
Certificate of Incorporation, as amended, and Bylaws of the Company could be
used to delay or deter coercive attempts to obtain control of the Partnerships
or the Company, respectively, in transactions not approved by the General
Partner, on behalf of the Partnerships, or the Board of Directors, on behalf of
the Company. Moreover, Vincent E. Galewick might be able to use the convertible
feature of his preferred stock to delay, defer or prevent a change in control of
the Company.
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Voting Rights
The Partnerships
----------------
Generally, under the Partnership Agreements and applicable California law, the
Limited Partners have voting rights only as to major Partnership transactions
(e.g., amendment of the Partnership Agreements, removal of the General Partner,
election of a new General Partner, sale of all the assets of the Partnerships,
and dissolution of the Partnerships). Otherwise, all decisions relating to the
operation and management of the Partnerships are made by the General Partner.
The Company
-----------
The Company is managed and controlled by a Board of Directors. The directors are
elected by the shareholders at annual meetings of the Company. Delaware General
Corporation Law requires that certain major corporate transactions, including
most amendments to the Company's Certificate of Incorporation, may not be
consummated without the approval of shareholders holding at least a majority of
the outstanding voting stock entitled to vote. Notwithstanding the foregoing,
certain transactions, such as the sale of all of the assets of the Company to an
Affiliate of the Company, must be approved by at least 90% of the outstanding
voting stock entitled to vote. To the extent that the Company will have
outstanding shares held of record by 100 or more persons, adoption of additional
anti-takeover provisions may require a supermajority vote (i.e., two-thirds) to
adopt. Subject to the provisions of the Company's Certificate of Incorporation,
as amended, and Bylaws regarding certain anti-takeover provisions discussed at
"Anti-Takeover Provisions," above, each share of the Company's common stock will
have one vote, and the Company's Certificate of Incorporation, as amended,
permits the Board of Directors to classify and issue capital stock in one or
more classes having voting power which may differ from that of the Merger Stock.
Comparison. The Limited Partners have limited voting rights. The
shareholders of the Company have voting rights that permit them to elect the
Board of Directors and to approve or disapprove certain major corporate
transactions.
Compensation, Fees and Distributions
The Partnerships
----------------
Generally, under the Partnership Agreements, the General Partner receives
compensation for its management services to the Partnerships. Also, the General
Partner has the same rights to distributions according to its respective
Partnership interests as the Limited Partners. The General Partner also receives
reimbursement for expenses incurred by it for the benefit of the Partnerships.
The Company
-----------
The directors of the Company will receive compensation for their services as
described herein under "Management of the General Partner and Company."
Comparison. Under the Partnership Agreements, fees, distributions and
reimbursements are payable to the General Partner and its Affiliates. The
directors of the Company will receive compensation for their services as
described under "Management of the General Partner and Company."
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Liability of Investors
The Partnerships
----------------
Under the Partnership Agreements and pursuant to California law, the liability
of Limited Partners for the Partnerships' debts and obligations is limited to
the amounts of their investments in the respective Partnerships together with an
interest in undistributed income, if any. The Units are fully paid and
nonassessable. The General Partner is liable for all of the debts and
obligations of the Partnerships.
The Company
-----------
Under Delaware General Corporation Law, shareholders are not personally liable
for the debts or obligations of the Company. The Merger Stock, upon issuance,
will be fully paid and nonassessable.
Comparison. The personal liability of the shareholders of the Company for
the debts and obligations of the Company is comparable to that of the Limited
Partners for the debts and obligations of the Partnerships.
Nature of Investment
The Partnerships
----------------
The Units constitute equity interests entitling the Limited Partners to pro rata
shares of cash distributions made by the Partnerships. The Partnerships
generally maintain a policy of long-term ownership for current cash receipts and
long term appreciation. The Partnership Agreements specify how the cash
available for distribution, whether arising from operations or sales or
refinancing, is to be shared among the Limited Partners and the General Partner.
The distributions payable to the Limited Partners are not fixed in amount and
depend upon the operating results and net sale or refinancing proceeds available
from the disposition of the Partnerships' assets.
The Company
-----------
The Merger Stock constitutes equity interests in the Company. Each shareholder
will be entitled to a pro rata share of any dividends or distributions paid with
respect to the Merger Stock. The dividends payable to the shareholders are not
fixed in amount and are only paid if, when, and as declared by the Board of
Directors. The Company currently does not plan to pay any cash dividends on the
Merger Stock or preferred stock for the foreseeable future, as all available
cash will be utilized to continue the growth of the Company's business
subsequent to the Closing Date for the proximate future thereafter. The payment
of any subsequent cash dividends will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Board of Directors.
Comparison. The Units and the Merger Stock represent equity interests
entitling the holders thereof to participate financially in the growth and
income of the Partnerships and the Company, respectively. Until distribution
payments were suspended pending the Merger Proposal, the Partnerships have
distributed available cash to the Limited Partners. Dividends payable by the
Company on its securities are payable at the discretion of the Board of
Directors. The Company does not currently anticipate that it will pay dividends
on the Merger Stock.
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Potential Dilution of Payment Rights
The Partnerships
----------------
Because the Partnerships may issue additional equity securities only in limited
circumstances and only upon the unanimous consent of the Limited Partners, there
is little chance for dilution of the Limited Partners' share of cash available
for distribution.
The Company
-----------
The Board of Directors may issue, at its discretion, additional shares of the
Company's common stock and has the authority to issue from the authorized
capital stock a variety of other equity securities of the Company with such
powers, preferences, and rights as the Board of Directors may at the time
designate. The issuance of additional shares of either common stock, preferred
stock or other similar equity securities in addition to the Merger Stock may
result in the dilution of the interests of the shareholders of the Company.
Comparison. The Limited Partners are not subject to dilution of the
Partnerships' cash available for distribution. The shareholders of the Company
will be subject to potential dilution if the Board of Directors, in its sole and
absolute discretion, decides to issue additional equity securities of the
Company. Furthermore, the Board of Directors will have the authority to issue
from the authorized capital stock a variety of other equity securities, which
may subject shareholders of the Company to additional dilution.
Liquidity
The Partnerships
----------------
The transfer of the Units is subject to a number of restrictions imposed by the
Partnership Agreements, which are designated in part to preserve the tax status
of the Partnerships as "partnerships" under the Internal Revenue Code of 1986,
as amended ("Code"). The transferee of a Limited Partner's interest in a
Partnership does not have the right to become a substitute Limited Partner
(entitling such transferee to vote on matters submitted to a vote of the Limited
Partners of such Partnership) unless, among other things, such substitution is
approved by the General Partner.
The Company
-----------
The Merger Stock will be freely transferable once registered under the
Securities Act. The Company will attempt to list the Merger Stock on a regional
or national securities exchange, although there is no guarantee or assurance the
Company will be able to list the Merger Stock on any regional or national
market. If the Merger Stock is so listed, the Company anticipates a public
market for the Merger Stock to develop. The breadth and strength of any such
market, if it develops at all, will depend, among other things, upon the number
of shares of Merger Stock outstanding, the Company's financial results and
prospects, the general interest in the Company's and other similar investments,
and the Company's dividend yield compared to that of other debt and equity
securities. Comparison. One of the primary objectives of the Merger Proposal is
to provide increased liquidity to the Limited Partners.
The Merger Stock may be listed on a regional or national securities
exchange, but there is no guarantee or assurance that any Company security will
be so listed. If so listed, a public market for the Merger Stock may develop.
The breadth of such market cannot yet be determined, but it is expected that the
market for the Merger Stock may be broader than the current market, if any, for
the Units.
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Taxation
The Partnerships
----------------
The Partnerships are not subject to federal or state income taxes. Instead each
Limited Partner includes his or her allocable share of respective Partnership
taxable income or loss in determining such Partner's individual federal and
state income tax liability. The maximum effective federal tax rate for
individuals under current law is 39.6%. However, upper bracket individuals are
subject to a phaseout of their personal exemptions, and a restriction on
itemized deductions, which in combination in certain circumstances, can bring
the actual maximum federal income tax rate to more than 47%.
The Company
-----------
The Company will be subject to federal and state income taxes on income. The
maximum federal corporate tax rate is 39%. In addition, shareholders of the
Company will be subject to federal and state income taxes on distributions of
dividends or corporate earnings. The maximum effective federal tax rate for
individuals under current law is 39.6%. However, upper bracket individuals are
subject to a phaseout of their personal exemptions, and a restriction on
itemized deductions, which in combination in certain circumstances, can bring
the actual maximum federal rate to more than 47%. See "FEDERAL INCOME TAX
CONSEQUENCES" and "OTHER TAX CONSEQUENCES."
Comparison. While in partnership form income is taxed only once (i.e., to
the Limited Partners), in corporate form income can be taxed twice, or more,
(i.e., once to the Company and once to its shareholders to the extent they
receive dividends or recognize gain on the sale or exchange of shares). See
"FEDERAL INCOME TAX CONSEQUENCES" and "CERTAIN STATE AND LOCAL INCOME TAX
CONSEQUENCES." See also "SUMMARY -- Disadvantages of the Merger and Related
Transactions."
Passive vs. Portfolio Income
The Partnerships
----------------
As to the Limited Partners, income and loss from the Partnerships generally are
subject to the "passive activity" limitations. Under the "passive activity"
rules, income and loss from the Partnerships generally can be offset against
income and loss from other investments that constitute "passive activities."
The Company
-----------
Dividends paid by the Company to its shareholders will be treated as "portfolio"
income and cannot be offset with losses from "passive activities."
Benefits from Distributions
The Partnerships
----------------
Cash distributions from the Partnerships are not taxable to the Limited
Partners, except to the extent they exceed the Limited Partners' basis in the
Units. Distributions made by the Company to its taxable domestic shareholders
out of current or accumulated earnings and profits will be ordinary income.
The Company
-----------
Distributions that are designated as capital gains dividends generally will be
taxed as long-term capital gains. Distributions in excess of current or
accumulated earnings and profits will be treated as a nontaxable return of basis
to the extent of a shareholder's adjusted basis in his or her Merger Stock, with
the excess taxed as capital gain.
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Fiduciary Duties
The Partnerships
----------------
The General Partner is accountable as a fiduciary to the Partnerships and is
required to operate the businesses of the Partnerships for the benefit of all
Limited Partners and not to perform any acts detrimental to the best interests
of the Partnerships. However, the Partnership Agreements generally allow the
General Partner to conduct independent activities which may be competitive with
the businesses of the Partnerships.
The Company
-----------
Under Delaware General Corporation Law, the directors must perform their duties
in good faith, in a manner that they reasonably believe to be in the best
interests of the Company and with the care of an ordinarily prudent person in a
similar situation. Directors of the Company who act in such a manner will
generally not be liable to the Company for monetary damages arising from their
activities.
Comparison. In both the Partnerships and the Company, the General Partner
of the Partnerships, and the Board of Directors of the Company, respectively,
owe fiduciary duties to their constituent parties. Some courts have interpreted
the fiduciary duties of members of a board of directors in the same way as the
duties of a general partner in a limited partnership. Other courts, however,
have indicated that the fiduciary obligations of a general partner to limited
partners are greater than those owed by a director to stockholders. Therefore,
although it is unclear whether, or to what extent, there are differences in such
fiduciary duties, it is possible that the fiduciary duties of the directors of
the Company to its shareholders may be less than those of the General Partner to
the Limited Partners.
Reporting Procedures
The Partnerships
----------------
Each year, Limited Partners receive a Schedule K-1 tax form containing detailed
tax information for use in preparing their appropriate income tax returns.
The Company
-----------
Each year, shareholders will receive Form 1099 used by corporations to report
dividends paid to their shareholders.
State Taxation
The Partnerships
----------------
Limited Partners are required in some cases to file state income tax returns
and, sometimes, pay state income taxes in states in which the Partnerships own
property, even if they are not residents of those states.
The Company
-----------
Shareholders who are individuals generally will not be required to file state
income tax returns or pay state income taxes outside of their states of
residence with respect to the Company's operations and distributions (although
it is possible that the State of California or other states may seek to impose
tax on nonresidents with respect to distributions to nonresidents). The Company
may be required to pay state income taxes in certain states.
THE COMPANY AS A NOMINALLY FOREIGN CORPORATION
Factors to Determine Foreign Corporations Subject to California Laws. For
purposes of this section, a "foreign" corporation is a corporation not formed in
California. Certain foreign corporations may be designated as "nominally
foreign" corporations if such corporations are owned and operated in California.
Nominally foreign corporations are subject to a number of the key provisions of
the California General Corporation Law applicable to domestic corporations.
Section 2115 of the California General Corporation Law sets forth the factors
which are used to determine if a foreign corporation must comply with the key
California state statutes regulating corporations. Basically, a foreign
corporation is subject to California regulation if the average of its property
factor, payroll factor and sales factor (as these terms are defined in Sections
25129, 25132 and 25134 of the California Revenue and Taxation Code) is more than
50% during its latest complete income year and if more than one-half of its
outstanding voting securities are held of record by persons having addresses in
California.
California Laws Which Supersede Foreign Laws for Nominally Foreign
Corporations. The following chapters and sections of the California General
Corporation Law apply, to the EXCLUSION of the law of the state of
incorporation, to nominally foreign corporations:
Section 301 relating to annual election of directors;
Section 303 relating to removal of directors without cause;
Section 304 relating to removal of directors by court proceedings;
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Section 305, subdivision (c), relating to filing of director vacancies
where less than a majority in office elected by shareholders;
Section 309 relating to directors' standard of care;
Section 316 (excluding paragraph (3), subdivision (a) and paragraph (3) of
subdivision (f)) relating to liability of directors for unlawful
distributions;
Section 317 relating to indemnification of directors, officers and others;
Sections 500 to 505, inclusive, relating to limitations on corporate
distributions in cash or property);
Section 506 relating to liability of shareholder who receives unlawful
distribution;
Section 600, subdivisions (b) and (c), relating to requirement for annual
shareholders' meeting and remedy if same not timely held;
Section 708, subdivisions (a), (b) and (c), relating to shareholder's right
to cumulate votes at any election of directors;
Section 710 relating to supermajority vote requirement;
Section 1001, subdivision (d), relating to limitations on sale of assets;
Section 1101 (provisions following subdivision (e)) relating to limitations
on mergers;
Chapter 12 (commencing with Section 1200) relating to reorganizations;
Chapter 13 (commencing with Section 1300) relating to dissenters' rights;
Sections 1500 and 1501 relating to records and reports;
Section 1508 relating to action by Attorney General; and
Chapter 16 (commencing with Section 1600) relating to rights of inspection.
Directors. Election and removal of directors must be in accordance with the
California General Corporation Law. Unless the Company has divided its board of
directors into classes (which can only be done if the corporation's shares are
listed on a national market exchange -- see the portion of this Joint Consent
Statement/Prospectus entitled "Elimination of Cumulative Voting"), all directors
must be elected at each annual meeting for a one-year term. Directors can also
be removed without cause on approval of the outstanding shares of common stock.
Directors are subject to the California standard of care that directors must
observe. This involves requirements not only of good faith, but of inquiry and
reasonable belief in the competency of others on whom a director is relying.
Therefore, while directors may be held liable for unlawful "distributions," they
are not obligated by related California provisions applicable to loans or
guaranties to officers, directors, and certain other persons. The indemnity
provisions of Section 317 of the California General Corporation Law are also
applicable.
Distributions. Some California limitations on distributions of cash or
property apply to nominally foreign corporations, including the basic
limitations on dividends contained in Sections 500 through 505, inclusive, of
the California General Corporation Law and the personal liability of
shareholders who receive improper distributions with knowledge of such
impropriety. They do not include certain other provisions as to redemptions,
notices, and treasury shares.
Shareholder Meetings. Annual shareholders' meetings are required as
provided by Section 600(b) of the California General Corporation Law . The
remedies for failure to hold annual meetings also apply. Subject to the "listed
corporation" exemption, shareholders have the right to cumulative voting for
directors. (See the portion of this Joint Consent Statement/Prospectus entitled
"Elimination of Cumulative Voting") Shareholders who are residents of California
have a right to receive a report of the vote taken at any annual, regular, or
special meeting of shareholders. The provisions of Section 710 of the California
General Corporation Law concerning supermajority vote requirements also apply.
Sales of Assets, Mergers and Reorganizations. Board of Directors and
shareholder approval are required for sales of assets and reorganizations.
Dissenters' rights must be provided to shareholders in any reorganization.
Shareholders with the same type of shares must be treated equally in a merger.
Records. Nominally foreign corporations are obligated by the basic
California requirements concerning keeping of books and records, minutes of all
meetings, and share registers. Directors of such a corporation have the absolute
right at any reasonable time to inspect all books, records and properties of the
corporation or its subsidiaries.
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COMMENCEMENT AND CESSATION OF "NOMINALLY FOREIGN" STATUS
Commencement. The nominal foreign corporation rules become applicable to
any foreign corporation only upon the first day of the first income year of such
corporation commencing on or after the 30th day after the filing by such a
report pursuant to Section 2108 of the California General Corporation Law
indicating that the factors referred to in Section 2115(a) of the California
General Corporation Law have been satisfied.
Cessation. The status of a corporation as a nominally foreign corporation
ceases at the end of any income year during which (a) an annual report has been
filed indicating that at least one of the factors for such status is not
satisfied or (b) a final order shall have been entered by a court of competent
jurisdiction declaring that one of the factors has not been satisfied.
Exemptions. Section 2115 of the California General Corporation Law does not
apply to any foreign corporation that has outstanding securities (i) listed on
the New York or American Stock Exchanges or (ii) designated as qualified for
trading as a national market security on NASDAQ (or any successor national
market system) if the corporation has at least 800 shareholders as of the record
date of its most recent annual meeting of shareholders.
There is also an exemption for any corporation if all the voting shares
(other than directors' qualifying shares) are owned directly or indirectly by
one or more corporations not subject to Section 2115 of the California General
Corporation Law.
The Company anticipates applying for listing on a regional or national
stock exchange after completion of the Merger; however, there can be no
assurance that the Company will be approved for listing.
RIGHTS OF DISSENTING LIMITED PARTNERS
Dissenting Limited Partners and Appraisal Rights. The Thompson-Killea Act
provides Dissenting Limited Partners with certain rights to receive compensation
for their Units based on an appraisal of the Partnership's assets performed by
an independent appraiser unaffiliated with PCM, the General Partner or the
Company and which values those assets as if sold in an orderly manner in a
reasonable period of time, adding or subtracting other balance sheet items, and
subtracting the cost of sale or refinancing. Compensation to Dissenting Limited
Partners may be cash, secured debt instruments, unsecured debt instruments, or
freely tradeable securities; provided, however, that:
(A) debt instruments used as compensation must provide for a trustee and an
indenture to protect the rights of the debt holders and provide a rate of
interest based upon, but not less than, the then applicable federal rate as
determined in accordance with Section 1274 of the Internal Revenue Code of 1986,
as amended ("Code");
(B) unsecured debt instruments used as compensation, in addition to the
above requirements, must limit total leverage to 70 percent of the appraised
value of the assets;
(C) all debt securities have a term no greater than seven years and provide
for prepayment with 80 percent of the net proceeds of any sale or refinancing of
the assets previously owned by the entity or any part thereof; and
(D) freely tradeable securities used as compensation to Dissenting Limited
Partners must be issued by an issuer whose securities are listed on a certified
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., for at least one year prior to the consummation of the Merger,
and the number of securities to be received in return for Units must be
determined by an appraisal of applicable Partnership assets, conducted in a
manner consistent with the procedures described above, in relation to the
average last sale price of the freely tradeable securities in the 20-day period
following the consummation of the Merger. If the issuer of the freely tradeable
securities is affiliated with PCM, the General Partner or the Company, newly
issued securities to be utilized as compensation to Dissenting Limited Partners
shall not represent more than 20 percent of the issued and outstanding shares of
that class of securities after giving effect to the issuance. For the purposes
of the preceding sentence, PCM, the General Partner or the Company is deemed
"affiliated" with the issuer of the freely tradeable securities if PCM, the
General Partner or the Company receives any material compensation from the
issuer or its Affiliates in conjunction with the Merger or related transactions;
provided, however, that PCM, the General Partner or the Company may, under
certain circumstances, receive payment for their equity interests and other
compensation.
Further, the Dissenting Limited Partners may, in lieu of the forgoing,
receive or retain a security with substantially the same terms and conditions as
the security originally held, i.e. the Units, provided that the receipt or
retention of that security is not a step in a series of subsequent transactions
that directly or indirectly through acquisition or otherwise involves future
combinations or reorganizations of one or more former Merger Proposal
participants. Securities received or retained will be considered to have the
same terms and conditions as the security originally held if:
(A) there is no material adverse change to the Dissenting Limited Partners'
rights, including, but not limited to, rights with respect to voting, the
business plan, or the investment, distribution, management compensation, and
liquidation policies of the Company.
(B) the Dissenting Limited Partners receive the same preferences,
privileges, and priorities as they had pursuant to the security originally held.
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The Company is satisfying this requirement by offering to purchase the
Units of any Dissenting Limited Partner with an unsecured subordinated debenture
("Debenture") issued under an Indenture Agreement ("Indenture Agreement"), the
terms of which satisfy the requirements of the Thompson-Killea Act. A copy of
the Debenture is included with this Joint Consent Statement/Prospectus as
Appendix N. A copy of the Indenture Agreement is included with this Joint
Consent Statement/Prospectus as Appendix M.
Subject to Sections 8.01 through 8.03, inclusive, of the Indenture
Agreement, and further subject to the rights and powers granted to the Trustee
under the Indenture Agreement and the Trust Indenture Act of 1939, the Company
may merge or consolidate with certain other entities, subject to certain
conditions, including the assumption by any successor or surviving corporation
of all of the terms, conditions, and duties of the Company specified in the
Indenture Agreement. Moreover, although the Company's Bylaws and Certificate of
Incorporation do not limit the Company's incurrence of debt, the Indenture
Agreement provides that the Debenture shall limit total leverage to 70 percent
of the appraised value of the assets previously owned by the Partnerships and
must be prepaid with 80 percent of the net proceeds of any sale or refinancing
of the assets previously owned by the Partnerships.
The Merger Proposal and related transactions have also been structured to
comply with the other protections provided by the Thompson-Killea Act. In the
event a Limited Partner elects to exercise his or her right to dissent, such
Limited Partner must perform the acts set forth at the portion of this Joint
Consent Statement/Prospectus entitled "VOTING PROCEDURES -- Dissenting Limited
Partners." Dissenting Limited Partners must complete Part V of the Letter of
Transmittal and Consent Statement and thereafter provide that Letter of
Transmittal and Consent Statement to the Exchange Agent, which will serve as a
request to the General Partner that their Units be purchased using the
Debenture.
DISSENTING LIMITED PARTNERS MAY HAVE OTHER RIGHTS NOT PRESENTED ABOVE.
DISSENTING LIMITED PARTNERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO ALL
SUCH MATTERS.
RIGHTS OF DISSENTING SHAREHOLDERS
Dissenting Shareholders and Appraisal Rights. Although Vincent E. Galewick,
the majority shareholder of PCM and the sole shareholder of the Company, and
Michael A. Cushing, the other shareholder of PCM, have approved the Merger
Proposal, dissenting shareholders ("Dissenting Shareholders"), pursuant to
applicable California law, are provided with certain rights pertaining to
corporate mergers and reorganizations. Neither Mr. Galewick nor Mr. Cushing
intend to exercise dissenter's rights or become Dissenting Shareholders.
Dissenting Shareholders have no specific appraisal rights; however, they do
have certain repurchase rights. Sections 1300 et seq. of the California General
Corporation Law provide that each shareholder entitled to vote on the Merger
Proposal and related transactions who dissents may require the Company to
purchase such Dissenting Shareholder's shares for cash at their fair market
value. The fair market value of such Dissenting Shareholder's shares is to be
determined as of the day before the first announcement of the terms of the
Merger Proposal and related transactions, excluding any appreciation or
depreciation in consequence of the Merger Proposal or related transactions, but
adjusted for any stock split, reverse stock split or share dividend which
becomes effective thereafter.
A shareholder must meet all of the following requirements in order to
qualify as a Dissenting Shareholder:
(A) The shares held by such shareholder must have been outstanding in the
name of such shareholder on the Determination Date.
(B) Those shares must not have been voted in favor of the Merger Proposal
or related transactions.
(C) If the Merger Proposal and related transactions are approved, the
Company will send all of its shareholders a notice of approval of the Merger
Proposal and related transactions accompanied by a statement of the price
determined by the Company to represent the fair market value of the shares held
by Dissenting Shareholders and a brief description of the procedure to be
followed if the Dissenting Shareholders desire to exercise the Dissenting
Shareholder's purchase rights. The statement of price shall constitute an offer
by the Company to purchase any shares determined to be "Dissenting Shares" as
defined at Sections 1300 et seq. of the California General Corporation Law. Each
Dissenting Shareholder must then make a written demand on the Company that such
Dissenting Shareholder desires to exercise his or her purchase rights.
(D) THE DEMAND MUST BE RECEIVED BY THE EXCHANGE AGENT NO LATER THAN 30 DAYS
AFTER THE DATE ON WHICH THE NOTICE OF APPROVAL WAS MAILED.
(E) The demand must state the number and class of shares of PCM's common
stock or the Company's common stock held of record by such Dissenting
Shareholder, which such Dissenting Shareholder demands that the Company purchase
and must contain a statement of what such Dissenting Shareholder claims to be
the fair market value of such shares as of the day before the announcement of
the Merger Proposal and related transactions. The statement by such Dissenting
Shareholder shall constitute an offer by such Dissenting Shareholder to sell
those shares at such price.
(F) Each Dissenting Shareholder must, within 30 days after the date on
which the notice of approval was mailed, submit to the Company at the address
set forth herein the following: (1) if such Dissenting Shareholder
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possesses actual certificates representing the dissenting shares, the
certificates representing the Dissenting Shares to be stamped or endorsed with a
statement that the applicable shares are, in fact, Dissenting Shares or to be
exchanged for certificates of appropriate denomination so stamped or endorsed;
or (2) if such Dissenting Shareholder possesses no such certificates, written
notice of the number of Dissenting Shares which such Dissenting Shareholder
demands that the Company purchase.
If the Company denies that the applicable shares are Dissenting Shares, or
if the Company and such Dissenting Shareholder cannot agree upon the fair market
value of the applicable shares, then such Dissenting Shareholder demanding
purchase or the Company may, within six months after the date on which the
notice of approval was mailed, but no later, file a complaint in the Superior
Court of Orange County, State of California to determine (i) whether the
applicable shares are Dissenting Shares, (ii) the fair market value of the
applicable shares, or (iii) both. While Dissenting Shareholders have no specific
appraisal rights, the court may appoint one or more impartial appraisers to
determine the fair market value of the applicable shares. Dissenting
Shareholders continue to have all of the rights and privileges incident to their
shares, unless the Dissenting Shares lose their status as Dissenting Shares,
until the fair market value of their shares is agreed upon or determined. A
Dissenting Shareholder may not withdraw a demand for purchase, unless the
Company consents. Dissenting Shares lose their status as Dissenting Shares upon
the happening of: (i) the Company abandons the Merger Proposal; (ii) the
applicable shares are transferred prior to their submission for endorsement as
set forth above; (iii) the Dissenting Shareholder and the Company do not agree
upon the status of the applicable shares as dissenting or upon the purchase
price and neither files a complaint within six months of the date the notice of
approval was mailed as set forth above; or (iv) the Company consents to the
Dissenting Shareholder's withdrawal of the demand for purchase. If the Company
abandons the Merger Proposal, it must pay on demand to any Dissenting
Shareholder who has initiated proceedings for purchase of Dissenting Shares in
good faith all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
DISSENTING SHAREHOLDERS MAY HAVE OTHER RIGHTS NOT DISCUSSED ABOVE. DISSENTING
SHAREHOLDERS SHOULD CONSULT WITH THEIR LEGAL COUNSEL AS TO ALL SUCH MATTERS.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following information is intended to provide the Limited
Partners, the PCM Shareholders and the Company Shareholders with a summary of
all material federal income tax consequences of general application to the
Company and Limited Partners associated with the Merger Proposal. This summary
does not consider all tax matters that may affect the Partnerships, the Company,
the Limited Partners or those shareholders, including any state, local, foreign
or other matters, and does not consider various facts or limitations applicable
to any particular Limited Partner, or special tax rules that may apply to
certain Limited Partners or shareholders that may modify or alter the results
described herein.
Except as otherwise indicated, statements of legal conclusions regarding
tax treatments, tax effects or tax consequences present the opinions of John H.
Brainerd, Attorney at Law and tax counsel for the Company, based on the Internal
Revenue Code of 1986 ("Code") and applicable Treasury Regulations thereunder,
each as amended and in effect on the date hereof, and on reported judicial
decisions and published positions of the Internal Revenue Service ("IRS"). No
rulings have been requested from the IRS concerning any of the matters presented
in this Joint Consent Statement/Prospectus and the IRS will generally not issue
rulings on transactions such as the Merger Proposal. In some cases, particularly
those as to which tax counsel's opinion is qualified, there is a risk that the
IRS will disagree with the conclusions of tax counsel. The laws, regulations,
administrative rulings and judicial decisions that form the basis for
conclusions with respect to the tax consequences of the Merger Proposal are very
complex and are subject to change at any time.
The tax opinion of John H. Brainerd is filed as Exhibit 8 to the
Registration Statement, of which this Joint Consent Statement/Prospectus
constitutes a part. Upon receipt of a written request of a Limited Partner (or
such Limited Partner's representative who has been so designated in writing)
addressed to the Information Agent at 4100 Newport Place, Suite 400, Newport
Beach, California 92660, a copy of the tax opinion will be transmitted promptly,
without charge, by the General Partner.
The Limited Partners, PCM shareholders and Company Shareholders should be
aware that there is no direct authority of general applicability governing the
federal income tax treatment of transactions such as the Merger Proposal that
are structured as partnership mergers, because this structure is an approach
made available by recent developments in California partnership law. Therefore,
in rendering his opinions, John H. Brainerd has relied on authorities addressing
the consequences of analogous transactions that used similar structures.
Accordingly, although there appears to be no controlling authority contrary to
Mr. Brainerd's conclusions, it is possible that the IRS would take a different
position if it reviewed the tax consequences of the Merger Proposal.
Differences Between Partnership Units and Merger Stock. A limited
partnership is a pass-through entity for federal income tax purposes. This means
that a limited partnership is not liable for federal income tax on its taxable
income. Rather, a limited partnership passes its income (or loss) through to its
owners (i.e., general and limited partners) in proportion to their relative
interests in profits and losses. This is known as allocating a partnership's
income and loss. Many items of income, deduction, gain, loss, and credits are
allocated separately to each partner in proportion to such partner's interest in
those items as specified in such limited partnership's agreement of limited
partnership. The character of each item passed through to a partner remains the
same with such partner as it was with the limited partnership. Each partner
includes these items on such partner's income tax return and pays tax based on
those items combined with such partner's other items of income, deduction, gain,
loss or credits. Thus, tax is imposed
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on the partner regardless of whether the limited partnership actually
distributes any cash or property to that partner. Therefore, it is the
allocation, not the distribution, of income (or loss) to a partner that results
in tax effect for that partner.
A partner has a basis in the limited partnership interest he or she holds
which is generally equal to either the cost of that limited partnership
interest, if purchased, or, if not purchased, the amount of any cash or adjusted
basis of any other property that partner transferred to the limited partnership,
increased (or decreased) by that partner's share of the limited partnership's
income (or loss) and decreased by the amount of any cash (or the basis of any
property) distributed to that partner. Upon sale of his or her limited
partnership interest, a partner realizes gain equal to the amount received for
the limited partnership interest (including their share of partnership
liabilities) less that partner's adjusted basis in the limited partnership
interest. The partner's gain (or loss) upon sale is generally capital gain (or
loss), but may be characterized as ordinary gain (or loss) to the extent of that
partner's share of certain "hot" assets held by the limited partnership.
Because a limited partnership does not pay tax on income it earns (but
rather the general partner and limited partners pay tax on such income),
partners of a limited partnership are subject to federal income tax on income
earned in the business conducted by the limited partnership only once.
Accordingly, as owners of the Partnership, by their Units, Limited Partners
receive the federal income tax treatment just described. Regarding the
partnerships, the number of Units owned by a Partner (defined as either the
General Partner or any Limited Partner) will determine the amount of income or
loss allocated to such Partner by the applicable Partnership.
A corporation is a taxable entity and pays federal income tax at rates
ranging from 15% to 39% on its taxable income. A shareholder of a corporation is
generally not taxed on any income earned by that corporation until that
corporation distributes either cash or property to that shareholder or that
shareholder sells or exchanges his or her shares of stock issued by that
corporation at a gain. A corporation often makes distributions to its
shareholders in proportion to their interests in that corporation, but it need
not do so. When cash or property is distributed, each portion of the
distribution will be characterized in one of the following three ways: (i) as a
dividend, (ii) as a capital gain, or (iii) as a return of capital. The portion
of a distribution treated as a dividend is taxed at ordinary federal income tax
rates, which, for individuals, are as much as 39.6%. However, upper bracket
individuals are subject to a phaseout of their personal exemptions, and a
restriction on itemized deductions, which in combination under certain
circumstances, can bring the actual maximum effective federal rate to more than
47%. The portion treated as capital gain will reduce the adjusted basis in the
shareholder's stock and generally be taxed at a maximum 28% rate until the
adjusted basis reaches zero. The portion treated as return of capital will not
be taxed. The amount of any distribution treated in any of the three alternative
ways may differ for each shareholder, and will depend upon the value of the cash
and property received, the percentage interest in the corporation owned by the
shareholders receiving distributions and each shareholder's basis in his or her
shares. Because corporations are taxable on their own taxable income, and
because shareholders may be taxed again on that same income, if it is
distributed to shareholders in the form of cash or property, or if that income
is realized by the sale or exchange of shares at a gain, there are two levels of
potential tax upon income earned by a corporation. A shareholder's basis in his
or her shares is generally equal to the cost of the shares, if purchased, or, if
not purchased, the amount of any cash and basis of other property contributed to
the corporation, decreased by the amount of any distributions treated as a
return of capital. Upon a sale of shares, a shareholder's gain (or loss) will be
equal to the amount received for those shares less his or her basis in those
shares. The character of such gain (or loss) will generally be capital in
nature. As holders of interests in a corporation, the owners of Merger Stock
will be subject to the tax treatment just described.
As a holder of a Unit, a Limited Partner holds an interest in an entity
that earns income subject to federal income tax only once, whereas the holder of
Merger Stock would hold an interest in an entity that earns income subject to
federal income tax twice.
There are, however, potential tax advantages (and corresponding financial
advantages) to conducting a business in a corporation. These include the ability
of shareholders to defer tax on income earned by the corporation until the
corporation distributes such income. Partners in a partnership, by contrast, are
taxed as the partnership earns income, even if cash is not distributed to those
partners. Partners pay such tax at their individual federal tax rate, which may
exceed the maximum federal corporate tax rate. Alternatively, because
shareholders pay no tax until they receive distributions from the corporation,
the Company, as a corporation, may accumulate income for business expansion
without financially interfering with its shareholders' abilities to pay their
taxes. Finally, because tax is paid by the corporation, it is better able to
manage its tax liability by tax planning.
The Partnerships. The Partnerships will be deemed to have transferred all
their assets and liabilities to the Company and to have received the Merger
Stock in exchange, and then to have distributed the Merger Stock to the Limited
Partners and the General Partner in complete liquidation. The Partnerships will
realize, but not be required to recognize, gain or loss as if the applicable
Partnership had transferred of all their assets to the Company for an amount
equal to the value of the Merger Stock, plus the liabilities of the Partnership
assumed in the Merger. The Partnerships will avoid recognition of gain or loss
if they contribute property to the Company and immediately thereafter the
Partnerships and the PCM Shareholders are in control of 80% of the Company. The
Partnerships will, however, be taxed on any boot received in the Merger. Boot is
defined as cash or property (including securities other than the stock) received
by the Partnerships. Gain or loss is not recognized and deferred by the
Partnerships by the transfer of the Partnerships' adjusted basis in their
assets, reduced by any liabilities assumed by the Company, to the shares of
Merger Stock that they are deemed to receive in the Merger. The gain or loss
realized will be recognized when these shares of Merger Stock are sold or
exchanged in a taxable transaction.
60
<PAGE>
The Partnerships will have a split holding period for each share of Merger
Stock received. A share of Merger Stock received in exchange for Units will have
a holding period that begins on the day following the Closing Date to the extent
that the value of such share of Merger Stock on the Closing Date is attributable
to certain of the Partnerships' assets (essentially, their ordinary income
assets), and, to the extent of any excess value, such share of Merger Stock will
have a holding period that includes the period the Units were held by the
Limited Partners.
The Company. The Partnerships will be deemed to have transferred all their
assets and liabilities to the Company and to have received the Merger Stock in
exchange, and then to have distributed the Merger Stock to the Limited Partners
and the General Partner in complete liquidation.
The Company will not recognize gain or loss resulting from the Merger, but
the Company's tax basis in the assets acquired from the Partnerships will be the
same as that basis was in the hands of the Partnerships. The Company's holding
period in the assets will include the Partnerships' holding periods received by
the Company. The Partnerships, on the other hand, will not be required to
recognize gain or loss resulting from the Merger.
After consummation of the Merger, the Partnerships will cease to exist for
both state law and federal income tax purposes. The Company will be taxed as a
corporation on its taxable income. The income and deductions attributable to the
assets and liabilities received in the Merger will be included in the Company's
taxable income. The adjusted tax basis of certain of the assets will be
depreciable or amortizable for federal tax purposes, thereby reducing the amount
of the Company's income subject to tax.
The Limited Partners and Shareholders. Each Limited Partner will realize
gain or loss on the receipt of Merger Stock or a Debenture in exchange for his
or her Units. As the Merger Stock will probably be considered to be marketable
securities, the Merger Stock will be treated as cash received and gain to the
Limited Partners will be measured by the difference between the fair market
value of the Merger Stock received by the Limited Partners and their adjusted
basis in their Units. This gain will be limited by the prorata share of the net
gain, if any, which would be recognized if all the marketable securities (Merger
Stock) held by the Partnerships were sold. If all Dissenting Limited Partners
have had their interests redeemed before the distribution of the Merger Stock,
each Limited Partner's gains will be reduced to zero. This means that the
adjusted basis of the Merger Stock received would be the same as the adjusted
basis the Limited Partners had in their Units. If gain is recognized, the
adjusted basis in the Merger Stock would be increased by the amount of that
gain.
A Limited Partner that receives a Debenture (with respect to his or her
Units) because of such Limited Partner's exercise of dissenter's or similar
rights under California law (with respect to his or her Units) may recognize
gain depending upon such Limited Partner's aggregate basis in the applicable
Partnership prior to the Closing Date. The aggregate basis of any Merger Stock
received by a Limited Partner in exchange for Units will be equal to the
aggregate basis in such Units immediately before the Merger, decreased by the
amount of cash received by such Limited Partner for such Units in lieu of
fractional shares of Merger Stock. Such basis will be prorated among all shares
of Merger Stock received for such Units.
Limited Partners, PCM Shareholders and Company Shareholders will have a
split holding period for each share of Merger Stock received. A share of Merger
Stock will have a holding period that begins on the day following the Closing
Date to the extent that the value of such share of Merger Stock on such date is
attributable to certain of the Partnerships' assets (essentially, their ordinary
income assets), and, to the extent of any excess value, such share of Merger
Stock will have a holding period that includes the period that Units were held
by each recipient Limited Partner.
Each Dissenting Limited Partner will receive a Debenture which will be
treated the same as cash, resulting in gain that will be realized and recognized
by such Limited Partner. It is not anticipated that such Debenture will be
readily transferable. Accordingly, this gain may be eligible to be deferred
until payment is received under such Debenture. Limited Partners should consult
their tax advisor as to how these rules might apply to them.
An existing holder of shares of the Company's common stock who subsequently
sells shares of Merger Stock will recognize gain or loss measured by the
difference between the amount realized on such sale and his or her tax basis in
the shares of Merger Stock sold. Each Limited Partner who receives Merger Stock
will be required to file with his or her federal income tax return for the year
in which the Merger is consummated a statement that provides details relating to
his or her Units (which will be considered to be property transferred), the
Merger Stock, and his or her share of any liabilities assumed by the Company, as
the surviving corporation in the Merger. The Company will provide its
shareholders with information to assist them in preparing those statements.
After the Merger is consummated, the income and deductions attributable to
the assets and liabilities of the Company will not be allocated to the Company's
shareholders. A shareholder of the Company will be taxed only on dividends and
other distributions received from the Company, if any. Such distributions
generally will be taxable as dividends to the extent of any current or
accumulated earnings and profits of the Company. Any other distributions will be
treated as a nontaxable return of capital to the extent of such shareholder's
basis in his or her shares of the Company's common stock and as capital gain to
the extent of the remaining portion of such distribution.
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<PAGE>
THE FOREGOING INFORMATION RELATES ONLY TO THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER PROPOSAL APPLICABLE TO LIMITED PARTNERS, PCM SHAREHOLDERS AND COMPANY
SHAREHOLDERS GENERALLY. EACH LIMITED PARTNER, PCM SHAREHOLDER AND COMPANY
SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE
CONSEQUENCES OF THE MERGER PROPOSAL ON SUCH PERSON'S PARTICULAR TAX SITUATION.
OTHER TAX CONSEQUENCES
The following information is intended to provide the Limited Partners, PCM
Shareholders and Company Shareholders with a summary of certain material state
and local income tax consequences associated with the Merger Proposal in
addition to the federal tax consequences specified above. The following
information does not contemplate all tax matters that may affect the
Partnerships, the Company, the Limited Partners, the PCM Shareholders and the
Company Shareholders, and does not consider various facts and limitations
applicable to any particular Limited Partner, or special tax rules that may
apply to certain Limited Partners, PCM Shareholders and Company Shareholders
that may modify the information specified herein.
The following information is not the subject of the tax opinion rendered,
and has not otherwise been passed upon by John H. Brainerd, Attorney at Law and
tax counsel for the Company. No rulings have been requested from any state or
local tax jurisdiction concerning any of the matters specified in this Joint
Consent Statement/Prospectus.
A partnership is generally a pass-through entity for state and local income
tax purposes. As a result, a partnership is not liable for state or local income
tax on its taxable income. In general, partners liable for federal income tax
are also liable for the state and local income taxes of the states and taxing
municipalities in which the partnership of which they are partners does
business. These taxes are generally based on a partner's share of federal
taxable income from such partnership, as allocated or apportioned among the
various state and local jurisdictions on the basis of the character of the
income earned or on the basis of sales made, payroll paid, and property owned in
each jurisdiction. A partner is also generally subject to tax on all income
earned from that partner's investment in such partnership in that partner's
state and, if applicable, city of residence. These taxes may be offset by
credits for taxes paid to other states and municipalities. In general, interest
income and capital gains earned by a partnership are not subject to municipal
income tax. As with federal income tax, partners of a partnership are subject to
state and local income tax on income earned in the business conducted by that
partnership only once. See "FEDERAL INCOME TAX CONSEQUENCES."
The Partnerships have filed composite state income tax returns for a number
of years on behalf of eligible and electing Limited Partners, for the purpose of
limiting each Limited Partner's compliance responsibility to that Limited
Partner's state of residence. The taxes paid by the Partnerships with these
returns have been charged to the participating Limited Partners' respective
Partnership capital accounts.
A corporation is a taxable entity and pays state and local income taxes at
rates which vary depending upon the identity of the states and municipalities in
which that corporation conducts its business. The business of the Company is
expected to be conducted in California, which imposes a tax on income
apportioned to California. A shareholder of a corporation is generally not taxed
on any income earned by that corporation until that corporation distributes
either cash or property to that shareholder or that shareholder sells or
exchanges shares of capital stock issued by that corporation at a gain. See
"FEDERAL INCOME TAX CONSEQUENCES." Dividends and capital gains are generally
subject to tax only in a shareholder's state of residence. Income from capital
gains is generally taxed at the same rates as other taxable income. Neither
dividends nor capital gains are generally taxable by taxing municipalities.
THE FOREGOING INFORMATION RELATES ONLY TO CERTAIN OF THE STATE AND LOCAL INCOME
TAX CONSEQUENCES OF THE MERGER PROPOSAL APPLICABLE TO LIMITED PARTNERS, PCM
SHAREHOLDERS AND COMPANY SHAREHOLDERS GENERALLY. EACH LIMITED PARTNER, PCM
SHAREHOLDER AND COMPANY SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
CONCERNING THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE MERGER
PROPOSAL.
PRINCIPAL SHAREHOLDERS AND LIMITED PARTNERS
The following information is furnished as of April, 1998, with respect to
the issued and outstanding existing securities of the Company beneficially owned
by each director, the Chief Executive Officer, and the four other most highly
compensated executive officers of the Company; the directors and executive
officers of the Company as a group; and all beneficial owners of more than five
percent of the issued securities of the Company.
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<PAGE>
<TABLE>
<CAPTION>
Shares of Company's
Common Stock Outstanding
Units Existing Securities After Merger
------------------------------------------------------------------------------------
Capital Percent Number Percent Number Percent
Name and Titles Account of Class of Shares of Class of Shares of Class
---------------- -------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Vincent E. Galewick, director and
Chief Executive Officer........... 0 0 1,000 shares of 4,692,436 shares
Common Stock 100% of Common Stock 62.46%
Vincent E. Galewick, director and
Chief Executive Officer........... 0 0 100,000 shares of 100,000 shares of
Preferred Stock 100% Preferred Stock 100%
Michael A. Cushing, director and
Chief Financial Officer........... 0 0 0 0 66,785 shares of
Common Stock 0.89%
</TABLE>
MANAGEMENT OF THE GENERAL PARTNER, PCM AND THE COMPANY
PCM, the General Partner and the Company have a common director and some
common executive officers, which are specified below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Vincent E. Galewick... 38 President and Secretary of PCM. President and Secretary of the
General Partner; Chief Executive Officer and President of the
Company. Director of PCM, and the General Partner. Chairman
of the Board of Directors of the Company.
Michael Cushing....... 38 Chief Financial Officer of PCM, the General Partner and the
Company; Secretary and Senior Vice President, Financial
Affairs of the Company. Director of the Company.
William Savage........ 54 Vice President of Operations for the Company. Director of the
Company.
Ronald D. Collette.... 34 Vice President of Information Technologies for the Company.
</TABLE>
Vincent E. Galewick is the President and Secretary of PCM. Mr. Galewick is
the President and Secretary of the General Partner and the President and Chief
Executive Officer of the Company. Mr. Galewick is also a director of the
Company, the sole director of PCM and the General Partner, and the principal
shareholder of PCM. Mr. Galewick is the sole shareholder of the General Partner
and the Company. Mr. Galewick has been involved in the securities industry for
more than 10 years focusing on the investment banking aspects.
In January 1993, Mr. Galewick created and established PCM for the purpose
of identifying potential portfolio acquisitions, performing due diligence in
conjunction with potential portfolio acquisition, portfolio acquisition
negotiation, and the ultimate collection and servicing of acquired portfolios by
PCM and the Partnerships. Mr. Galewick has been involved in more than 130
portfolio acquisitions of various types of sizes totaling more than $2 billion
in original principal obligations. As a result of these acquisitions, Mr.
Galewick has developed numerous strategic and trusted relationships with
industry professionals, which are of benefit to PCM and the Partnerships and
should be of benefit to the Company.
From February 1987, through January 1989, Mr. Galewick served as a
Registered Representative in the securities industry. In January, 1989, Mr.
Galewick became affiliated with Income Network Company, working as a Registered
Principal. Income Network Company is a member Broker/Dealer of the National
Association of Securities Dealers, Inc. and has been such a member since March
14, 1988. Mr. Galewick was promoted to a managing Registered Principal and, in
March of 1992, Mr. Galewick purchased Income Network Company. Income Network
Company is an Affiliate of PCM, Vision, the Company and the General Partner and
specializes in direct participation programs. Income Network Company is the
Soliciting Agent. Mr. Galewick is currently both the President, Secretary, Chief
Financial Officer, sole director and sole shareholder of Income Network Company.
Additionally, Mr. Galewick continues as a Registered Principal of Income Network
Company and holds Series 6, 22, 24, 39, 62 and 63 securities licenses. Since his
acquisition of Income Network Company, Mr. Galewick has increased the number of
Registered Representatives from 6 to, presently, more than 20.
Michael Cushing is the Chief Financial Officer of PCM, the General Partner
and the Company. Mr. Cushing is also Senior Vice President, Financial Affairs,
Secretary and a director of the Company. Mr. Cushing is a minority shareholder
of PCM. He has been affiliated with PCM since its formation in January, 1993.
Mr. Cushing has been involved with PCM's business development, planning and
implementation of corporate strategies for all of PCM's operations and
acquisition programs. Mr. Cushing was instrumental in the marketing to the
financial community of PCM as a purchaser of debt portfolios, as well as the
design and application of PCM's acquisition stratification programs. Mr. Cushing
graduated from the University of California at Santa Barbara with a Bachelor of
Arts in Business Economics. Mr. Cushing became licensed as a Certified Public
Accountant in the State of California while employed by the certified public
accounting firm of Coopers and Lybrand. His clients, while at Coopers and
Lybrand, included real estate, manufacturing, banking, service, and retail
businesses.
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<PAGE>
From January of 1989, to November of 1991, Mr. Cushing served as Vice
President of Real Estate and Corporate Secretary for the Bay Plaza Company, a
master developer of a planned 1.4 million square foot, $240 million downtown
redevelopment project for the city of St. Petersburg, Florida ("Downtown
Redevelopment Project"). This company, also, was facility manager of a 1/4 mile
retail and entertainment pier complex with a 42,000 seat domed stadium, 8,500
seat arena and 2,000 seat fine arts theater for the city of St. Petersburg,
Florida. Mr. Cushing was responsible for all aspects of real estate operations
including asset and property management, investment analysis, financing,
acquisitions, dispositions, planning, and risk management. As corporate
secretary, Mr. Cushing was responsible for the maintenance of this company's
books and records.
From September of 1985, to January of 1989, Mr. Cushing was Senior Vice
President of the Elcor Companies, a national commercial real estate company.
This company served as an advisor and management company for Wespac Investors
Trust, a publicly traded Over-The-Counter real estate investment trust
("R.E.I.T.") with total assets in excess of $160,000,000 and approximately 5,000
shareholders. In addition to servicing the R.E.I.T., this company acquired,
owned and managed properties for its own accounts, as well as other third
parties. This company, also, owned 50% of the Downtown Redevelopment Project.
Mr. Cushing's responsibilities included overseeing all property and corporate
operations; performing all aspects of the disposition of R.E.I.T. assets;
placing, negotiating, and closing all property financing and workouts; and
overseeing the recovery of assets by bankruptcy and foreclosure proceedings.
From October of 1984, to September of 1985, Mr. Cushing was part of the
real estate acquisition team of Wespac Advisors, a national real estate
syndicator. His responsibilities included completion of acquisition and due
diligence documentation, negotiation of acquisition terms, and research of
markets and properties throughout the nation. This company provided the property
management and acquisition services for 3 publicly traded real estate investment
trusts with total assets in excess of $300,000,000.
William Savage is the Vice President of Operations and a director of the
Company. Mr. Savage has been with the Company since January 1997. Mr. Savage is
responsible for PCM's administration, portfolio management, systems support,
collection and legal compliance of the collection activities. Mr. Savage has
overall responsibility for managing the technologies and systems of PCM. Prior
to coming to the Company and PCM, Mr. Savage was Vice President of Operation of
National Telephone & Communications, Inc. in Irvine, California. ("NTC"). Mr.
Savage was instrumental in taking NTC's revenue in 1994 of $11 million dollars
to $106 million dollars in 1996. Prior to NTC, Mr. Savage was Vice-President of
Customer Service and Administration at Excel Telecommunications in Dallas,
Texas. Prior to Excel Telecommunications, Mr. Savage was employed by Allnet
Communication Services, Inc. in Bingham Farms, Michigan ("Allnet"). For five
years at Allnet, Mr. Savage held senior management positions in Customer
Service, Corporate Training, LEC Processing and as a Project Manager for
Information Systems.
Mr. Savage has a Bachelor of Arts degree in History from Michigan State
University, a Masters of Education degree from the College of William and Mary
and a Master of Science degree in Systems Management from the University of
Southern California.
Ronald D. Collette is Vice President of Information Technologies for the
Company. Mr. Collette has more than 13 years of experience with information
systems and has worked at Fortune 500 companies such as Ingram Micro,
Countrywide Mortgage Corporation, the Resolution Trust Company ("RTC"), and
Fluor Daniel Incorporated.
As the western regional MIS Director of the RTC, Mr. Collette was
responsible for the oversight of data processing for the world's largest
servicer of deposits and savings, loans, and real estate. The scope of this
responsibility included information services activities for all of the business
functions and program areas within his geographical jurisdiction. Mr. Collette
has a background in business process reengineering and user requirements
analysis. Mr. Collette has a Bachelor of Science degree in Economics from
Arizona State University.
Additional Key Personnel
Eddie J. Maloney, age 32, is Director of Management Information Systems
("MIS") for PCM and the Company. Mr. Maloney joined PCM in June, 1994. Mr.
Maloney studied government and politics at George Mason University and graduated
with honors at Computer Learning Center in Fairfax, Virginia. Mr. Maloney
provides integration solutions to the various computer systems and administers
all aspects of the networks at PCM, Income Network Company, the Company and the
General Partner. These include UNIX, Novell, RDBMS, and Windows (all versions).
Mr. Maloney supervises all in-house data conversions and software development
projects at PCM.
From September of 1990, to June 1994, Mr. Maloney served as a System's
Analyst and ISU Closing Director for the RTC in its California office. Mr.
Maloney was one of the primary programmers for many of the RTC's nationwide
computer operations. Mr. Maloney's proficiency in programming languages includes
dBase, Rbase, Clipper, Access, Platinum, SAS, Basic, C, and Microsoft SQL. In
addition to software development, Mr. Maloney established and maintained Banyan
and Novell networks both in the field and at the RTC's California office.
Additionally, Mr. Maloney directed computer operations for RTC
conservatorships in California, Oregon, Washington, Hawaii, and Guam. These
operations ranged from daily operation to the sale of institutions with systems
varying in size from small personal computer networks to multi-million dollar
mainframes. These conservatorships assets varied in amounts from $10 million to
$4 billion. Mr. Maloney assisted the RTC's Investigative Division, which worked
collectively with the federal government to seize and secure financial
institutions by uncovering evidence used in convictions of the responsible
individuals.
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<PAGE>
From February of 1987, to September of 1990, Mr. Maloney served as MIS
Director at Piedmont Federal Savings Bank in Virginia. During his employment,
Mr. Maloney provided all in house programming utilizing DEC Assembly, Basic,
COBOL, StarStream (NCR) and dBase programming languages.
Patricia Anthony, age 58, is PCM's collection counsel. She supervises all
legal matters relating to PCM collection of portfolios, including litigation
matters within California and actions in other states. Ms. Anthony also
supervises and is liaison with out-of-state counsel for prosecuting and
defending actions outside the State of California. She files and oversees
levies, garnishments, repossessions, attachments, and other legal collection
procedures on behalf of PCM and the Partnerships.
Ms. Anthony is a graduate of Western State Law School and was admitted to
the California State Bar in September, 1978. From 1978 through 1983 she was a
partner in the law firm of Griffith and Anthony located in Costa Mesa,
California, a general practice specializing in collection actions and
enforcement of creditor's rights. From 1983 through 1995 she formed a
professional law corporation and continued her practice as a creditor's rights
attorney. In 1995, she became general counsel for PCM.
David J. Caldwell, age 44, is PCM's Vice President of collection
operations. Mr. Caldwell has been with PCM since January, 1998. He is
responsible for administration of PCM's collection operations and legal
compliance, correspondence, portfolio client management, and rewritten loans
arising from and incidental to PCM's collection operations. Prior to his
employment with PCM, Mr. Caldwell was employed by General Electric Capital
Corporation ("GE") for 22 years. From March 1997 until January, 1998, Mr.
Caldwell was Vice President of recovery operations and was responsible for GE's
bankruptcy recovery operations, payment processing, legal and outside attorney
collection operations, petition processing, repossession and estate claims
departments, and that company's call center.
From June 1994 to March 1997, Mr. Caldwell was Vice President for
cardholder services for GE's bankcard (Mastercard/Visa) division. His
responsibilities included the development and execution of call center
strategies. Mr. Caldwell's management resulted in significant reductions in GE's
costs per call. From June 1991 through June 1994, Mr. Caldwell was the
Collection Manager for GE's Macy's portfolio, consisting of approximately $1.6
billion in indebtedness. His earlier positions at GE included a variety of
operational positions, including management of medium to large collection sites,
credit lending experience, customer service, and other commercial and
administrative functions. During his 22 years with GE, Mr. Caldwell received 2
Pinnacle Awards and 3 Summit Awards. These awards recognize those GE employees
who have achieved outstanding results and who are top performers for that
company.
Mr. Caldwell graduated from Western Michigan University with a Bachelor or
Arts Degree in Business.
Ronald Di Maria, age 44, is PCM's Manager of Collections. He has been with
PCM since December, 1997 and is responsible for all collection-related
operational issues including the management of 96 collectors and 12 supervisors.
Mr. Di Maria has 20 years' experience in the collection industry. He formed a
collection floor at the Law Offices of Ronald Rutiz in Santa Monica, California
and, during his 4-year term beginning in 1993, Mr. Di Maria was both Director of
Marketing and Operations Manager for collections. Mr. Di Maria sold and serviced
major banks and credit unions such as Bank of America and the Navy Federal
Credit Union along with other nationwide creditors. Mr. Di Maria also worked for
various national collection agencies beginning with his first Collection Manager
position with American Creditors Bureau, advancing into the position of General
Manager and ultimately Operations Manager.
In 1991, Mr. Di Maria accepted a position as Director of Operations with
United Creditors Alliance, based in Columbus, Ohio, and initiated operations for
a new office in Atlanta, Georgia. This office grew to over 60 collectors and
produced in excess of $1,000,000 per month in gross collections. Prior to
working for United Creditors Alliance, Mr. Di Maria was General Manager for
Capital Credit Corporation based in Fairfield, New Jersey.
Executive Compensation. Vision Capital Services Corporation, a California
corporation and an Affiliate of PCM, the General Partner, the Soliciting Agent
and the Company ("Vision") currently provides all management and human resource
services (employees) to the joint ventures in which the Partnerships and PCM
hold their distressed financial debt instruments and other obligations. See
"Certain Relationships and Related Transactions." The fees paid to Vision by
those joint ventures include amounts equal to the salaries and costs of all
employee benefits, and other normal and routine employee costs, paid or accrued
on behalf of the employees furnished by Vision and who are engaged in providing
services to those joint ventures. The following tables set forth the
compensation paid to PCM's Chief Executive Officer and the other four highest
paid executive officers, and the compensation paid to the General Partner's
Chief Executive Officer and the other four highest paid executive officers.
Vincent E. Galewick is the sole shareholder and sole director of Vision. Mr.
Galewick is the President and Secretary of Vision. Michael Cushing is the Chief
Financial Officer of Vision.
65
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (PCM)
Annual Compensation
Other Annual All Other
Name and Title Year Salary($) Bonus($) Compensation($) Compensation($)
-------------- ---- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Vincent E. Galewick, 1997 255,000 0 0 0
Chief Executive Officer 1996 229,500 0 0 0
1995 153,000 0 0 0
Michael Cushing, 1997 80,396 0 0 0
Chief Financial Officer 1996 48,352 0 34,531(1) 0
1995 0 0 119,589 0
</TABLE>
(1) Consulting fees paid on an independent contractor basis.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (GENERAL PARTNER)
Annual Compensation
Other Annual All Other
Name and Title Year Salary($) Bonus($) Compensation($) Compensation($)
-------------- ---- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Vincent E. Galewick, 1997 45,000 0 0 0
Chief Executive Officer 1996 40,500 0 0 0
1995 27,000 0 0 0
Michael Cushing, 1997 14,187 0 0 0
Chief Financial Officer 1996 14,627 8,532 0 0
1995 0 0 21,104 0
</TABLE>
The executive officers of PCM and the General Partner also perform services
for other entities and receive compensation for those services from those other
entities. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Committees of the Board of Directors. Upon consummation of the Merger, the
Board of Directors of the Company will establish a Compensation Committee and an
Audit Committee. The Compensation Committee will include at least two directors
who are "disinterested persons" within the meaning of Rule 16b-3, as amended
from time to time, under the Securities Exchange Act of 1934 and "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended, and will have the authority to determine compensation for the
Company's executive officers and to administer the Company's 1998 Stock Option
Plan (defined below). Prior to the establishment of the Compensation Committee,
decisions concerning the compensation of executive officers were and will be
made by Mr. Galewick, the Company's Chairman of the Board, Chief Executive
Officer and President. None of the executive officers of the Company currently
serve as a director or member of the Compensation Committee of another entity or
of any other committee of the board of directors of another entity performing
similar functions. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." The
Audit Committee will have the authority to make recommendations concerning the
engagement of independent certified public accountants, review with the
independent certified public accountants the plans and results of the audit
engagement, approve professional services provided by the independent certified
public accountants, review the independence of the independent certified public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
Stock Option Plan. If the Merger is consummated, the Company anticipates
adopting a stock option plan ("1998 Stock Option Plan"). The 1998 Stock Option
Plan will provide that it is to be administered by a committee of the Board of
Directors of the Company ("Option Committee") which will include at least two
outside directors. The Compensation Committee is expected to function as the
Option Committee. The Option Committee will have the authority, within
limitations to be set forth in the 1998 Stock Option Plan, to establish rules
and regulations concerning the 1998 Stock Option Plan, to determine the persons
to whom options may be granted, the number of shares of the Company's common
stock to be covered by each option, and the terms and provisions of the option
to be granted. The Option Committee will have the right to cancel any
outstanding options and to issue new options on such terms and upon such
conditions as may be consented to by the optionee affected.
A total of 1,000,000 shares are reserved for issuance under the 1998 Stock
Option Plan. The number of shares which may be granted under the 1998 Stock
Option Plan or under any outstanding options will be adjusted proportionately in
the event of any stock dividend or if the Common Shares shall be split,
converted, exchanged, reclassified or in any way substituted. Notwithstanding
any other provision of the 1998 Stock Option Plan, in the event of a
recapitalization, merger, consolidation, rights merger, separation,
reorganization or liquidation, or any other change in the Company's corporate
structure or outstanding shares, the Option Committee may make such equitable
66
<PAGE>
adjustments to the number and class of shares available under the 1998 Stock
Option Plan or to any outstanding options as it shall deem appropriate to
prevent dilution or enlargement of rights. The maximum term of any option
granted pursuant to the 1998 Stock Option Plan is ten years. In general, shares
subject to options granted under the 1998 Stock Option Plan which expire,
terminate or are canceled without having been exercised in full become available
again for option grants.
The class of eligible persons under the 1998 Stock Option Plan will consist
of directors and employees of, and consultants to, the Company or a parent or
subsidiary thereof, as determined by the Option Committee, except that
Non-Employee Directors can also receive fixed grants of options under the terms
set forth in the 1998 Stock Option Plan. Options granted under the 1998 Stock
Option Plan may be incentive stock options ("ISOs") or non-qualified options, at
the discretion of the Option Committee; however, ISOs can only be granted to
employees of the Company or a parent or subsidiary. The 1998 Stock Option Plan
provides that the exercise price of an option (other than a non-employee
director's option) will be fixed by the Option Committee on the date of grant;
however, the exercise price of an ISO must be not less than the fair market
value of the Company's common stock on the date of the grant. The exercise price
of an ISO granted to any participant who owns shares which are more than 10% of
the total combined voting power of all classes of outstanding stock of the
Company must be at least equal to 110% of the fair market value of the Common
Shares on the date of grant. Any ISOs granted to such participants also must
expire within five years from the date of grant. Additionally, options granted
under the 1998 Stock Option Plan will not be ISOs to the extent that the
aggregate fair market value of the shares with respect to which ISOs under the
1998 Stock Option Plan (or under any other plan maintained by the Company or a
parent or subsidiary thereof) first become exercisable in any year exceeds
$100,000. No options shall be granted under the 1998 Stock Option Plan on or
after the tenth anniversary of the adoption of the 1998 Stock Option Plan.
Options will be non-transferable and non-assignable; provided, however,
that the estate of a deceased holder can exercise options. Options (other than
non-employee directors' options) are exercisable by the holder thereof subject
to terms fixed by the Option Committee. However, no option will be able to be
exercised until at least six months after the date of grant.
Notwithstanding the above, an option will be exercisable immediately upon
the happening of (but in no event during the six-month period following the date
of grant or subsequent to the expiration of the term of an option) (i) the
holder's retirement on or after attainment of age 65; (ii) the holder's
disability or death; (iii) a "change of control" (as defined in the 1998 Stock
Option Plan) of the Company while the holder is in the employ or service of the
Company; or (iv) the occurrence of such special circumstances or events as the
Option Committee determines merits special consideration, except with respect to
non-employee directors' options. Under the 1998 Stock Option Plan, an option
holder generally will be permitted to pay the exercise price in cash, by check,
by delivery to the Company of shares of the Company's common stock already owned
by the holder or, except with respect to non-employee directors' options, by
such other method as the Option Committee may permit from time to time.
If an option holder terminates employment with the Company or service as a
director of or consultant to the Company while holding an unexercised option,
the option will terminate 30 days after such termination of employment or
service unless the option holder exercises the option within such 30-day period.
However, all options held by a holder will terminate immediately if the
termination is a result of a breach of such holder's duties. If cessation of
employment or service is due to retirement on or after attainment of age 65,
disability or death, the option holder or such holder's successor-in-interest,
as the case may be, will be permitted to exercise any option within three months
after retirement or within one year after disability or death.
The 1998 Stock Option Plan may be terminated and may be modified or amended
by the Option Committee or the Board of Directors at any time; provided,
however, that (i) no modification or amendment either increasing the aggregate
number of shares which may be issued under options or to any individual or
modifying the requirements as to eligibility to receive options will be
effective without stockholder approval within one year of the adoption of such
amendment and (ii) no such termination, modification or amendment of the 1998
Stock Option Plan will alter or affect the terms of any then outstanding options
without the consent of the holders thereof.
Stock Options Pursuant to Employment Relationships. In addition to options
granted under the 1998 Stock Option Plan, the Company may grant options other
than those contemplated by the 1998 Stock Option Plan to employees, consultants
and other agents of the Company pursuant to their various compensation
arrangements with the Company. Any such options shall be approved by the Option
Committee and the Compensation Committee, as well as the Board of Directors of
the Company.
Indemnification Arrangements. The Company has entered into indemnification
agreements pursuant to which it agrees to indemnify certain of its directors and
officers against judgments, claims, damages, losses and expenses incurred as a
result of the fact that any director or officer, in his or her capacity as such,
is made or threatened to be made a party to any litigation matter or proceeding.
Such persons will be indemnified to the fullest extent now or hereafter
permitted by the Delaware General Corporations Law. Those indemnification
agreements also provide for the advancement of certain expenses to such
directors and officers in connection with any such litigation matter or
proceeding. Also, the Company's Certificate of Incorporation, as amended, and
Bylaws provide for the indemnification of the Company's directors and officers
to the fullest extent permitted by the Delaware General Corporation Law. See
"Indemnification of Officers and Directors."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PCM, the Company, Vision, the General Partner, the Soliciting Agent, and
their Affiliates have certain common directors and officers and employees.
Additionally, many of the persons performing human resource services for PCM and
the General Partner, which are furnished by Vision, also perform certain human
resource services for certain Affiliates of PCM and the General Partner. The
Company, the General Partner, the Soliciting Agent and their Affiliates, except
for PCM, each have the same sole shareholder, which is Vincent E. Galewick. PCM
has two shareholders, who are Mr. Galewick and Michael Cushing; provided,
however, Mr. Galewick is the majority and controlling shareholder of PCM. The
officers and directors of PCM, Vision, the Soliciting Agent, the Company and the
General Partner may have conflicts of interest in allocating management time,
services and functions between various existing separate business ventures,
including, but not limited to, the business of the Company. The Partnerships
have entered into various joint ventures with PCM pursuant to which PCM provides
collecting and servicing activities. The joint venture agreements generally
provide that all distributions are shared by the venturers in proportion to
their respective percentage interests. Moreover, in addition to providing
collection efforts on distressed loan portfolios, PCM identifies and acquires
distressed loan portfolios and other discounted portfolios of financial debt
instruments and obligations and sells them to the Partnerships at negotiated
prices.
On April 8, 1994, the General Partner, on behalf of the Partnerships,
entered into a stock acquisition agreement with West Capital Financial Services
Corporation ("West Capital"), for the purpose of acquiring 50% of the
then-issued and outstanding shares of West Capital for the Partnerships and
their Affiliates. At that time, West Capital provided certain collection
services to the Partnerships, and owed the Partnerships significant funds from
the collection of the Partnerships' distressed loan portfolios. Certain disputes
arose between the General Partner and West Capital regarding the terms and
conditions of the stock acquisition agreement, and certain funds due to the
Partnerships from West Capital. As a result, the General Partner, for the
benefit of the Partnerships and their Affiliates, filed a civil lawsuit against
West Capital and entities related to West Capital.
On December 8, 1995, the General Partner, on behalf of the Partnerships,
entered into an agreement of trust with the California Department of
Corporations which created the Performance Asset Management Fund Trust
("Trust"). The purpose of the Trust was to provide to the Department reasonable
assurance that the terms and conditions of the Merger would not be unfair,
unjust and inequitable to the Limited Partners. At the time the Trust was
created, the General Partner was contemplating the Merger and participating in
discussions with representatives of the Department regarding the Merger and the
Company. The General Partner established the Trust for the sole exclusive
purpose of keeping available for the benefit of the Partnerships and the Limited
Partners that amount of cash or similar liquid assets as would be agreed upon by
the General Partner, on behalf of the Partnerships, and the Department to assure
the Department that the terms and conditions of the Merger Proposal would not be
unfair, unjust or inequitable to the Limited Partners. On February 8, 1996, the
General Partner, on behalf of the Partnerships, entered into a settlement
agreement with West Capital which provided for the assignment and transfer by
the Partnerships to West Capital of certain distressed loan portfolios and the
payment by West Capital to the Partnerships of $16,194,850 in exchange for a
general release by the Partnerships and those Affiliates. A significant portion
of those settlement proceeds were placed in the Trust.
Michael L. Wachtell is the Trustee of the Trust and, in his capacity as
Trustee, operates and maintains the Trust. The General Partner and the Company
anticipate that the Trust, as a result of the consummation of the Merger, will
terminate on the Closing Date; provided, however, pursuant to the provisions of
the Trust Agreement, the Trust shall terminate no later than August 16, 1998. In
the event the Trust is terminated on the Closing Date, as a result of the
consummation of the Merger, the assets of the Trust, as assets of the
Partnerships, shall be transferred to the Company, and the Partnerships shall
receive in exchange therefor shares of Merger Stock commensurate with their
respective allocated portion of those assets of the Trust. In the event the
Merger is not consummated for any reason whatsoever, on the termination of the
Trust, the assets held by the Trust shall be distributed to the Partnerships as
allocated by the General Partner, in its sole discretion.
Atlas Equity, Inc., a California corporation, and an Affiliate of PCM, the
Company, the General Partner, Vision, and the Soliciting Agent, does business
using the fictitious business name Performance Telecom. The Company and
Performance Telecom have common officers. Vincent E. Galewick is the President,
sole director and sole shareholder of Performance Telecom. Michael Cushing is
the Chief Financial Officer of Performance Telecom. William Savage is the Vice
President of Operations of Performance Telecom.
Performance Telecom is in the business of providing long-distance telephone
and related services. PCM utilizes the services of Performance Telecom in
connection with the conduct of PCM's business. Specifically, the long-distance
telephone calls made by collection agents of PCM in connection with servicing
and collecting the distressed loan portfolios owned by PCM and the Partnerships,
utilize the long-distance services provided by Performance Telecom.
The amounts charged by Performance Telecom to PCM for those long-distance
services are not less favorable to PCM or more favorable to Performance Telecom
than those amounts which would be charged by unaffiliated parties in arms-length
transactions providing similar services in the same geographic location.
PCM's collection agents offer and promote the long-distance services of
Performance Telecom to the various debtors they contact, with the intent to
cause those debtors to use Performance Telecom as their long-distance service
provider. Those debtors which utilize Performance Telecom's long-distance
services are billed by Performance Telecom each month for (i) the cost of those
long-distance services and (ii) the amount of portfolio debt that such debtor
owes PCM and the Partnerships for such month.
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Performance Telecom collects the payment for both its long-distance
telephone services and that amount of portfolio debt owed to PCM and the
Partnership. Performance Telecom then remits to PCM, for its own account and the
Partnerships, those funds collected by Performance Telecom for the benefit of
PCM and the Partnerships. Performance Telecom does not charge PCM for billing
those debtors and collecting the payments of portfolio debt made for PCM and the
Partnerships.
The Company anticipates that in the event the Merger is consummated, the
Company will enter into a similar relationship with Performance Telecom. PCM
anticipates that in the event the Merger is not consummated, its relationship
with Performance Telecom will continue.
The General Partner serves as the general partner of Performance Asset
Management Fund VI Ltd., A California Limited Partnership ("PAM VI"). PAM VI
commenced operations in April 1997 and the General Partner anticipates that PAM
VI will raise $10 million through June 1998. Units in PAM VI are offered and
sold without registration required by the provisions of the Securities Act,
pursuant to an exemption from such registration provided by the provisions of
Regulation D promulgated pursuant to the provisions of the Securities Act. PAM
VI will not be a participant in the Merger; and, therefore, in the event the
Merger is consummated, PAM VI will continue to exist and the General Partner
shall continue to serve as its General Partner.
The Company anticipates that in the event the Merger is consummated, the
Company will provide portfolio acquisition, servicing and management services to
PAM VI on terms and conditions similar to those terms and conditions of the
servicing and collection relationships between PCM and the Partnerships.
In the event the Merger is consummated, Vision will not provide human
resources to the Company; but, rather, the Company shall hire as its employees
those persons which have been providing human resources to PCM, the Partnerships
and the General Partner, as employees of Vision. It is anticipated by the
Company that, in the event the Merger is consummated, those persons may continue
to provide services to Affiliates of the General Partner and the Company;
provided, however, the Company shall not pay those persons for those services;
but, rather, those Affiliates will pay either Vision or those persons directly
for those services.
Wendy Galewick is the sister of Vincent E. Galewick. Vincent E. Galewick is
the (i) sole shareholder, sole director and President, Secretary and Chief
Financial Officer of the Soliciting Agent; (ii) sole shareholder, a director,
Chairman of the Board and Chief Executive Officer of the Company; (iii) sole
shareholder, sole director, President, Secretary and Treasurer of the General
Partner; (iv) majority shareholder, a director, and President of PCM; and (v)
sole shareholder, sole director, President and Treasurer of Vision. Wendy
Galewick works for PCM as an office manager. The compensation Ms. Galewick
receives from PCM and the terms and conditions of her employment are not more
favorable to her than those terms and conditions which she could reasonably
obtain from equally qualified but unaffiliated employers. Additionally, in the
event the Merger is consummated, Ms. Galewick will be employed by the Company on
similar terms and conditions and for similar compensation.
Individual Related Party Transactions Over $60,000 in 1997
On September 23, 1997, PAM paid PAM IV $110,000, which was the balance due
on a portfolio acquisition.
On September 23, 1997, PAM II paid PAM IV $750,000, which was the balance
due on a portfolio acquisition. On July 8, 1997, PAM II paid PCM $173,122.34 for
a portfolio acquisition. On August 19, 1997, PAM II paid PCM $84,084.72 for a
portfolio acquisition.
On January 1, 1997, PAM III paid PCM $80,986.50 as reimbursement for
collection expenses.
On May 13, 1997, PAM IV paid PCM $67,201.46 in collection expenses. On July
1, 1997, PAM IV paid PCM $520,671.90 for a portfolio acquisition. On July 8,
1997, PAM IV paid PCM $152,355.56 in collection expenses. On December 19, 1997
PAM IV paid PCM $2,858,076.41 for a portfolio acquisition. On March 4, 1997 PAM
IV paid the General Partner $67,091.68 as reimbursement for professional
services (legal and accounting expenses incurred for the benefit of PAM IV). On
May 13, 1997 paid the General Partner $151,565.99 in monthly management fees and
accrued income from portfolio collections. On July 11, 1997 and September 23,
1997, PAM IV paid the General Partner $145,438.24 and $492,847.92, respectively,
for accrued management fees and professional services incurred on behalf of PAM
IV. On June 20, 1997, PAM V made a deposit to the Trust in the amount of
$1,488,278 for the benefit of PAM IV. On September 23, 1997, PAM V paid PAM IV
$1,000,000 for the balance due on a portfolio acquisition. On March 4, 1997 PAM
V paid PCM $1,065,995.20 for portfolio acquisition and collection expenses. On
July 8, 1997, PAM V paid PCM $84,372.76 in collection expenses.
PCM paid PAM collection proceeds of $97,246.70 on January 1, 1997 and
$60,031.15 on April 7, 1997. PAM paid PAM II collection proceeds of $86,190.32
and $60,701.23 on January 16, 1997 and July 21, 1997, respectively, and paid PAM
II $393,777.85 as reimbursement for Trust disbursements on January 29, 1997. PCM
paid PAM III collection proceeds of $110,055.92 and $123,706.17 on January 16,
1997 and April 7, 1997, respectively; $76,614.96 and $61,185.28 on April 22,
1997 and June 4, 1997, respectively; $73,371.02 and $182,683.19 on July 8, 1997
and July 21, 1997, respectively; $73,745.63 and $66,616.76 on August 21, 1997
and September 22, 1997, respectively; and $64,486.19 and $61,447.54 on December
1, 1997 and December 23, 1997, respectively. On January 1, 1997, PCM paid
$356,399.52 to PAM III as reimbursement for Trust disbursements.
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PCM paid PAM IV the following collection proceeds: $416,541.59 on January
16, 1997; $455,126.43 on April 7, 1997; $242,388.71 on April 22, 1997;
$183,524.16 on June 4, 1997; $217,339.47 on July 8, 1997; $248,962.30 on July
21, 1997; $249,655.30 on August 21, 1997; $187,599.22 on September 22, 1997;
$190,794.11 on October 23, 1997; $262,410.26 on December 1, 1997; and
$238,601.85 on December 23, 1997. On June 19, 1997, PCM paid $1,469,950 to PAM
IV as reimbursement for Trust disbursements.
PCM paid PAM V the following collection proceeds: $148,012.10 on January
16, 1997; $247,813 on March 26, 1997; $90,744.37 on April 7, 1997; $75,743.52 on
April 22, 1997; $90,557,40 on June 4, 1997; $66,485 on July 8, 1997; $109,038.40
on August 21, 1997; $81,692.96 on September 22, 1997; and $86,550.49 on December
1, 1997. PCM paid PAM V $181,582.10 for collections and reimbursement for a
portfolio acquisition overpayment on July 21, 1997.
The General Partner made payments to certain Partnerships to adjust for
portfolio acquisitions made on behalf of more than one Partnership in 1997. To
effect such adjustments, the General Partner paid PAM II $100,000 on June 24,
1997; PAM IV $200,000 on June 24, 1997; and PAM IV $138,051.20 on July 10, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Delinquent Consumer Indebtedness Business. The nonperforming or delinquent
segment of the consumer indebtedness industry, while relatively small as a
percentage of the $4.95 trillion total consumer indebtedness outstanding, has
now become a significant business opportunity. Several factors have contributed
to a recent increase in non-performing and charged-off consumer indebtedness.
Banks and non-bank finance companies redirected their commercial lending in the
early 1990's toward the consumer market.
The growth of this segment was certainly intensified by the low interest
rate environment and the mortgage refinance trend of the early 1990's, which
contributed to the temporary reduction of revolving indebtedness during this
time. In pursuit of greater market share and increased receivables, banks and
nonbank financial companies have been pursuing 2 methods for growth.
Specifically, they have increased their preapproved mailings for credit card
solicitations and increased lending of all product types to subprime borrowers.
In 1995 there were about 2.7 billion credit card solicitations mailed to
consumers. Although response rates averaged a low 1.4%, this still resulted in
40 million new accounts. The average American now has 10 to 12 revolving charge
cards. As the balances on these cards increase and borrowers become
overleveraged, any problem in economic circumstances can cause default on the
resulting indebtedness. By December of 1997, industry sources such as
Collections & Credit Risk magazine estimated that the bad-debt market in 1997
was $12 billion to $18 billion, with most of this indebtedness arising from
credit card and other consumer debt.
The growth of the industry in lending to subprime borrowers has been
exponential, resulting in drastically lower prices and easier terms to
consumers, as more lenders compete for customers. The negative impact of the
easing of credit to this segment of the population is increased defaults, as
many of these borrowers become unable to pay their obligations.
The rate of credit losses has been masked by 3 factors, (i) rapid balance
growth, which keeps chargeoff rates artificially low; (ii) sales of high-risk
portfolios by banks to nonbank financial institutions to avoid future
chargeoffs; and (iii) a significant increase in receivables generated by
convenience users now using their credit cards to earn frequent flier miles and
similar benefits.
The General Partner anticipates that loss rates will continue to increase
as new originations level off. The accumulation of problem loans is causing
lenders to consider alternative methods for dealing with delinquent debt. Many
lenders have moved into the secondary market to finance these loans. As was the
case with the original thrift industry crisis of the 1980s and the formation of
the Resolution Trust Company ("RTC") in the early 1990s, a substantial secondary
market has developed to purchase these loans, as lenders seek to reduce exposure
to chargeoff loans, raise cash, and eliminate costly collection operations.
The secondary market for charged-off loans began in 1983, with a sale by
Bank of America. The first auction of receivables was done in 1988. In the early
1990s, the RTC entered the market.
There was evidence of significant returns for early purchasers. This
attracted capital to the distressed-debt market, e.g., investors generally
associating with collection firms in joint ventures.
Supply from the RTC was plentiful for several years until the RTC dissolved
in December, 1995. Private distressed indebtedness is now being sold both
directly by credit originators and through brokers. In June, 1997, National Loan
Exchange, a division of Koll Dove Global Disposition Services LLC ("Koll Dove"),
completed the sale of $1.1 billion in charged-off credit card receivables for
Citicorp, the single largest open-market sale of its type to date. Koll Dove
estimates it sold a record $6 billion to $7 billion in distressed credit card
accounts in 1997.
Purchasers of nonperforming or charged-off consumer indebtedness fall into
3 general categories, (i) those who purchase and collect their own portfolios,
(ii) those who purchase and repackage to sell on a local or regional basis, and
(iii) those who purchase to securitize and service the indebtedness.
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Of the $4.95 trillion of consumer indebtedness outstanding in 1995, there
was a chargeoff rate of about 2.97% -- or about $147 billion of chargeoffs -- as
estimated by the Federal Reserve. In the first quarter of 1996, there was
approximately $41.4 billion of distressed consumer indebtedness (delinquent 90
or more days) held by issuers. This does not include the several hundred of
billions of dollars previously charged off. These figures continued to increase
significantly through 1997, and industry sources estimate that the market for
bad debt has continued to grow at approximately 50% annually since the late
1980's.
The private sale of indebtedness developed significantly in the early
1990s. The first year that private sales topped the $1 billion mark was 1992.
The market doubled in 1993 and then again in 1994, when there were approximately
$4 billion in private sales.
1995 was a significant year in the secondary market for charged-off loans,
with more than $5 billion in advertised sales, plus numerous negotiated sales
and the final sales of the RTC. The fourth quarter of 1995 was marked by a
downward trend in pricing for these loans, because of the tremendous amount of
supply. Prices have now stabilized and even increased from mid-1995 amounts.
Industry sources report that bad debt portfolio prices have risen dramatically
in recent years, prompting banks and other credit suppliers to sell distressed
consumer indebtedness earlier in the collection process. Accounts sold today are
generally no more than two years old and only recently taken off active
collections. In 1996 and 1997 the bad-debt market attracted a significant number
of new participants, as total sales of bad debt rose from an estimated $7
billion to $8 billion in 1996 to between $12 billion and $18 billion for 1997.
Industry sources cite the record-setting delinquencies of consumers and the
increasing willingness of credit grantors to sell off rather than "outsource"
their chargeoffs for the significant increase in the bad debt market
("outsourcing" refers to the performance of services by persons other than
employees or similar agents; in the credit industry, defaulted loans are
frequently "outsourced" to collection agencies or collection attorneys).
Although the market is more than 10 years old, in the opinion of the
Company, it is still inefficient, with the perceived values of portfolios still
quite varied. Determinants of the value of a portfolio include:
o The amount of time since chargeoff or last payment
o The historical cash received
o The size of portfolio and average account balance
o The location of borrowers and creditors
o The number of times the loan has been placed with collection agencies
and average settlement offered
o How the loan was originated and its original credit quality
o The type of debt
o The availability of documentation
o Provisions of the sale agreement, and the quality of data
The market also is affected by outsourcing. As banks aggressively reduce
their staffs, they are outsourcing many functions, and the sale of chargeoffs is
consistent with this strategy. Moreover, industry sources cite the trend of
credit issuers to concentrate on loan generation and the active management of
early delinquencies, leaving the secondary market to purchase nonperforming
loans. These trends suggest an increase in the available supply of consumer
indebtedness portfolios and the availability of delinquent loan portfolios much
earlier in the delinquency cycle.
The consolidation of the collection industry is another factor which may
affect the Company's business operations. In 1994 there were more than 4,000
collection agencies in the United States, many of them small, family-owned
businesses. There has been a significant amount of merger and acquisition
activity in the past 4 years, with the larger agencies purchasing both, smaller
agencies and each other. The theory is that the larger agencies can become more
efficient, invest more in technology, and be lower cost service providers to
increase market share. The Company anticipates that, after consummation of the
Merger, it will be one of the larger agencies. The Company recognizes, however,
that new computer software containing generic bank card portfolio pricing
systems is now becoming available to smaller collectors, which should assist
those smaller collectors in determining what to bid on specific delinquent debt
portfolios. The Company also believes that PCM's proprietary software for
estimating the gross recovery rate and other pertinent collection factors of
distressed debt portfolios is at least equal to the new software available on
the market. PCM continues to invest in advanced collection technology, including
enhancements to its computer software. Those companies which have invested in
advanced collection technology are able to service more accounts with greater
efficiency. The Company anticipates that, after consummation of the Merger, it
should have competitive collection technology.
Overview. PCM and the Partnerships are engaged in the business of
purchasing discounted portfolios of distressed debt instruments and obligations.
Chase Manhattan Bank is the source of more than 10% of the distressed debt
portfolios currently held by PCM and the Partnerships. Those portfolios
typically consist of unsecured consumer
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loans and credit card debt. In contrast to many purchasers of charged-off debt
portfolios, PCM, on its own behalf and on behalf of the Partnerships, usually
collects and services the portfolios it acquires, rather than using traditional
third-party servicing. The Company will engage in the same business and will
continue to analyze and purchase portfolios similar to those purchased in the
past.
PCM's Operations. PCM and the Partnerships have their corporate offices in
Newport Beach, California in a facility of approximately 15,000 square feet,
which facility is shared among a number of Affiliates of the Company. PCM also
maintains collection offices in Tustin, California. PCM is one of the largest
purchasers of consumer indebtedness in the industry. PCM currently manages,
services and collects more than $1.3 billion in face value of distressed
indebtedness, and purchases approximately $25 million in face value of
additional indebtedness each month from various financial institutions. PCM
acquires indebtedness primarily for the benefit of the Partnerships, and enters
into servicing arrangements with the Partnerships to participate in the proceeds
from collection of that indebtedness. PCM estimates that approximately 93% of
all the work it performs is for the benefit of the Partnerships. Since employing
David Caldwell as Vice President of collection operations in January, 1998,
PCM's first quarter collections totalled over $3.5 million, PCM's highest total
for quarterly collections to date.
PARTNERSHIP OPERATIONS
PAM. PAM has continued to purchase distressed loan portfolios consisting
primarily of charged-off credit card accounts and consumer loan balances, such
as auto and personal lines of credit originated by independent third-party
financial institutions located throughout the United States. In addition, PAM
also acquired certain portfolios of default consumer debts which were rewritten
under terms different from the original obligation. In 1994 PAM spent $67,088 on
such purchases. In 1995, PAM spent $5,463 on such purchases. In 1996, PAM spent
$1,315,611 on such purchases. Collections on investments in distressed loan
portfolios were $735,412 in 1994, $290,328 in 1995 and $1,290,544 in 1996.
In 1994, PAM's investments in distressed loan portfolios consisted of
$343,585 in credit card accounts and $466,574 in consumer loans. PAM recorded
net investment income of $205,208 and interest income of $13,095. Operating
expenses for PAM consist of management fee expense of $17,584; amortization
expense of $798; and general and administrative expenses of $3,159; for total
operating expenses of $21,541. Therefore, PAM recorded net income of $170,572
for 1994.
In 1995, PAM's investments in distressed loan portfolios consisted of
$287,551 in credit card accounts and $418,540 in consumer loans. PAM recorded
net investment income of $180,797 and interest income of $13,294. Operating
expenses for PAM consist of management fee expense of $23,096; collection
expense of $365; professional fees of $7,233; amortization expense of $798; and
general and administrative expenses of $2,947; for total operating expenses of
$34,439. Therefore, PAM recorded net income of $133,064 for 1995.
In 1996, PAM's investments in distressed loan portfolios consisted of
$912,597 in credit card accounts and $356,989 in consumer loans. PAM recorded
net investment income of $538,428, net interest income of $3,389 and other
income of $755. Operating expenses for PAM consist of management fee expense of
$25,979; collection expense of $43,257; professional fees of $96,527;
amortization expense of $665; and general and administrative expenses of $6,369;
for total operating expenses of $172,797. Therefore, PAM recorded net income of
$369,775 for 1996.
PAM II. PAM II has continued to invest in distressed loan portfolios
consisting primarily of charged-off credit card accounts and consumer loan
balances such as auto and personal lines of credit originated by independent
third-party financial institutions located throughout the United States. In
addition, PAM II also acquired certain portfolios of default consumer debts
which were rewritten under terms different from the original obligation. In 1994
PAM II spent $854,139 on such purchases. In 1995, PAM II spent $114,183 on such
purchases. In 1996, PAM II spent $1,502,705 on such purchases. Collections on
investments in distressed loan portfolios were $1,507,295 in 1994, $1,022,494 in
1995 and $1,707,090 in 1996.
In 1994, PAM II's investments in distressed loan portfolios consisted of
$196,945 in credit card accounts, $10,319 in performing rewritten accounts,
$1,692,353 in consumer loans and $21,226 in trade receivables. PAM II recorded
net investment income of $458,892, additional income in the form of interest
income of $22,912 and other income of $9,250. Operating expenses for PAM II
consist of the following: management fee expense of $70,022; collection expense
of $27,191; professional fees of $5,957; amortization expense of $1,107; and
general and administrative expenses of $7,412; for total operating expenses of
$111,689. Thus, PAM II recorded net income of $379,365 for 1994.
In 1995, PAM II's investments in distressed loan portfolios consisted of
$254,681 in credit card accounts, $5,197 in performing rewritten accounts, and
$810,857 in consumer loans. PAM II recorded net investment income of $634,187,
and interest income of $16,792. Operating expenses for PAM II consist of the
following: management fee expense of $68,385; collection expense of $12,336;
professional fees of $180,540; amortization expense of $1,107; and general and
administrative expenses of $3,345; for total operating expenses of $265,713.
Thus, PAM II recorded net income of $385,266 for 1995.
In 1996, PAM II's investments in distressed loan portfolios consisted of
$1,305,291 in credit card accounts and $65,885 in consumer loans. In 1996, PAM
II recorded net investment income of $504,836, net interest income of $141,209
and other income of $886. Operating expenses for PAM II consist of the
following: management fee expense of $75,464; collection expense of $67,854;
professional fees of $189,709; amortization expense of $1,107;
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and general and administrative expenses of $8,082; for total operating expenses
of $342,216. Thus, PAM II recorded net income of $304,715 for 1996.
PAM III. PAM III has continued to invest in distressed loan portfolios
consisting primarily of charged-off credit card accounts and consumer loan
balances such as auto and personal lines of credit originated by independent
third-party financial institutions located throughout the United States. In
addition, PAM III also acquired certain portfolios of default consumer debts
which were rewritten under terms different from the original obligation. In 1994
PAM III spent $204,928 on such purchases. In 1995, PAM III spent $160,605 on
such purchases. In 1996, PAM III spent $2,764,469 on such purchases. Collections
on investments in distressed loan portfolios were $1,870,385 in 1994, $1,337,920
in 1995 and $4,725,191 in 1996.
In 1994, PAM III's investments in distressed loan portfolios consisted of
$3,043,207 in credit card accounts, $46,017 in performing rewritten accounts,
$1,310,633 in consumer loans and $8,004 in trade receivables. In 1994, PAM III
recorded net investment income of $15,660, net interest income of $9,437, and
other income of $900. Operating expenses for PAM III consist of the following:
management fee expense of $121,205; collection expense of $12,076; professional
fees of $6,856; amortization expense of $1,157; and general and administrative
expenses of $6,990; for total operating expenses of $148,284. Thus, PAM III
recorded a net loss of $122,287 for 1994.
In 1995, PAM III's investments in distressed loan portfolios consisted of
$1,168,650 in credit card accounts, $1,952,735 in performing rewritten accounts
and $520,968 in consumer loans. In 1995, PAM III recorded net investment income
of $205,518, net interest income of $14,283, and other income of $1,735.
Operating expenses for PAM III consist of the following: management fee expense
of $92,447; collection expense of $7,716; professional fees of $208,877;
amortization expense of $1,157; and general and administrative expenses of
$3,183; for total operating expenses of $313,380. Thus, PAM III recorded a net
loss of $91,844 for 1995.
In 1996, PAM III's investments in distressed loan portfolios consisted of
$2,566,546 in credit card accounts. In 1996, PAM III recorded net investment
income of $884,915 and net interest income of $190,605. Operating expenses for
PAM III consist of the following: management fee expense of $51,425; collection
expense of $73,542; professional fees of $254,453; amortization expense of
$1,155; and general and administrative expenses of $11,782; for total operating
expenses of $392,357. Thus, PAM III recorded net income of $683,163 for 1996.
PAM IV. PAM IV has continued to invest in distressed loan portfolios
consisting primarily of charged-off credit card accounts and consumer loan
balances such as auto and personal lines of credit originated by independent
third-party financial institutions located throughout the United States. In
addition, PAM IV also acquired certain portfolios of default consumer debts
which were rewritten under terms different from the original obligation. In
1994, PAM IV spent $9,804,992 on such purchases. In 1995, PAM IV spent
$4,215,633 on such purchases. In 1996, PAM IV spent $4,474,765 on such
purchases. Collections on investments in distressed loan portfolios were
$2,078,150 in 1994, $4,041,724 in 1995 and $5,235,693 in 1996.
In 1994, PAM IV's investments in distressed loan portfolios consisted of
$5,894,375 in credit card accounts, $1,230,121 in performing rewritten accounts,
$1,275,696 in consumer loans, and $869,140 in trade receivable accounts. In
1994, PAM IV received investment income of $11,558, additional income in the
form of net interest of $96,928, and miscellaneous income in the amount of $900.
Against this, PAM IV had operating expenses as follows: management fee expenses
of $144,633; collection expenses of $525,073; professional fees of $60,949;
amortization expense of $3,605; general and administrative expenses of $6,321;
and provision for portfolio losses of $405,000; for total operating expenses of
$1,145,581. Thus, PAM IV's net loss for 1994 was $1,036,195.
In 1995, PAM IV's investments in distressed loan portfolios consisted of
$5,857,955 in credit card accounts, $414,056 in performing rewritten accounts,
$2,984,756 in consumer loans, and $445,000 in notes secured by deeds of trust.
In 1995, PAM IV received investment income of $367,527, additional income in the
form of net interest of $109,670, and miscellaneous income in the amount of
$1,800. Against this, PAM IV had operating expenses as follows: management fee
expenses of $214,677; collection expenses of $225,318; professional fees of
$514,773; amortization expense of $3,669; general and administrative expenses of
$21,532; and provision for portfolio losses of $109,000; for total operating
expenses of $1,088,969. Thus, PAM IV's net loss for 1995 was $609,972.
In 1996, PAM IV's investments in distressed loan portfolios consisted of
$6,947,644 in credit card accounts, $1,795,999 in consumer loans, and $347,543
in notes secured by deeds of trust. In 1996, PAM IV received investment income
of $150,347, additional income in the form of net interest of $535,431, and
miscellaneous income in the amount of $15,151. Against this, PAM IV had
operating expenses as follows: management fee expenses of $221,422; collection
expenses of $227,874; professional fees of $959,297; amortization expense of
$3,670; and general and administrative expenses of $20,832; for total operating
expenses of $1,433,095. Thus, PAM IV's net loss for 1996 was $732,166.
PAM V. PAM V has continued to invest in distressed loan portfolios
consisting primarily of charged-off credit card accounts and consumer loan
balances such as auto and personal lines of credit originated by independent
third-party financial institutions located throughout the United States. In
addition, PAM V also acquired certain portfolios of default consumer debts which
were rewritten under terms different from the original obligation. In 1994 PAM V
spent $530,088 on such purchases. In 1995, PAM V spent $1,843,039 on such
purchases. In 1996, PAM V spent $1,645,090 on such purchases. Collections on
investments in distressed loan portfolios were $38,117 in 1994, $483,439 in 1995
and $1,202,048 in 1996.
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In 1994, PAM V's investments in distressed loan portfolios consisted of
$283,658 in credit card accounts and $154,075 in consumer loans. PAM V recorded
net interest income of $9,542. Operating expenses for PAM V consist of the
following: management fee expense of $5.128; collection expense of $59,052;
professional fees of $8,691; provision for portfolio losses of $54,000;
amortization expense of $617; and general and administrative expenses of $2,072;
for total operating expenses of $129,560. Thus, PAM V recorded a net loss of
$120,018 for 1994.
In 1995, PAM V's investments in distressed loan portfolios consisted of
$1,032,857 in credit card accounts, $105,089 in performing rewritten accounts
and $633,622 in consumer loans. PAM V recorded net interest income of $32,864,
and other income of $46. Operating expenses for PAM V consist of the following:
management fee expense of $39,146; collection expense of $64,375; professional
fees of $103,202; a provision for portfolio losses of $103,202; amortization
expense of $1,031; and general and administrative expenses of $2,629; for total
operating expenses of $236,383. Thus, PAM V recorded a net loss of $203,473 for
1995.
In 1996, PAM V's investments in distressed loan portfolios consisted of
$1,875,933 in credit card accounts and $424,729 in consumer loans. PAM V
recorded net investment income of $86,052 and net interest income of $101,123.
Operating expenses for PAM V consist of the following: management fee expense of
$57,217; collection expense of $72,423; professional fees of $133,690;
amortization expense of $1,034; and general and administrative expenses of
$8,147; for total operating expenses of $272,511. Thus, PAM V recorded a net
loss of $85,336 for 1996.
Acquisition of Portfolios. As specified above, PCM purchases portfolios
which consist primarily of charged-off credit card accounts and consumer loans,
such as auto loans and personal lines of credit originated by independent
third-party financial institutions located throughout the United States, and
resells some of those portfolios to the Partnerships, at prices generally equal
to PCM's cost plus an acquisition fee of as much as 36%. The Partnerships'
investments in portfolios are carried at the lower of cost, market, or estimated
net realizable value. Amounts collected on the portfolios acquired by the
Partnerships are treated as a reduction to the carrying basis of the related
investment on an individual portfolio basis. Accordingly, income is not
recognized by the Partnerships until recovery of 100% of the carrying values of
the investments of the Partnerships, on a portfolio by portfolio basis, occurs.
Estimated net realizable value represents the estimate of the General Partner,
based upon the General Partner's experience, of the present value of future
collections. As a result of the distressed nature of the loans comprising the
portfolios, there is no assurance that the unpaid principal balances of those
loans will be collected. Any adjustments to the carrying value of the individual
portfolios are recorded in results of operations.
As of December 31, 1996, the Partnerships held portfolios consisting of the
following (amounts are "carrying amounts" consistent with generally accepted
accounting principles applied consistently ("GAAP")).
PAM held cash and equivalents (equivalents being all highly liquid
investments with a maturity of three months or less when purchased) of $283,232,
with $1,269,586 in net investments in distressed loan portfolios. PAM II held
cash and equivalents of $1,024,507 with $1,003,215 cash held in the Performance
Asset Fund Trust ("Trust") and $1,371,176 in net investments in distressed loan
portfolios. PAM III held cash and equivalents of $775,755 with $2,656,338 cash
held in the Trust and $2,566,546 in net investments in distressed loan
portfolios. PAM IV held cash and equivalents of $2,121,545 with $5,834,268 cash
held in the Trust and $9,091,186 in net investments in distressed loan
portfolios. PAM V held $1,731,112 in cash and equivalents with $8,388 cash held
in the Trust and $2,300,662 in net investments in distressed loan portfolios.
The Company anticipates that the Company will continue PCM's current
business plan and structure. The Company anticipates entering into a revolving
borrowing facility with a third-party financial institution with an initial
borrowing capacity of $5 million to $25 million. Portfolio acquisitions by the
Company in 1998 may utilize a combination of available capital and borrowed
funds. Based on available cash projections, the Company anticipates that its
portfolio acquisitions will continue to increase over the next few years. The
Company's anticipated future growth is dependent upon the consummation of the
Merger.
In the event the Merger is not consummated, the General Partner anticipates
that portfolio acquisitions by the Partnerships will occur uniformly based on
cash available to the Partnerships. Additionally, in such event, the General
Partner anticipates that the Partnerships will stop acquiring portfolios at some
point prior to their respective termination dates, while collections and
portfolio account sales will continue until the termination of the Partnerships.
Servicing and Collections. Since its formation in February, 1993, PCM has
become a fully operational collection facility with approximately 95 full time
collectors, 12 supervisors, and related support staff furnished by Vision
Capital Services Corporation, a California corporation and an Affiliate of the
General Partner, the Soliciting Agent, PCM and the Company ("Vision"). PCM
anticipates utilizing additional collection personnel and plans to utilize up to
150 full time collection personnel by 1999; provided, however, no assurance or
guarantee can be given that the Company, in the event the Merger is consummated,
will employ that many full-time collection personnel by that date. PCM is
currently planning to consolidate its corporate offices with its collection
personnel in the same facilities to facilitate its long-term growth plans. In
that regard, PCM is currently engaged in discussions with institutional lenders
regarding PCM's obtaining its own credit line. PCM believes that PCM's access to
commercial credit lines will improve during the next two years. PCM recently
completed a hardware and software conversion that provides it with new computer
technology and equipment that will aid in the collection and servicing of
indebtedness. PCM utilizes proprietary collection software and "predictive
dialing" telecommunications software which enables PCM's collection agents to
dial as many as 50,000 calls per day. This predictive dialing technology
provides PCM's collection agents with the ability to search PCM's entire
database on an ongoing basis and also allows for each collection agent to
produce his or her own predictive dialing campaign to contact those debtors
scheduled for follow-up
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contact. This technology also provides PCM with the ability to capture every
call that comes in to PCM. By capturing the phone number a debtor is calling
from and attaching it to his or her file, PCM has created additional information
sources to reach the debtor, such as his or her current place of employment.
This also may significantly reduce or even eliminate the calls of collection
agents to answering machines, wrong numbers, and disconnected numbers. Once a
debtor is contacted, the collection agent begins negotiating various payment and
settlement options. These options range from payment in full for all outstanding
obligations to discount settlements and from short term payment plans to
refinancing the old debt. Normally, because the cost basis is extremely low for
each account, collection agents can offer more attractive settlement and payment
options to individual debtors than those debtors have been offered by the
originating lender or contingent collection firm.
In September, 1997, PCM installed a Northern Telecom Model 61C telephone
system. This system provides full-featured computer telephone integration
capability, automatic call distribution, automatic number identification, and
multiple office support, with growth capabilities which will support PCM's
planned expansion. PCM believes that this technology provides PCM with
significant technological advantages in its collection operations. Servicing
agreements between PCM and the Partnerships generally provide that all proceeds
generated from the collection of indebtedness shall be shared generally 55% to
60% for the Partnerships and 40% to 45% for PCM. PCM is also reimbursed by the
Partnerships for certain costs associated with the collection of indebtedness.
Notwithstanding the face value of the portfolios, PCM typically purchases
portfolios at significant discounts and the face value of any portfolio is not
necessarily indicative of its actual value.
Employees. Neither PCM, the General Partner nor the Partnerships have any
employees. The human resources requirements (employees) of PCM, the General
Partner and the Partnerships are furnished by Vision Capital Services
Corporation, a California corporation and an Affiliate of PCM, the General
Partner, the Soliciting Agent and the Company ("Vision"). PCM, the General
Partner and the Partnerships, respectively, reimburse Vision for the fees and
expenses of those human resources. Fees and expenses paid by PCM, the General
Partner and the Partnerships, respectively, to Vision are not less favorable to
PCM, the General Partner and the Partnerships than those which would be paid by
the Partnerships, the General Partner and PCM to equally qualified but
unaffiliated persons in arms' length transactions for similar services.
Expansion. The amount of distressed consumer loans has increased
significantly during the past three years, with credit card delinquencies and
charge-offs approaching levels experienced in the most recent recession. Banks
are increasingly selling nonperforming loans to third parties as an alternative
to servicing these loans themselves or managing the placement process. The
Company anticipates that growth in the delinquent consumer indebtedness industry
will continue. PCM, using the employees furnished by Vision, has continued to
increase the size of its collection workforce. PCM has recently hired additional
collection managers to manage all collection supervisors. The Company also
anticipates leasing additional offices to expand its collection operations.
Year 2000 Computer Issues. The General Partner recognizes that the arrival
of the Year 2000 poses a challenge to the ability of computer systems, including
the computer systems of PCM used to service, manage and collect the portfolios
of indebtedness in which the Partnerships have an interest, to recognize
properly and process date sensitive information related to the date change from
December 31, 1999 to January 1, 2000. As the century date change occurs,
date-sensitive systems may recognize the Year 2000 as 1900, or not at all. This
inability to recognize or treat properly the Year 2000 may cause computer
systems to process financial and operational information incorrectly, which
could have a material adverse effect on the Partnerships' results of operations.
PCM has assessed and begun remedial work relating to PCM's computer software
programs and business processes to provide for the Partnership's ability to
continue to function effectively.
In 1996 PCM began the process of identifying, evaluating and implementing
changes to PCM's computer programs necessary to address the Year 2000 issue. The
General Partner is currently addressing the Partnerships' internal Year 2000
issue by coordinating with PCM in connection with PCM's modification of existing
programs and conversions to new programs. The General Partner is also in
communication with financial institutions and other entities with which the
Partnerships conduct business to help them identify and resolve the Year 2000
issue as it relates to the Partnerships' business operations. An assessment of
the readiness of those third party institutions and entities with which the
Partnerships do business is ongoing. While PCM and the General Partner are
confident that PCM will complete assessment and remediation of PCM's computer
software, there can be no assurance that the necessary modifications and
conversions by those third party institutions and entities with which the
Partnerships conduct business will be completed in a timely manner, which could
have a material adverse effect on the Partnerships' results of operations. The
total cost to the Partnerships associated with the required modifications and
conversions is not expected to be material to the Partnerships' results of
operations and financial position and is being expensed as incurred.
In planning and implementing Year 2000 corrective actions, senior
management and the Board of Directors of the General Partner believe that they
have committed adequate resources and devoted adequate personnel to
identification and completion of the tasks necessary to ensure continuation of
the Partnerships' processing ability and various contingency plans.
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RESULTS OF OPERATIONS
Overview. As specified below, neither PCM's financial condition nor the
Partnerships' financial conditions as compared to December 31, 1996, have
changed significantly. As of December 31, 1996, PCM had total assets of
$3,982,265 compared to total liabilities of $3,971,156. PAM had total assets of
$1,622,033 compared to total liabilities of $504,379. PAM II had total assets of
$3,524,539 compared to total liabilities of $0.00. PAM III had total assets of
$6,120,078 compared to total liabilities of $493,515. PAM IV had total assets of
$17,291,452 compared to total liabilities of $356,927. PAM V had total assets of
$4,419,239 compared to total liabilities of $56,940.
Partnership Revenues. For the year ended December 31, 1996, the
Partnerships had net income and distributions consisting of the following:
PAM had net income of $369,775 and distributions of $154,560. PAM II had
net income of $304,715 and distributions of $230,023. PAM III had net income of
$683,163 and distributions of $295,925. PAM IV had net loss of $732,166 and
distributions of $1,433,425. PAM V had net loss of $85,336 and distributions of
$179,100.
Other Partnership Income. For the year ending December 31, 1996, each
Partnership earned the following additional income: PAM earned $3,389 in
interest income and $755 in other income, for total additional income of $4,144.
PAM II earned $141,209 in interest income and $886 in other income for total
additional income of $142,095. PAM III earned $190,605 in interest income and no
other income. PAM IV earned $535,431 in interest income and $15,151 in other
income for total additional income of $550,582. PAM V earned $101,123 in
interest income and no other income.
PCM's Revenues. PCM's principal source of revenues consist of sales of
distressed portfolio assets, almost all of which have been sold to the
Partnerships. Portfolio sales decreased in 1995 by 52%, or $5,383,487. In 1995
PCM acquired and sold 17 portfolios for a total of $4,998,906 in sales proceeds,
as compared to 39 portfolios totaling $10,382,393 in sales proceeds for the
comparable period in 1994. This decrease in portfolio acquisition and sales
activity was caused by management's decision to focus the operational growth of
PCM in the collection and servicing areas. Accordingly, PCM experienced a
decrease in the percentage of total revenue attributed to portfolio sales to 68%
in 1995 from 87% in 1994. Revenue generated from PCM's collection and servicing
operations increased more than 49% or $769,973 during this same period and
contributed to 32% of total revenue in 1995 as compared to 13% for the
comparable period in 1994. Total revenues decreased 39% or $4,613,514 in 1995
from the comparable period in 1994.
Portfolio sales increased significantly in 1996, growing $7,050,321 or more
than 141% from the comparable period in 1995. This increase was primarily caused
by the acquisition of a large portfolio of credit card accounts from Chase
Manhattan Bank in August 1996 totalling approximately $638 million of original
principal balances. In addition, PCM acquired and sold 16 additional portfolios
during the year ended December 31, 1996, 15 of which were sold to the
Partnerships. PCM experienced a small increase in its percentage of total
revenue attributed to portfolio sales to 75% in 1996 from 68% in 1995. PCM also
continued to improve and increase revenues from its collection and servicing
activities in 1996. Revenue generated from collection and servicing activities
for the year ended December 31, 1996 increased $1,740,612 or almost 75% over the
comparable period in 1995. The continued increase in collection and servicing
revenues was due primarily to the refinements in PCM's servicing technology and
growth of PCM's collection staff, which grew from approximately 35 full time
collection representatives to 50 full time collection representatives by the end
of 1996. Revenue generated from collection and servicing activities decreased as
a percentage of total revenue to 25% in 1996 from 32% in 1995. For the year
ended December 31, 1996, PCM had portfolio sales of $12,049,227, collection
revenues of $3,458,403 and accrued portfolio servicing fees of $609,220. PCM had
interest income of $44,478 and a total net income of $97,724.
Partnerships' Operating Costs and Expenses. For the year ended December 31,
1996, each Partnership incurred the following operating costs and expenses: PAM
incurred collection expenses of $43,257; management fees expenses of $25,979;
professional fees of $96,527; amortization expenses of $665; and general and
administrative expenses of $6,369, for total operating expenses of $172,797. PAM
II incurred collection expenses of $67,854; management fees expenses of $75,464;
professional fees of $189,709; amortization expenses of $1,107; and general and
administrative expenses of $8,082, for total operating expenses of $342,216. PAM
III incurred collection expenses of $73,542; management fees expenses of
$51,425; professional fees of $254,453; amortization expenses of $1,155; and
general and administrative expenses of $11,782, for total operating expenses of
$392,357. PAM IV incurred collection expenses of $227,874; management fees
expenses of $221,422; professional fees of $959,297; amortization expenses of
$3,670; and general and administrative expenses of $20,832, for total operating
expenses of $1,433,095. PAM V incurred collection expenses of $72,423;
management fees expenses of $57,217; professional fees of $133,690; amortization
expenses of $1,034; and general and administrative expenses of $8,147, for total
operating expenses of $272,511.
Management and Other Fees Incurred by the Partnerships. The General Partner
receives an annual and ongoing fee for management of the affairs of the
Partnerships from 2 to 3% of the net asset value of each Partnership's assets.
The net asset value of each Partnership's assets is defined as the total of (i)
the lower of the (a) market value, as determined by the General Partner on an
annual basis, or (b) cost to such Partnership of non-performing assets and (ii)
principal balances of performing assets. The management fee is earned by the
General Partner on an annual basis and has been paid or accrued to the General
Partner pro rata.
Except for PAM IV, the General Partner has, and will continue to have, a
present and continuing 10% interest
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in each Partnership's allocations of net income and loss, taxable income and
loss, credits, deductions, and distributions until the Limited Partners in such
Partnership have received cash distributions from such Partnership in an amount
equal to 100% of their contributions to the capital of such Partnership
("Capital Contributions"). Then the General Partner shall receive 30% of those
allocations. If the Limited Partners have received cash distributions from such
Partnership in an amount equal to 100% of their Capital Contributions, the
General Partner shall receive 30% of any distributions upon liquidation of such
Partnership. Otherwise, the General Partner shall receive 10% of such
distributions until the Limited Partners have received cash distributions from
such Partnership equal to 100% of their Capital Contributions. The General
Partner also has, and will continue to have, a present and continuing 10%
interest in allocations of net income and loss, taxable income and loss,
credits, and distributions of PAM IV, until the Limited Partners in PAM IV have
received cash contributions from PAM IV in an amount equal (i) 100% of their
Capital Contributions and (ii) an annual return equal to 6% of their unreturned
Capital Contributions. Then the General Partner shall receive 30% of those
allocations. If the Limited Partners of PAM IV have received cash distributions
from PAM IV in an amount equal to (i) 100% of their Capital Contributions and
(ii) an annual return equal to 6% of their unreturned Capital Contributions, the
General Partner shall receive 30% of any distributions upon liquidation of PAM
IV. Otherwise the General Partner shall receive 10% of such distributions until
the Limited Partners of PAM IV have received cash distributions from PAM IV
equal to (i) 100% of their Capital Contributions and (ii) 6% of their Capital
Contributions. As of the date of this Joint Consent Statement/Prospectus, none
of the Limited Partners have received cash distributions from any Partnership in
an amount equal to 100% of their Capital Contributions. Therefore, as of the
date of this Joint Consent Statement/Prospectus, the General Partner is entitled
to receive 10% of the above allocations and distributions.
The General Partner and its Affiliates are reimbursed for reasonable and
necessary expenses paid or incurred by the General Partner and its Affiliates
regarding the operation of the Partnerships, including legal and accounting fees
and costs and fees of consultants, collection agencies, and other related
services.
PCM's Operating Costs and Expenses. Significant operating expenses of PCM
include the costs of portfolios acquired, salaries and related expenses of
management and collections personnel, and professional and consulting expenses.
Costs of portfolios acquired include the costs of portfolios purchased from
third-party financial institutions. Salaries and related expenses include the
costs of human resource personnel (employees) provided by Vision. Professional
and consulting expenses include all legal, accounting and management consulting
expenses incurred from related and non-related entities.
Total operating expenses decreased by 40% or $4,911,611 in 1995 as compared
to the comparable period in 1994, and totalled approximately 100% of total
revenue in 1995 as compared to 103% for the comparable period in 1994. Costs of
portfolios acquired decreased $4,417,591 or 55% in 1995 as compared to 1994.
This decrease was due to the decrease in the number of portfolios acquired by
PCM in 1995, which totalled 17 portfolios as compared to 39 portfolio
acquisitions in 1994. However, the gross margin on the sale of portfolios
increased in 1995 to 26.95% from 22.28% in 1994, which contributed to
improvement in the results of operations in 1995 from the comparable period in
1994. Costs of portfolios acquired as a percentage of total revenue decreased to
50% in 1995 from 68% in 1994. Personnel and related expenses decreased 18% or
$525,063 in 1995 as compared to the similar period in 1994. This decrease in
personnel expense resulted from the reduction of PCM personnel outsourced in
1995, as compared to 1994. Personnel costs as a percentage of total revenue
increased to 33% in 1995 from 24% in 1994. However, personnel costs as a
percentage of collection and servicing revenue decreased to 103% as compared to
188% in 1994. Professional and consulting expenses did not increase
significantly in 1995, as compared to 1994. However, these expenses did increase
as a percentage of total revenue, increasing to 9% of revenue as compared to 6%
in 1994. All other expenses remained relatively constant in 1995, as compared to
the previous period in 1994.
Total operating expenses for PCM increased significantly in 1996,
increasing 119% to $16,050,418 in 1996, as compared to $7,344,522 in 1995, and
totalled approximately 99% of total revenue in 1996, as compared to 100% for the
comparable period in 1995. The total operating expenses for the year ended
December 31, 1996 were $8,725,019 in cost of portfolio sales; $3,473,232 in
personnel costs and related benefits costs; $2,920,523 in professional and
management fee expenses; and $482,657 in collection expenses, and $448,987 in
other general and administrative expense.
Costs of portfolios acquired increased $5,073,631 or 139% in 1996, as
compared to 1995. The increase was primarily attributed to the acquisition of a
large portfolio from Chase Manhattan Bank in August 1996 totalling $5,871,195.
PCM acquired 17 portfolios in each of 1995 and 1996. However, the gross margin
on the sale of portfolios increased to 27.58% in 1996, as compared to 26.95% in
1995, which contributed to the improvement in the results of operations in 1996
over 1995. This increase was the result of a portfolio sale to a third-party
purchaser in 1996 that resulted in a higher sale margin than customary portfolio
sales to the Partnerships. Costs of portfolios acquired as a percentage of total
revenues increased slightly to 54% of total revenue as compared to 50% in 1995.
Personnel expenses increased 45% or $1,070,094 in 1996, as compared to
1995. This increase in personnel expenses was primarily attributed to the
increased number of collection agents utilized by PCM in 1996. The increase is
also attributed to the additional collection and servicing revenue generated in
1996, as compared to 1995, as a growing percentage of collection agent payroll
is commission-based. Personnel costs as a percentage of total revenue decreased
to 22% of total revenue in 1996, as compared to 33% in 1995. In addition,
personnel costs as a percentage of collection and servicing revenue decreased to
85%, as compared to 103% of collection revenue in 1994. Professional and
management consulting fees increased 433% in 1996 to $2,920,523 from $673,545 in
1995. In addition, professional fees increasing as a percentage of total
revenue, increased to 18% of revenue in 1996 as compared to 9% in 1995.
77
<PAGE>
PCM's Liquidity and Capital Resources. PCM's liquidity, including its
ability to access conventional credit sources, has significantly improved during
the last two years primarily due to (i) consistent management of cash, (ii)
implementation of effective cost cutting measures, (iii) successful portfolio
acquisition and collection efforts, and (iv) disposal of marginal or
non-producing loan portfolios. These changes should enable PCM to obtain capital
from traditional markets and credit from more conventional, and less costly,
sources.
Moreover, long and short term liquidity are expected to continue to improve
due to (i) PCM having entered into financing arrangements which will provide for
greater working and portfolio acquisition capital, and (ii) the generation of
new revenues from PAM VI.
As of June 30, 1997, PCM had assets totalling $2,915,500, of which
approximately 35%, i.e., $1,008,203, are cash and equivalent balances and 42%,
i.e., $1,237,079, are short-term receivables from the Partnerships and other
Affiliates.
PCM was initially funded through capital infusions from Vincent E.
Galewick, the founding shareholder. To date, PCM has funded all subsequent
operations through cash generated from operating activities of its business. PCM
has remained profitable from operations since its formation, and management
believes that PCM will continue to do so in the future periods, even if the
Merger Proposal is not approved.
In 1994 PCM generated cash receipts from operations of $377,726, financed
primarily from decreases in Affiliate receivables and payables, which were used
to acquire small portfolios of distressed debt obligations for its own account
and additional computer hardware and collection software to further enhance its
collection and servicing operations. Net cash increased $65,687 in 1994 to
$175,356 at December 31, 1994. In 1995 PCM generated cash receipts from
operations of $497,713, again, financed primarily from Affiliate payables, of
which approximately 28% was used to acquire additional operating equipment. Net
cash increased $240,918 in 1995 to $416,274 at December 31, 1995.
ANY FORWARD LOOKING STATEMENTS CONTAINED IN THIS JOINT CONSENT
STATEMENT/PROSPECTUS HAVE BEEN COMPILED ON THE BASIS OF ASSUMPTIONS MADE BY
MANAGEMENT OF THE COMPANY AND CONSIDERED TO BE REASONABLE. FUTURE OPERATING
RESULTS OF THE COMPANY, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION
OR WARRANTY REGARDING FUTURE OPERATING RESULTS OF THE COMPANY IS TO BE INFERRED
FROM ANY FORWARD LOOKING STATEMENTS CONTAINED IN THIS JOINT CONSENT
STATEMENT/PROSPECTUS.
78
<PAGE>
79
<PAGE>
GLOSSARY
The following defined terms are in addition to those defined terms
specified elsewhere in this Joint Consent Statement/Prospectus and are deemed to
include the singular, as well as the plural, and the present tense, as well as
the past tense, and, when they appear in this Joint Consent
Statement/Prospectus, are defined as follows:
"Affiliate" shall mean (i) any Person who directly or indirectly controls
or is controlled by or under common control with another Person; (ii) a Person
owning or controlling 10% or more of the outstanding voting securities of such
other Person; (iii) any officer or director of such other Person; or (iv) any
Person who is an officer, director, general partner, trustee, or holder of 10%
or more of the voting securities or beneficial interests of any of the
foregoing.
"California General Corporation Law" shall mean the General Corporation Law
of the State of California, as amended.
"Closing Date" shall mean the date on which all of the conditions precedent
to the obligations of each of the parties, as specified in the Merger Agreement,
shall have been satisfied or shall have been waived, and further, on which date
of the transfer of the Merger Stock pursuant to the Merger Agreement.
"Code" shall mean the United States Internal Revenue Code of 1986, as
amended.
"Commission" shall mean the United States Securities and Exchange
Commission.
"Company" shall mean Performance Asset Management Company, a Delaware
corporation.
"Company Shareholders" shall mean the holders of all issued and outstanding
shares of $.001 par value common stock issued by the Company. "Company
Shareholder" shall mean any one of the Company Shareholders.
"Consent Forms" shall mean the Letters of Transmittal and Consent
Statements.
"Delaware General Corporation Law" shall mean the General Corporation Law
of the State of Delaware, as amended.
"Determination Date" shall mean the date set by the Board of Directors of
the Company which shall serve as the record date to determine the capital
accounts of each Limited Partner and the Company Shareholders, PCM Shareholders,
and Limited Partners of record entitled to vote on the proposed Merger. The
Company currently has specified June 30, 1997, as the Determination Date.
"Dissenting Limited Partner" shall mean a holder of one or more Units who
casts a vote against the Merger Proposal and who thereafter elects to exercise
his or her dissenter's rights.
"Dissenting Shareholder" shall mean any shareholder of PCM or the Company
who exercises his or her dissenters' rights under the Delaware General
Corporation Law or the California General Corporation Law.
"Effective Date" shall mean the date the Registration Statement is
effective with the Commission and with any applicable state Blue Sky regulatory
agencies.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"Exchange Agent" shall mean U.S. Stock Transfer Corporation, 1745 Gardena
Avenue, Glendale, California.
"Exchange Value" shall mean the value determined by the Company, PCM and
the General Partner for Units, shares of PCM's common stock and shares of the
Company's common stock, as reviewed and determined to be fair from a financial
point of view by the Fairness Analyst.
"Fairness Analyst" shall mean Willamette Management Associates, Inc., the
independent analyst retained to furnish the Fairness Opinion.
"Fairness Opinion" shall mean the determination by the Fairness Analyst
that the Exchange Value is fair from a financial standpoint to the Partnerships.
"GAAP" shall mean United States' generally accepted accounting principles
as set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entities as approved by a significant segment of the
accounting profession in the United States of America as in effect from time to
time.
"General Partner" shall mean Performance Development, Inc., a California
corporation, the General Partner of the Partnerships.
"Information Agent" shall mean Bud Webb, the person engaged by the Company
to provide certain
80
<PAGE>
consulting, administrative and clerical work in connection with the Merger
Proposal.
"IRS" shall mean the United States Internal Revenue Service.
"Joint Consent Statement/Prospectus" shall mean this Joint Consent
Statement/Prospectus dated October 31, 1997, and any and all amendments and
supplements thereto.
"Limited Partner" or "Limited Partners" shall mean a limited partner, in
the singular, or limited partners, in the plural, of any or all of the
Partnerships.
"Merger" shall mean the proposed merger of PCM and the Partnerships with
and into the Company pursuant to the Merger Agreement.
"Merger Agreement" shall mean the Merger Agreement and Plan of
Reorganization dated as of October 31, 1997 between and among the Company, PCM
and the Partnerships.
"Merger Proposal" shall mean the proposed Merger as specified in this
Prospectus.
"Merger Stock" shall mean the shares of $.001 par value common stock of the
Company issued in exchange for the assets, properties, rights, interests, and
liabilities of PCM and the Partnerships.
"Partnership Agreements" shall mean the Agreements of Limited Partnership
of the Partnerships entered into by the General Partner and the Limited
Partners. "PARTNERSHIP AGREEMENT" shall mean any one of the Partnership
Agreements.
"Partnerships" shall mean Performance Asset Management Fund, Ltd., A
California Limited Partnership ("PAM"); Performance Asset Management Fund II,
Ltd., A California Limited Partnership ("PAM II"); Performance Asset Management
Fund III, Ltd., A California Limited Partnership ("PAM III"); Performance Asset
Management Fund IV, Ltd., A California Limited Partnership ("PAM IV"); and
Performance Asset Management Fund V, Ltd., A California Limited Partnership
("PAM V"). "Partnership" shall mean any of the Partnerships.
"PCM" shall mean Performance Capital Management, Inc., a California
corporation.
"PCM Shareholders" shall mean the holders of all issued and outstanding
shares of no par common stock issued by PCM. "PCM Shareholder" shall mean any
one of the PCM Shareholders.
"Person" shall mean an individual, partnership, entity, corporation,
association, joint stock company, trust, joint venture, unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof.)
"Prospectus" shall mean this Joint Consent Statement/Prospectus dated
October 31, 1997, and any and all amendments and supplements thereto.
"Registration Statement" shall mean the Registration Statement on Form S-4
under the Securities Act filed with the Commission with respect to the Merger
Stock.
"RTC" shall mean the Resolution Trust Company.
"Rule 144" shall mean the rule promulgated under the Securities Act that
permits holders of restricted securities as well as Affiliates of an issuer of
securities, pursuant to certain conditions and subject to certain restrictions,
to sell their securities publicly without registration under the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.
"Soliciting Agent" shall mean Income Network Company, a California
corporation, and an Affiliate of the Company, PCM and the General Partner, which
shall solicit the votes of the Limited Partners regarding the Merger Proposal.
Income Network Company is a Broker/Dealer fully registered with the National
Association of Securities Dealers, Inc.
"Solicitation Materials" shall mean this Joint Consent
Statement/Prospectus, together with the accompanying appropriate Consent Forms,
which are being distributed jointly to the Limited Partners, the PCM
Shareholders and the Company Shareholders to obtain their votes "for" or
"against" the Merger Proposal and related transactions.
"Solicitation Period" shall mean the period during which the Limited
Partners and the Shareholders may vote "for" or "against" the Merger Proposal.
The Solicitation Period commences upon the delivery of the Prospectus to the
Limited Partners and the Shareholders and will continue until the latter of (i)
60 calendar days after the initial delivery of the Joint Consent
Statement/Prospectus or (ii) such later date as may be designated by the Board
of Directors of the Company, the Board of Directors of PCM, and the Board of
Directors of the General Partner.
"Thompson-Killea Act" shall mean the Thompson-Killea Limited Partnership
Act of 1992, as enacted in the State of California.
81
<PAGE>
"Treasury Regulations" shall mean the United States Treasury Regulations
promulgated under the Code, as such Treasury Regulations may be amended from
time to time (including corresponding provisions of succeeding regulations)
whether in final, temporary or proposed form.
"Trust" shall mean the Performance Asset Management Fund Trust created by
the General Partner, for and on behalf of the Partnerships, on December 8, 1995.
"Units" shall mean the interests in the Partnerships held by the Limited
Partners.
"Vision" shall mean Vision Capital Services Corporation, a California
corporation.
82
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial statements and explanatory notes are
presented to indicate the results of the Merger as described in the Summary of
this document on PCM's and the Partnerships' historical financial positions,
results of operations, and cash flows. The merger will qualify as a tax-free
exchange and will be accounted for as a pooling of interests as it satisfies the
criteria of APB Opinion No. 16 - Business Combinations. There has been no
financial activity in the Company. Therefore, it is not included in the pro
forma financial statements.
Each of these pro forma financial statements reflect the merger of PCM and the
Partnerships into the Company, as described in the summary of this document.
PCM and the Partnerships utilize GAAP. The accompanying unaudited pro forma
financial statements include all adjustments which are, in the opinion of the
Company, necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented.
The pro forma financial statements should be read and considered in conjunction
with the separate historical financial statements and notes thereto of the
Company included elsewhere herein.
The pro forma financial statements are not necessarily indicative of the results
which would have occurred had the merger been in effect on the dates and for the
periods indicated or which may result in the future.
83
<PAGE>
PAMCO
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Six Months December 31,
Ended June 30, ----------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
==============================================================================================
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
ASSETS
Cash and equivalents $25,546,323 $23,668,225 $14,041,940 $17,837,659 $9,887,025 $5,512,438
Cash held in trust 7,448,377 9,502,209 9,200,137
Investments in distressed loan
portfolios, net 6,419,699 9,106,908 12,564,393 14,556,935 10,765,919 6,907,502
Accounts receivable 1,073,841
Receivable from West Capital 5,218,435 5,218,435 1,275,656 260,122
Due from affiliates 403,204 0 2,028,170 826,867 657,756
Loan to shareholder 843 96,620
Other assets 277,443 297,581 718,668 401,254 835,710 195,771
Property and equipment, net 628,686 703,195 381,968 324,812 206,775 13,208
----------------------------------------------------------------------------------------------
Total Assets $41,798,416 $43,278,118 $44,153,711 $38,435,715 $23,797,952 $13,546,797
==============================================================================================
LIABILITIES AND PARTNERS'
CAPITAL/SHAREHOLDERS EQUITY
Accounts Payable 2,680,389 236,468 240,582 256,308 169,472 304,741
Due to affiliates 0 1,103,008 0 186,109
Note payable to affiliate 199,390 191,598 176,914 253,855 100,000
Deposits in escrow for investor
subscriptions
----------------------------------------------------------------------------------------------
Total liabilities $2,879,779 $1,531,074 $417,496 $696,272 $269,472 $304,741
----------------------------------------------------------------------------------------------
Common stock 46,836,997 49,162,281 49,162,281 41,207,390 24,262,397 13,365,494
Retained earnings (7,918,340) (7,415,237) (5,426,066) (3,467,947) (733,917) (123,438)
----------------------------------------------------------------------------------------------
Total partners'
capital/shareholders' equity $38,918,637 $41,747,044 $43,736,215 $37,739,443 $23,528,480 $13,242,056
----------------------------------------------------------------------------------------------
Total Liabilities and Partners'
Capital/Shareholders' Equity $41,798,416 $43,278,118 $44,153,711 $38,435,715 $23,797,952 $13,546,797
==============================================================================================
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
For the Six Months For the Years Ended December 31,
Ended June 30, ----------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
==============================================================================================
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Portfolio sales $177,169 $607,586 $0 $372,309 $5,884
Collection revenue 5,343,416 3,485,808 1,395,550 1,069,113 323,569
Servicing fees 296,737 167,527 640,127 2,726
Portfolio collections 2,800,759 14,160,566 7,175,905 6,229,359 4,420,899 1,559,525
Less: portfolio basis recovery (3,916,978) (12,760,760) (6,890,211) (6,174,986) (4,326,447) (1,559,525)
----------------------------------------------------------------------------------------------
Net investment income $4,701,103 $5,660,727 $2,321,371 $1,498,521 $423,905 $0
Personnel and related benefits 2,405,540 3,473,232 2,403,138 2,928,201 626,377
Professional and management fees 3,693,975 4,457,672 1,688,170 764,607 75,685
Collection expense 514,604 525,914 288,529 389,165 127,579 42,365
Management fee expense (70,548) 0
Professional fees 96,527 12,109
Provision for portfolio losses (173) 0
Amortization 1,569
General and Administrative expense 305,394 500,199 361,110 323,736 209,306 26,472
----------------------------------------------------------------------------------------------
Total operating expenses $6,919,340 $8,982,996 $4,740,947 $4,405,709 $1,038,947 $82,515
----------------------------------------------------------------------------------------------
Loss from operations ($2,218,237) ($3,322,269) ($2,419,576) ($2,907,188) ($615,042) ($82,515)
----------------------------------------------------------------------------------------------
Interest income, net 355,745 1,016,235 186,000 126,449 112,167 65,229
Other income 33,235 16,792 3,581 11,050 17,361
----------------------------------------------------------------------------------------------
Loss before provision for
income taxes (1,829,257) (2,289,242) (2,229,995) (2,769,689) (485,514) (17,286)
----------------------------------------------------------------------------------------------
Provision for income taxes 800 17,186 4,800 4,800 4,000 2,400
----------------------------------------------------------------------------------------------
Net loss ($1,830,057) ($2,306,428) ($2,234,795) ($2,774,489) ($489,514) ($19,686)
==============================================================================================
Basic and diluted net loss
per share (0.244) (0.307) (0.298) (0.369) (0.070) (0.004)
==============================================================================================
Shares used in basic and diluted
net loss per share 7,511,500 7,511,500 7,511,500 7,511,500 7,041,500 5,456,900
==============================================================================================
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
For the Six Months For the Years Ended December 31,
Ended June 30, ----------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
==============================================================================================
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS
Cash flows from operating
activities:
Net income ($1,830,057) ($2,306,428) ($2,234,795) ($2,774,489) ($489,514) ($19,686)
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization 1,569
Depreciation 99,127 150,813 81,454 50,559 14,615
Gain on repurchase
of limited
partnership units (9,250)
Provision for
portfolio losses
Decrease (increase) in assets:
Due from affiliates (849,764) 325,163 (1,329,000) (86,702) (330,599) (25,840)
Other assets 20,138 421,087 (280,681) 150,768 (742,290) (190,851)
Increase (decrease) in
liabilities:
Due to affiliates (495,555) 2,806,015 (143,633) 747,453 (93,550) (169,018)
Accounts payable 1,709,471 (4,114) (15,726) 133,898 (135,269) 66,899
----------------------------------------------------------------------------------------------
Net cash provided by
operating activities ($1,346,640) $1,392,536 ($3,922,381) ($1,787,763) ($1,776,607) ($336,927)
----------------------------------------------------------------------------------------------
Cash flows provided by (used in)
investing activities:
Purchase of property
and equipment (472,040) (138,610) (168,596) (221,390)
Organization costs 48,433 (10,920)
Recovery of portfolio basis 3,071,369 12,760,760 6,890,211 6,174,986 4,326,447 1,559,525
Accounts receivable (1,073,841)
Receivable from West Capital 5,218,435 (3,659,090) (1,015,534) (260,122)
Cash held in trust 2,053,832 (302,072) (9,200,137)
Purchase of investments in
dist loan ports (833,572) (8,986,018) (5,265,082) (9,611,130) (8,184,864) (7,761,519)
----------------------------------------------------------------------------------------------
Net cash provided by
investing activities $3,217,788 $8,219,065 ($7,713,618) ($7,263,830) ($5,046,908) ($6,473,036)
----------------------------------------------------------------------------------------------
Cash flows provided by (used in)
financing activities
Increase in payable
to affiliate 7,792 14,684 18,914 153,855 100,000
Distributions to partners 1
Contributions from
limited partners 8,408,524 17,377,431 11,098,102 11,062,559
Deposit in escrow for
investor subscriptions 0
Payments for offering
expenses (453,700) (432,439)
Loans to shareholders (843) (133,458) (96,620)
----------------------------------------------------------------------------------------------
Net cash used in financing
activities $6,950 $14,684 $7,840,280 $17,002,227 $11,198,102 $11,062,559
----------------------------------------------------------------------------------------------
Net (decrease) increase in cash 1,878,098 9,626,285 (3,795,719) 7,950,634 4,374,587 4,252,596
Cash at beginning of period 23,668,225 14,041,940 17,837,659 9,887,025 5,512,438 1,259,842
----------------------------------------------------------------------------------------------
Cash at end of period $25,546,323 $23,668,225 $14,041,940 $17,837,659 $9,887,025 $5,512,438
==============================================================================================
</TABLE>
86
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial statements and explanatory notes are
presented to indicate the results of the Merger as described in the Summary of
this document on PCM's and the Partnerships' historical financial positions,
results of operations, and cash flows. The merger will qualify as a tax-free
exchange and will be accounted for as a pooling of interests as it satisfies the
criteria of APB Opinion No. 16 - Business Combinations. There has been no
financial activity in the Company. Therefore, it is not included in the pro
forma financial statements.
Each of these pro forma financial statements reflect the merger of PCM and the
Partnerships into the Company, as described in the summary of this document.
PCM and the Partnerships utilize GAAP. The accompanying unaudited pro forma
financial statements include all adjustments which are, in the opinion of the
Company, necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented.
The pro forma financial statements should be read and considered in conjunction
with the separate historical financial statements and notes thereto of the
Company included elsewhere herein.
The pro forma financial statements are not necessarily indicative of the results
which would have occurred had the merger been in effect on the dates and for the
periods indicated or which may result in the future.
87
<PAGE>
PAMCO
PROFORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PCM PAM I PAM II PAM III PAM IV PAM V
BALANCE SHEETS (UNAUDITED)
June 30, 1997
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and equivalents $1,009,336 $ 82,205 $1,283,708 $ 829,346 $ 3,032,196 $ 971,973
Cash held in trust 0 (97,348) 441,613 2,091,560 5,144,273 (131,721)
Investments in distressed loan portfolios, net 3,250 1,061,666 1,331,691 2,033,929 8,220,126 2,857,717(A)
(B)
(C)
Accounts receivable 660,887 66,630 98,257 0 0 248,067
Due from affiliates 1,379,136 12,019 0 213,352 0 42,608(A)
(D)
Loan to shareholder 843 0 0 0 0 0
Other assets 27,439 12,732 42,942 64,480 104,977 24,873
Property and equipment, net 628,686 0 0 0 0 0
Organization costs, net 0 0 0 290 1,529 1,981
------------------------------------------------------------------------------
Total Assets $3,709,577 $1,137,904 $3,198,211 $5,232,957 $16,503,101 $4,015,498
==============================================================================
LIABILITIES AND PARTNERS' CAPITAL
/SHAREHOLDER'S EQUITY
Accounts payable 1,339,985 333,727 104,589 8,469 11,862 147,307
Due to affiliates 2,313,510 0 169,799 326,492 1,765,633 0(D)
Note payable to affiliate 0 199,390 0 0 0 0
------------------------------------------------------------------------------
Total liabilities 3,653,495 533,117 274,388 334,961 1,777,495 147,307
General partner capital 0 (337,817) (394,023) (362,696) (968,309) (121,749)(A)
Limited partners' capital 0 942,604 3,317,846 5,260,692 15,693,915 3,989,940(A)
Common stock 100 0 0 0 0 0
Retained earnings 55,982 0 0 0 0 0(A)
(B)
(C)
------------------------------------------------------------------------------
Total partners' capital /shareholders' equity 56,082 604,787 2,923,823 4,897,996 14,725,606 3,868,191
------------------------------------------------------------------------------
Total Liabilities and
Partners' Capital /Shareholders' Equity $3,709,577 $1,137,904 $3,198,211 $5,232,957 $16,503,101 $4,015,498
==============================================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
Eliminations Balances Adjustments Balances
------------ ------------ ------------ -----------
BALANCE SHEETS (UNAUDITED)
June 30, 1997
ASSETS
<S> <C> <C> <C> <C>
Cash and equivalents $ 7,208,764(H) $ 18,337,559 $ 25,546,323
Cash held in trust 7,448,377 7,448,377
Investments in distressed loan portfolios, net (8,450,762) 5,643,442(K) 776,257 6,419,699
(267,155)
(1,147,020)
Accounts receivable 1,073,841 1,073,841
Due from affiliates 21,089 (1,107,667)(E) 1,510,871 403,204
(2,775,871)
Loan to shareholder 843 843
Other assets 277,443 277,443
Property and equipment, net 628,686 628,686
Organization costs, net 3,800(I) (3,800) 0
------------ ------------ ------------ ------------
Total Assets ($12,619,719) $ 21,177,529 $ 20,620,887 41,798,416
============ ============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL/SHAREHOLDER'S EQUITY
Accounts payable 1,945,939(H) 734,450 2,680,389
Due to affiliates (2,775,871) 1,799,563(H) (1,799,563) 0
Note payable to affiliate 199,390 199,390
------------ ------------ ------------ ------------
Total liabilities (2,775,871) 3,944,892 (1,065,113) 2,879,779
General partner capital 42,054 (2,142,540)(F) 2,224,145 0
(H) (81,605)
Limited partners' capital 378,451 29,583,448 (F) (28,848,998) 0
(H) (734,450)
Common stock 100 (F) 26,624,853 46,836,997
(H) 20,212,044
Retained earnings (8,850,178) (10,208,371)(E) 1,298,378 (7,918,360)
(267,155) (H) 6,683
(1,147,020) (I) (7,448)
(L) 216,141
(K) 776,257
------------ ------------ ------------ ------------
Total partners' capital/shareholders' equity (9,843,848) 17,232,637 21,686,000 38,918,637
------------ ------------ ------------ ------------
Total Liabilities and
Partners' Capital/Shareholders' Equity ($12,619,719) $ 21,177,529 $ 20,620,887 $ 41,798,416
============ ============ ============ ============
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS (UNAUDITED)
For the Six Months Ended June 30, 1997
PCM PAM I PAM II PAM III PAM IV PAM V
<S> <C> <C> <C> <C> <C> <C>
Portfolio sales $2,543,002 $ 0 $ 0 $ 0 $ 0 $ 0 (B)
(J)
Collection revenue 5,343,416 0 0 0 0 0
Servicing fees 296,737 0 0 0 0 0
Portfolio collections 0 208,187 214,795 532,617 1,417,226 427,934
Less : portfolio basis recovery 0 (207,920) (214,795) (532,617) (1,391,732) (422,894)(C)
------------------------------------------------------------------------------------
Net investment income 8,183,155 267 0 0 25,494 5,040
------------------------------------------------------------------------------------
Cost of portfolio sales 2,098,678 0 0 0 0 0 (J)
Personnel and related benefits 2,405,540 0 0 0 0 0
Professional and management fees 3,167,726 0 0 0 0 0 (G)
Collection expense 217,684 20,569 38,124 29,275 167,889 41,063
Management fee expense 0 7,821 31,086 28,901 108,724 35,961
Professional fees 73,632 121,866 43,975 71,758 165,793 49,225 (G)
Amortization 0 0 586 633 1,925 504
G & A expense 215,694 6,459 6,942 6,488 63,800 5,838
------------------------------------------------------------------------------------
Total operating expenses 8,178,954 156,715 120,713 137,055 508,131 132,591
------------------------------------------------------------------------------------
Income (loss) from operations 4,201 (156,448) (120,713) (137,055) (482,637) (127,551)
Interest income (expense), net 23,457 (6,774) 43,766 75,604 188,640 31,052
Other income 18,215 0 4,419 84 9,993 524
------------------------------------------------------------------------------------
Income (loss) before provision for
income taxes 45,873 (163,222) (72,528) (61,367) (284,004) (95,975)
Provision for income taxes 800 0 0 0 0 0
------------------------------------------------------------------------------------
Net income (loss) $ 45,073 ($163,222) ($72,528) ($61,367) ($284,004) ($95,975)
====================================================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C>
Portfolio sales ($267,155) $ 177,169 $ 177,169
($2,098,678)
Collection revenue 5,343,416 5,343,416
Servicing fees 296,737 296,737
Portfolio collections 2,800,759 2,800,759
Less : portfolio basis recovery (1,147,020) (3,916,978) (3,916,978)
---------- ---------- -------- ----------
Net investment income (3,512,853) 4,701,103 4,701,103
---------- ---------- -------- ----------
Cost of portfolio sales (2,098,678) 0
Personnel and related benefits 2,405,540 2,405,540
Professional and management fees 526,249 3,693,975 3,693,975
Collection expense 514,604 514,604
Management fee expense 212,493 (E) (212,493) 0
Professional fees (526,249) 0 0
Amortization 3,648 (I) (3,648) 0
G & A expense 305,221 305,221
---------- ---------- -------- ----------
Total operating expenses (2,098,678) 7,135,481 (216,141) 6,919,340
---------- ---------- -------- ----------
Income (loss) from operations (1,414,175) (2,434,378) 216,141 (2,218,237)
Interest income (expense), net 355,745 355,745
Other income 33,235 33,235
---------- ---------- -------- ----------
Income (loss) before provision for income taxes (1,414,175) (2,045,398) 216,141 (1,829,257)
Provision for income taxes 800 800
---------- ---------- -------- ----------
Net income (loss) ($1,414,175) ($2,046,198) (M) $216,141 ($1,830,057)
========== ========== ======== ==========
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 1997
PCM PAM I PAM II PAM III PAM IV
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $45,073 ($163,222) ($72,528) ($61,367) ($284,004)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 0 0 586 633 1,925
Depreciation 99,127 0 0 0 0
Decrease (increase) in assets:
Due from affiliates (1,050,905) 44,464 82,175 (157,313) 136,022
Other assets 20,141 0 0 (3) 0
Increase (decrease) in liabilities:
Due to affiliates (1,470,221) (271,403) 169,799 (166,308) 1,415,057
Accounts payable 1,152,560 292,349 104,589 7,754 5,511
-----------------------------------------------------------------------
Net cash provided by operating activities (1,204,225) (97,812) 284,621 (376,604) 1,274,511
-----------------------------------------------------------------------
Cash flows provided by (used in) investing activities:
Recovery of portfolio basis 0 0 0 532,617 1,391,732
Accounts receivable (660,887) (66,630) (98,257) 0 0
Cash held in trust 0 97,348 561,602 564,778 689,995
Purchase of investments in
distressed loan portfolios (3,250) 207,920 39,485 0 (520,672)
-----------------------------------------------------------------------
Net cash provided by investing activities (664,137) 238,638 502,830 1,097,395 1,561,055
-----------------------------------------------------------------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 0 7,792 0 0 0
Distributions to partners 0 (349,645) (503,250) (667,200) (1,909,915)
Redemption of partnership units 0 0 (25,000) 0 (15,000)
Loans to shareholder (843) 0 0 0 0
-----------------------------------------------------------------------
Net cash used in financing activities (843) (341,853) (528,250) (667,200) (1,924,915)
-----------------------------------------------------------------------
Net (decrease) increase in cash (1,869,205) (201,027) 259,201 53,591 910,651
-----------------------------------------------------------------------
Cash at beginning of period 2,878,541 283,232 1,024,507 775,755 2,121,545
-----------------------------------------------------------------------
Cash at end of period $1,009,336 $82,205 $1,283,708 $829,346 $3,032,196
=======================================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
PAM V Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($95,975) ($1,414,175) ($2,046,198) $216,141 ($1,830,057)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 504 3,648 (3,648) 0
Depreciation 0 99,127 99,127
Decrease (increase) in assets:
Due from affiliates 309,110 (824) (637,271) (212,493) (849,764)
Other assets 0 20,138 20,138
Increase (decrease) in liabilities:
Due to affiliates (56,341) 267,979 (111,438) (384,117) (495,555)
Accounts payable 146,708 1,709,471 1,709,471
--------- ------------------------- --------------------------
Net cash provided by operating activities 304,006 (1,147,020) (962,523) (384,117) (1,346,640)
--------- ------------------------- --------------------------
Cash flows provided by (used in) investing activities:
Recovery of portfolio basis 0 1,147,020 3,071,369 3,071,369
Accounts receivable (248,067) (1,073,841) (1,073,841)
Cash held in trust 140,109 2,053,832 2,053,832
Purchase of investments in
distressed loan portfolios (557,055) (833,572) (833,572)
--------- ------------------------- --------------------------
Net cash provided by investing activities (665,013) 1,147,020 3,217,788 3,217,788
--------- ------------------------- --------------------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 0 7,792 7,792
Distributions to partners (398,132) (3,828,142) 3,828,142 0
Redemption of partnership units 0 (40,000) 40,000 0
Loans to shareholder 0 (843) (843)
--------- ------------------------- --------------------------
Net cash used in financing activities (398,132) (3,861,193) 3,868,142 6,949
--------- ------------------------- --------------------------
Net (decrease) increase in cash (759,139) 0 (1,605,928) 3,484,025 1,878,097
Cash at beginning of period 1,731,112 8,814,692 14,853,533 23,668,225
--------- ------------------------- --------------------------
Cash at end of period $971,973 $0 $7,208,764 $18,337,558 $25,546,322
========= ========================= ==========================
</TABLE>
90
<PAGE>
PERFORMANCE ASSET MANAGEMENT COMPANY
NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
Performance Asset Management Company, a Delaware corporation ("Company"),
was formed on May 7, 1996. Performance Capital Management, Inc., a California
corporation ("PCM"), was formed in January 1992 for the purpose of identifying,
analyzing, negotiating, acquiring, and servicing investments in distressed loan
portfolios. Vincent E. Galewick owns all of the issued and outstanding $.001 par
value common stock of the Company. Mr. Galewick and Michael Cushing own all of
the issued and outstanding no par common stock of PCM; provided, however, Mr.
Galewick is the principal and controlling shareholder of PCM.
Performance Development, Inc., a California corporation ("General
Partner"), is the General Partner of Performance Asset Management Fund, Ltd., a
California Limited Partnership ("PAM"); Performance Asset Management Fund II,
Ltd., a California Limited Partnership ("PAM II"); Performance Asset Management
Fund III, Ltd., a California Limited Partnership ("PAM III"); Performance Asset
Management Fund IV, Ltd., a California Limited Partnership ("PAM IV"); and
Performance Asset Management Fund, Ltd., a California Limited Partnership ("PAM
V") ("PAM Funds"). Mr. Galewick owns all of the issued and outstanding no par
common stock of the General Partner. The General Partner will not be a direct
participant in the merger.
The General Partner is proposing a consolidation by merger of PCM with PAM,
PAM II, PAM III, PAM IV, and PAM V into the Company ("Merger"). The PAM Funds
are each California limited partnerships formed and created to acquire, service
and collect investments in distressed consumer debts. Upon the completion of the
Merger, the Company will continue to acquire, service and collect investments in
distressed consumer debts and intends to use leveraged financing to acquire
additional investments.
Upon Merger, the General Partner and the limited partners ("Partners") will
receive shares of common stock in the Company in return for their partnership
interests in the PAM Funds. The Merger will be accounted for similar to a
pooling of interests, and therefore, no adjustment to the historical carrying
amount of assets and liabilities will be made.
Historical information for the PAM Funds and PCM as of and for the six
months ended June 30, 1997 is based on audited financial statements which are
included elsewhere herein. The unaudited pro forma balance sheet and statement
of operations have been prepared assuming 100% partnership participation.
The unaudited pro forma balance sheet as of June 30, 1997, has been
prepared as if the transactions contemplated by the Merger had occurred on June
30, 1997, and the
91
<PAGE>
accompanying unaudited pro forma statements of operations and cash flows for the
year ended June 30, 1997 have been prepared as if the Merger had occurred on
January 1, 1997.
The unaudited pro forma financial statements have been prepared by making
certain adjustments to the historical financial information of PCM and the PAM
Funds. The pro forma information presented is not indicative of the result that
would have occurred had the Merger occurred and the Company operated as a single
entity during the period presented, or of the future operations of the PAM
Funds.
92
<PAGE>
2. Adjusting and ProForma Journal Entries
1997
The pro forma financial statements include the following
adjustments and reclassifications:
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
A Investments in Distressed Assets $8,450,762
Due From Affiliate $21,089
General Partner Capital $42,054
Limited Partners Capital $378,451
Retained Earnings $8,850,178
To eliminate the cumulative effect of related party activity.
B Investment in Distressed Assets $267,155
Portfolio Sales $267,155
To eliminate related party portfolio acquisition
fees for the year.
C Investment in Distressed Assets $1,147,020
Portfolio Basis Recovery $1,147,020
To eliminate related party collection revenue for the year.
D Due to Affiliates $2,775,871
Due from Affiliates $2,775,871
To eliminate intercompany balances.
*E Due from Affiliates $1,510,871
Management fee expense $212,493
Retained Earnings $1,298,378
To reverse management fees charged by general partner.
</TABLE>
* ProForma journal entries
93
<PAGE>
2. Adjusting and ProForma Journal Entries
1997
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
*F General Partner Capital $2,224,145
Limited Partners Capital $28,848,998
Common Stock $26,624,853
To record the effect of the exchange of partnership units
for common stock as if it had taken place at June 30, 1997
G Prof and Mgmt Fees $526,249
Prof Fees $526,249
To reclassify professional fees.
*H General Partners Capital $81,605
Limited Partners Capital $734,450
Cash $18,337,559
Due to Affiliates $1,799,563
Accounts Payable $734,450
Common Stock $20,212,044
Retained Earnings $6,683
To reverse partnership distributions through June 30, 1997.
*I Organization Costs $3,800
Retained Earnings $7,448
Amortization Expense $3,648
To eliminate unamortized organization costs.
</TABLE>
* ProForma journal entries
94
<PAGE>
2. Adjusting and ProForma Journal Entries
1997
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
J Portfolio Sales $2,098,678
Cost of Portfolio Sales $2,098,678
To eliminate related party portfolio sales.
*K Investment in Distressed Assets $776,257
Retained Earnings $776,257
To reverse current provision and allowance for portfolio losses
*L ProForma net income adjustments $216,141
Retained Earnings $216,141
To record the net income from ProForma adjustments to
Retained Earnings.
</TABLE>
* ProForma journal entries
95
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial statements and explanatory notes are
presented to indicate the results of the Merger as described in the Summary of
this document on PCM's and the Partnerships' historical financial positions,
results of operations, and cash flows. The merger will qualify as a tax-free
exchange and will be accounted for as a pooling of interests as it satisfies the
criteria of APB Opinion No. 16 - Business Combinations. There has been no
financial activity in the Company. Therefore, it is not included in the pro
forma financial statements.
Each of these pro forma financial statements reflect the merger of PCM and the
Partnerships into the Company, as described in the summary of this document.
PCM and the Partnerships utilize GAAP. The accompanying unaudited pro forma
financial statements include all adjustments which are, in the opinion of the
Company, necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented.
The pro forma financial statements should be read and considered in conjunction
with the separate historical financial statements and notes thereto of the
Company included elsewhere herein.
The pro forma financial statements are not necessarily indicative of the results
which would have occurred had the merger been in effect on the dates and for the
periods indicated or which may result in the future.
96
<PAGE>
PAMCO
PROFORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PCM PAM PAM II PAM III PAM IV
BALANCE SHEETS
December 31, 1996
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and equivalents $2,878,541 $283,232 $1,024,507 $775,755 $2,121,545
Cash held in trust 0 0 1,003,215 2,656,338 5,834,268
Investments in distressed loan portfolios, net 0 1,269,586 1,371,176 2,566,546 9,091,186
Due from affiliates 352,949 56,483 82,114 56,039 136,022
Other assets 47,580 12,732 42,942 64,477 104,977
Property and equipment, net 703,195 0 0 0 0
Organization costs, net 0 0 585 923 3,454
--------------------------------------------------------------------------
Total Assets $3,982,265 $1,622,033 $3,524,539 $6,120,078 $17,291,452
==========================================================================
LIABILITIES AND PARTNERS' CAPITAL/
SHAREHOLDERS' EQUITY
Accounts payable 187,425 41,378 0 715 6,351
Due to affiliates 3,783,731 271,403 0 492,800 350,576
Note payable to affiliate 0 191,598 0 0 0
-------------------------------------------------------------------------
Total liabilities 3,971,156 504,379 0 493,515 356,927
General partner's capital 0 (339,676) (304,726) (289,959) (748,842)
Limited partners' capital 0 1,457,330 3,829,265 5,916,522 17,683,367
Common stock 100 0 0 0 0
Retained earnings 11,009 0 0 0 0
-------------------------------------------------------------------------
Total partners' capital/
shareholders' equity 11,109 1,117,654 3,524,539 5,626,563 16,934,525
-------------------------------------------------------------------------
Total Liabilities and
Partners' Capital/
Shareholders' Equity $3,982,265 $1,622,033 $3,524,539 $6,120,078 $17,291,452
==========================================================================
<CAPTION>
Adjustments ProForma
and Combined Proforma Adjusted
PAM V Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C> <C>
Cash and equivalents $1,731,112 $8,814,692 (I) $14,853,533 $23,668,225
Cash held in trust 8,388 9,502,209 9,502,209
Investments in distressed loan portfolios, net 2,300,662 (A) (4,814,516) 8,330,651 (M) 776,257 9,106,908
(B) (2,716,622)
(C) (737,367)
Due from affiliates 351,718 (A) 21,089 (1,298,378)(G) 1,298,378 0
(D) (2,354,792)
Other assets 24,873 297,581 297,581
Property and equipment, net 0 703,195 703,195
Organization costs, net 2,486 7,448 (J) (7,448) 0
---------- ------------ ------------ ------------ ------------
Total Assets $4,419,239 ($10,602,208) $26,357,398 $16,920,720 $43,278,118
========== ============ ============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL/
SHAREHOLDERS' EQUITY
Accounts payable 599 236,468 236,468
Due to affiliates 56,341 (D) (2,354,792) 2,600,059 (I) (1,497,051) 1,103,008
Note payable to affiliate 0 191,598 191,598
---------- ------------ ------------ ------------ ------------
Total liabilities 56,940 (2,354,792) 3,028,125 (1,497,051) 1,531,074
General partner's capital (72,218)(A) 125,272 (1,630,149)(H) 1,630,149 0
Limited partners' capital 4,434,517 (A) 1,127,428 34,448,429 (H) (34,448,429) 0
Common stock 0 100 (H) 32,818,280 49,162,281
(I) 16,343,901
Retained earnings 0 (A) (6,046,127) (9,489,107)(H) 6,683 (7,415,237)
(B) (2,716,622) (H) 509,686
(G) 796,323
(C) (737,367) (H) 776,257
(J) (15,079)
---------- ------------ ------------ ------------ ------------
Total partners' capital/
shareholders' equity 4,362,299 (8,247,416) 23,329,273 18,417,771 41,747,044
---------- ------------ ------------ ------------ ------------
Total Liabilities and
Partners' Capital/
Shareholders' Equity $4,419,239 ($10,602,208) $26,357,398 $16,920,720 $43,278,118
========== ============ ============ ============ ============
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996 PCM PAM PAM II PAM III PAM IV PAM V
<S> <C> <C> <C> <C> <C> <C>
Portfolio sales $12,049,227 $0 $0 $0 $0 $0 (B)
(K)
Collection revenue 3,485,808 0 0 0 0 0
Servicing fees 609,220 0 0 0 0 0 (E)
Portfolio collections 0 1,290,544 1,707,090 4,725,191 5,235,693 1,202,048
Less : portfolio basis recovery (27,405) (752,116) (1,202,254) (3,840,276) (5,085,346) (1,115,996)(C)
-------------------------------------------------------------------------------------
Net investment income 16,116,850 538,428 504,836 884,915 150,347 86,052
Cost of portfolio sales 8,725,019 0 0 0 0 0 (K)
Personnel and related benefits 3,473,232 0 0 0 0 0
Professional and management fees 2,920,523 0 0 0 0 0 (L)
Collection expense 482,657 43,257 67,854 73,542 227,874 72,423 (E)
Management fee expense 0 25,979 75,464 51,425 221,422 57,217
Professional fees 0 96,527 189,709 254,453 959,297 133,690 (L)
Amortization 0 665 1,107 1,155 3,670 1,034
G & A expense 448,987 6,369 8,082 11,782 20,832 8,147
-------------------------------------------------------------------------------------
Total operating expenses 16,050,418 172,797 342,216 392,357 1,433,095 272,511
-------------------------------------------------------------------------------------
Income (loss) from operations 66,432 365,631 162,620 492,558 (1,282,748) (186,459)
Interest income (expense), net 44,478 3,389 141,209 190,605 535,431 101,123
Other income 0 755 886 0 15,151 0
-------------------------------------------------------------------------------------
Income (loss) before provision for
income taxes 110,910 369,775 304,715 683,163 (732,166) (85,336)
Provision for income taxes 13,186 0 0 0 0 0
-------------------------------------------------------------------------------------
Net income (loss) $97,724 $369,775 $304,715 $683,163 ($732,166) ($85,336)
=====================================================================================
<CAPTION>
Adjustments ProForma
STATEMENTS OF OPERATIONS and Combined Proforma Adjusted
For the Year Ended December 31, 1996 Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C>
Portfolio sales ($2,716,622) $607,586 $607,586
(8,725,019)
Collection revenue 3,485,808 3,485,808
Servicing fees (441,693) 167,527 167,527
Portfolio collections 14,160,566 14,160,566
Less : portfolio basis recovery (737,367) (12,760,760) (12,760,760)
------------ ------------ ------------ ------------
Net investment income (12,620,701) 5,660,727 5,660,727
Cost of portfolio sales (8,725,019) 0 0
Personnel and related benefits 3,473,232 3,473,232
Professional and management fees 1,537,149 4,457,672 4,457,672
Collection expense (441,693) 525,914 525,914
Management fee expense 431,507 (G) (502,055) (70,548)
Professional fees (1,537,149) 96,527 96,527
Amortization 7,631 (J) (7,631) 0
G & A expense 504,199 (F) (4,000) 500,199
------------ ------------ ------------ ------------
Total operating expenses (9,166,712) 9,496,682 (513,686) 8,982,996
------------ ------------ ------------ ------------
Income (loss) from operations (3,453,989) (3,835,955) 513,686 (3,322,269)
Interest income (expense), net 1,016,235 1,016,235
Other income 16,792 16,792
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes (3,453,989) (2,802,928) 513,686 (2,289,242)
Provision for income taxes 13,186 (F) 4,000 17,186
------------ ------------ ------------ ------------
Net income (loss) ($3,453,989) ($2,816,114)(N) $509,686 ($2,306,428)
============ ============ ============ ============
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1996 PCM PAM PAM II PAM III PAM IV
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $97,724 $369,775 $304,715 $683,163 ($732,166)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 0 665 1,107 1,155 3,670
Depreciation 150,813 0 0 0 0
Decrease (increase) in assets:
Due from affiliates 5,234 (56,483) 117,268 (56,039) 544,709
Other assets 89,781 31,507 72,425 101,338 114,176
Increase (decrease) in liabilities:
Due to affiliates 2,558,294 49,214 0 59,858 342,326
Accounts payable 5,056 35,252 (1,743) (1,808) (38,872)
--------------------------------------------------------------------------
Net cash provided by operating activities 2,906,902 429,930 493,772 787,667 233,843
--------------------------------------------------------------------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (472,040) 0 0 0 0
Recovery of portfolio basis 27,405 752,116 1,202,254 3,840,276 5,085,346
Receivable from West Capital 0 559,730 778,565 927,540 1,937,718
Cash held in trust 0 4,221 168,654 (1,893,699) 412,939
Purchase of investments in
Distressed Loan Portfolios 0 (1,315,611) (1,502,705) (2,764,469) (4,474,765)
--------------------------------------------------------------------------
Net cash provided by investing activities (444,635) 456 646,768 109,648 2,961,238
--------------------------------------------------------------------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 0 14,684 0 0 0
Distributions to partners 0 (172,133) (255,833) (331,700) (1,592,759)
Redemption of partnership units 0 (5,000) (5,000) 0 (40,000)
--------------------------------------------------------------------------
Net cash used in financing activities 0 (162,449) (260,833) (331,700) (1,632,759)
--------------------------------------------------------------------------
Net (decrease) increase in cash 2,462,267 267,937 879,707 565,615 1,562,322
Cash at beginning of period 416,274 15,295 144,800 210,140 559,223
--------------------------------------------------------------------------
Cash at end of period $2,878,541 $283,232 $1,024,507 $775,755 $2,121,545
==========================================================================
<CAPTION>
Adjustments ProForma
and Combined Proforma Adjusted
PAM V Eliminations Balances Adjustments Amounts
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($85,336) ($3,453,989) ($2,816,114) $509,686 ($2,306,428)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 1,034 0 7,631 (7,631) 0
Depreciation 0 0 150,813 0 150,813
Decrease (increase) in assets:
Due from affiliates 272,529 0 827,218 (502,055) 325,163
Other assets 11,860 0 421,087 0 421,087
Increase (decrease) in liabilities:
Due to affiliates 54,691 0 3,064,383 (258,368) 2,806,015
Accounts payable (1,999) 0 (4,114) 0 (4,114)
---------- ------------ ------------ ------------ ------------
Net cash provided by operating activities 252,779 (3,453,989) 1,650,904 (258,368) 1,392,536
---------- ------------ ------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment 0 0 (472,040) 0 (472,040)
Recovery of portfolio basis 1,115,996 737,367 12,760,760 0 12,760,760
Receivable from West Capital 1,014,882 0 5,218,435 0 5,218,435
Cash held in trust 1,005,813 0 (302,072) 0 (302,072)
Purchase of investments in
Distressed Loan Portfolios (1,645,090) 2,716,622 (8,986,018) 0 (8,986,018)
---------- ------------ ------------ ------------ ------------
Net cash provided by investing activities 1,491,601 3,453,989 8,219,065 0 8,219,065
---------- ------------ ------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 0 0 14,684 14,684
Distributions to partners (199,066) 0 (2,551,491) 2,551,491 0
Redemption of partnership units (30,000) 0 (80,000) 80,000 0
---------- ------------ ------------ ------------ ------------
Net cash used in financing activities (229,066) 0 (2,616,807) 2,631,491 14,684
---------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash 1,515,314 0 7,253,162 2,373,123 9,626,285
Cash at beginning of period 215,798 0 1,561,530 12,480,410 14,041,940
---------- ------------ ------------ ------------ ------------
Cash at end of period $1,731,112 $0 $8,814,692 $14,853,533 $23,668,225
========== ============ ============ ============ ============
</TABLE>
99
<PAGE>
PERFORMANCE ASSET MANAGEMENT COMPANY
NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
Performance Asset Management Company, a Delaware corporation ("Company"),
was formed on May 7, 1996. Performance Capital Management, Inc., a California
corporation ("PCM"), was formed in January 1992 for the purpose of identifying,
analyzing, negotiating, acquiring, and servicing investments in distressed loan
portfolios. Vincent E. Galewick owns all of the issued and outstanding $.001 par
value common stock of the Company. Mr. Galewick and Michael Cushing own all of
the issued and outstanding no par common stock of PCM; provided, however, Mr.
Galewick is the principal and controlling shareholder of PCM.
Performance Development, Inc., a California corporation ("General
Partner"), is the General Partner of Performance Asset Management Fund, Ltd., a
California Limited Partnership ("PAM"); Performance Asset Management Fund II,
Ltd., a California Limited Partnership ("PAM II"); Performance Asset Management
Fund III, Ltd., a California Limited Partnership ("PAM III"); Performance Asset
Management Fund IV, Ltd., a California Limited Partnership ("PAM IV"); and
Performance Asset Management Fund, Ltd., a California Limited Partnership ("PAM
V") ("PAM Funds"). Mr. Galewick owns all of the issued and outstanding no par
common stock of the General Partner. The General Partner will not be a direct
participant in the merger.
The General Partner is proposing a consolidation by merger of PCM with PAM,
PAM II, PAM III, PAM IV, and PAM V into the Company ("Merger"). The PAM Funds
are each California limited partnerships formed and created to acquire, service
and collect investments in distressed consumer debts. Upon the completion of the
Merger, the Company will continue to acquire, service and collect investments in
distressed consumer debts and intends to use leveraged financing to acquire
additional investments.
Upon Merger, the General Partner and the limited partners ("Partners") will
receive shares of common stock in the Company in return for their partnership
interests in the PAM Funds. The Merger will be accounted for similar to a
pooling of interests, and therefore, no adjustment to the historical carrying
amount of assets and liabilities will be made.
Historical information for the PAM Funds and PCM as of and for the year
ended December 31, 1996 is based on audited financial statements which are
included elsewhere herein. The unaudited pro forma balance sheet and statement
of operations have been prepared assuming 100% partnership participation.
The unaudited pro forma balance sheet as of December 31, 1996, has been
prepared as if the transactions contemplated by the Merger had occurred on
December 31, 1996, and the accompanying unaudited pro forma statements of
operations and cash flows for the year ended
100
<PAGE>
December 31, 1996 have been prepared as if the Merger had occurred on January 1,
1996.
The unaudited pro forma financial statements have been prepared by making
certain adjustments to the historical financial information of PCM and the PAM
Funds. The pro forma information presented is not indicative of the result that
would have occurred had the Merger occurred and the Company operated as a single
entity during the period presented, or of the future operations of the PAM
Funds.
101
<PAGE>
2. Adjusting and ProForma Journal Entries 1996
The pro forma financial statements include the following adjustments and
reclassifications:
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
A Investments in Distressed Assets $4,814,516
Due From Affiliate $21,089
General Partner Capital $125,272
Limited Partners Capital $1,127,428
Retained Earnings $6,046,127
To eliminate the cumulative effect of related party activity.
B Investment in Distressed Assets $2,716,622
Portfolio Sales $2,716,622
To eliminate related party portfolio acquisition fees for the
year.
C Investment in Distressed Assets $737,367
Portfolio Basis Recovery $737,367
To eliminate related party collection revenue for the year.
D Due to Affiliates $2,354,792
Due from Affiliates $2,354,792
To eliminate intercompany balances.
E Servicing Fees $441,693
Collection Expense $441,693
To eliminate related party servicing fees.
*F G&A Expense $4,000
Provision for Income Taxes $4,000
To reclassify income tax expense.
</TABLE>
* ProForma journal entries
102
<PAGE>
2. Adjusting and ProForma Journal Entries 1996
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
*G Due from Affiliates $1,298,378
Management fee expense $502,055
Retained Earnings $796,323
To reverse management fees charged by general partner.
*H General Partner Capital $1,630,149
Limited Partners Capital $34,448,429
Common Stock $32,818,280
To record the effect of the exchange of partnership units for
common stock as if it had taken place at December 31, 1996.
*I Cash $14,853,533
Due to Affiliates $1,497,051
Common Stock $16,343,901
Retained Earnings $6,683
To reverse partnership distributions through December 31, 1996.
*J Organization Costs $7,448
Retained Earnings $15,079
Amortization Expense $7,631
To eliminate unamortized organization costs.
K Portfolio Sales $8,725,019
Cost of Portfolio Sales $8,725,019
To eliminate related party portfolio sales.
</TABLE>
* ProForma journal entries
103
<PAGE>
2. Adjusting and ProForma Journal Entries 1996
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
L Prof and Mgmt Fees $1,537,149
Prof Fees $1,537,149
To reclassify professional fees.
*M Investment in Distressed Assets $776,257
Retained Earnings $776,257
To reverse allowance for portfolio losses.
*N ProForma net income adjustment $509,686
Retained Earnings $509,686
To record the net income from ProForma adjustments to Retained
Earnings
</TABLE>
* Proforma journal entries
104
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial statements and explanatory notes are
presented to indicate the results of the Merger as described in the Summary of
this document on PCM's and the Partnerships' historical financial positions,
results of operations, and cash flows. The merger will qualify as a tax-free
exchange and will be accounted for as a pooling of interests as it satisfies the
criteria of APB Opinion No. 16 - Business Combinations. There has been no
financial activity in the Company. Therefore, it is not included in the pro
forma financial statements.
Each of these pro forma financial statements reflect the merger of PCM and the
Partnerships into the Company, as described in the summary of this document.
PCM and the Partnerships utilize GAAP. The accompanying unaudited pro forma
financial statements include all adjustments which are, in the opinion of the
Company, necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented.
The pro forma financial statements should be read and considered in conjunction
with the separate historical financial statements and notes thereto of the
Company included elsewhere herein.
The pro forma financial statements are not necessarily indicative of the results
which would have occurred had the merger been in effect on the dates and for the
periods indicated or which may result in the future.
105
<PAGE>
PAMCO
PROFORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PCM PAM PAM II PAM III
BALANCE SHEETS
December 31, 1995
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents $416,274 $15,295 $144,800 $210,140
Cash held in trust 0 4,221 1,171,869 762,639
Investments in distressed loan portfolios, net 27,405 706,091 1,070,725 3,642,353
Receivable from West Capital 0 559,730 778,565 927,540
Due from affiliates 358,183 0 201,632 0
Other assets 137,361 44,239 115,367 165,815
Property and equipment, net 381,968 0 0 0
Organization costs, net 0 665 1,692 2,078
---------------------------------------------------------
Total Assets $1,321,191 $1,330,241 $3,484,650 $5,710,565
=========================================================
LIABILITIES AND PARTNERS' CAPITAL /SHAREHOLDERS' EQUITY
Accounts payable $182,369 $6,126 $1,743 $2,523
Due to affiliates 1,225,437 222,189 2,250 432,942
Note payable to affiliate 0 176,914 0 0
---------------------------------------------------------
Total liabilities 1,407,806 405,229 3,993 435,465
General partner's capital 0 (359,171) (309,388) (322,499)
Limited partners' capital 0 1,284,183 3,790,045 5,597,599
Common stock 100 0 0 0
Retained earnings (86,715) 0 0 0
---------------------------------------------------------
Total partners' capital /shareholders' equity (86,615) 925,012 3,480,657 5,275,100
---------------------------------------------------------
Total liabilities and
Partner's Capital /Shareholders' Equity $1,321,191 $1,330,241 $3,484,650 $5,710,565
=========================================================
</TABLE>
<TABLE>
<CAPTION>
Adjustments
and
PAM IV PAM V Eliminations
BALANCE SHEETS (continued)
December 31, 1995
<S> <C> <C> <C>
ASSETS
Cash and equivalents $559,223 $215,798
Cash held in trust 6,247,207 1,014,201
Investments in distressed loan portfolios, net 9,701,767 1,771,568 (A) (2,697,193)
(B) (1,347,518)
(C) (1,087,062)
Receivable from West Capital 1,937,718 1,014,882
Due from affiliates 680,731 624,247 (A) 21,089
(E) (654,035)
Other assets 219,153 36,733
Property and equipment, net 0 0
Organization costs, net 7,124 3,520
----------------------------- --------------
Total Assets $19,352,923 $4,680,949 ($5,764,719)
============================= ==============
LIABILITIES AND PARTNERS' CAPITAL /SHAREHOLDERS' EQUITY
Accounts payable $45,223 $2,598
Due to affiliates 8,250 1,650 (E) (654,035)
Note payable to affiliate 0 0
----------------------------- --------------
Total liabilities 53,473 4,248 (654,035)
General partner's capital (516,291) (43,718)(A) 179,286
Limited partners' capital 19,815,741 4,720,419 (A) 1,613,565
Common stock 0 0
Retained earnings 0 0 (A) (4,468,955)
(B) (1,347,518)
(C) (1,087,062)
----------------------------- --------------
Total partners' capital /shareholders' equity 19,299,450 4,676,701 (5,110,684)
----------------------------- --------------
Total liabilities and
Partner's Capital /Shareholders' Equity $19,352,923 $4,680,949 ($5,764,719)
============================= ==============
</TABLE>
<TABLE>
<CAPTION>
ProForma
Combined ProForma Adjusted
Balances Adjustments Balances
BALANCE SHEETS (continued)
December 31, 1995
<S> <C> <C> <C>
ASSETS
Cash and equivalents $ 1,561,530 (J) $12,480,410 $14,041,940
Cash held in trust 9,200,137
Investments in distressed loan portfolios, net 11,788,136 (D) 776,257 12,564,393
Receivable from West Capital 5,218,435 5,218,435
Due from affiliates 1,231,847 (H) 796,323 2,028,170
Other assets 718,668 718,668
Property and equipment, net 381,968 381,968
Organization costs, net 15,079 (L) (15,079) 0
--------------- -------------------------------
Total Assets $30,115,800 $14,037,911 $44,153,711
=============== ===============================
LIABILITIES AND PARTNERS' CAPITAL /SHAREHOLDERS' EQUITY
Accounts payable $240,582 $240,582
Due to affiliates 1,238,683 (J) (1,238,683) 0
Note payable to affiliate 176,914 176,914
--------------- -------------------------------
Total liabilities 1,656,179 (1,238,683) 417,496
General partner's capital (1,371,781)(I) 1,371,781 0
Limited partners' capital 36,821,552 (I) (36,821,552) 0
Common stock 100 (I) 35,449,771 49,162,281
(J) 13,712,410
Retained earnings (6,990,250)(H) 358,572 (5,426,066)
(J) 6,683
(K) (22,792)
(N) 580,464
(D) 641,257
--------------- -------------------------------
Total partners' capital /shareholders' equity 28,459,621 15,276,594 43,736,215
--------------- -------------------------------
Total liabilities and
Partner's Capital /Shareholders' Equity $30,115,800 $14,037,911 $44,153,711
=============== ===============================
</TABLE>
106
<PAGE>
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
PCM PAM PAM II PAM III
<S> <C> <C> <C> <C>
Portfolio sales $4,998,906 $0 $0 $0
Collection revenue 1,395,550 0 0 0
Servicing fees 946,734 0 0 0
Portfolio collections 0 290,328 1,022,494 1,337,920
Less: portfolio basis recovery (15,273) (109,531) (388,307) (1,132,402)
---------------------------------------------------------
Net investment income 7,325,917 180,797 634,187 205,518
Cost of portfolio sales 3,651,388 0 0 0
Personnel and related benefits 2,403,138 0 0 0
Professional and management fees 673,545 0 0 0
Collection expense 285,026 365 12,336 7,716
Management fee expense 0 23,096 68,385 92,447
Professional fees 0 7,233 180,540 208,877
Provision for portfolio losses 0 0 0 0
Amortization 0 798 1,107 1,157
G & A expense 331,425 2,947 3,345 3,183
---------------------------------------------------------
Total operating expenses 7,344,522 34,439 265,713 313,380
---------------------------------------------------------
Income (Loss) from operations (18,605) 146,358 368,474 (107,862)
Interest income (expense), net 25,685 (13,294) 16,792 14,283
Other income 0 0 0 1,735
---------------------------------------------------------
Income (Loss) before provision for income taxes 7,080 133,064 385,266 (91,844)
Provision for income taxes 800 0 0 0
---------------------------------------------------------
Net income (Loss) $6,280 $133,064 $385,266 ($91,844)
=========================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS Adjustments
For the Year Ended December 31, 1995 and
PAM IV PAM V Eliminations
<S> <C> <C> <C>
Portfolio sales $0 $0 (B) ($1,347,518)
(L) (3,651,388)
Collection revenue 0 0 0
Servicing fees 0 0 (F) (306,607)
Portfolio collections 4,041,724 483,439 0
Less: portfolio basis recovery (3,674,197) (483,439)(C) (1,087,062)
----------------------------- --------------
Net investment income 367,527 0 (6,392,575)
Cost of portfolio sales 0 0 (L) (3,651,388)
Personnel and related benefits 0 0
Professional and management fees 0 0 (M) 1,014,625
Collection expense 225,318 64,375 (F) (306,607)
Management fee expense 214,677 39,146
Professional fees 514,773 103,202 (M) (1,014,625)
Provision for portfolio losses 109,000 26,000
Amortization 3,669 1,031
G & A expense 21,532 2,629
----------------------------- --------------
Total operating expenses 1,088,969 236,383 (3,957,995)
----------------------------- --------------
Income (Loss) from operations (721,442) (236,383) (2,434,580)
Interest income (expense), net 109,670 32,864
Other income 1,800 46
----------------------------- --------------
Income (Loss) before provision for income taxes (609,972) (203,473) (2,434,580)
Provision for income taxes 0 0
----------------------------- --------------
Net income (Loss) ($609,972) ($203,473) ($2,434,580)
============================= ==============
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS ProForma
For the Year Ended December 31, 1995 Combined ProForma Adjusted
Balances Adjustments Balances
<S> <C> <C> <C>
Portfolio sales $0 $0
Collection revenue 1,395,550 1,395,550
Servicing fees 640,127 640,127
Portfolio collections 7,175,905 7,175,905
Less: portfolio basis recovery (6,890,211) (6,890,211)
--------------- -------------------------------
Net investment income 2,321,371 2,321,371
Cost of portfolio sales 0 0
Personnel and related benefits 2,403,138 2,403,138
Professional and management fees 1,688,170 1,688,170
Collection expense 288,529 288,529
Management fee expense 437,751 (H) (437,751) 0
Professional fees 0 0
Provision for portfolio losses 135,000 (D) (135,000) 0
Amortization 7,762 (K) (7,762)
G & A expense 365,061 (K) 49 361,110
(G) (4,000)
--------------- -------------------------------
Total operating expenses 5,325,411 (584,464) 4,740,947
--------------- -------------------------------
Income (Loss) from operations (3,004,040) 584,464 (2,419,576)
Interest income (expense), net 186,000 186,000
Other income 3,581 3,581
--------------- -------------------------------
Income (Loss) before provision for income taxes (2,814,459) 584,464 (2,229,995)
Provision for income taxes 800 (G) 4,000 4,800
--------------- -------------------------------
Net income (Loss) ($2,815,259)(N) $580,464 ($2,234,795)
=============== ===============================
</TABLE>
107
<PAGE>
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
PCM PAM PAM II PAM III
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $6,280 $133,064 $385,266 ($91,844)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 0 798 1,107 1,157
Depreciation 81,454 0 0 0
Provision for portfolio losses 0 0 0 0
Decrease (increase) in assets:
Due from affiliates (382,072) 0 288,289 0
Other assets 40,586 (44,239) (35,298) (64,236)
Increase (decrease) in liabilities:
Due to affiliates 763,783 45,969 0 62,333
Accounts payable (12,318) (29,123) (537) (842)
---------------------------------------------------------
Net cash provided by operating activities 497,713 106,469 638,827 (93,432)
---------------------------------------------------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (138,610) 0 0 0
Organization costs 0 0 0 0
Recovery of portfolio basis 15,273 109,531 388,307 1,132,402
Cash held in trust 0 (4,221) (1,171,869) (762,639)
Purchase of investments in
distressed loan portfolios 0 (5,463) (114,183) (366,122)
---------------------------------------------------------
Net cash provided by investing activities (123,337) 99,847 (897,745) 3,641
---------------------------------------------------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 0 18,914 0 0
Distributions to partners 0 (233,422) (344,389) (441,528)
Redemption of partnership units 0 0 0 (10,000)
Contributions from limited partners 0 0 0 0
Deposits in escrow for investor subscriptions 0 0 0 0
Payments for offering expenses 0 0 0 0
Loans to shareholder (133,458) 0 0 0
---------------------------------------------------------
Net cash used in financing activities (133,458) (214,508) (344,389) (451,528)
---------------------------------------------------------
Net (decrease) increase in cash 240,918 (8,192) (603,307) (541,319)
Cash at beginning of period 175,356 23,487 748,107 751,459
---------------------------------------------------------
Cash at end of period $416,274 $15,295 $144,800 $210,140
=========================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Adjustments
For the Year Ended December 31, 1995 and
PAM IV PAM V Eliminations
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($609,972) ($203,473) ($2,434,580)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 3,669 1,031
Depreciation 0 0
Provision for portfolio losses 109,000 26,000
Decrease (increase) in assets:
Due from affiliates (304,681) (492,785)
Other assets (200,728) 23,234
Increase (decrease) in liabilities:
Due to affiliates (501,507) (232,378)
Accounts payable 25,296 1,798
----------------------------- --------------
Net cash provided by operating activities (1,478,923) (876,573) (2,434,580)
----------------------------- --------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment 0 0
Organization costs 0 (49)
Recovery of portfolio basis 3,674,197 483,439 1,087,062
Cash held in trust (6,247,207) (1,014,201)
Purchase of investments in
distressed loan portfolios (4,215,633) (1,911,199) 1,347,518
----------------------------- --------------
Net cash provided by investing activities (6,788,643) (2,442,010) 2,434,580
----------------------------- --------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 0 0
Distributions to partners (1,719,383) (97,836)
Redemption of partnership units 0 0
Contributions from limited partners 5,803,524 3,025,000 (420,000)
Deposits in escrow for investor subscriptions (260,000) (160,000) 420,000
Payments for offering expenses 0 (453,700)
Loans to shareholder 0 0
----------------------------- --------------
Net cash used in financing activities 3,824,141 2,313,464 0
----------------------------- --------------
Net (decrease) increase in cash (4,443,425) (1,005,119) 0
Cash at beginning of period 5,002,648 1,220,917
----------------------------- --------------
Cash at end of period $559,223 $215,798 $0
============================= ==============
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS ProForma
For the Year Ended December 31, 1995 Combined ProForma Adjusted
Balances Adjustments Amounts
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) (2,815,259) $580,464 (2,234,795)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 7,762 (7,762) 0
Depreciation 81,454 81,454
Provision for portfolio losses 135,000 (135,000) 0
Decrease (increase) in assets:
Due from affiliates (891,248) (437,751) (1,329,000)
Other assets (280,681) (280,681)
Increase (decrease) in liabilities:
Due to affiliates 138,200 (281,833) (143,633)
Accounts payable (15,726) (15,726)
--------------- -------------------------------
Net cash provided by operating activities (3,640,499) (281,882) (3,922,381)
--------------- -------------------------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (138,610) (138,610)
Organization costs (49) 49 0
Recovery of portfolio basis 6,890,211 6,890,211
Cash held in trust (9,200,137) (9,200,137)
Purchase of investments in
distressed loan portfolios (5,265,082) (5,265,082)
--------------- -------------------------------
Net cash provided by investing activities (7,713,667) 49 (7,713,618)
--------------- -------------------------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 18,914 18,914
Distributions to partners (2,836,558) 2,836,558 0
Redemption of partnership units (10,000) 10,000 0
Contributions from limited partners 8,408,524 8,408,524
Deposits in escrow for investor subscriptions
Payments for offering expenses (453,700) (453,700)
Loans to shareholder (133,458) (133,458)
--------------- -------------------------------
Net cash used in financing activities 4,993,722 2,846,558 7,840,280
--------------- -------------------------------
Net (decrease) increase in cash (6,360,444) 2,564,725 (3,795,719)
Cash at beginning of period 7,921,974 9,915,685 17,837,659
--------------- -------------------------------
Cash at end of period $1,561,530 $12,480,410 $14,041,940
=============== ===============================
</TABLE>
108
<PAGE>
PERFORMANCE ASSET MANAGEMENT COMPANY
NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
Performance Asset Management Company, a Delaware corporation ("Company"),
was formed on May 7, 1996. Performance Capital Management, Inc., a California
corporation ("PCM"), was formed in January 1992 for the purpose of identifying,
analyzing, negotiating, acquiring, and servicing investments in distressed loan
portfolios. Vincent E. Galewick owns all of the issued and outstanding $.001 par
value common stock of the Company. Mr. Galewick and Michael Cushing own all of
the issued and outstanding no par common stock of PCM; provided, however, Mr.
Galewick is the principal and controlling shareholder of PCM.
Performance Development, Inc., a California corporation ("General
Partner"), is the General Partner of Performance Asset Management Fund, Ltd., a
California Limited Partnership ("PAM"); Performance Asset Management Fund II,
Ltd., a California Limited Partnership ("PAM II"); Performance Asset Management
Fund III, Ltd., a California Limited Partnership ("PAM III"); Performance Asset
Management Fund IV, Ltd., a California Limited Partnership ("PAM IV"); and
Performance Asset Management Fund, Ltd., a California Limited Partnership ("PAM
V") ("PAM Funds"). Mr. Galewick owns all of the issued and outstanding no par
common stock of the General Partner. The General Partner will not be a direct
participant in the merger.
The General Partner is proposing a consolidation by merger of PCM with PAM,
PAM II, PAM III, PAM IV, and PAM V into the Company ("Merger"). The PAM Funds
are each California limited partnerships formed and created to acquire, service
and collect investments in distressed consumer debts. Upon the completion of the
Merger, the Company will continue to acquire, service and collect investments in
distressed consumer debts and intends to use leveraged financing to acquire
additional investments.
Upon Merger, the General Partner and the limited partners ("Partners") will
receive shares of common stock in the Company in return for their partnership
interests in the PAM Funds. The Merger will be accounted for similar to a
pooling of interests, and therefore, no adjustment to the historical carrying
amount of assets and liabilities will be made.
Historical information for the PAM Funds and PCM as of and for the year
ended December 31, 1995 is based on audited financial statements which are
included elsewhere herein. The unaudited pro forma balance sheet and statement
of operations have been prepared assuming 100% partnership participation.
The unaudited pro forma balance sheet as of December 31, 1995, has been
prepared as if the transactions contemplated by the Merger had occurred on
December 31, 1995, and the accompanying unaudited pro forma statements of
operations and cash flows for the year ended December 31, 1995 have been
prepared as if the Merger had occurred on January 1, 1995.
The unaudited pro forma financial statements have been prepared by making
certain adjustments to the historical financial information of PCM and the PAM
Funds. The pro forma information presented is not indicative of the result that
would have occurred had the Merger occurred and the Company operated as a single
entity during the period presented, or of the future operations of the PAM
Funds.
109
<PAGE>
2. Adjusting and ProForma Journal Entries
1995
The pro forma financial statements include the following
adjustments and reclassifications:
Dr Cr
----------- -----------
A Investments in Distressed Assets $2,697,193
Due From Affiliate $21,089
General Partner Capital $179,286
Limited Partners Capital $1,613,565
Retained Earnings $4,468,955
To eliminate cumulative effect of
related party activity.
B Investment in Distressed Assets $1,347,518
Portfolio Sales $1,347,518
To eliminate related party portfolio
acquisition fees for the year.
C Investment in Distressed Assets $1,087,062
Portfolio Basis Recovery 1,087,062
To eliminate related party collection
revenue for the year.
*D Investment in Distressed Assets $776,257
Provision for portfolio losses $135,000
Retained Earnings $641,257
To reverse current provision and
allowance for portfolio losses.
E Due to Affiliates $654,035
Due from Affiliates $654,035
To eliminate intercompany balances.
F Servicing Fees $306,607
Collection Expense $306,607
To eliminate related party servicing
fees.
*G G&A Expense $4,000
Provision for Income Taxes $4,000
To reclassify income tax expense
* ProForma journal entries
110
<PAGE>
2. Adjusting and ProForma Journal Entries
1995
The pro forma financial statements include the following
adjustments and reclassifications:
Dr Cr
----------- -----------
*H Due from Affiliates $796,323
Management fee expense $437,751
Retained Earnings $358,572
To reverse management fees charged by
general partner.
*I General Partner Capital $1,371,781
Limited Partners Capital $36,821,552
Common Stock $35,449,771
To record the effect of the exchange of
partnership units for common stock as if
it had taken place at December 31, 1995.
*J Cash $12,480,410
Due to Affiliates $1,238,683
Common Stock $13,712,410
Retained Earnings $6,683
To reverse partnership distributions
through December 31, 1995.
*K Organization Costs $15,079
Retained Earnings $22,792
Amortization Expense $7,762
General and Administration Expense $49
To eliminate unamortized organization
costs.
L Portfolio Sales $3,651,388
Cost of Portfolio Sales $3,651,388
To eliminate related party portfolio
sales.
* ProForma journal entries
111
<PAGE>
2. Adjusting and ProForma Journal Entries
1995
The pro forma financial statements include the following
adjustments and reclassifications:
Dr Cr
----------- -----------
M Prof and Mgmt Fees $1,014,625
Prof Fees $1,014,625
To reclassify professional fees.
*N Proforma net income adjustment $580,464
Retained Earnings $580,464
To record the net income from ProForma
adjustments to Retained Earnings
* ProForma journal entries
112
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial statements and explanatory notes are
presented to indicate the results of the Merger as described in the Summary of
this document on PCM's and the Partnerships' historical financial positions,
results of operations, and cash flows. The merger will qualify as a tax-free
exchange and will be accounted for as a pooling of interests as it satisfies the
criteria of APB Opinion No. 16 - Business Combinations. There has been no
financial activity in the Company. Therefore, it is not included in the pro
forma financial statements.
Each of these pro forma financial statements reflect the merger of PCM and the
Partnerships into the Company, as described in the summary of this document.
PCM and the Partnerships utilize GAAP. The accompanying unaudited pro forma
financial statements include all adjustments which are, in the opinion of the
Company, necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented.
The pro forma financial statements should be read and considered in conjunction
with the separate historical financial statements and notes thereto of the
Company included elsewhere herein.
The pro forma financial statements are not necessarily indicative of the results
which would have occurred had the merger been in effect on the dates and for the
periods indicated or which may result in the future.
113
<PAGE>
PAMCO
PROFORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PCM PAM PAM II PAM III PAM IV
BALANCE SHEETS
December 31, 1994
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents $175,356 $23,487 $748,107 $751,459 $5,002,648
Investments in distressed
loan portfolios, net 42,678 810,159 1,920,842 4,408,633 9,269,331
Receivable from West Capital 0 559,730 778,565 927,540 1,937,718
Due from affiliates 101 0 12,876 0 376,050
Loan to shareholder 96,620 0 0 0 0
Other assets 177,947 0 80,069 101,579 18,425
Property and equipment, net 324,812 0 0 0 0
Organization costs, net 0 1,463 2,799 3,235 10,793
------------------------------------------------------------------------------
Total Assets $817,514 $1,394,839 $3,543,258 $6,192,446 $16,614,965
==============================================================================
LIABILITIES AND PARTNERS' CAPITAL /
SHAREHOLDERS' EQUITY
Accounts payable $194,687 $35,249 $2,280 $3,365 $19,927
Due to affiliates 619,867 176,220 101,198 370,609 509,757
Note payable to affiliate 95,855 158,000 0 0 0
Deposits in escrow for investor subscriptions 0 0 0 0 260,000
------------------------------------------------------------------------------
Total liabilities 910,409 369,469 103,478 373,974 789,684
General partner's capital 0 (349,055) (313,476) (271,487) (282,936)
Limited partners' capital 0 1,374,425 3,753,256 6,089,959 16,108,217
Common stock 100 0 0 0 0
Retained earnings (92,995) 0 0 0 0
------------------------------------------------------------------------------
Total partners' capital /
shareholders' equity (92,895) 1,025,370 3,439,780 5,818,472 15,825,281
------------------------------------------------------------------------------
Total Liabilities and
Partner's Capital /
Shareholders' Equity $817,514 $1,394,839 $3,543,258 $6,192,446 $16,614,965
==============================================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
PAM V Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents $1,220,917 $7,921,974 (K) $9,915,685 $17,837,659
Investments in distressed
loan portfolios, net 437,971 (A) (425,050) 13,915,678 (D) 641,257 14,556,935
(B) (1,941,105)
(C) (607,781)
Receivable from West Capital 1,014,882 5,218,435 5,218,435
Due from affiliates 100,032 (A) 21,089 (358,572)(H) 358,572 0
(E) (868,720)
Loan to shareholder 0 96,620 96,620
Other assets 23,234 401,254 401,254
Property and equipment, net 0 324,812 324,812
Organization costs, net 4,502 22,792 (L) (22,792) 0
---------- ------------ ------------ ------------ ------------
Total Assets $2,801,538 ($3,821,567) $27,542,993 $10,892,722 $38,435,715
========== ============ ============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL /
SHAREHOLDERS' EQUITY
Accounts payable $800 $256,308 $256,308
Due to affiliates 234,028 (E) (868,720) 1,142,959 (K) (956,850) 186,109
Note payable to affiliate 0 253,855 253,855
Deposits in escrow for investor subscriptions 160,000 420,000 (J) (420,000) 0
---------- ------------ ------------ ------------ ------------
Total liabilities 394,828 (868,720) 2,073,122 (1,376,850) 696,272
General partner's capital (13,585)(A) 140,591 (1,089,948)(I) 1,089,948 0
Limited partners' capital 2,420,295 (A) 1,265,301 31,011,453 (I) (31,011,453) 0
Common stock 0 100 (I) 29,921,505 41,207,390
(K) 10,865,785
(J) 420,000
Retained earnings 0 (A) (1,809,853) (4,451,734)(K) 6,750 (3,467,947)
(B) (1,941,105) (L) (24,957)
(C) (607,781) (P) 819,737
(D) 182,257
---------- ------------ ------------ ------------ ------------
Total partners' capital /
shareholders' equity 2,406,710 (2,952,847) 25,469,871 12,269,572 37,739,443
---------- ------------ ------------ ------------ ------------
Total Liabilities and
Partner's Capital /
Shareholders' Equity $2,801,538 ($3,821,567) $27,542,993 $10,892,722 $38,435,715
========== ============ ============ ============ ============
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
For the Year ended December 31, 1994
PCM PAM PAM II PAM III PAM IV
<S> <C> <C> <C> <C> <C>
Portfolio sales $10,382,393 $0 $0 $0 $0
Collection revenue 1,069,113 0 0 0 0
Servicing fees 517,089 0 0 0 0
Portfolio collections 0 735,412 1,507,295 1,870,385 2,078,150
Less: portfolio basis recovery (29,164) (530,204) (1,048,403) (1,854,725) (2,066,592)
---------------------------------------------------------------------------------
Net investment income 11,939,431 205,208 458,892 15,660 11,558
Cost of portfolio sales 8,068,979 0 0 0 0
Personnel and related benefits 2,928,201 0 0 0 0
Professional and management fees 682,154 0 0 0 0
Collection expense 280,136 0 27,191 12,076 525,073
Management fee expense 0 17,584 70,022 121,205 144,633
Professional fees 0 0 5,957 6,856 60,949
Provision for portfolio losses 0 0 0 0 405,000
Amortization 0 798 1,107 1,157 3,605
G & A expense 296,663 3,159 7,412 6,990 6,321
---------------------------------------------------------------------------------
Total operating expenses 12,256,133 21,541 111,689 148,284 1,145,581
---------------------------------------------------------------------------------
Income (Loss) from operations (316,702) 183,667 347,203 (132,624) (1,134,023)
Interest income (expense), net 725 (13,095) 22,912 9,437 96,928
Other income 0 0 9,250 900 900
---------------------------------------------------------------------------------
Income (Loss) before provision for income taxes (315,977) 170,572 379,365 (122,287) (1,036,195)
Provision for income taxes 800 0 0 0 0
---------------------------------------------------------------------------------
Net income (Loss) ($316,777) $170,572 $379,365 ($122,287) ($1,036,195)
=================================================================================
<CAPTION>
STATEMENTS OF OPERATIONS Adjustments ProForma
For the Year ended December 31, 1994 and Combined ProForma Adjusted
PAM V Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C> <C>
Portfolio sales $0 (B) ($1,941,105) $372,309 $372,309
(M) (8,068,979)
Collection revenue 0 1,069,113 1,069,113
Servicing fees 0 (F) (514,363) 2,726 2,726
Portfolio collections 38,117 0 6,229,359 6,229,359
Less: portfolio basis recovery (38,117)(C) (607,781) (6,174,986) (6,174,986)
---------- ----------- ----------- -------- -----------
Net investment income 0 (11,132,228) 1,498,521 1,498,521
Cost of portfolio sales 0 (M) (8,068,979) 0 0
Personnel and related benefits 0 0 2,928,201 2,928,201
Professional and management fees 0 (N) 82,453 764,607 764,607
Collection expense 59,052 (F) (514,363) 389,165 389,165
Management fee expense 5,128 0 358,572 (H) (358,572) 0
Professional fees 8,691 (N) (82,453) 0 0
Provision for portfolio losses 54,000 459,000 (D) (459,000) 0
Amortization 617 (O) (7,284) 0 0
G & A expense 2,072 (O) 7,284 329,901 (L) (2,165) 323,736
(G) (4,000)
---------- ----------- ----------- -------- -----------
Total operating expenses 129,560 (8,583,342) 5,229,446 (823,737) 4,405,709
---------- ----------- ----------- -------- -----------
Income (Loss) from operations (129,560) (2,548,886) (3,730,925) 823,737 (2,907,188)
Interest income (expense), net 9,542 126,449 126,449
Other income 0 11,050 11,050
---------- ----------- ----------- -------- -----------
Income (Loss) before provision for income taxes (120,018) (2,548,886) (3,593,426) 823,737 (2,769,689)
Provision for income taxes 0 800 (G) 4,000 4,800
---------- ----------- ----------- -------- -----------
Net income (Loss) ($120,018) ($2,548,886) ($3,594,226)(P) $819,737 ($2,774,489)
========== =========== =========== ======== ===========
</TABLE>
115
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
For the Year ended December 31, 1994
PCM PAM PAM II PAM III PAM IV
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($316,777) $170,572 $379,365 ($122,287) ($1,036,195)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 0 798 1,107 1,157 3,605
Depreciation 50,559 0 0 0 0
Gain on repurchase of
limited partnership units 0 0 (9,250) 0 0
Provision for portfolio losses 0 0 0 0 405,000
Decrease (increase) in assets:
Due from affiliates 526,530 111,857 76,912 8,695 (361,735)
Other assets (148,921) 121,268 238,071 (17,991) (18,425)
Increase (decrease) in liabilities:
Due to affiliates 150,927 109,959 12,509 269,438 509,757
Accounts payable 115,408 23,531 (12,664) (7,304) 14,127
-------------------------------------------------------------------------
Net cash provided by operating activities 377,726 537,985 686,050 131,708 (483,866)
-------------------------------------------------------------------------
Cash flows provided by (used in) investing
activities:
Purchase of property and equipment (168,596) 0 0 0 0
Organization costs 0 0 0 0 0
Recovery of portfolio basis 29,164 530,204 1,048,403 1,854,725 2,066,592
Receivable from West Capital 0 (280,128) (401,259) (25,103) (1,937,718)
Purchase of investments in
Distressed Loan Portfolios (71,842) (67,088) (854,139) (214,445) (9,804,990)
-------------------------------------------------------------------------
Net cash provided by investing activities (211,274) 182,988 (206,995) 1,615,177 (9,676,116)
-------------------------------------------------------------------------
Cash flows provided by (used in) financing
activities:
Increase in payable to affiliate (4,145) 158,000 0 0 0
Distributions to partners 0 (875,000) (1,271,778) (1,484,583) (1,704,784)
Redemption of partnership units 0 0 (50,750) 0 0
Contributions from investors 0 0 0 0 14,274,931
Deposits in escrow for
investor subscriptions 0 0 0 0 (32,500)
Payments for offering expenses 0 0 0 0 0
Loans to shareholder (96,620) 0 0 0 0
-------------------------------------------------------------------------
Net cash used in financing activities (100,765) (717,000) (1,322,528) (1,484,583) 12,537,647
-------------------------------------------------------------------------
Net (decrease) increase in cash 65,687 3,973 (843,473) 262,302 2,377,665
Cash at beginning of period 109,669 19,514 1,591,580 489,157 2,624,983
-------------------------------------------------------------------------
Cash at end of period $175,356 $23,487 $748,107 $751,459 $5,002,648
=========================================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
PAM V Eliminations Balances Adjustments Amounts
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($120,018) ($2,548,886) ($3,594,226) $819,737 ($2,774,489)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 617 7,284 (7,284) 0
Depreciation 0 50,559 50,559
Gain on repurchase of
limited partnership units 0 (9,250) (9,250)
Provision for portfolio losses 54,000 459,000 (459,000) 0
Decrease (increase) in assets:
Due from affiliates (90,389) 271,870 (358,572) (86,702)
Other assets (23,234) 150,768 150,768
Increase (decrease) in liabilities:
Due to affiliates 234,028 1,286,618 (539,165) 747,453
Accounts payable 800 133,898 133,898
---------- ------------ ------------ ------------ ------------
Net cash provided by operating activities 55,804 (2,548,886) (1,243,479) (544,284) (1,787,763)
---------- ------------ ------------ ------------ ------------
Cash flows provided by (used in) investing
activities:
Purchase of property and equipment 0 (168,596) (168,596)
Organization costs (5,119) (5,119) 5,119 0
Recovery of portfolio basis 38,117 607,781 6,174,986 6,174,986
Receivable from West Capital (1,014,882) (3,659,090) (3,659,090)
Purchase of investments in
Distressed Loan Portfolios (539,731) 1,941,105 (9,611,130) (9,611,130)
---------- ------------ ------------ ------------ ------------
Net cash provided by investing activities (1,521,615) 2,548,886 (7,268,949) 5,119 (7,263,830)
---------- ------------ ------------ ------------ ------------
Cash flows provided by (used in) financing
activities:
Increase in payable to affiliate 0 153,855 153,855
Distributions to partners (15,833) (5,351,978) 5,351,978 0
Redemption of partnership units 0 (50,750) 50,750 0
Contributions from investors 2,975,000 127,500 17,377,431 17,377,431
Deposits in escrow for
investor subscriptions 160,000 (127,500) 0 0
Payments for offering expenses (432,439) (432,439) (432,439)
Loans to shareholder 0 (96,620) (96,620)
---------- ------------ ------------ ------------ ------------
Net cash used in financing activities 2,686,728 0 11,599,499 5,402,728 17,002,227
---------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash 1,220,917 0 3,087,071 4,863,563 7,950,634
Cash at beginning of period 0 0 4,834,903 5,052,122 9,887,025
---------- ------------ ------------ ------------ ------------
Cash at end of period $1,220,917 $0 $7,921,974 $9,915,685 $17,837,659
========== ============ ============ ============ ============
</TABLE>
116
<PAGE>
PERFORMANCE ASSET MANAGEMENT COMPANY
NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
Performance Asset Management Company, a Delaware corporation ("Company"),
was formed on May 7, 1996. Performance Capital Management, Inc., a California
corporation ("PCM"), was formed in January 1992 for the purpose of identifying,
analyzing, negotiating, acquiring, and servicing investments in distressed loan
portfolios. Vincent E. Galewick owns all of the issued and outstanding $.001 par
value common stock of the Company. Mr. Galewick and Michael Cushing own all of
the issued and outstanding no par common stock of PCM; provided, however, Mr.
Galewick is the principal and controlling shareholder of PCM.
Performance Development, Inc., a California corporation ("General
Partner"), is the General Partner of Performance Asset Management Fund, Ltd., a
California Limited Partnership ("PAM"); Performance Asset Management Fund II,
Ltd., a California Limited Partnership ("PAM II"); Performance Asset Management
Fund III, Ltd., a California Limited Partnership ("PAM III"); Performance Asset
Management Fund IV, Ltd., a California Limited Partnership ("PAM IV"); and
Performance Asset Management Fund, Ltd., a California Limited Partnership ("PAM
V") ("PAM Funds"). Mr. Galewick owns all of the issued and outstanding no par
common stock of the General Partner. The General Partner will not be a direct
participant in the merger.
The General Partner is proposing a consolidation by merger of PCM with PAM,
PAM II, PAM III, PAM IV, and PAM V into the Company ("Merger"). The PAM Funds
are each California limited partnerships formed and created to acquire, service
and collect investments in distressed consumer debts. Upon the completion of the
Merger, the Company will continue to acquire, service and collect investments in
distressed consumer debts and intends to use leveraged financing to acquire
additional investments.
Upon Merger, the General Partner and the limited partners ("Partners") will
receive shares of common stock in the Company in return for their partnership
interests in the PAM Funds. The Merger will be accounted for similar to a
pooling of interests, and therefore, no adjustment to the historical carrying
amount of assets and liabilities will be made.
Historical information for the PAM Funds and PCM as of and for the year
ended December 31, 1994 is based on audited financial statements which are
included elsewhere herein. The unaudited pro forma balance sheet and statement
of operations have been prepared assuming 100% partnership participation.
The unaudited pro forma balance sheet as of December 31, 1994, has been
prepared as if the transactions contemplated by the Merger had occurred on
December 31,
117
<PAGE>
1994, and the accompanying unaudited pro forma statements of operations and cash
flows for the year ended December 31, 1994 have been prepared as if the Merger
had occurred on January 1, 1994.
The unaudited pro forma financial statements have been prepared by making
certain adjustments to the historical financial information of PCM and the PAM
Funds. The pro forma information presented is not indicative of the result that
would have occurred had the Merger occurred and the Company operated as a single
entity during the period presented, or of the future operations of the PAM
Funds.
118
<PAGE>
2. Adjusting and ProForma Journal Entries
1994
The pro forma financial statements include the following adjustments and
reclassifications:
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
A Investments in Distressed Assets $425,050
Due From Affiliate $21,089
General Partner Capital $140,591
Limited Partners Capital $1,265,301
Retained Earnings $1,809,853
To eliminate the cumulative effect of related party activity
B Investment in Distressed Assets $1,941,105
Portfolio Sales $1,941,105
To eliminate related party portfolio acquisition fees for the year.
C Investment in Distressed Assets $607,781
Portfolio Basis Recovery $607,781
To eliminate related party collection revenue for the year.
*D Investment in Distressed Assets $641,257
Provision for portfolio losses $459,000
Retained Earnings $182,257
To reverse current provision and allowance for portfolio losses.
E Due to Affiliates $868,720
Due from Affiliates $868,720
To eliminate intercompany balances.
F Servicing Fees $514,363
Collection Expense $514,363
To eliminate related party servicing fees.
</TABLE>
* ProForma journal entries
119
<PAGE>
2. Adjusting and ProForma Journal Entries
1994
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
*G G&A Expense $4,000
Provision for Income Taxes $4,000
To reclassify income tax expense
*H Due from Affiliates $358,572
Management fee expense $358,572
To reverse management fees charged by general partner.
*I General Partner Capital $1,089,948
Limited Partners Capital $31,011,453
Common Stock $29,921,505
To record the effect of the exchange of partnership units for
common stock as if it had taken place at December 31, 1994.
*J Deposit in Escrow $420,000
Common Stock $420,000
To reclassify deposits in escrow to common stock.
*K Cash $9,915,685
Due to Affiliates $956,850
Common Stock $10,865,785
Retained Earnings $6,750
To reverse partnership distributions through December 31, 1994.
</TABLE>
* ProForma journal entries
120
<PAGE>
2. Adjusting and ProForma Journal Entries
1994
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
*L Organization Costs $22,792
G & A expense $2,165
Retained Earnings $24,957
To eliminate unamortized organization costs.
M Portfolio Sales $8,068,979
Cost of Portfolio Sales $8,068,979
To eliminate related party portfolio sales.
N Prof and Mgmt Fees $82,453
Prof Fees $82,453
To reclassify professional fees.
O Amortization Expense $7,284
G & A expense $7,284
To reclassify amortization expense.
*P ProForma net income adjustment $819,737
Retained Earnings $819,737
To record the net income from ProForma adjustments
to Retained Earnings
</TABLE>
* ProForma journal entries
121
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial statements and explanatory notes are
presented to indicate the results of the Merger as described in the Summary of
this document on PCM's and the Partnerships' historical financial positions,
results of operations, and cash flows. The merger will qualify as a tax-free
exchange and will be accounted for as a pooling of interests as it satisfies the
criteria of APB Opinion No. 16 - Business Combinations. There has been no
financial activity in the Company. Therefore, it is not included in the pro
forma financial statements.
Each of these pro forma financial statements reflect the merger of PCM and the
Partnerships into the Company, as described in the summary of this document.
PCM and the Partnerships utilize GAAP. The accompanying unaudited pro forma
financial statements include all adjustments which are, in the opinion of the
Company, necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented.
The pro forma financial statements should be read and considered in conjunction
with the separate historical financial statements and notes thereto of the
Company included elsewhere herein.
The pro forma financial statements are not necessarily indicative of the results
which would have occurred had the merger been in effect on the dates and for the
periods indicated or which may result in the future.
122
<PAGE>
PAMCO
PROFORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE SHEETS PCM PAM I PAM II PAM III PAM IV
December 31, 1993
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and equivalents $ 109,669 $ 19,514 $ 1,591,580 $ 489,157 $ 2,624,983
Investments in distressed loan portfolios, net 0 1,273,275 2,115,107 6,048,913 1,935,931 (B)
(C)
Receivable from West Capital 0 279,602 93,617 902,437 0
Due from affiliates 526,631 158,919 89,788 8,695 14,315 (B)
(E)
Other assets 29,026 121,268 601,828 83,588 0
Property and equipment, net 206,775 0 0 0 0
Organization costs, net 0 2,261 3,906 4,392 14,398
---------------------------------------------------------------------
Total Assets $ 872,101 $ 1,854,839 $ 4,495,826 $ 7,537,182 $ 4,589,627
=====================================================================
LIABILITIES AND PARTNERS' CAPITAL /SHAREHOLDERS' EQUITY
Accounts payable $ 79,279 $ 58,780 $ 14,944 $ 10,669 $ 5,800
Due to affiliates 468,940 66,261 88,689 101,171 0 (E)
Note payable to affiliate 100,000 0 0 0 0
Deposits in escrow for investor subscriptions 0 0 0 0 292,500
---------------------------------------------------------------------
Total liabilities 648,219 125,041 103,633 111,840 298,300
General partner's capital 0 (278,612) (224,234) (110,875) (4,795 (A)
Limited partners' capital 0 2,008,410 4,616,427 7,536,217 4,296,122 (A)
Common stock 100 0 0 0 0
Retained earnings 223,782 0 0 0 0 (A)
(B)
(C)
---------------------------------------------------------------------
Total partners' capital /shareholders' equity 223,882 1,729,798 4,392,193 7,425,342 4,291,327
---------------------------------------------------------------------
Total Liabilities and
Partners' Capital /Shareholders' Equity $ 872,101 $ 1,854,839 $ 4,495,826 $ 7,537,182 $ 4,589,627
=====================================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C>
Cash and equivalents $ 4,834,903 (J) $ 5,052,122 $ 9,887,025
Investments in distressed loan portfolios, net (741,267) 10,583,662 (D) 182,257 10,765,919
(48,297)
Receivable from West Capital 1,275,656 1,275,656
Due from affiliates 21,089 94,376 (G) 314,806 826,867
(725,061) (J) 417,685
Other assets 835,710 835,710
Property and equipment, net 206,775 206,775
Organization costs, net 24,957 (K) (24,957) 0
------------ ------------ ------------ ------------
Total Assets ($ 1,493,536) $ 17,856,039 $ 5,941,913 $ 23,797,952
============ ============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL /SHAREHOLDERS' EQUITY
Accounts payable $ 169,472 $ 169,472
Due to affiliates (725,061) 0 0
Note payable to affiliate 100,000 100,000
Deposits in escrow for investor subscriptions 292,500 (I) (292,500) 0
------------ ------------ ------------ ------------
Total liabilities (725,061) 561,972 (292,500) 269,472
General partner's capital 66,134 (552,382)(H) 552,382 0
Limited partners' capital 595,196 19,052,372 (H) (19,052,372) 0
Common stock 100 (H) 18,499,990 24,262,397
(I) 292,500
(J) 5,469,807
Retained earnings (661,330) (1,206,023)(D) 182,257 (733,917)
(720,178) (O) 289,849
(48,297)
------------ ------------ ------------ ------------
Total partners' capital /shareholders' equity (768,475) 17,294,067 6,234,413 23,528,480
------------ ------------ ------------ ------------
Total Liabilities and
Partners' Capital /Shareholders' Equity ($ 1,493,536) $ 17,856,039 $ 5,941,913 $ 23,797,952
============ ============ ============ ============
</TABLE>
123
<PAGE>
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1993
<TABLE>
<CAPTION>
PCM PAM I PAM II PAM III PAM IV
<S> <C> <C> <C> <C> <C>
Portfolio sales $ 2,101,225 $ 0 $ 0 $ 0 $ 0 (B)
(L)
Collection revenue 323,569 0 0 0 0
Portfolio collections 0 1,281,431 1,992,701 932,049 214,718
Less: portfolio basis recovery 0 (1,139,182) (1,992,201) (932,049) (214,718)(C)
------------------------------------------------------------------------------
Net investment income 2,424,794 142,249 500 0 0
Cost of portfolio sales 1,375,163 0 0 0 0 (L)
Personnel and related benefits 626,377 0 0 0 0
Professional and management fees 32,663 0 0 0 0 (M)
Collection expense 67,148 38,315 7,685 14,431 0
Management fee expense 0 36,792 100,847 156,421 20,746
Professional fees 0 13,368 13,528 16,126 0 (M)
Amortization 0 798 1,107 1,144 20,827 (N)
G & A expense 99,525 2,801 3,529 41,096 16,722 (N)
------------------------------------------------------------------------------
Total operating expenses 2,200,876 92,074 126,696 229,218 58,295
------------------------------------------------------------------------------
Income (Loss) from operations 223,918 50,175 (126,196) (229,218) (58,295)
Interest income (expense), net 664 3,987 53,006 44,162 10,348
Other income 0 2,000 10,111 5,250 0
------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 224,582 56,162 (63,079) (179,806) (47,947)
Provision for income taxes 800 0 0 0 0
------------------------------------------------------------------------------
Net income (loss) $ 223,782 $ 56,162 ($ 63,079) ($ 179,806) ($ 47,947)
==============================================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C>
Portfolio sales ($ 720,178) $ 5,884 $ 5,884
($1,375,163)
Collection revenue 323,569 323,569
Portfolio collections 4,420,899 4,420,899
Less: portfolio basis recovery (48,297) (4,326,447) (4,326,447)
----------- ----------- ----------- -----------
Net investment income (2,143,638) 423,905 0 423,905
Cost of portfolio sales (1,375,163) 0 0
Personnel and related benefits 626,377 626,377
Professional and management fees 43,022 75,685 75,685
Collection expense 127,579 127,579
Management fee expense 314,806 (G) (314,806) 0
Professional fees (43,022) 0 0
Amortization (23,876) 0 0
G & A expense 23,876 187,549 (K) 24,957 209,306
(F) (3,200)
----------- ----------- ----------- -----------
Total operating expenses (1,375,163) 1,331,996 (293,049) 1,038,947
----------- ----------- ----------- -----------
Income (Loss) from operations (768,475) (908,091) 293,049 (615,042)
Interest income (expense), net 112,167 112,167
Other income 17,361 17,361
----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes (768,475) (778,563) 293,049 (485,514)
Provision for income taxes 800 (F) 3,200 4,000
----------- ----------- ----------- -----------
Net income (loss) ($ 768,475) ($ 779,363)(O) $ 289,849 ($ 489,514)
=========== =========== =========== ===========
</TABLE>
124
<PAGE>
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1993
<TABLE>
<CAPTION>
PCM PAM I PAM II PAM III PAM IV
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 223,782 $ 56,162 ($ 63,079) ($ 179,806) ($ 47,947)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 0 798 1,107 1,144 20,827
Depreciation 14,615 0 0 0 0
Due from affiliates (526,531) 138,261 (89,788) 182,863 (14,315)
Other assets (29,026) (8,496) (518,829) (83,588) (102,351)
Increase (decrease) in liabilities: 0 0 0 0 0
Due to affiliates 468,940 66,261 2,569 101,171 0
Accounts payable 79,279 (245,961) 14,944 10,669 5,800
-----------------------------------------------------------------------
Net cash provided by operating activities 231,059 7,025 (653,076) 32,453 (137,986)
-----------------------------------------------------------------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (221,390) 0 0 0 0
Organization costs 0 0 0 (400) 0
Recovery of portfolio basis 0 1,139,182 1,992,201 932,049 214,718
Receivable from West Capital 0 (113,097) 0 (902,437) 0
Purchase of investments in
Distressed Loan Portfolios 0 (53,322) (354,485) (6,367,675) (2,150,649)
-----------------------------------------------------------------------
Net cash provided by investing activities (221,390) 972,763 1,637,716 (6,338,463) (1,935,931)
-----------------------------------------------------------------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 100,000 0 0 0 0
Distributions to partners 0 (1,400,000) (1,853,083) (923,767) (40,425)
Redemption of partnership units 0 (10,000) (35,000) 0 0
Contributions from limited partners 0 0 0 6,680,777 4,446,825
Deposits in escrow for investor subscriptions 0 0 0 (322,000) 292,500
Net cash used in financing activities 100,000 (1,410,000) (1,888,083) 5,435,010 4,698,900
-----------------------------------------------------------------------
Net (decrease) increase in cash 109,669 (430,212) (903,443) (871,000) 2,624,983
Cash at beginning of period 0 449,726 2,495,023 1,360,157 0
-----------------------------------------------------------------------
Cash at end of period $ 109,669 $ 19,514 $ 1,591,580 $ 489,157 $ 2,624,983
=======================================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
Eliminations Balances Adjustments Balances
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 768,475) ($ 779,363) $ 289,849 ($ 489,514)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 23,876 (23,876) 0
Depreciation 14,615 14,615
Due from affiliates (21,089) (330,599) (330,599)
Other assets (742,290) (742,290)
Increase (decrease) in liabilities: 0 0
Due to affiliates 638,941 (732,491) (93,550)
Accounts payable (135,269) (135,269)
------------ ------------ ------------ ------------
Net cash provided by operating activities (789,564) (1,310,089) (466,518) (1,776,607)
------------ ------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (221,390) (221,390)
Organization costs (400) 48,833 48,433
Recovery of portfolio basis 48,297 4,326,447 4,326,447
Receivable from West Capital (1,015,534) (1,015,534)
Purchase of investments in
Distressed Loan Portfolios 741,267 (8,184,864) (8,184,864)
------------ ------------ ------------ ------------
Net cash provided by investing activities 789,564 (5,095,741) 48,833 (5,046,908)
------------ ------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate 100,000 100,000
Distributions to partners (4,217,275) 4,217,275 0
Redemption of partnership units (45,000) 45,000 0
Contributions from limited partners (29,500) 11,098,102 11,098,102
Deposits in escrow for investor subscriptions 29,500 0 0
Net cash used in financing activities 0 6,935,827 4,262,275 11,198,102
------------ ------------ ------------ ------------
Net (decrease) increase in cash 0 529,997 3,844,590 4,374,587
Cash at beginning of period 4,304,906 1,207,532 5,512,438
------------ ------------ ------------ ------------
Cash at end of period $ 0 $ 4,834,903 $ 5,052,122 $ 9,887,025
============ ============ ============ ============
</TABLE>
125
<PAGE>
PERFORMANCE ASSET MANAGEMENT COMPANY
NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
Performance Asset Management Company, a Delaware corporation ("Company"),
was formed on May 7, 1996. Performance Capital Management, Inc., a California
corporation ("PCM"), was formed in January 1992 for the purpose of identifying,
analyzing, negotiating, acquiring, and servicing investments in distressed loan
portfolios. Vincent E. Galewick owns all of the issued and outstanding $.001 par
value common stock of the Company. Mr. Galewick and Michael Cushing own all of
the issued and outstanding no par common stock of PCM; provided, however, Mr.
Galewick is the principal and controlling shareholder of PCM.
Performance Development, Inc., a California corporation ("General
Partner"), is the General Partner of Performance Asset Management Fund, Ltd., a
California Limited Partnership ("PAM"); Performance Asset Management Fund II,
Ltd., a California Limited Partnership ("PAM II"); Performance Asset Management
Fund III, Ltd., a California Limited Partnership ("PAM III"); Performance Asset
Management Fund IV, Ltd., a California Limited Partnership ("PAM IV"); and
Performance Asset Management Fund, Ltd., a California Limited Partnership ("PAM
V") ("PAM Funds"). Mr. Galewick owns all of the issued and outstanding no par
common stock of the General Partner. The General Partner will not be a direct
participant in the merger.
The General Partner is proposing a consolidation by merger of PCM with PAM,
PAM II, PAM III, PAM IV, and PAM V into the Company ("Merger"). The PAM Funds
are each California limited partnerships formed and created to acquire, service
and collect investments in distressed consumer debts. Upon the completion of the
Merger, the Company will continue to acquire, service and collect investments in
distressed consumer debts and intends to use leveraged financing to acquire
additional investments.
Upon Merger, the General Partner and the limited partners ("Partners") will
receive shares of common stock in the Company in return for their partnership
interests in the PAM Funds. The Merger will be accounted for similar to a
pooling of interests, and therefore, no adjustment to the historical carrying
amount of assets and liabilities will be made.
Historical information for the PAM Funds and PCM as of and for the year
ended December 31, 1993 is based on audited financial statements which are
included elsewhere herein. The unaudited pro forma balance sheet and statement
of operations have been prepared assuming 100% partnership participation.
The unaudited pro forma balance sheet as of December 31, 1993, has been
prepared as if the transactions contemplated by the Merger had occurred on
December 31,
126
<PAGE>
1993, and the accompanying unaudited pro forma statements of operations and cash
flows for the year ended December 31, 1993 have been prepared as if the Merger
had occurred on January 1, 1993.
The unaudited pro forma financial statements have been prepared by making
certain adjustments to the historical financial information of PCM and the PAM
Funds. The pro forma information presented is not indicative of the result that
would have occurred had the Merger occurred and the Company operated as a single
entity during the period presented, or of the future operations of the PAM
Funds.
127
<PAGE>
2. Adjusting and ProForma Journal Entries
1993
The pro forma financial statements include the following adjustments and
reclassifications:
<TABLE>
<CAPTION>
Dr Cr
---------- ----------
<S> <C> <C>
A General Partner Capital $66,134
Limited Partners Capital $595,196
Retained Earnings $661,330
To eliminate the cumulative effect of related party activity
B Investment in Distressed Assets $741,267
Due from Affiliate $21,089
Portfolio Sales $720,178
To eliminate related party portfolio acquisition fees for the year.
C Investment in Distressed Assets $48,297
Portfolio Basis Recovery $48,297
To eliminate related party collection revenue for the year.
*D Investment in Distressed Assets $182,257
Retained Earnings $182,257
To reverse allowance for portfolio losses.
E Due to Affiliates $725,061
Due from Affiliates $725,061
To eliminate intercompany balances.
*F G&A Expense $3,200
Provision for Income Taxes $3,200
To reclassify income tax expense.
</TABLE>
* ProForma journal entries
128
<PAGE>
2. Adjusting and ProForma Journal Entries
1993
<TABLE>
<CAPTION>
Dr Cr
----------- -----------
<S> <C> <C>
*G Due from Affiliates $314,806
Management fee expense $314,806
To reverse management fees charged by the general partner
*H General Partner Capital $552,382
Limited Partners Capital $19,052,372
Common Stock $18,499,990
To record the effect of the exchange of partnership units for
common stock as if it had taken place at December 31, 1993
*I Deposit in Escrow $292,500
Common Stock $292,500
To reclassify deposits in escrow to common stock.
*J Cash $5,052,122
Due from Affiliates $417,685
Common Stock $5,469,807
To reverse partnership distributions through December 31, 1993.
*K Organization Costs $24,957
G & A expense $24,957
To expense unamortized organization costs.
</TABLE>
* ProForma journal entries
129
<PAGE>
2. Adjusting and ProForma Journal Entries
1993
<TABLE>
<CAPTION>
Dr Cr
---------- -----------
<S> <C> <C>
L Portfolio Sales $1,375,163
Cost of Portfolio Sales $1,375,163
To eliminate related party portfolio sales.
M Prof and Mgmt Fees $43,022
Prof Fees $43,022
To reclassify professional fees.
N Amortization Expense $23,876
G & A expense $23,876
To reclassify amortization expense
*O ProForma net income adjustment $289,849
Retained Earnings $289,849
To record the net income from Proforma adjustments
to retained earnings.
</TABLE>
* ProForma journal entries
130
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial statements and explanatory notes are
presented to indicate the results of the Merger as described in the Summary of
this document on PCM's and the Partnerships' historical financial positions,
results of operations, and cash flows. The merger will qualify as a tax-free
exchange and will be accounted for as a pooling of interests as it satisfies the
criteria of APB Opinion No. 16 - Business Combinations. There has been no
financial activity in the Company. Therefore, it is not included in the pro
forma financial statements.
Each of these pro forma financial statements reflect the merger of PCM and the
Partnerships into the Company, as described in the summary of this document.
PCM and the Partnerships utilize GAAP. The accompanying unaudited pro forma
financial statements include all adjustments which are, in the opinion of the
Company, necessary to present fairly the financial position, results of
operations, and cash flows for the periods presented.
The pro forma financial statements should be read and considered in conjunction
with the separate historical financial statements and notes thereto of the
Company included elsewhere herein.
The pro forma financial statements are not necessarily indicative of the results
which would have occurred had the merger been in effect on the dates and for the
periods indicated or which may result in the future.
131
<PAGE>
PAMCO
PROFORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAM PAM II PAM III
BALANCE SHEETS
December 31, 1992
ASSETS
<S> <C> <C> <C>
Cash and equivalents $449,726 $2,495,023 $1,360,157
Investments in distressed loan portfolios, net 2,359,135 3,752,823 613,287
Receivable from West Capital 166,505 93,617 0
Due from affiliates 297,180 0 191,558 (E)
Other assets 112,772 82,999 0
Organization costs, net 3,059 5,013 5,136
------------------------------------------------
Total Assets $3,388,377 $6,429,475 $2,170,138
================================================
LIABILITIES AND PARTNERS' CAPITAL/
SHARHOLDERS' EQUITY
Accounts payable $304,741 $0 $0
Due to affiliates 0 86,120 0 (E)
Deposits in escrow for investor subscriptions 0 0 322,000
------------------------------------------------
Total liabilities 304,741 86,120 322,000
General partner's capital (143,702) (32,618) (517)(A)
Limited partners' capital 3,227,338 6,375,973 1,848,655 (A)
Common stock 0 0 0
Retained earnings 0 0 0 (A)
------------------------------------------------
Total partners' capital/shareholders' equity 3,083,636 6,343,355 1,848,138
------------------------------------------------
Total Liabilities and
Partners' Capital/
Shareholders' Equity $3,388,377 $6,429,475 $2,170,138
================================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
Eliminations Balances Adjustments Balances
BALANCE SHEETS
December 31, 1992
ASSETS
<S> <C> <C> <C> <C>
Cash and equivalents $4,304,906 (B) $1,207,532 $5,512,438
Investments in distressed loan portfolios, net 6,725,245 (D) $182,257 6,907,502
Receivable from West Capital 260,122 260,122
Due from affiliates ($86,120) 402,618 (B) $134,171 657,756
(G) $120,967
Other assets 195,771 195,771
Organization costs, net 13,208 13,208
----------------------------- -----------------------------
Total Assets ($86,120) 11,901,870 $1,644,927 $13,546,797
============================= =============================
LIABILITIES AND PARTNERS' CAPITAL/
SHARHOLDERS' EQUITY
Accounts payable $304,741 $304,741
Due to affiliates ($86,120) 0 0
Deposits in escrow for investor subscriptions 322,000 (H) (322,000) 0
----------------------------- -----------------------------
Total liabilities (86,120) 626,741 (322,000) 304,741
General partner's capital 42,666 (134,171)(B) 134,171 0
Limited partners' capital 383,996 11,835,962 (B) 1,207,532 0
(F) (13,043,494)
Common stock 0 (F) 13,043,494 13,365,494
(H) 322,000
Retained earnings (426,662) (426,662)(I) 303,224 (123,438)
----------------------------- -----------------------------
Total partners' capital/shareholders' equity 0 11,275,129 1,966,927 13,242,056
----------------------------- -----------------------------
Total Liabilities and
Partners' Capital/
Shareholders' Equity ($86,120) $11,901,870 $1,644,927 $13,546,797
============================= =============================
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
Adjustments
and Combined
STATEMENTS OF OPERATIONS PAM PAM II PAM III Eliminations Balances
For the Year Ended December 31, 1992
<S> <C> <C> <C> <C> <C>
Portfolio collections $1,350,653 $208,872 $0 1,559,525
Less: portfolio basis recovery (1,350,653) (208,872) 0 (1,559,525)
------------------------------------------- ---------------------------
Net investment income 0 0 0 0
Collection expense 38,316 4,049 0 42,365
Management fee expense 54,659 63,935 2,373 120,967
Professional fees 12,109 0 0 12,109
Provision for portfolio losses 182,257 0 0 182,257
Amortization 798 521 250 1,569
G & A expense 13,504 11,604 3,764 28,872
------------------------------------------- ---------------------------
Total operating expenses 301,643 80,109 6,387 388,139
------------------------------------------- ---------------------------
Income (loss) from operations (301,643) (80,109) (6,387) (388,139)
Interest income (expense), net 25,915 38,097 1,217 65,229
------------------------------------------- ---------------------------
Loss before provision for income taxes (275,728) (42,012) (5,170) (322,910)
Provision for income taxes 0 0 0 0
------------------------------------------- ---------------------------
Net income (loss) ($275,728) ($42,012) ($5,170) $0 ($322,910)
=========================================== ===========================
<CAPTION>
ProForma
ProForma Adjusted
STATEMENTS OF OPERATIONS Adjustments Balances
For the Year Ended December 31, 1992
<S> <C> <C>
Portfolio collections 1,559,525
Less: portfolio basis recovery (1,559,525)
----------------------------
Net investment income 0
Collection expense 42,365
Management fee expense (G) (120,967) 0
Professional fees 12,109
Provision for portfolio losses (D) (182,257) 0
Amortization 1,569
G & A expense (2,400) 26,472
----------------------------
Total operating expenses (C) (305,624) 82,515
----------------------------
Income (loss) from operations 305,624 (82,515)
Interest income (expense), net 65,229
----------------------------
Loss before provision for income taxes 305,624 (17,286)
Provision for income taxes (C) 2,400 2,400
----------------------------
Net income (loss) $303,224 ($19,686)
============================
</TABLE>
133
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS PAM PAM II PAM III
For the Year Ended December 31, 1992
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($275,728) ($42,012) ($5,170)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 798 521 250
Provision for portfolio losses 182,257 0 0
Decrease (increase) in assets:
Due from affiliates 165,718 0 (191,558)
Other assets (107,852) (82,999) 0
Increase (decrease) in liabilities: 0
Due to affiliates 0 86,120 0
Accounts payable 66,899 0 0
----------------------------------------------
Net cash provided by operating activities 32,092 (38,370) (196,478)
----------------------------------------------
Cash flows provided by (used in) investing activities:
Organization costs 0 (5,534) (5,386)
Recovery of portfolio basis 1,350,653 208,872 0
Receivable from West Capital (166,505) (93,617) 0
Purchase of investments in
Distressed Loan Portfolios (3,186,537) (3,961,695) (613,287)
----------------------------------------------
Net cash provided by investing activities (2,002,389) (3,851,974) (618,673)
----------------------------------------------
Cash flows provided by (used in) financing activities:
Distributions to partners (1,057,536) (284,167) 0
Contributions from limited partners 2,217,717 6,669,534 1,853,308
Deposits in escrow for investor subscriptions 0 0 322,000
----------------------------------------------
Net cash used in financing activities 1,160,181 6,385,367 2,175,308
----------------------------------------------
Net (decrease) increase in cash (810,116) 2,495,023 1,360,157
Cash at beginning of period 1,259,842 0 0
----------------------------------------------
Cash at end of period $449,726 $2,495,023 $1,360,157
==============================================
<CAPTION>
Adjustments ProForma
and Combined ProForma Adjusted
STATEMENTS OF CASH FLOWS Eliminations Balances Adjustments Amounts
For the Year Ended December 31, 1992
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) (322,910) $303,224 ($19,686)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Amortization 1,569 1,569
Provision for portfolio losses 182,257 (D) (182,257) 0
Decrease (increase) in assets:
Due from affiliates (25,840) (25,840)
Other assets (190,851) (190,851)
Increase (decrease) in liabilities:
Due to affiliates 86,120 (B) (134,171) (169,018)
(G) (120,967)
Accounts payable 66,899 66,899
---------------------------- ----------------------------
Net cash provided by operating activities (202,756) (134,171) (336,927)
---------------------------- ----------------------------
Cash flows provided by (used in) investing activities:
Organization costs (10,920) (10,920)
Recovery of portfolio basis 1,559,525 1,559,525
Receivable from West Capital (260,122) (260,122)
Purchase of investments in
Distressed Loan Portfolios (7,761,519) (7,761,519)
---------------------------- ----------------------------
Net cash provided by investing activities (6,473,036) (6,473,036)
---------------------------- ----------------------------
Cash flows provided by (used in) financing activities:
Distributions to partners (1,341,703)(B) 1,341,703 0
Contributions from limited partners 10,740,559 (H) 322,000 11,062,559
Deposits in escrow for investor subscriptions 322,000 (H) (322,000) 0
---------------------------- ----------------------------
Net cash used in financing activities 9,720,856 1,341,703 11,062,559
---------------------------- ----------------------------
Net (decrease) increase in cash 3,045,064 1,207,532 4,252,596
Cash at beginning of period 1,259,842 1,259,842
---------------------------- ----------------------------
Cash at end of period $0 $4,304,906 $1,207,532 $5,512,438
============================ ============================
</TABLE>
134
<PAGE>
PERFORMANCE ASSET MANAGEMENT COMPANY
NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
Performance Asset Management Company, a Delaware corporation ("Company"),
was formed on May 7, 1996. Performance Capital Management, Inc., a California
corporation ("PCM"), was formed in January 1992 for the purpose of identifying,
analyzing, negotiating, acquiring, and servicing investments in distressed loan
portfolios. Vincent E. Galewick owns all of the issued and outstanding $.001 par
value common stock of the Company. Mr. Galewick and Michael Cushing own all of
the issued and outstanding no par common stock of PCM; provided, however, Mr.
Galewick is the principal and controlling shareholder of PCM.
Performance Development, Inc., a California corporation ("General
Partner"), is the General Partner of Performance Asset Management Fund, Ltd., a
California Limited Partnership ("PAM"); Performance Asset Management Fund II,
Ltd., a California Limited Partnership ("PAM II"); Performance Asset Management
Fund III, Ltd., a California Limited Partnership ("PAM III"); Performance Asset
Management Fund IV, Ltd., a California Limited Partnership ("PAM IV"); and
Performance Asset Management Fund, Ltd., a California Limited Partnership ("PAM
V") ("PAM Funds"). Mr. Galewick owns all of the issued and outstanding no par
common stock of the General Partner. The General Partner will not be a direct
participant in the merger.
The General Partner is proposing a consolidation by merger of PCM with PAM,
PAM II, PAM III, PAM IV, and PAM V into the Company ("Merger"). The PAM Funds
are each California limited partnerships formed and created to acquire, service
and collect investments in distressed consumer debts. Upon the completion of the
Merger, the Company will continue to acquire, service and collect investments in
distressed consumer debts and intends to use leveraged financing to acquire
additional investments.
Upon Merger, the General Partner and the limited partners ("Partners") will
receive shares of common stock in the Company in return for their partnership
interests in the PAM Funds. The Merger will be accounted for similar to a
pooling of interests, and therefore, no adjustment to the historical carrying
amount of assets and liabilities will be made.
Historical information for the PAM Funds and PCM as of and for the year
ended December 31, 1992 is based on audited financial statements which are
included elsewhere herein. The unaudited pro forma balance sheet and statement
of operations have been prepared assuming 100% partnership participation.
The unaudited pro forma balance sheet as of December 31, 1992, has been
prepared as if the transactions contemplated by the Merger had occurred on
December 31,
135
<PAGE>
1992, and the accompanying unaudited pro forma statements of operations and cash
flows for the year ended December 31, 1992 have been prepared as if the Merger
had occurred on January 1, 1992.
The unaudited pro forma financial statements have been prepared by making
certain adjustments to the historical financial information of PCM and the PAM
Funds. The pro forma information presented is not indicative of the result that
would have occurred had the Merger occurred and the Company operated as a single
entity during the period presented, or of the future operations of the PAM
Funds.
136
<PAGE>
2. Adjusting and ProForma Journal Entries
1992
The pro forma financial statements include the following adjustments and
reclassifications:
<TABLE>
<CAPTION>
Dr Cr
----------- -----------
<S> <C> <C>
A General Partner Capital $42,666
Limited Partners Capital $383,996
Retained Earnings $426,662
To eliminate the cumulative effect of
related party activity.
*B Cash $1,207,532
Due from Affiliate $134,171
General Partner Capital $134,171
Limited Partner Capital $1,207,532
To reverse the partnerships distributions through 12/31/92.
*C G & A Expense $2,400
Provision for Income Tax $2,400
To reclassify income tax expense
*D Investment in Distressed Loan Portfolios $182,257
Provision for Portfolio Losses $182,257
To reverse provision for portfolio losses.
E Due to Affiliate $86,120
Due from Affiliate $86,120
To eliminate intercompany balances.
*F Limited Partner Capital $13,043,494
Common Stock $13,043,494
To record the effect of the exchange of partnership units
for common stock as if it had taken place at 12/31/92.
*G Due from Affiliates $120,967
Management Fee Expense $120,967
To reverse management fees charged by the
General Partner
*H Deposits in Escrow $322,000
Common Stock $322,000
To reclassify deposits in escrow to common stock
*I ProForma net income adjustment $303,224
Retained Earnings $303,224
To record the net income from ProForma adjustments
to retained earnings.
</TABLE>
* ProForma journal entries
137
<PAGE>
PAMCO
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994
------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET
ASSETS
Cash and equivalents $7,208,764 $8,814,692 $1,561,530 $7,921,974
Cash held in trust 7,448,377 9,502,209 9,200,137 0
Investments in distressed
loan portfolios, net 5,643,442 8,330,651 11,788,136 13,915,678
Receivable from West Capital 0 0 5,218,435 5,218,435
Accounts receivable 1,073,841 (1,298,378) 1,231,847 (358,572)
Loan to shareholder 843 0 0 96,620
Other assets 277,443 297,581 718,668 401,254
Property and equipment, net 628,686 703,195 381,968 324,812
Organization costs, net 3,800 7,448 15,079 22,792
----------- ----------- ----------- -----------
Total Assets $22,285,196 $26,357,398 $30,115,800 $27,542,993
=========== =========== =========== ===========
LIABILITIES AND PARTNERS'
CAPITAL/ SHAREHOLDERS' EQUITY
Accounts payable $1,945,939 $236,468 $240,582 $256,308
Due to affiliates 2,907,230 2,600,059 1,238,683 1,142,959
Note payable to affiliate 199,390 191,598 176,914 253,855
Deposits in escrow for
investor subscriptions 0 0 0 420,000
----------- ----------- ----------- -----------
Total liabilites $5,052,559 $3,028,125 $1,656,179 $2,073,122
General partner's capital (2,142,540) (1,630,149) (1,371,781) (1,089,948)
Limited partners' capital 29,583,448 34,448,429 36,821,552 31,011,453
Common stock 100 100 100 100
Retained earnings (10,208,371) (9,489,107) (6,990,250) (4,451,734)
----------- ----------- ----------- -----------
Total partners' capital/
shareholders' equity $17,232,637 $23,329,273 $28,459,621 $25,469,871
----------- ----------- ----------- -----------
Total Liabilities and Partners'
Capital /Shareholders' Equity $22,285,196 $26,357,398 $30,115,800 $27,542,993
=========== =========== =========== ===========
</TABLE>
138
<PAGE>
PAMCO
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994
------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Portfolio sales $177,169 $607,586 $0 $372,309
Collection revenue 5,343,416 3,485,808 1,395,550 1,069,113
Servicing fees 296,737 167,527 640,127 2,726
Portfolio collections 2,800,759 14,160,566 7,175,905 6,229,359
Less: portfolio basis recovery (3,916,978) (12,760,760) (6,890,211) (6,174,986)
----------- ----------- ----------- -----------
Net investment income $4,701,103 $5,660,727 $2,321,371 $1,498,521
Personnel and related benefits 2,405,540 3,473,232 2,403,138 2,928,201
Professional and management fees 3,693,975 4,457,672 1,688,170 764,607
Collection expense 514,604 525,914 288,529 389,165
Management fee expense 212,493 431,507 437,751 358,572
Professional fees 0 96,527 0 0
Provision for portfolio losses (173) 0 135,000 459,000
Amortization 3,648 7,631 7,762 0
G & A expense 305,394 504,199 365,061 329,901
----------- ----------- ----------- -----------
Total operating expenses $7,135,481 $9,496,682 $5,325,411 $5,229,446
----------- ----------- ----------- -----------
Loss from operations ($2,434,378) ($3,835,955) ($3,004,040) ($3,730,925)
Interest income (expense), net 355,745 1,016,235 186,000 126,449
Other income 33,235 16,792 3,581 11,050
----------- ----------- ----------- -----------
Loss before provision
for income taxes ($2,045,398) ($2,802,928) ($2,814,459) ($3,593,426)
Provision for income taxes 800 13,186 800 800
----------- ----------- ----------- -----------
Net loss ($2,046,198) ($2,816,114) ($2,815,259) ($3,594,226)
=========== =========== =========== ===========
</TABLE>
139
<PAGE>
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Years Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994
------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income (loss) ($2,046,198) ($2,816,114) ($2,815,259) ($3,594,226)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Amortization 3,648 7,631 7,762 7,284
Depreciation 99,127 150,813 81,454 50,559
Gain on repurchase of limited ptrshp units 0 0 0 (9,250)
Provision for portfolio losses 0 0 135,000 459,000
Decrease (increase) in assets:
Due from affiliates (637,271) 827,218 (891,249) 271,870
Other assets 20,138 421,087 (280,681) 150,768
Increase (decrease) in liabilities:
Due to affiliates (111,438) 3,064,383 138,200 1,286,618
Accounts payable 1,709,471 (4,114) (15,726) 133,898
----------- ----------- ----------- -----------
Net cash provided by operating activities ($962,523) $1,650,904 ($3,640,499) ($1,243,479)
----------- ----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment $0 ($472,040) ($138,610) ($168,596)
Organization costs 0 0 (49) (5,119)
Recovery of portfolio basis 3,071,369 12,760,760 6,890,211 6,174,986
Accounts receivable (1,073,841) 0 0 0
Receivable from West Capital 0 5,218,435 0 (3,659,090)
Cash held in trust 2,053,832 (302,072) (9,200,137) 0
Purchase of investments in distressed loan portfolios (833,572) (8,986,018) (5,265,082) (9,611,130)
----------- ----------- ----------- -----------
Net cash provided by investing activities $3,217,788 $8,219,065 ($7,713,667) ($7,268,949)
----------- ----------- ----------- -----------
Cash flows provided by (used in) financing activities:
Increase in payable to affiliate $7,792 $14,684 $18,914 $153,855
Distributions to partners (3,828,142) (2,551,491) (2,836,558) (5,351,978)
Redemption of partnership units (40,000) (80,000) (10,000) (50,750)
Contributions from investors 0 0 8,408,524 17,377,431
Payments for offering expenses 0 0 (453,700) (432,439)
Loans to shareholder (843) 0 (133,458) (96,620)
----------- ----------- ----------- -----------
Net cash used in financing activities ($3,861,193) ($2,616,807) $4,993,722 $11,599,499
----------- ----------- ----------- -----------
Net (decrease) increase in cash ($1,605,928) $7,253,162 ($6,360,444) $3,087,071
Cash at beginning of period $8,814,692 $1,561,530 $7,921,974 $4,834,903
----------- ----------- ----------- -----------
Cash at end of period $7,208,764 $8,814,692 $1,561,530 $7,921,974
=========== =========== =========== ===========
</TABLE>
140
<PAGE>
PAMCO
BOOKVALUE PER SHARE CALCULATION
PCM
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993
------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Common Stock 100 100 100 100 100
Retained Earnings 55,982 11,009 86,715 92,995 223,782
------- ------- ------- ------- --------
Stockholders Equity 56,082 11,109 86,815 93,095 223,882
Number of Shares Outstanding 100 100 100 100 100
Book Value Per Share 560.82 111.09 868.15 930.95 2,238.82
======= ======= ======= ======= ========
</TABLE>
141
<PAGE>
PAMCO
BOOKVALUE PER UNIT CALCULATION
PAM
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
General Partner's Capital (337,817) (339,676) (359,171) (349,055) (278,612) (143,702)
Limited Partner's Capital 942,604 1,457,330 1,284,183 1,374,425 2,008,410 3,227,338
---------- ---------- ---------- ---------- ---------- ----------
Total Partners Capital 604,787 1,117,654 925,012 1,025,370 1,729,798 3,083,636
Number of Shares Outstanding 1,049 1,049 1,050 1,050 1,050 1,052
Book Value Per Unit 576.54 1,065.45 880.96 976.54 1,647.43 2,931.21
========== ========== ========== ========== ========== ==========
</TABLE>
142
<PAGE>
PAMCO
BOOKVALUE PER UNIT CALCULATION
PAM II
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
General Partner's Capital (394,023) (304,726) (309,388) (313,476) (224,234) (32,618)
Limited Partner's Capital 3,317,846 3,829,265 3,790,045 3,753,256 4,616,427 6,375,973
---------- ---------- ---------- ---------- ---------- ----------
Total Partners Capital 2,923,823 3,524,539 3,480,657 3,439,780 4,392,193 6,343,355
Number of Shares Outstanding 1543 1548 1549 1549 1561 1568
Book Value Per Unit 1,894.90 2,276.83 2,247.03 2,220.65 2,813.70 4,045.51
========== ========== ========== ========== ========== ==========
</TABLE>
143
<PAGE>
PAMCO
BOOKVALUE PER UNIT CALCULATION
PAM III
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
General Partner's Capital (362,696) (289,959) (322,499) (271,487) (110,875) (517)
Limited Partner's Capital 5,260,692 5,916,522 5,597,599 6,089,959 7,536,217 1,848,655
---------- ---------- ---------- ---------- ---------- ----------
Total Partners Capital 4,897,996 5,626,563 5,275,100 5,818,472 7,425,342 1,848,138
Number of Shares Outstanding 1,998 1,998 1,998 2,000 2,000 437
Book Value Per Unit 2,451.45 2,816.10 2,640.19 2,909.24 3,712.67 4,229.15
========== ========== ========== ========== ========== ==========
</TABLE>
144
<PAGE>
PAMCO
BOOKVALUE PER UNIT CALCULATION
PAM IV
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
General Partner's Capital (968,309) (748,842) (516,291) (282,936) (4,795)
Limited Partner's Capital 15,693,915 17,683,367 19,815,741 16,108,217 4,296,122
----------- ----------- ----------- ----------- -----------
Total Partners Capital 14,725,606 16,934,525 19,299,450 15,825,281 4,291,327
Number of Shares Outstanding 11,462 11,472 11,488 8,781 2,047
Book Value Per Unit 1,284.73 1,476.16 1,679.97 1,802.22 2,096.40
=========== =========== =========== =========== ===========
</TABLE>
145
<PAGE>
PAMCO
BOOKVALUE PER UNIT CALCULATION
PAM V
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
General Partner's Capital (121,749) (72,218) (43,718) (13,585)
Limited Partner's Capital 3,989,940 4,434,517 4,720,419 2,420,295
---------- ---------- ---------- ----------
Total Partners Capital 3,868,191 4,362,299 4,676,701 2,406,710
Number of Shares Outstanding 1,194 1,194 1,200 595
Book Value Per Unit 3,239.69 3,653.52 3,897.25 4,044.89
========== ========== ========== ==========
</TABLE>
146
<PAGE>
PAMCO
SELECTED HISTORICAL DATA - RATIO OF EARNINGS TO FIXED CHARGES
PCM
<TABLE>
<CAPTION>
June 30,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) $45,073 $97,724 $6,280 ($316,777) $223,782
ADD PROVISION FOR INCOME TAXES 800 13,186 800 800 800
--------- --------- --------- --------- ---------
PRE-TAX INCOME (LOSS) 45,873 110,910 7,080 (315,977) 224,582
FIXED CHARGES
INTEREST 164 532 7,673 7,827 2,000
--------- --------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES
AND FIXED CHARGES $46,037 $111,442 $14,753 ($308,150) $226,582
--------- --------- --------- --------- ---------
RATIO OF EARNINGS TO
FIXED CHARGES 280.71 209.48 1.92 (39.37) 113.29
========= ========= ========= ========= =========
</TABLE>
147
<PAGE>
PAMCO
SELECTED HISTORICAL DATA - RATIO OF EARNINGS TO FIXED CHARGES
PAM
June 30,
1997 1996 1995 1994
--------- --------- --------- ---------
NET INCOME (LOSS) ($163,222) $369,775 $133,064 $170,572
ADD PROVISION FOR INCOME TAXES -- -- -- --
--------- --------- --------- ---------
PRE-TAX INCOME (LOSS) (163,222) 369,775 133,064 170,572
FIXED CHARGES
INTEREST 3,896 14,684 13,816 13,098
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES
AND FIXED CHARGES ($159,326) $384,459 $146,880 $183,670
--------- --------- --------- ---------
RATIO OF EARNINGS TO
FIXED CHARGES (40.89) 26.18 10.63 14.02
========= ========= ========= =========
148
<PAGE>
PAMCO
SELECTED HISTORICAL DATA - RATIO OF EARNINGS TO FIXED CHARGES
PAM II
1992
--------
NET LOSS ($42,012)
ADD PROVISION FOR INCOME TAXES --
--------
PRE-TAX LOSS (42,012)
FIXED CHARGES
INTEREST 150
--------
EARNINGS BEFORE INCOME TAXES
AND FIXED CHARGES ($41,862)
--------
RATIO OF EARNINGS TO
FIXED CHARGES (279.08)
========
149
<PAGE>
PAMCO
SELECTED HISTORICAL DATA - RATIO OF EARNINGS TO FIXED CHARGES
PAM IV
1995
---------
NET LOSS ($609,972)
ADD PROVISION FOR INCOME TAXES --
---------
PRE-TAX LOSS (609,972)
FIXED CHARGES
INTEREST 957
---------
EARNINGS BEFORE INCOME TAXES
AND FIXED CHARGES ($609,015)
---------
RATIO OF EARNINGS TO
FIXED CHARGES (636.38)
=========
150
<PAGE>
PAMCO
Selected Historical Data
PCM
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash And Cash Equivalents 1,009,336 2,878,541 416,274 175,356 109,669 --
Investments in Distressed Loan Portofilios 3,250 -- 27,405 42,678 -- --
Total Assets (at Book Value) 3,709,577 3,982,265 1,321,191 817,514 872,101 --
Total Liabilities 3,653,495 3,971,156 1,407,806 910,409 648,219 --
General Partner Equity -- -- -- -- -- --
Limited Partner Equity -- -- -- -- -- --
Net Revenue 8,183,155 16,116,850 7,325,917 11,939,431 2,424,794 --
Income (Loss) From Operations 4,201 66,432 (18,605) (316,702) 223,918 --
Income (Loss) From Operations Per Share 0.0009 0.0149 (0.0040) (0.0710) (0.0500)
Net Income (Loss) 45,073 97,724 6,280 (316,777) 223,782 --
Net Income (Loss) Per Share 0.010 0.022 0.001 (0.07) 0.050 --
Net increase (decrease) in cash and cash equivalents (1,869,205) 2,462,267 240,918 65,687 109,669 --
Net cash provided by operating activities (1,204,225) 2,906,902 497,713 377,726 231,509 --
Ratio of Earnings to Fixed Charges 280.71 209.48 1.92 (39.37) 113.29 --
Book Value Per Share 560.82 111.09 868.15 930.95 2,238.82 --
</TABLE>
151
<PAGE>
PAMCO
Selected Historical Data
PAM
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash And Cash Equivalents 82,205 283,232 15,295 23,487 19,514 449,726
Investments in Distressed Loan Portfolios 1,061,666 1,269,586 706,091 810,159 1,273,275 2,359,135
Total Assets (at Book Value) 1,137,904 1,622,033 1,330,241 1,394,839 1,854,839 3,388,377
Total Liabilities 533,177 504,379 405,229 369,469 125,041 304,741
General Partner Equity (337,817) (339,676) (359,171) (349,055) (278,612) (143,702)
Limited Partner Equity 942,604 1,457,330 1,284,183 1,374,425 2,008,410 3,227,338
Net Revenue 267 538,428 180,797 205,208 142,249 --
Income (Loss) From Operations (156,448) 365,631 146,358 183,667 50,175 (301,643)
Income (Loss) From Operations Per Unit (155.81) 348.55 139.39 174.92 47.79 (286.73)
Net Income (Loss) (163,222) 369,775 133,064 170,572 56,162 (275,728)
Net Income (Loss) Per Unit (155.60) 352.50 126.73 162.45 53.49 (262.10)
Net increase (decrease) in cash and cash equivalents (201,027) 267,937 (8,192) 3,973 (430,212) (810,116)
Net cash provided by operating activities (97,812) 429,930 106,469 537,985 7,025 32,092
Cash Distributions Declared 349,645 172,133 233,422 875,000 1,400,000 1,057,536
Cash Distributions Per Unit 333.31 164.09 222.31 833.33 1333.33 1005.26
Ratio of Earnings to Fixed Charges (40.89) 26.18 10.63 14.02 N/A N/A
Book Value Per Share 576.54 1,065.45 880.96 976.54 1,647.43 2,931.21
</TABLE>
152
<PAGE>
PAMCO
Selected Historical Data
PAM II
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash And Cash Equivalents 1,283,708 1,024,507 144,800 748,107 1,591,280 2,495,023
Investments in Distressed Loan Portfolios 1,331,691 1,371,176 1,070,725 1,920,842 2,115,107 3,752,823
Total Assets (at Book Value) 3,198,211 3,524,539 3,484,650 3,543,258 4,495,826 6,429,475
Total Liabilities 274,388 -- 3,993 103,478 103,633 86,120
General Partner Equity (394,023) (304,726) (309,388) (313,476) (224,234) (32,618)
Limited Partner Equity 3,317,846 3,829,265 3,790,045 3,753,256 4,616,427 6,375,973
Net Revenue -- 504,836 634,187 458,892 500 --
Income (Loss) From Operations (120,713) 162,620 368,474 347,203 (126,196) (80,109)
Income (Loss) From Operations Per Unit (68.60) 104.98 237.88 224.15 (81.49) (51.71)
Net Income (Loss) (72,528) 304,715 385,266 379,365 (63,079) (42,012)
Net Income (Loss) Per Unit (47.04) 196.84 248.72 244.91 (40.41) (26.79)
Net increase (decrease) in cash and cash equivalents 259,201 879,707 (603,307) (843,473) (903,443) 2,495,023
Net cash provided by operating activities 284,621 493,772 638,827 686,050 (653,076) (38,370)
Cash Distributions Declared 667,200 255,833 344,389 1,271,778 1,853,083 284,167
Cash Distributions Per Unit 330.45 165.27 222.33 821.03 1,187.11 181.23
Ratio of Earnings to Fixed Charges N/A N/A N/A N/A N/A (279.08)
Book Value Per Share 1,894.90 2,276.83 2,247.03 2,220.65 2,813.70 4,045.51
</TABLE>
153
<PAGE>
PAMCO
Selected Historical Data
PAM III
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash And Cash Equivalents 829,346 775,755 210,140 754,459 489,157 1,360,157
Investments in Distressed Loan Portfolios 2,033,929 2,566,546 3,642,353 4,408,633 6,048,913 613,287
Total Assets (at Book Value) 5,232,957 6,120,078 5,710,565 6,192,446 7,537,182 2,170,138
Total Liabilities 334,961 493,515 435,465 373,974 111,840 322,000
General Partner Equity (362,696) (289,959) (322,499) (271,487) (110,875) (517)
Limited Partner Equity 5,260,692 5,916,522 5,597,599 6,089,959 7,536,217 1,848,655
Net Revenue -- 884,915 205,518 15,660 -- --
Income (Loss) From Operations (137,055) 492,558 (107,862) (132,624) (229,218) (6,387)
Income (Loss) From Operations Per Unit (78.23) 246.53 (53.98) (66.31) (114.72) (3.20)
Net Income (Loss) (61,367) 683,163 (91,844) (122,287) (179,806) (5,170)
Net Income (Loss) Per Unit (30.71) 341.93 (45.97) (61.14) (89.90) (11.83)
Net increase (decrease) in cash and cash equivalents 53,591 565,615 (541,319) 489,157 (871,000) 1,360,157
Net cash provided by operating activities (376,604) 787,667 (93,432) 131,708 32,453 (196,478)
Cash Distributions Declared 503,250 331,700 441,528 1,484,583 923,767 --
Cash Distributions Per Unit 326 166.02 220.98 742.29 461.88 --
Ratio of Earnings to Fixed Charges N/A N/A N/A N/A N/A N/A
Book Value Per Share 2,451.45 2,816.10 2,640.19 2,909.24 3,712.67 4,229.15
</TABLE>
154
<PAGE>
PAMCO
Selected Historical Data
PAM IV
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash And Cash Equivalents 3,032,196 2,121,545 559,223 5,002,648 2,624,983 --
Investments in Distressed Loan Portfolios 8,220,126 9,091,186 9,701,767 9,269,331 1,935,931 --
Total Assets (at Book Value) 16,503,101 17,291,452 19,352,923 16,614,965 4,589,627 --
Total Liabilities 1,777,495 356,927 53,473 373,974 298,300 --
General Partner Equity (968,309) (748,842) (516,291) (282,936) (4,795) --
Limited Partner Equity 15,693,915 17,683,367 19,815,741 16,108,217 4,296,122 --
Net Revenue 25,494 150,347 367,527 11,558 -- --
Income (Loss) From Operations (482,637) (1,282,748) (721,442) (1,134,023) (58,295) --
Income (Loss) From Operations Per Unit (42.10) (111.82) (62.80) (129.17) (28.31) --
Net Income (Loss) (284,004) (732,166) (609,972) (1,036,195) (47,947) --
Net Income (Loss) Per Unit (24.78) (63.82) (53.10) (118.00) (23.42) --
Net increase (decrease) in cash and cash equivalents 910,651 1,562,322 (4,443,425) 2,377,665 2,624,983 --
Net cash provided by operating activities 1,274,511 233,843 (1,478,923) (483,866) (137,986) --
Cash Distributions Declared 1,909,915.00 1,592,759 1,719,383 1,704,784 40,425 --
Cash Distributions Per Unit 166.63 138.84 149.67 194.14 19.75 --
Ratio of Earnings to Fixed Charges N/A N/A (636.38) N/A N/A --
Book Value Per Share 1,284.73 1,476.16 1,679.97 1,802.22 2,096.40 --
</TABLE>
155
<PAGE>
PAMCO
Selected Historical Data
PAM V
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 1996 1995 1994 1993 1992
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cash And Cash Equivalents 971,973 1,731,112 215,798 1,220,917 -- --
Investments in Distressed Loan Portfolios 2,857,717 2,300,662 1,771,568 437,971 -- --
Total Assets (at Book Value) 4,015,498 4,419,239 4,680,949 2,801,538 -- --
Total Liabilities 147,307 56,940 4,248 394,828 -- --
General Partner Equity (121,749) (72,218) (43,718) (13,585) -- --
Limited Partner Equity 3,989,940 4,434,517 4,720,419 2,420,295 -- --
Net Revenue 5,040 86,052 -- -- -- --
Income (Loss) From Operations (127,551) (186,459) (236,383) (129,560) -- --
Income (Loss) From Operations Per Unit (106.83) (156.16) (196.99) (217.75) -- --
Net Income (Loss) (95,975) (85,336) (203,473) (120,018) -- --
Net Income (Loss) Per Unit -- (71.47) (169.56) (201.71) -- --
Net increase (decrease) in cash and cash equivalents (759,139) 1,515,314 (1,005,119) 1,220,917 -- --
Net cash provided by operating activities 304,006 252,779 (876,573) 55,804 -- --
Cash Distributions Declared 398,132 199,066 97,836 15,833 -- --
Cash Distributions Per Unit 333.44 166.72 81.53 26.61 -- --
Ratio of Earnings to Fixed Charges N/A N/A N/A N/A -- --
Book Value Per Share 3,239.69 3,653.52 3,897.25 4,044.89 -- --
</TABLE>
156
<PAGE>
Pamco
Selected Consolidated Financial Data
Proforma Basis
<TABLE>
<CAPTION>
For the Six For the Years Ended December 31,
Months Ended ----------------------------------------------------------------------------
June 30, 1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Portfolio sales $177,169 $607,586 $ -- $372,309 $5,884 $ --
Collection revenue 5,343,416 3,485,808 1,395,550 1,069,113 323,569
Servicing fees 296,737 167,527 640,127 2,726
Portfolio collections 2,800,759 14,160,566 7,175,905 6,229,359 4,420,899 1,559,525
Less: portfolio basis recovery (3,916,978) (12,760,760) (6,890,211) (6,174,986) (4,326,447) (1,559,525)
-------------------------------------------------------------------------------------------
Net investment income 4,701,103 5,660,727 2,321,371 1,498,521 423,905 --
Personnel and related benefits 2,405,540 3,473,232 2,403,138 2,928,201 626,377
Professional and management fees 3,693,975 4,457,672 1,688,170 764,607 75,685
Collection expense 514,604 525,914 288,529 389,165 127,579 42,365
Management fee expense (70,548)
Professional fees 96,527 12,109
Provision for portfolio losses (173)
Amortization 1,569
G & A expense 305,394 500,199 361,110 323,736 209,306 26,472
-------------------------------------------------------------------------------------------
Total operating expenses 6,919,340 8,982,996 4,740,947 4,405,709 1,038,947 82,515
-------------------------------------------------------------------------------------------
Loss from operations (2,218,237) (3,322,269) (2,419,576) (2,907,188) (615,042) (82,515)
Interest income, net 355,745 1,016,235 186,000 126,449 112,167 65,229
Other income 33,325 16,792 3,581 11,050 17,361
Loss before provision for income taxes (1,829,257) (2,289,242) (2,229,995) (2,769,689) (485,514) (17,286)
Provision for income taxes 800 17,186 4,800 4,800 4,000 2,400
-------------------------------------------------------------------------------------------
Net loss $(1,830,057) $(2,306,428) $(2,234,795) $(2,774,489) $(489,514) $(19,686)
===========================================================================================
Net loss per share basic and diluted (0.244) (0.307) (0.298) (0.369) (0.070) (0.004)
===========================================================================================
Weighted average common shares 7,511,500 7,511,500 7,511,500 7,511,500 7,041,500 5,456,900
===========================================================================================
Balance sheet data:
Cash and equivalents $25,546,323 $23,668,225 $14,041,940 $17,837,659 $9,887,025 $5,512,438
Total assets 41,798,416 43,278,118 44,153,711 38,435,715 23,797,952 13,546,797
Long term obligations 199,390 191,598 176,914 253,855 100,000
Total liabilities 2,879,779 1,531,074 417,496 696,272 269,472 304,741
Total stockholders' equity 38,918,637 41,747,044 43,736,215 37,739,443 23,528,480 13,242,056
</TABLE>
157
<PAGE>
PAMCO
Historical Basis
<TABLE>
<CAPTION>
For the Six For the Years Ended December 31,
Summary Consolidated Financial Data Months Ended ----------------------------------------------
June 30, 1997 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Statement of operations data:
Net investment income $4,701,103 $5,660,727 $2,321,371 $1,498,521
Income/(Loss) before provision for income taxes (2,045,398) (2,802,928) (2,814,459) 3,593,426
Net loss from operations per partnership unit (124.29) (170.28) (162.83) 257.13
Units used in calculation 16,456 16,461 17,285 13,975
<CAPTION>
December 31,
-----------------------------------------------
June 30, 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet data:
Cash and equivalents $7,208,764 $8,814,692 $1,561,530 $7,921,974
Total assets 22,285,196 26,357,398 30,115,800 27,542,993
Long term obligations 199,390 191,598 176,914 253,855
Total liabilities 5,052,559 3,028,125 1,656,179 2,073,122
Total stockholders' equity 17,232,637 23,329,273 28,459,621 25,469,871
</TABLE>
158
<PAGE>
EXPERTS
ACCOUNTING. The consolidated financial statements of the Partnerships for
each of the three years in the period ended December 31, 1996, and the financial
statements of the Company at December 31, 1996 appearing in this Prospectus have
been audited by Kelly & Company, independent auditors for the Company and PCM,
as set forth in their reports thereon appearing elsewhere herein, and are
included in reliance upon the authority of Kelly & Company as experts in
accounting and auditing.
INTERESTS OF NAMED EXPERTS AND COUNSEL. None of the experts named in the
Registration Statement as having prepared or certified any part hereof,
including auditors and accountants, was employed for such purpose on a
contingent basis, or at the time of such preparation, certification or opinion
or at any time thereafter through the date of the effectiveness of the
Registration Statement or that part of the Registration Statement to which such
preparation, certification or opinion relates, had, or is to receive in
connection with the offering, a substantial interest, direct or indirect, in the
Company or any of its parents or subsidiaries or was connected with the Company
or any of its parents or subsidiaries as a promoter, managing underwriter (or
any principal underwriter, if there are no managing underwriters), voting
trustee, director, officer, or employee.
OTHER MATTERS. The Fairness Opinion was prepared as of the date set forth
herein by Willamette Management Associates, Inc., and is included in reliance
upon the authority of such firm as experts in valuation and business
consolidation matters.
LEGAL MATTERS
OPINION ON SECURITIES ACT MATTERS. In connection with the Merger Stock
certain legal matters under the Securities Act have been passed upon for the
Company by White and Stepp LLP, located at 4100 Newport Place, Suite 800,
Newport Beach, California 92660.
OPINION ON FEDERAL INCOME TAX MATTERS. The opinion referred to in "FEDERAL
INCOME TAX CONSIDERATIONS" has been rendered by John H. Brainerd,
Attorney-at-Law, 4100 Newport Beach, Suite 800, Newport Beach, California 92660.
LEGAL PROCEEDINGS. There are no legal actions pending against any of the
Partnerships or the Company nor are any such legal actions contemplated.
The General Partner, Income Network Company, and Vincent E. Galewick are
named as Defendants in a pending litigation matter entitled Margarita K. Kanne
and Louis H. Knoop v. Sundance Resources; Prospect Fund, 1991-II et al. In that
action the Plaintiffs allege violations of certain provisions of the
159
<PAGE>
California Corporations Code and the Securities Act and common law fraud. The
General Partner, Income Network Company, and Mr. Galewick deny each and every
such allegation in that litigation matter and are defending that litigation
matter vigorously. The causes of action alleged in that litigation matter
against the defendants regarding those violations of the California Corporations
Code and the Securities Act were dismissed by summary adjudication entered in
favor of those defendants. It is the opinion of counsel for the General Partner
that any resolution of that litigation matter should not (i) affect the ability
of the General Partner to function as the General Partner and manage operations
of the Partnerships or (ii) materially and adversely affect the General Partner
or the Partnerships. Moreover, it is the opinion of counsel for the Company that
any resolution of that litigation matter should not materially and adversely
effect the (i) Company or (ii) the Merger.
160
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
----
<S> <C>
PERFORMANCE ASSET MANAGEMENT FUND, LTD.
Financial Statements for the Years Ended December 31, 1996, 1995, and 1994
Report of Independent Auditors..............................................................................
Financial Statements of Performance Asset Management Fund, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995.......................................................
Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Partners' Capital (Deficit) for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Note to Financial Statements..........................................................................
PERFORMANCE ASSET MANAGEMENT FUND II, LTD.
Financial Statements for the Years Ended December 31, 1996, 1995, and 1994
Report of Independent Auditors..............................................................................
Financial Statements of Performance Asset Management Fund II, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995.......................................................
Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Partners' Capital (Deficit) for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Note to Financial Statements..........................................................................
PERFORMANCE ASSET MANAGEMENT FUND III, LTD.
Financial Statements for the Years Ended December 31, 1996, 1995, and 1994
Report of Independent Auditors..............................................................................
Financial Statements of Performance Asset Management Fund III, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995.......................................................
Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Partners' Capital (Deficit) for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Note to Financial Statements..........................................................................
</TABLE>
161
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
PERFORMANCE ASSET MANAGEMENT FUND IV, LTD.
Financial Statements for the Years Ended December 31, 1996, 1995, and 1994
Report of Independent Auditors..............................................................................
Financial Statements of Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995.......................................................
Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Partners' Capital (Deficit) for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Note to Financial Statements..........................................................................
PERFORMANCE ASSET MANAGEMENT FUND V, LTD.
Financial Statements for the Years Ended December 31, 1996, 1995, and 1994
Report of Independent Auditors..............................................................................
Financial Statements of Performance Asset Management Fund V, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995.......................................................
Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Partners' Capital (Deficit) for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Note to Financial Statements..........................................................................
PERFORMANCE CAPITAL MANAGEMENT FUND, INC.
Financial Statements for the Years Ended December 31, 1996, 1995, and 1994
Report of Independent Auditors..............................................................................
Financial Statements of Performance Capital Management, Inc.:
Balance Sheets as of December 31, 1996 and 1995.......................................................
Statements of Operations for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Partners' Capital (Deficit) for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994...............................................................
Note to Financial Statements..........................................................................
</TABLE>
162
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
PERFORMANCE ASSET MANAGEMENT COMPANY
Financial Statements for the Six Months Ended June 30, 1997 (Unaudited)
and the Year Ended December 31, 1996, 1995, and 1994
Report of Independent Auditors..............................................................................
Financial Statements of Performance Asset Management Company:
Balance Sheet as of June 30, 1997 (Unaudited) and December 31, 1996..................................
Statements of Operations for the Six Months Ended
June 30, 1997 (Unaudited) and the Year Ended
December 31, 1996...............................................................................
Statements of Shareholders' for Six Months Ended
June 30, 1997 (Unaudited) and the Year Ended
December 31, 1996...............................................................................
Statements of Cash Flows for Six Months Ended
June 30, 1997 (Unaudited) and the Year Ended
December 31, 1996 ..............................................................................
Note to Financial Statements..........................................................................
</TABLE>
163
<PAGE>
Performance Asset Management
Fund, Ltd.,
A California Limited Partnership
Financial Statements
For the Years Ended
December 31, 1996, 1995 and 1994
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Index to Financial Statements
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
Report of Independent Auditors.................................................1
Financial Statements of Performance Asset Management Fund, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995....................2
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994...............................3
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1996, 1995, and 1994...................4
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994...............................5
Notes to Financial Statements..................................................6
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Performance Asset Management Fund, Ltd.
A California Limited Partnership
We have audited the accompanying balance sheets of Performance Asset Management
Fund, Ltd., A California Limited Partnership ("Partnership"), as of December 31,
1996 and 1995, and the related statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Asset Management
Fund, Ltd., A California Limited Partnership, as of December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
February 21, 1997
F-2
<PAGE>
Performance Asset Manaagement Fund, Ltd.,
A California Partnership
Balance Sheets
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
Cash and equivalents $283,232 $15,295
Cash held in trust -- 4,221
Investments in distressed loan portfolios, net 1,269,586 706,091
Receivable from West Capital -- 559,730
Due from affiliate 56,483 --
Other receivables 12,732 44,239
Organization costs, net -- 665
----------- -----------
Total assets $1,622,033 $1,330,241
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $41,378 $6,126
Due to affiliates 271,403 222,189
Note payable to affiliate 191,598 176,914
----------- -----------
Total liabilities 504,379 405,229
----------- -----------
General partner's deficit (no units outstanding) (339,676) (359,171)
Limited partners capital (2,000 units authorized;
1,049 and 1,050 units issued and outstanding at
December 31, 1996 and 1995, respectively) 1,457,330 1,284,183
----------- -----------
Total partners' capital 1,117,654 925,012
----------- -----------
Total liabilities and partners' capital $1,622,033 $1,330,241
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Partnership
Statements of Operations
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Portfolio collections $1,290,544 $290,328 $735,412
Less: portfolio basis recovery 752,116 109,531 530,204
---------- ---------- ----------
Net investment income 538,428 180,797 205,208
---------- ---------- ----------
Cost of operations:
Collection expense 43,257 365 --
Management fee expense 25,979 23,096 17,584
Professional fees 96,527 7,233 --
Amortization 665 798 798
General and administrative expense 6,369 2,947 3,159
---------- ---------- ----------
Total operating expenses 172,797 34,439 21,541
---------- ---------- ----------
Income from operations 365,631 146,358 183,667
Other income (expense) :
Interest income (expense), net 3,389 (13,294) (13,095)
Other 755 -- --
========== ========== ==========
Net income $369,775 $133,064 $170,572
========== ========== ==========
Net income allocable to general partner $36,978 $13,306 $17,057
========== ========== ==========
Net income allocable to limited partners $332,797 $119,758 $153,515
========== ========== ==========
Net income per limited partnership unit $317.25 $114.05 $146.20
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Partnership
Statements of Partners' Capital (Deficit)
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993 ($278,612) $2,008,410 $1,729,798
Distributions (87,500) (787,500) (875,000)
Net income 17,057 153,515 170,572
----------- ----------- -----------
Balance, December 31, 1994 (349,055) 1,374,425 1,025,370
Distributions (23,422) (210,000) (233,422)
Net income 13,306 119,758 133,064
----------- ----------- -----------
Balance, December 31, 1995 (359,171) 1,284,183 925,012
Distributions (17,483) (154,650) (172,133)
Redemption of one partnership unit -- (5,000) (5,000)
Net income 36,978 332,797 369,775
=========== =========== ===========
Balance, December 31, 1996 (339,676) $1,457,330 $1,117,654
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Partnership
Statements of Cash Flows
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $369,775 $133,064 $170,572
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization 665 798 798
Decrease (increase) in assets:
Other receivables 31,507 (44,239) 121,268
Due from affiliates (56,483) -- 111,857
Increase (decrease) in liabilities:
Due to affiliates 49,214 45,969 109,959
Accounts payable 35,252 (29,123) 23,531
----------- ----------- -----------
Net cash provided by operating activities 429,930 106,469 537,985
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Recovery of portfolio basis 752,116 109,531 530,204
Receivable from West Capital 559,730 -- (280,128)
Cash held in trust 4,221 (4,221) --
Purchase of investments in distressed
loan portfolios (1,315,611) (5,463) (67,088)
----------- ----------- -----------
Net cash provided by investing activities: 456 99,847 182,988
----------- ----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from note payable to affiliate -- -- 158,000
Increase in payable to affiliate 14,684 18,914 --
Distributions to partners (172,133) (233,422) (875,000)
Redemption of one partnership unit (5,000) -- --
----------- ----------- -----------
Net cash used in financing activities (162,449) (214,508) (717,000)
----------- ----------- -----------
Net increase (decrease) in cash 267,937 (8,192) --
Cash at beginning of period 15,295 23,487 19,514
----------- ----------- -----------
Cash at end of period $283,232 $15,295 $23,487
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Franchise taxes $800 $800 $800
Interest -- 8,000 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
Performance Asset Management Fund, Ltd.
A California Limited Partnership
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Performance Asset Management Fund, Ltd., A California Limited Partnership
(the "Partnership"), was formed in April 1991, for the purpose of acquiring
investments in or direct ownership of distressed loan portfolios from
financial institutions and other sources. Interests in the Partnership were
sold in a private placement offering pursuant to Regulation D promulgated
by the Securities and Exchange Commission on a "best efforts" basis;
however, the Partnership did not begin its primary operations until July
1991. The general partner is Performance Development, Inc., a California
corporation ("PDI")(the "General Partner").
The Partnership terminates at December 31, 2000. At that time, the
Partnership will distribute any remaining cash after payment of Partnership
obligations following the sale or collection of all assets.
Profits, losses, and cash distributions are allocated 90% to the limited
partners and 10% to the General Partner until such time as the limited
partners have received cash equal to 100% of their contributions to the
Partnership. Thereafter, Partnership profits, losses, and cash
distributions are allocated 70% to the limited partners and 30% to the
General Partner.
Cash and Equivalents
The Partnership defines cash equivalents as all highly liquid investments
with an original maturity of three months or less. The Partnership
maintains cash balances at one bank in accounts which exceeded federally
insured limits by approximately $237,000 at December 31, 1996. The
Partnership uses a cash management system whereby idle cash balances are
transferred daily into a master account and invested in high quality,
short-term securities that do not enjoy the benefit of the federal
insurance. The Partnership's management believes that these cash balances
are not subject to any significant credit risk due to the nature of the
investments and the strength of the bank and has not experienced any past
losses with cash and equivalent investments.
F-7
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Cash and Equivalents, Continued
The Partnership received interest income from these investments, net of
interest expense, of $3,389 in 1996. The Partnership incurred interest
expense, net of interest income, of $13,294 and $13,095 in 1995 and 1994,
respectively.
Cash Held in Trust
The General Partner anticipates that the Partnership and PAM II, III, IV
and V, may, in the future, be reorganized and merged into one corporation
(Potential Merger Participant PAM Funds). In an effort to accomplish that
reorganization and merger, the General Partner, on behalf of the
Partnership and the other Potential Merger Participant PAM Funds, entered
into an agreement on December 12, 1995 with the State of California
Department of Corporations, pursuant to the provisions of which the
Performance Asset Management Fund Trust ("Trust") was created. These funds
held in trust are subject to the terms of the Trust Agreement. The Trust
was the recipient of a portion of the funds resulting from the settlement
of certain then pending litigation between the Partnership and its
affiliates and West Capital Financial Services Corp. ("WCFSC") and its
affiliates. The trust fund balance until Trust termination must exceed
$5,000,000 among all other Potential Merger Participant PAM Funds. The
Trust will terminate and the trustee will distribute all of the remaining
funds held by the trustee on August 18, 1998 if reorganization and merger
is not completed by that date. The Partnership's share of the Trust's funds
was zero at December 31, 1996 and $4,221 at December 31, 1995.
Investment in Distressed Loan Portfolios and Revenue Recognition
Investments in distressed loan portfolios are carried at the lower of cost
or estimated net realizable value. Amounts collected are treated as a
reduction to the carrying basis of the related investment on an individual
portfolio basis and are reported in the Statement of Operations as
portfolio basis recovery. Under the cost recovery method of revenue
recognition used by the Partnership, income is not recognized until 100%
recovery of the carrying value of the investment in each portfolio occurs.
Estimated net realizable value represents management's estimates, based on
its present plans and intentions, of the present value of future
collections. Due to the distressed nature of these investments, no interest
is earned on outstanding balances, and there is no assurance that the
unpaid balances of these investments
F-8
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Investment in Distressed Loan Portfolios and Revenue Recognition, Continued
will ultimately be collected. Any adjustments reducing the carrying value
of the individual portfolios are recorded in the results of operations as
general and administrative expense.
Organization Costs, Net
Organization costs include legal and other professional fees incurred
related to the initial organization of the Partnership. These costs have
been capitalized and amortized using the straight-line method over five
years ending in 1996.
Professional Expenses
Professional expenses are incurred in relation to ongoing accounting and
legal assistance.
Income Taxes
No provision for income taxes has been provided for in the financial
statements, except for the Partnership's minimum state franchise tax
liability of $800. All partners report individually on their share of
Partnership operating results.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from the estimates.
Financial Statement Classification
Certain amounts within the 1995 and 1994 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
F-9
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net
Investments in distressed loan portfolios consist primarily of charged-off
credit card accounts and consumer loan balances, such as auto and personal
lines of credit, originated by independent third-party financial
institutions located throughout the United States. In addition, the
Partnership acquired portfolios of defaulted consumer debts which were
rewritten under terms different from the original obligation. The fair
value of these investments was determined by discounting the estimated
future cash collections on such investments during the estimated portfolio
holding period using a discount rate commensurate with the risks involved.
The discount rate converts the individual portfolio's expected future cash
flows to a calculated present value. The Partnership utilized an industry
specific discount rate from Ibbotson's Cost of Capital Yearbook 1997 which
considered information for the 1996 year. The Partnership utilized the cost
of capital rate experienced in 1996 by personal finance companies. The
Partnership selected the personal finance companies' data as it most
closely reflected comparable economic risk levels and the type of business
operations encountered. The weighted average cost of capital for personal
finance companies was between 7.31 and 9.4 for 1996 and 1995. The
Partnership used a rate within this range.
At December 31, 1996 and 1995, investments in distressed loan portfolios
consisted of the following: 1996
1996
------------------------------
Carrying Fair
Amount Value
------ -----
Credit card accounts $912,597 $1,480,656
Consumer loans 356,989 425,479
---------- ----------
$1,269,586 $1,906,135
========== ==========
1995
------------------------------
Carrying Fair
Amount Value
------ -----
Credit card accounts $287,551 $512,174
Consumer loans 418,540 503,742
---------- ----------
$706,091 $1,015,916
========== ==========
F-10
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net, Continued
At December 31, 1996 and 1995, the allowance for possible losses on
investments (the "allowance") in specific distressed loan portfolios
consisted of the following:
1996
----------------------------------------------
Investment Allowance for Carrying
Balance Portfolio Losses Amount
------- ---------------- ------
Credit card accounts $925,024 -- $925,024
Consumer loans 621,370 ($276,808) 344,562
----------- ----------- -----------
$1,546,394 ($276,808) $1,269,586
=========== =========== ===========
1995
----------------------------------------------
Investment Allowance for Carrying
Balance Portfolio Losses Amount
------- ---------------- ------
Credit card accounts $287,551 -- $287,551
Consumer loans 695,348 ($276,808) 418,540
--------- --------- ---------
$982,899 ($276,808) $706,091
========= ========= =========
The Partnership continuously evaluates the collectibility of distressed
loan balances by reviewing the cash flows from the individual portfolios as
well as their respective market values. The Partnership adjusts the
allowance of those portfolios for which the cash flows or market values of
the portfolios are less than the current net book value. The Partnership
has recorded an allowance for losses on investments in specific distressed
loan portfolios of $276,808 at December 31, 1996, 1995, and 1994,
respectively.
3. Related Party Transactions
The Partnership has entered into several fee and cost reimbursement
arrangements with affiliated corporations most of which are provided for
and documented in the limited partnership agreement and the offering
prospectus. With the exception of PCM, all of the entities are controlled
by the General Partner and/or its sole shareholder. In the case of PCM,
there is one minority shareholder who holds one and one-half per cent of
the outstanding stock. The affiliated corporations and other affiliated
entities are identified below:
F-11
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
Affiliated Corporations:
Performance Development, Inc. ("PDI")
Performance Capital Management ("PCM")
Spectrum Capital Management, Inc. ("Spectrum")
Other Affiliated Entities:
Performance Asset Management Funds II, III, IV, and V, Ltd. ("PAM
Funds")
PDI was formed as a California corporation in June 1990 to engage in
various aspects of the investment banking industry. PDI is also the General
Partner for the PAM Funds and various other California limited
partnerships. PDI, in accordance with the limited partnership agreement and
offering prospectus, is reimbursed for legal, accounting, and other costs
relating to the limited partnership. In addition, the Partnership pays PDI
an annual management fee of 2.0% of the net asset value of the Partnership
portfolio assets during the operating phase of the Partnership in
accordance with the provisions of the limited partnership agreement. As the
General Partner in the Partnership, PDI is also entitled to a portion of
periodic distributions to partners, in accordance with the provisions of
the limited partnership agreement.
PDI's management fees incurred and recorded by the Partnership totaled
$25,979, $23,096 and $17,584 for the years ended December 31, 1996, 1995,
and 1994, respectively. The Partnership made general partner capital
distributions to PDI of $17,483, $23,422 and $87,500 for the years ended
December 31, 1996, 1995, and 1994, respectively.
At December 31, 1996 and 1995, the Partnership had amounts owed to PDI
recorded as amounts due to affiliates of $271,145 and $221,329,
respectively.
PCM was formed as a California corporation in February 1993, and since its
formation has performed services for the Partnership and the PAM Funds
relative to locating, evaluating, negotiating, acquiring, servicing, and
collecting investments in distressed loan portfolios. PCM acquires
distressed loan portfolios from third
F-12
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
parties and sells the portfolios to the Partnership for amounts determined
by the General Partner to be reasonable, customary, and competitive in
light of the size, type and character of the acquired portfolios and
consistent with the limited partnership agreement. The Partnership also
enters into agreements with PCM to collect and service the acquired
portfolios. The agreements generally provide that all proceeds generated
from the collection of portfolio assets will be shared by the parties in
proportion to their respective distribution interests, generally 55% to 65%
for the Partnership and 35% to 45% for PCM. The Partnership also reimburses
PCM for certain costs incurred in the collection of portfolio assets.
For the years ended December 31, 1996, 1995, and 1994, the Partnership was
charged $43,257, $365, and $0, respectively, by PCM for collection expenses
which included but were not limited to collection letters that were sent
out to the debtors, debtor tracers utilized in an attempt to locate current
debtors, and administration costs incurred when setting up each debtor
profile in the PCM information database.
For the years ended December 31, 1996 and 1995, PCM sold to the Partnership
two portfolios and one portfolio and recorded acquisition fees for these
portfolios of $363,405 and $0, respectively. These acquisition fees have
been included in the carrying value of the related Partnership investments
(see Note 1 Cash Held in Trust).
The Partnership had three portfolio sales for $189,744 in the year ended
December 31, 1996. The Partnership had no sales in 1995 and 1994. PCM
effects the sale of the portfolios for the Partnership to non-related third
parties and retains 15% of the proceeds as a commission.
At December 31, 1996 and 1995, the Partnership had a net amount due to PCM
of $56,483 and $222,189, respectively.
Spectrum was formed in 1988 to serve as an employment service bureau to
PCM, PDI and the PAM Funds. All employees, while directly employed by
Spectrum, work for the benefit of PCM, PDI and the PAM Funds. The
Partnership pays PDI, as General Partner, a fee equal to the employee
service fee it paid to Spectrum. For the year ended December 31, 1996,
employee service fees were
F-13
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
$30,441. The Partnership paid no employee service fees in 1995 and 1994.
Prior to 1994, Spectrum performed and earned fees related to asset
location, research, due diligence, and acquisition services provided for
the Partnership.
On January 1, 1994, the Partnership entered into an agreement to borrow
$158,000 from Spectrum for future portfolio acquisitions. The agreement was
evidenced by a promissory note, which accrued interest at 8% per annum and
required all remaining principal and interest to be paid on or before June
30, 1995. On June 30, 1995, the Partnership renegotiated and extended the
agreement's remaining outstanding principal and interest on substantially
the same terms and the outstanding balance is due on demand.
On December 31, 1995, the Partnership entered into an agreement to
negotiate the outstanding principal and interest of $176,914 under
substantially the same terms and conditions of the previous note
agreements. During the years ended December 31, 1996, 1995, and 1994, the
Partnership incurred interest expense related to the note totaling $14,684,
$13,816, and $13,098, respectively.
4. Settlement with West Capital Financial Services Corp.
On April 8, 1994, the General Partner, on behalf of the Partnership and the
PAM Funds, entered into a Stock Acquisition Agreement ("Stock Agreement")
with WCFSC, for the purpose of acquiring 50% of the then issued and
outstanding no par common shares of WCFSC. The Stock Agreement provided
that the Partnership and the PAM Funds would receive credits for
approximately $1,881,950 due them from WCFSC. The Partnership and the PAM
Funds would then remit cash in the amount of $1,970,000 that was payable
during the five month period subsequent to the agreement date of the
transaction.
Certain differences of opinion developed between the General Partner and
WCFSC regarding the terms and conditions of the Stock Agreement. As a
result, the General Partner, for the benefit of the Partnership and the PAM
Funds, commenced litigation against WCFSC and certain of its affiliates
("WCFSC Dispute").
F-14
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Settlement with West Capital Financial Services Corp., Continued
On February 8, 1996, the parties to the WCFSC Dispute entered into a
Settlement Agreement and Mutual General Release ("Settlement Agreement")
for the purpose of settling and resolving any and all disputes existing
between the various parties to the WCSFC Dispute. The Settlement Agreement
resulted in the dismissal of the WCFSC Dispute, release by all parties of
all claims against other involved parties, including those claims relating
to the Stock Agreement, and the assignment and transfer by the Partnership
and the Pam Funds to WCFSC of certain distressed loan portfolios.
The Settlement Agreement required that WCFSC pay to the Partnership and its
affiliates $16,194,850 in exchange for the general release as well as the
transfer to WCFSC by the Partnership and the PAM Funds of certain interests
in certain distressed loan portfolios, and the transfer of various other
assets and rights. In addition, the Settlement Agreement required the
establishment of a defense fund of $250,000 from the proceeds which has
been available to pay legal fees and costs incurred by WCFSC to defend any
and all actions which may be brought by limited partners of the Partnership
and the PAM Funds. To date no such actions have been brought and no funds
have been expended. The defense fund terminates in July 1999. Any remaining
funds and earned interest will be distributed to the Partnership and the
PAM Funds. The Partnership's portion of the defense fund is included in
other assets.
The proceeds from the Settlement Agreement were allocated to the
Partnership and its affiliates, including the PAM Funds, by the General
Partner in accordance with the respective interests of the Partnership and
those affiliates. Accordingly, the Partnership was allocated $1,483,254 of
the total settlement proceeds (see Note 1 Cash Held in Trust).
The Settlement Agreement was approved by 78.29% of the limited partners of
the Partnership; none of the limited partners of the Partnership
disapproved; and 21.71% of the limited partners of the Partnership provided
no responses. A general release in favor of WCFSC was executed by 91.12% of
all the limited partners in the Partnership and the PAM Funds.
F-15
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
5. Partners' Capital
In 1995 the limited partners voted to suspend partner distributions in
order to utilize cash to enhance the Partnership's operations. Cash
distributions were reinstated in 1996. For the years ended December 31,
1996, 1995, and 1994, the Partnership had 1,049, 1,050, and 1,050
partnership units, respectively, outstanding of the 2,000 partnership units
authorized. At inception, the General Partner contributed $52,600 (1%) of
the capital of the Partnership.
The net income (loss) per partnership unit was calculated by dividing the
total limited partner net income (loss) by the number of limited
partnership units issued and outstanding as of December 31, 1996, 1995 and
1994. The general partner did not own any partnership units at December 31,
1996, 1995 and 1994.
6. Disclosures about Fair Value of Financial Instruments
The carrying amounts reported on the Balance Sheet for cash and cash
equivalents approximate fair value due to the short-maturity of these
instruments.
The carrying values of due to affiliates and due from affiliates
approximate fair value.
The fair value of investment in distressed loan portfolios is addressed in
Note 2 Investments in Distressed Loan Portfolios.
7. Year 2000 Disclosure
PCM has begun the process of identifying, evaluating and implementing
changes to PCM's computer programs necessary to address the Year 2000
issue. The General Partner is currently addressing the Partnership's
internal Year 2000 issue by coordinating with PCM in connection with PCM's
modification of existing programs and conversions to new programs. The
General Partner is also in communication with financial institutions and
other entities with which the Partnership conducts business to help them
identify and resolve the Year 2000 issue as it relates to the Partnership's
business operations. An assessment of the readiness of those third party
institutions and entities with which the Partnership does business is
ongoing. While PCM and the General Partner are confident that PCM will
complete the assessment and remediation of PCM's computer software,
F-16
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
7. Year 2000 Disclosure, Continued
there can be no assurance that the necessary modifications and conversions
by those third party institutions and entities with which the Partnership
conducts business will be completed in a timely manner, which could have a
material adverse effect on the Partnership's results of operations. The
total cost to the Partnership associated with the required modifications
and conversions is not expected to be material to the Partnership's results
of operations and financial position and is being expensed as incurred.
8. New Pronouncements
Management has reviewed the following new pronouncements issued in 1996 by
the Financial Accounting Standards Board: SFAS 120, Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Companies;
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of; SFAS 122, Accounting for Mortgage
Servicing Rights; SFAS 123, Accounting for Stock-Based Compensation; SFAS
124, Accounting for Certain Investments Held by Not-for-Profit
Organizations; SFAS 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities; SFAS 126, Exemption
for Certain Required Disclosures about Financial Instruments for Certain
Nonpublic Entities; SFAS 127, Deferral of the Effective Date of Certain
Provisions of SFAS 125; and SOP 96-1, Environmental Remediation
Liabilities. Management believes these pronouncements do not apply or will
not have a material impact to the Partnership.
F-17
<PAGE>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
9. Net Investment Income
The following schedule summarizes portfolio sales and collections of debt
on portfolios held by the Partnership. Related portfolio basis recoveries
and net investment income are also presented (see Note 1 for the
Partnership's revenue recognition policy).
1996
-------------------------------------------------
Sales to Collection
WCFSC Third Parties of Debt Total
----- ------------- ------- -----
Portfolio collections $846,654 $189,744 $254,146 $1,290,544
Portfolio basis recovery 326,514 189,744 235,858 752,166
---------- ---------- ---------- ----------
Net investment income $520,140 -- $18,288 $538,428
========== ========== ========== ==========
1995
-------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ------- -----
Portfolio collections -- $290,328 $290,328
Portfolio basis recovery -- 109,531 109,531
---------- ---------- ----------
Net investment income -- $180,797 $180,797
========== ========== ==========
1994
-------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ------- -----
Portfolio collections -- $735,412 $735,412
Portfolio basis recovery -- 530,204 530,204
---------- ---------- ----------
Net investment income -- $205,208 $205,208
========== ========== ==========
F-18
<PAGE>
Performance Asset Management
Fund II, Ltd.,
A California Limited Partnership
Financial Statements
For the Years Ended
December 31, 1996, 1995, and 1994
F-19
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Index to Financial Statements
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
Report of Independent Auditors.................................................1
Financial Statements of Performance Asset Management Fund II, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996, and 1995...........................2
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994........................................3
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1996, 1995, and 1994............................4
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994........................................5
Notes to Financial Statements..................................................6
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Performance Asset Management Fund II, Ltd.
A California Limited Partnership
We have audited the accompanying balance sheets of Performance Asset Management
Fund II, Ltd., A California Limited Partnership ("Partnership"), as of December
31, 1996 and 1995, and the related statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Asset Management
Fund II, Ltd., A California Limited Partnership, as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
February 21, 1997
F-21
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Balance Sheets
December 31, 1996 and 1995
----------------
ASSETS
1996 1995
----------- -----------
Cash and equivalents $1,024,507 $144,800
Cash held in trust 1,003,215 1,171,869
Investments in distressed loan portfolios, net 1,371,176 1,070,725
Receivable from West Capital -- 778,565
Due from affiliates 353,615 201,632
Other assets 42,942 115,367
Organization costs, net 585 1,692
----------- -----------
Total assets $3,796,040 $3,484,650
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable -- $1,743
Due to affiliates $271,501 2,250
----------- -----------
Total liabilities 271,501 3,993
----------- -----------
General partner's deficit (no units outstanding) (304,726) (309,388)
Limited partners capital (1,600 units authorized;
1,548 and 1,549 units issued and outstanding
at December 31, 1996, and 1995, respectively) 3,829,265 3,790,045
----------- -----------
Total partners' capital 3,524,539 3,480,657
----------- -----------
Total liabilities and partners' capital $3,796,040 $3,484,650
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Statements of Operations
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
Portfolio collections $1,707,090 $1,022,494 1,507,295
Less: portfolio basis recovery 1,202,254 388,307 1,048,403
---------- ---------- ----------
Net investment income 504,836 634,187 458,892
---------- ---------- ----------
Cost of operations:
Collection expense 67,854 12,336 27,191
Management fee expense 75,464 68,385 70,022
Professional fees 189,709 180,540 5,957
Amortization 1,107 1,107 1,107
General and administrative expense 8,082 3,345 7,412
---------- ---------- ----------
Total operating expenses 342,216 265,713 111,689
---------- ---------- ----------
Income from operations 162,620 368,474 347,203
Other income:
Interest 141,209 16,792 22,912
Other 886 -- 9,250
---------- ---------- ----------
Net income $304,715 $385,266 $379,365
========== ========== ==========
Net income allocable to general partner $30,472 $38,527 $37,936
========== ========== ==========
Net income allocable to limited partners $274,243 $346,739 $341,429
========== ========== ==========
Income per limited partnership unit $177.16 $223.84 $220.42
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Statements of Partners' Capital (Deficit)
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993 ($224,234) $4,616,427 $4,392,193
Redemption of twelve partnership units -- (60,000) (60,000)
Distributions (127,178) (1,144,600) (1,271,778)
Net income 37,936 341,429 379,365
----------- ----------- -----------
Balance, December 31, 1994 (313,476) 3,753,256 3,439,780
Distributions (34,439) (309,950) (344,389)
Net income 38,527 346,739 385,266
----------- ----------- -----------
Balance, December 31, 1995 (309,388) 3,790,045 3,480,657
Distributions (25,810) (230,023) (255,833)
Redemption of one partnership unit -- (5,000) (5,000)
Net income 30,472 274,243 304,715
----------- ----------- -----------
Balance, December 31, 1996 ($304,726) $3,829,265 $3,524,539
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Statements of Cash Flows
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $304,715 $385,266 $379,365
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 1,107 1,107 1,107
Gain on repurchase of limited partnership units -- -- (9,250)
Decrease (increase) in assets:
Other assets 72,425 (35,298) 238,071
Due from affiliates (151,983) (188,756) 76,912
Increase (decrease) in liabilities:
Accounts payable (1,743) (537) (12,664)
Due to affiliates 269,251 477,045 12,509
----------- ----------- -----------
Net cash provided by operating activities 493,772 638,827 686,050
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Recovery of portfolio basis 1,202,254 388,307 1,048,403
Receivable from West Capital 778,565 -- (401,259)
Cash held in trust 168,654 (1,171,869) --
Purchase of investments in distressed loan portfolios (1,502,705) (114,183) (854,139)
----------- ----------- -----------
Net cash provided by (used in) investing activities 646,768 (897,745) (206,995)
----------- ----------- -----------
Cash flows used in financing activities:
Distributions to partners (255,833) (344,389) (1,271,778)
Redemption of partnership units (5,000) -- --
Repurchase of limited partnership units -- -- (50,750)
----------- ----------- -----------
Net cash used in financing activities (260,833) (344,389) (1,322,528)
----------- ----------- -----------
Net increase (decrease) in cash 879,707 (603,307) (843,473)
Cash at beginning of period 144,800 748,107 1,591,580
----------- ----------- -----------
Cash at end of period $1,024,507 $144,800 $748,107
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Franchise taxes $800 $800 $800
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
Performance Asset Management Fund II, Ltd.
A California Limited Partnership
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Performance Asset Management Fund II, Ltd., A California Limited
Partnership (the "Partnership"), was formed in April 1992, for the purpose
of acquiring investments in or direct ownership of distressed loan
portfolios from financial institutions and other sources. Interests in the
Partnership were sold in a private placement offering pursuant to
Regulation D promulgated by the Securities and Exchange Commission on a
"best efforts" basis; however, the Partnership did not begin its primary
operations until May 1992. The general partner is Performance Development,
Inc., a California corporation ("PDI")(the "General Partner").
The Partnership terminates at December 31, 2005. At that time, the
Partnership will distribute any remaining cash after payment of Partnership
obligations following the sale or collection of all assets.
Profits, losses, and cash distributions are allocated 90% to the limited
partners and 10% to the General Partner until such time as the limited
partners have received cash equal to 100% of their contributions to the
Partnership. Thereafter, Partnership profits, losses, and cash
distributions are allocated 70% to the limited partners and 30% to the
General Partner.
Cash and Equivalents
The Partnership defines cash equivalents as all highly liquid investments
with an original maturity of three months or less. The Partnership
maintains cash balances at one bank in accounts which exceeded federally
insured limits by approximately $1,060,000 and $44,800 at December 31, 1996
and 1995, respectively. The Partnership uses a cash management system
whereby idle cash balances are transferred daily into a master account and
invested in high quality, short-term securities that do not enjoy the
benefit of the federal insurance. The Partnership's management believes
that these cash balances are not subject to any significant credit risk due
to the nature of the investments and the strength of the bank and has not
experienced any past losses with cash and equivalent investments.
The Partnership received interest income from these investments of
$141,209, $16,792, and $22,912 in 1996, 1995, and 1994, respectively.
F-26
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Cash Held in Trust
The General Partner anticipates that the Partnership and PAM, PAM III, IV,
and V, may, in the future, be reorganized and merged into one corporation
(Potential Merger Participant PAM Funds). In an effort to accomplish that
reorganization and merger, the General Partner, on behalf of the
Partnership and the other Potential Merger Participant PAM Funds, entered
into an agreement on December 12, 1995 with the State of California
Department of Corporations, pursuant to the provisions of which the
Performance Asset Management Fund Trust ("Trust") was created. These funds
held in trust are subject to the terms of the Trust Agreement. The Trust
was the recipient of a portion of the funds resulting from the settlement
of certain then pending litigation between the Partnership and its
affiliates and West Capital Financial Services Corp. ("WCFSC") and its
affiliates. The trust fund balance until Trust termination must exceed
$5,000,000 among all Potential Merger Participant PAM Funds. The Trust will
terminate and the trustee will distribute all of the remaining funds held
by the trustee on August 18, 1998 if reorganization and merger is not
completed by that date. The Partnership's share of the Trust's funds at
December 31, 1996 and 1995 was $1,003,215 and $1,171,869.
Investment in Distressed Loan Portfolios and Revenue Recognition
Investments in distressed loan portfolios are carried at the lower of cost
or estimated net realizable value. Amounts collected are treated as a
reduction to the carrying basis of the related investment on an individual
portfolio basis and are reported in the Statement of Operations as
portfolio basis recovery. Under the cost recovery method of revenue
recognition used by the Partnership, income is not recognized until 100%
recovery of the carrying value of the investment in each portfolio occurs.
Estimated net realizable value represents management's estimates, based on
its present plans and intentions, of the present value of future
collections. Due to the distressed nature of these investments, no interest
is earned on outstanding balances, and there is no assurance that the
unpaid balances of these investments will ultimately be collected. Any
adjustments reducing the carrying value of the individual portfolios are
recorded in the results of operations as a general and administrative
expense.
F-27
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Organization Costs, Net
Organization costs include legal and other professional fees incurred
related to the initial organization of the Partnership. These costs have
been capitalized and amortized using the straight-line method over five
years ending in 1997.
Professional Expenses
Professional expenses are incurred in relation to ongoing accounting and
legal assistance.
Income Taxes
No provision for income taxes has been provided for in the financial
statements, except for the Partnership's minimum state franchise tax
liability of $800. All partners report individually on their share of
Partnership operating results.
Supplemental Non-Cash Disclosure
In 1995 the Partnership sold two distressed asset portfolios to Performance
Asset Management Fund IV, Ltd. for $575,993, which was equal to the
remaining carrying value at December 31, 1995.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from the estimates.
Financial Statement Classification
Certain amounts within the 1995 and 1994 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
F-28
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net
Investments in distressed loan portfolios consist primarily of charged-off
credit card accounts and consumer loan balances, such as auto and personal
lines of credit, originated by independent third-party financial
institutions located throughout the United States. In addition, the
Partnership acquired portfolios of defaulted consumer debts which were
rewritten under terms different from the original obligation. The fair
value of these investments was determined by discounting the estimated
future cash collections on such investments during the estimated portfolio
holding period using a discount rate commensurate with the risks involved.
The discount rate converts the individual portfolio's expected future cash
flows to a calculated present value. The Partnership utilized an industry
specific discount rate from Ibbotson's Cost of Capital Yearbook 1997 which
considered information for the 1996 year. The Partnership utilized the cost
of capital rate experienced in 1996 by personal finance companies. The
Partnership selected the personal finance companies' data as it most
closely reflected comparable economic risk levels and the type of business
operations encountered. The 1996 and 1995 weighted average cost of capital
for personal finance companies was between 7.31 and 9.4. The Partnership
used a rate within this range.
At December 31, 1996 and 1995, investments in distressed loan portfolios
consisted of the following:
1996
----------------------------
Carrying Fair
Amount Value
---------- ----------
Credit card accounts $1,305,291 $2,052,867
Consumer loans 65,885 82,052
---------- ----------
$1,371,176 $2,134,919
========== ==========
1995
----------------------------
Carrying Fair
Amount Value
---------- ----------
Credit card accounts $254,681 $304,502
Performing rewritten accounts 5,187 5,187
Consumer loans 810,857 810,857
---------- ----------
$1,070,725 $1,120,546
========== ==========
F-29
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net, Continued
The Partnership continuously evaluates the collectibility of distressed
loan balances by reviewing the cash flows from the individual portfolios as
well as their respective market values. The Partnership adjusts the
allowance of those portfolios for which the cash flows or market values of
the portfolios are less than the current net book value. The Partnership
has not recorded a reserve for possible losses in distressed loan
portfolios as of December 31, 1996, 1995, and 1994.
3. Related Party Transactions
The Partnership has entered into several fee and cost reimbursement
arrangements with affiliated corporations most of which are provided for
and documented in the limited partnership agreement and the offering
prospectus. With the exception of PCM, all of the entities are controlled
by the General Partner and/or its sole shareholder. In the case of PCM,
there is one minority shareholder who holds one and one-half per cent of
the outstanding stock. The affiliated corporations and other affiliated
entities are identified below:
Affiliated Corporations:
Performance Development, Inc. ("PDI")
Performance Capital Management ("PCM")
Spectrum Capital Management, Inc. ("Spectrum")
Other Affiliated Entities:
Performance Asset Management Fund, Ltd. and
Performance Asset Management Funds III, IV, and V, Ltd. ("PAM Funds")
PDI was formed as a California corporation in June 1990 to engage in
various aspects of the investment banking industry. PDI is also the General
Partner for the PAM Funds and various other California limited
partnerships. PDI, in accordance with the limited partnership agreement and
offering prospectus, is reimbursed for legal, accounting, and other costs
relating to the limited partnership. In addition, the Partnership pays PDI
an annual management fee of 2.5% of the net asset value of the Partnership
portfolio assets during the operating phase of the Partnership in
accordance with the provisions of the limited partnership agreement. As the
General Partner in the Partnership, PDI is also entitled to a portion of
periodic distributions to partners, in accordance with the provisions of
the limited partnership agreement.
F-30
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
PDI's management fees incurred and recorded by the Partnership totaled
$75,464, $68,385, and $70,022 for the years ended December 31, 1996, 1995,
and 1994, respectively. The Partnership made general partner capital
distributions to PDI of $25,810, $34,439, and $127,178 for the years ended
December 31, 1996, 1995, and 1994, respectively. On December 31, 1995, the
Partnership sold two portfolio assets with a remaining carrying value of
$588,632 to PAM IV for cash of $12,639 and a receivable collectible from
PDI for $575,993. At December 31, 1996, the Partnership had a net amount
owed to PDI included in amounts due to affiliates of $175,887. At December
31, 1995, the Partnership had a net amount owed from PDI included in
amounts due from affiliates of $148,374.
PCM was formed as a California corporation in February 1993, and since its
formation has performed services for the Partnership and the PAM Funds
relative to locating, evaluating, negotiating, acquiring, servicing, and
collecting investments in distressed loan portfolios. PCM acquires
distressed loan portfolios from third-parties and sells the portfolios to
the Partnership for amounts determined by the General Partner to be
reasonable, customary, and competitive in light of the size, type and
character of the acquired portfolios and consistent with the limited
partnership agreement. The Partnership also enters into agreements with PCM
to collect and service the acquired portfolios. The agreements generally
provide that all proceeds generated from the collection of portfolio assets
will be shared by the parties in proportion to their respective
distribution interests, generally 55% to 65% for the Partnership and 35% to
45% for PCM. The Partnership also reimburses PCM for certain costs incurred
in the collection of portfolio assets.
For the years ended December 31, 1996, 1995, and 1994, the Partnership was
charged $67,854, $12,336, and $27,191, respectively, by PCM for collection
expenses which included but were not limited to collection letters that
were sent out to the debtors, debtor tracers utilized in an attempt to
locate current debtors, and administration costs incurred when setting up
each debtor profile in the PCM information database.
For the years ended December 31, 1996, 1995, and 1994, PCM sold to the
Partnership two portfolios, one portfolio, and four portfolios,
respectively, and recorded acquisition fees for these portfolios of
$412,930, $30,225, and $178,678,respectively. These acquisition fees have
been included in the carrying value of the related Partnership investments
(see Note 1 - Cash Held in Trust).
F-31
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
The Partnership had three portfolio sales for $112,259 in the year ended
December 31, 1996. The Partnership had no sales in 1995 and 1994. PCM
effects the sale of the portfolios for the Partnership to non-related third
parties and retains 15% of the proceeds as a commission.
At December 31, 1996 and 1995, the Partnership had a net amount due from
PCM of $43,947 and $9,008, respectively.
Spectrum was formed in 1988 to serve as an employment service bureau to
PCM, PDI and the PAM Funds. All employees, while directly employed by
Spectrum, work for the benefit of PCM, PDI and the PAM Funds. The
Partnership pays PDI, as General Partner, a fee equal to the employee
service fee it paid to Spectrum. For the year ended December 31, 1996,
employee service fees were $43,971. The Partnership paid no employee
service fees in 1995 and 1994. Prior to 1994, Spectrum performed and earned
fees related to asset location, research, due diligence, and acquisition
services provided for the Partnership.
4. Settlement with West Capital Financial Services Corp.
On April 8, 1994, the General Partner, on behalf of the Partnership and the
PAM Funds, entered into a Stock Acquisition Agreement ("Stock Agreement")
with WCFSC, for the purpose of acquiring 50% of the then issued and
outstanding no par common shares of WCFSC. The Stock Agreement provided
that the Partnership and the PAM Funds would receive credits for
approximately $1,881,950 due them from WCFSC. The Partnership and the PAM
Funds would then remit cash in the amount of $1,970,000 that was payable
during the five month period subsequent to the agreement date of the
transaction.
Certain differences of opinion developed between the General Partner and
WCFSC regarding the terms and conditions of the Stock Agreement. As a
result, the General Partner, for the benefit of the Partnership and the PAM
Funds, commenced litigation against WCFSC and certain of its affiliates
("WCFSC Dispute").
On February 8, 1996, the parties to the WCFSC Dispute entered into a
Settlement Agreement and Mutual General Release ("Settlement Agreement")
for the purpose of settling and resolving any and all disputes existing
between the various parties
F-32
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Settlement with West Capital Financial Services Corp., Continued
to the WCSFC Dispute. The Settlement Agreement resulted in the dismissal of
the WCFSC Dispute, release by all parties of all claims against other
involved parties, including those claims relating to the Stock Agreement,
and the assignment and transfer by the Partnership and the Pam Funds to
WCFSC of certain distressed loan portfolios.
The Settlement Agreement required that WCFSC pay to the Partnership and its
affiliates $16,194,850 in exchange for the general release as well as the
transfer to WCFSC by the Partnership and the PAM Funds of certain interests
in certain distressed loan portfolios, and the transfer of various other
assets and rights. In addition, the Settlement Agreement required the
establishment of a defense fund of $250,000 from the proceeds which has
been available to pay legal fees and costs incurred by WCFSC to defend any
and all actions which may be brought by limited partners of the Partnership
and the PAM Funds. To date no such actions have been brought and no funds
have been expended. The defense fund terminates in July 1999. Any remaining
funds and earned interest will be distributed to the Partnership and the
PAM Funds. The Partnership's portion of the defense fund is included in
other assets.
The proceeds from the Settlement Agreement were allocated to the
Partnership and its affiliates, including the PAM Funds, by the General
Partner in accordance with the respective interests of the Partnership and
those affiliates. Accordingly, the Partnership was allocated $2,529,949 of
the total settlement proceeds (see Note 1 Cash Held in Trust).
The Settlement Agreement was approved by 85.12% of the limited partners of
the Partnership; only 0.71% of the limited partners of the Partnership
disapproved; and 14.17% of the limited partners of the Partnership provided
no responses. A general release in favor of WCFSC was executed by 91.12% of
all the limited partners in the Partnership and the PAM Funds.
5. Partners' Capital
In 1995 the limited partners voted to suspend partner distributions in
order to utilize cash to enhance the Partnership's operations. Cash
distributions were reinstated in 1996. For the years ended December 31,
1996, 1995, and 1994, the Partnership
F-33
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
5. Partners' Capital, Continued
had 1,548, 1,549, and 1,549 partnership units, respectively, outstanding of
the 1,600 partnership units authorized.
The net income (loss) per limited partnership unit was calculated by
dividing the total limited partner net income (loss) by the number of
limited partnership units issued and outstanding as of December 31, 1996,
1995, and 1994. The General Partner did not own any partnership units as of
December 31, 1996, 1995, and 1994.
6. Disclosures about Fair Value of Financial Instruments
The carrying amounts reported on the Balance Sheet for cash and cash
equivalents approximate fair value due to the short-maturity of these
instruments.
The carrying values of due to affiliates and due from affiliates
approximate fair value.
The fair value of investment in distressed loan portfolios is addressed in
Note 2 Investments in Distressed Loan Portfolios.
7. Year 2000 Disclosure
PCM has begun the process of identifying, evaluating and implementing
changes to PCM's computer programs necessary to address the Year 2000
issue. The General Partner is currently addressing the Partnership's
internal Year 2000 issue by coordinating with PCM in connection with PCM's
modification of existing programs and conversions to new programs. The
General Partner is also in communication with financial institutions and
other entities with which the Partnership conducts business to help them
identify and resolve the Year 2000 issue as it relates to the Partnership's
business operations. An assessment of the readiness of those third party
institutions and entities with which the Partnership does business is
ongoing. While PCM and the General Partner are confident that PCM will
complete the assessment and remediation of PCM's computer software, there
can be no assurance that the necessary modifications and conversions by
those third party institutions and entities with which the Partnership
conducts business will be completed in a timely manner, which could have a
material adverse effect on the Partnership's results of operations. The
total cost to the Partnership
F-34
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
7. Year 2000 Disclosure, Continued
associated with the required modifications and conversions is not expected
to be material to the Partnership's results of operations and financial
position and is being expensed as incurred.
8. New Pronouncements
Management has reviewed the following new pronouncements issued in 1996 by
the Financial Accounting Standards Board: SFAS 120, Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Companies;
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of; SFAS 122, Accounting for Mortgage
Servicing Rights; SFAS 123, Accounting for Stock-Based Compensation; SFAS
124, Accounting for Certain Investments Held by Not-for-Profit
Organizations; SFAS 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities; SFAS 126, Exemption
for Certain Required Disclosures about Financial Instruments for Certain
Nonpublic Entities; SFAS 127, Deferral of the Effective Date of Certain
Provisions of SFAS 125; and SOP 96-1, Environmental Remediation
Liabilities. Management believes these pronouncements do not apply or will
not have a material impact to the Partnership.
9. Net Investment Income
The following schedule summarizes portfolio sales and collections of debt
on portfolios held by the Partnership. Related portfolio basis recoveries
and net investment income are also presented (see Note 1 for the
Partnership's revenue recognition policy).
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------------
Sales to Collection
WCFSC Third Parties of Debt Total
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Portfolio collections $1,240,861 $112,759 $353,470 $1,707,090
Portfolio basis recovery 797,585 112,759 291,910 1,202,254
---------- ---------- ---------- ----------
Net investment income $443,276 -- $61,560 $504,836
========== ========== ========== ==========
</TABLE>
F-35
<PAGE>
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
9. Net Investment Income, Continued
<TABLE>
<CAPTION>
1995
------------------------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ---------- ----------
<S> <C> <C> <C>
Portfolio collections -- $1,022,494 $1,022,494
Portfolio basis recovery -- 388,307 388,307
------------- ------------ ----------
Net investment income -- $634,187 $634,187
============= ============ ==========
<CAPTION>
1994
------------------------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ---------- ----------
<S> <C> <C> <C>
Portfolio collections -- $1,507,295 $1,507,295
Portfolio basis recovery -- 1,048,403 1,048,403
------------- ------------ ----------
Net investment income -- $458,892 $458,892
============= ============ ==========
</TABLE>
F-36
<PAGE>
Performance Asset Management
Fund III, Ltd.,
A California Limited Partnership
Financial Statements
For the Years Ended
December 31, 1996, 1995, and 1994
F-37
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Index to Financial Statements
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
Report of Independent Auditors................................................ 1
Financial Statements of Performance Asset Management Fund III, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995......................... 2
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994................................... 3
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1996, 1995, and 1994....................... 4
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994................................... 5
Notes to Financial Statements................................................. 6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
We have audited the accompanying balance sheets of Performance Asset Management
Fund III, Ltd., A California Limited Partnership ("Partnership"), as of December
31, 1996 and 1995, and the related statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Asset Management
Fund III, Ltd., A California Limited Partnership, as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Kelly & Company
- -------------------------
Kelly & Company
Newport Beach, California
February 21, 1997
F-38
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Balance Sheets
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
ASSETS
1996 1995
----------- -----------
Cash and equivalents $775,755 $210,140
Cash held in trust 2,656,338 762,639
Investments in distressed loan portfolios, net 2,566,546 3,642,353
Due from affiliate 56,039 --
Receivable from West Capital -- 927,540
Other assets 64,477 165,815
Organization costs, net 923 2,078
----------- -----------
Total assets $6,120,078 $5,710,565
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $715 $2,523
Due to affiliates 492,800 432,942
----------- -----------
Total liabilities 493,515 435,465
----------- -----------
General partner's deficit (no units outstanding) (289,959) (322,499)
Limited partner's capital (2,000 units authorized;
1,998 units issued and outstanding at
December 31, 1996, and1995) 5,916,522 5,797,599
----------- -----------
Total partners' capital 5,626,563 5,475,100
----------- -----------
Total liabilities and partners' capital $6,120,078 $5,910,565
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Statements of Operations
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Portfolio collections $4,725,191 $1,337,920 $1,870,385
Less: portfolio basis recovery 3,840,276 1,132,402 1,854,725
----------- ----------- -----------
Net investment income 884,915 205,518 15,660
----------- ----------- -----------
Cost of operations:
Collection expense 73,542 7,716 12,076
Management fee expense 51,425 92,447 121,205
Professional fees 254,453 208,877 6,856
Amortization 1,155 1,157 1,157
General and administrative expense 11,782 3,183 6,990
----------- ----------- -----------
Total operating expenses 392,357 313,380 148,284
----------- ----------- -----------
Income (loss) from operations 492,558 (107,862) (132,624)
Other income:
Interest 190,605 14,283 9,437
Other -- 1,735 900
----------- ----------- -----------
Net income (loss) $683,163 ($91,844) ($122,287)
=========== =========== ===========
Net income (loss) allocable to general partner
$68,315 ($9,184) ($12,229)
=========== =========== ===========
Net income (loss) allocable to limited partners
$614,848 ($82,660) ($110,058)
=========== =========== ===========
Income (loss) per limited partnership unit
$307.73 ($41.37) ($55.03)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Statements of Partners' Capital (Deficit)
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993 ($110,875) $7,536,217 $7,425,342
Distributions (148,383) (1,336,200) (1,484,583)
Net loss (12,229) (110,058) (122,287)
----------- ----------- -----------
Balance, December 31, 1994 (271,487) 6,089,959 5,818,472
Redemption of two partnership units -- (10,000) (10,000)
Distributions (41,828) (399,700) (441,528)
Net loss (9,184) (82,660) (91,844)
----------- ----------- -----------
Balance, December 31, 1995 (322,499) 5,597,599 5,275,100
Distributions (35,775) (295,925) (331,700)
Net income 68,315 614,848 683,163
----------- ----------- -----------
Balance, December 31, 1996 ($289,959) $5,916,522 $5,626,563
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $683,163 ($91,844) ($122,287)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization 1,155 1,157 1,157
Decrease (increase) in assets:
Other assets 101,338 (64,236) (17,991)
Due from affiliates (56,039) -- 8,695
Increase (decrease) in liabilities:
Accounts payable (1,808) (842) (7,304)
Due to affiliates 59,858 62,333 269,438
----------- ----------- -----------
Net cash provided by (used in) operating activities 787,667 (93,432) 131,708
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Recovery of portfolio basis 3,840,276 926,885 1,845,208
Receivable from West Capital 927,540 -- (25,103)
Cash held in trust (1,893,699) (762,639) --
Purchase of investments in distressed loan portfolios (2,764,469) (160,605) (204,928)
----------- ----------- -----------
Net cash provided by investing activities 109,648 3,641 1,615,177
----------- ----------- -----------
Cash flows used in financing activities:
Redemption of limited partnership units -- (10,000) --
Distributions to partners (331,700) (441,528) (1,484,583)
----------- ----------- -----------
Net cash used in financing activities (331,700) (451,528) (1,484,583)
----------- ----------- -----------
Net (decrease) increase in cash 565,615 (541,319) 262,302
Cash at beginning of period 210,140 751,459 489,157
----------- ----------- -----------
Cash at end of period $775,755 $210,140 $751,459
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Franchise taxes $800 $800 $800
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE>
Performance Asset Management Fund III, Ltd.
A California Limited Partnership
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Performance Asset Management Fund III, Ltd., A California Limited
Partnership (the "Partnership"), was formed in September 1992, for the
purpose of acquiring investments in or direct ownership of distressed loan
portfolios from financial institutions and other sources. Interests in the
Partnership were sold in a private placement offering pursuant to
Regulation D promulgated by the Securities and Exchange Commission on a
"best efforts" basis; however, the Partnership did not begin its primary
operations until October 1992. The general partner is Performance
Development, Inc., a California corporation ("PDI")(the "General Partner").
The Partnership terminates at December 31, 2005. At that time, the
Partnership will distribute any remaining cash after payment of Partnership
obligations following the sale or collection of all assets.
Profits, losses, and cash distributions are allocated 90% to the limited
partners and 10% to the General Partner until such time as the limited
partners have received cash equal to 100% of their contributions to the
Partnership. Thereafter, Partnership profits, losses, and cash
distributions are allocated 70% to the limited partners and 30% to the
General Partner.
Cash and Equivalents
The Partnership defines cash equivalents as all highly liquid investments
with an original maturity of three months or less. The Partnership
maintains cash balances at one bank in accounts which exceeded federally
insured limits by approximately $675,755 and $110,140 at December 31, 1996
and 1995, respectively. The Partnership uses a cash management system
whereby idle cash balances are transferred daily into a master account and
invested in high quality, short-term securities that do not enjoy the
benefit of the federal insurance. The Partnership's management believes
that these cash balances are not subject to any significant credit risk due
to the nature of the investments and the strength of the bank and has not
experienced any past losses with cash and equivalent investments.
F-43
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- -------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Cash and Equivalents, Continued
The Partnership received interest income from these investments of
$190,605, $14,283, and $9,437 in 1996, 1995, and 1994, respectively.
Cash Held in Trust
The General Partner anticipates that the Partnership and PAM, PAM II, IV,
and V, may, in the future, be reorganized and merged into one corporation
(Potential Merger Participant PAM Funds). In an effort to accomplish that
reorganization and merger, the General Partner, on behalf of the
Partnership and the other Potential Merger Participant PAM Funds, entered
into an agreement on December 12, 1995 with the State of California
Department of Corporations, pursuant to the provisions of which the
Performance Asset Management Fund Trust ("Trust") was created. These funds
held in trust are subject to the terms of the Trust Agreement. The Trust
was the recipient of a portion of the funds resulting from the settlement
of certain then pending litigation between the Partnership and its
affiliates and West Capital Financial Services Corp. ("WCFSC") and its
affiliates. The trust fund balance until Trust termination must exceed
$5,000,000 among all other Potential Merger Participant PAM Funds. The
Trust will terminate and the trustee will distribute all of the remaining
funds held by the trustee on August 18, 1998 if reorganization and merger
is not completed by that date. The Partnership's share of the Trust's funds
at December 31, 1996 and 1995 was $2,656,338 and $762,639.
Investment in Distressed Loan Portfolios and Revenue Recognition
Investments in distressed loan portfolios are carried at the lower of cost
or estimated net realizable value. Amounts collected are treated as a
reduction to the carrying basis of the related investment on an individual
portfolio basis and are reported in the Statement of Operations as
portfolio collections. Under the cost recovery method of revenue
recognition used by the Partnership, net investment income is not
recognized until 100% recovery of the carrying value of the investment in
the individual portfolio occurs. Estimated net realizable value represents
management's estimates, based on its present plans and intentions, of the
present value of future collections. Due to the distressed nature of these
investments, no interest is earned on outstanding balances, and there is no
assurance that the unpaid balances of these investments will ultimately
F-44
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Investment in Distressed Loan Portfolios and Revenue Recognition, Continued
be collected. Any adjustments reducing the carrying value of the individual
portfolios are recorded in the results of operations as a general and
administrative expense.
Organization Costs, Net
Organization costs include legal and other professional fees incurred
related to the initial organization of the Partnership. These costs have
been capitalized and amortized using the straight-line method over five
years ending in 1997.
Professional Expenses
Professional expenses are incurred in relation to ongoing accounting and
legal assistance.
Income Taxes
No provision for income taxes has been provided for in the financial
statements, except for the Partnership's minimum state franchise tax
liability of $800. All partners report individually on their share of
Partnership operating results.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from the estimates.
Financial Statement Classification
Certain amounts within the 1995 and 1994 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
F-45
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net
Investments in distressed loan portfolios consist primarily of
charged-off credit card accounts and consumer loan balances, such as
auto and personal lines of credit, originated by independent
third-party financial institutions located throughout the United
States. In addition, the Partnership acquired portfolios of
defaulted consumer debts which were rewritten under terms different
from the original obligation. The fair value of these investments
was determined by discounting the estimated future cash collections
on such investments during the estimated portfolio holding period
using a discount rate commensurate with the risks involved.
The discount rate converts the individual portfolio's expected
future cash flows to a calculated present value. The Partnership
utilized an industry specific discount rate from Ibbotsen's Cost of
Capital Yearbook 1997 which considered information for the 1996
year. The Partnership utilized the cost of capital rate experienced
in 1997 by personal finance companies. The Partnership selected the
personal finance companies' data as it most closely reflected
comparable economic risk levels and the type of business operations
encountered. The weighted average cost of capital for personal
finance companies was between 7.31 and 9.4 for 1996 and 1995. The
Partnership used a rate within this range.
At December 31, 1996 and 1995, investments in distressed loan
portfolios consisted of the following:
1996
-------------------------
Carrying Fair
Amount Value
------ -----
Credit card accounts $2,566,058 $4,254,288
Consumer loans 488 1,236
---------- ----------
$2,566,546 $4,255,524
========== ==========
1995
-------------------------
Carrying Fair
Amount Value
------ -----
Credit card accounts $1,168,650 $1,223,117
Performing rewritten accounts 1,952,735 1,952,735
Consumer loans 520,968 526,993
---------- ----------
$3,642,353 $3,702,845
========== ==========
F-46
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net, Continued
The Partnership continuously evaluates the collectibility of distressed
loan balances by reviewing the cash flows from the individual portfolios as
well as their respective market values. The Partnership adjusts the
allowance of those portfolios for which the cash flows or market values of
the portfolios are less than the current net book value. The Partnership
has not recorded a reserve for possible losses in distressed loan
portfolios as of December 31, 1996, 1995, and 1994.
3. Related Party Transactions
The Partnership has entered into several fee and cost reimbursement
arrangements with affiliated corporations most of which are provided for
and documented in the limited partnership agreement and the offering
prospectus. With the exception of PCM, all of the entities are controlled
by the General Partner and/or its sole shareholder. In the case of PCM,
there is one minority shareholder who holds one and one-half per cent of
the outstanding stock. The affiliated corporations and other affiliated
entities are identified below:
Affiliated Corporations:
Performance Development, Inc. ("PDI")
Performance Capital Management ("PCM")
Spectrum Capital Management, Inc. ("Spectrum")
Income Network Company ("INC")
Other Affiliated Entities:
Performance Asset Management Fund, Ltd. and
Performance Asset Management Funds II, IV, and V, Ltd. ("PAM Funds")
PDI was formed as a California corporation in June 1990 to engage in
various aspects of the investment banking industry. PDI is also the General
Partner for the PAM Funds and various other California limited
partnerships. PDI, in accordance with the limited partnership agreement and
offering prospectus, is reimbursed for legal, accounting, and other costs
relating to the limited partnership. In addition, the Partnership pays PDI
an annual management fee of 2.5% of the net asset value of the Partnership
portfolio assets during the operating phase of the Partnership in
F-47
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
accordance with the provisions of the limited partnership agreement. As the
General Partner in the Partnership, PDI is also entitled to a portion of
periodic distributions to partners, in accordance with the provisions of
the limited partnership agreement.
PDI's management fees incurred and recorded by the Partnership totaled
$51,425, $92,447, and $121,205 for the years ended December 31, 1996, 1995,
and 1994, respectively. The Partnership made general partner capital
distributions to PDI of $35,775, $41,828, and $148,383 for the years ended
December 31, 1996, 1995, and 1994, respectively. At December 31, 1996 and
1995, the Partnership had amounts owed to PDI included in amounts due to
affiliates of $492,364 and $420,681, respectively.
PCM was formed as a California corporation in February 1993, and since its
formation has performed services for the Partnership and the PAM Funds
relative to locating, evaluating, negotiating, acquiring, servicing, and
collecting investments in distressed loan portfolios. PCM acquires
distressed loan portfolios from third parties and sells the portfolios to
the Partnership for amounts determined by the General Partner to be
reasonable, customary, and competitive in light of the size, type and
character of the acquired portfolios and consistent with the limited
partnership agreement. The Partnership also enters into agreements with PCM
to collect and service the acquired portfolios. The agreements generally
provide that all proceeds generated from the collection of portfolio assets
will be shared by the parties in proportion to their respective
distribution interests, generally 55% to 65% for the Partnership and 35% to
45% for PCM. The Partnership also reimburses PCM for certain costs incurred
in the collection of portfolio assets.
For the years ended December 31, 1996, 1995, and 1994, the Partnership was
charged $73,542, $4,578, and $940, respectively, by PCM for collection
expenses which included but were not limited to collection letters that
were sent out to the debtors, debtor tracers utilized in an attempt to
locate current debtors, and administration costs incurred when setting up
each debtor profile in the PCM information database.
For the years ended December 31, 1996 and 1995, PCM sold to the Partnership
three portfolios and one portfolio, respectively, and recorded acquisition
fees for these portfolios of $686,459 and $42,513, respectively. These
acquisition fees have
F-48
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
been included in the carrying value of the related Partnership investments
(see Note 1 - Cash Held in Trust).
The Partnership sold three portfolios for $112,820 in the year ended
December 31, 1996. The Partnership had no sales in 1995 and 1994. PCM
effects the sale of the portfolios for the Partnership to non-related third
parties and retains 15% of the proceeds as a commission. The Partnership
had a net amount due from PCM of $56,039 and $432,942 at December 31, 1996
and 1995, respectively.
Spectrum was formed in 1988 to serve as an employment service bureau to
PCM, PDI and the PAM Funds. All employees, while directly employed by
Spectrum, work for the benefit of PCM, PDI and the PAM Funds. The
Partnership pays PDI, as General Partner, a fee equal to the employee
service fee it paid to Spectrum. For the year ended December 31, 1996,
employee service fees were $56,184. The Partnership paid no employee
service fees in 1995 and 1994. Prior to 1994, Spectrum performed and earned
fees related to asset location, research, due diligence, and acquisition
services provided for the Partnership.
INC was formed on February 1, 1988 and subsequently became a registered
broker-dealer and member of the National Association of Security Dealers,
Inc. and the Securities Investor Protection Corporation. INC's sole
shareholder is also the sole shareholder of the General Partner, PDI.
As of December 31, 1995, the Partnership had amounts owed to INC of $2,850
for payments made on behalf of the Partnership.
4. Settlement with West Capital Financial Services Corp.
On April 8, 1994, the General Partner, on behalf of the Partnership and the
PAM Funds, entered into a Stock Acquisition Agreement ("Stock Agreement")
with WCFSC, for the purpose of acquiring 50% of the then issued and
outstanding no par common shares of WCFSC. The Stock Agreement provided
that the Partnership and the PAM Funds would receive credits for
approximately $1,881,950 due them from WCFSC. The Partnership and the PAM
Funds would then remit cash in the amount of $1,970,000 that was payable
during the five month period subsequent to the agreement date of the
transaction.
F-49
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Settlement with West Capital Financial Services Corp., Continued
Certain differences of opinion developed between the General Partner and
WCFSC regarding the terms and conditions of the Stock Agreement. As a
result, the General Partner, for the benefit of the Partnership and the PAM
Funds, commenced litigation against WCFSC and certain of its affiliates
("WCFSC Dispute").
On February 8, 1996, the parties to the WCFSC Dispute entered into a
Settlement Agreement and Mutual General Release ("Settlement Agreement")
for the purpose of settling and resolving any and all disputes existing
between the various parties to the WCSFC Dispute. The Settlement Agreement
resulted in the dismissal of the WCFSC Dispute, release by all parties of
all claims against other involved parties, including those claims relating
to the Stock Agreement, and the assignment and transfer by the Partnership
and the Pam Funds to WCFSC of certain distressed loan portfolios.
The Settlement Agreement required that WCFSC pay to the Partnership and its
affiliates $16,194,850 in exchange for the general release as well as the
transfer to WCFSC by the Partnership and the PAM Funds of certain interests
in certain distressed loan portfolios, and the transfer of various other
assets and rights. In addition, the Settlement Agreement required the
establishment of a defense fund of $250,000 from the proceeds which has
been available to pay legal fees and costs incurred by WCFSC to defend any
and all actions which may be brought by limited partners of the Partnership
and the PAM Funds. To date no such actions have been brought and no funds
have been expended. The defense fund terminates in July 1999. Any remaining
funds and earned interest will be distributed to the Partnership and the
PAM Funds. The Partnership's portion of the Defense Fund is included in
other assets.
The proceeds from the Settlement Agreement were allocated to the
Partnership and its affiliates, including the PAM Funds, by the General
Partner in accordance with the respective interests of the Partnership and
those affiliates. Accordingly, the Partnership was allocated $5,727,315 of
the total settlement proceeds with a portion still being held in trust (see
Note 1 - Cash Held in Trust).
The Settlement Agreement was approved by 87.63% of the limited partners of
the Partnership; only 0.2% of the limited partners of the Partnership
disapproved; and 12.35% of the limited partners of the Partnership provided
no responses. A general
F-50
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Settlement with West Capital Financial Services Corp., Continued
release in favor of WCFSC was executed by 91.12% of all the limited
partners in the Partnership and the other Potential Merger Participant PAM
Funds.
5. Partners' Capital
In July 1995 the limited partners voted to suspend partner distributions in
order to utilize cash to enhance the Partners' operations. Cash
distributions were subsequently reinstated in 1996. For the years ended
December 31, 1996, 1995, and 1994, the Partnership had 1,998, 1,998, and
2,000 partnership units, respectively, outstanding of the 2,000 partnership
units authorized.
The net income (loss) per limited partnership unit was calculated by
dividing the total limited partner net income (loss) by the number of
limited partnership units issued and outstanding as of December 31, 1996,
1995, and 1994. The General Partner did not own any partnership units as of
December 31, 1996, 1995, and 1994.
6. Disclosures about Fair Value of Financial Instruments
The carrying amounts reported on the Balance Sheet for cash and cash
equivalents approximate fair value due to the short-maturity of these
instruments.
The carrying values of due to affiliates and due from affiliates
approximate fair value.
The fair value of investment in distressed loan portfolios is addressed in
Note 2 Investments in Distressed Loan Portfolios.
7. Year 2000 Disclosure
PCM has begun the process of identifying, evaluating and implementing
changes to PCM's computer programs necessary to address the Year 2000
issue. The General Partner is currently addressing the Partnership's
internal Year 2000 issue by coordinating with PCM in connection with PCM's
modification of existing programs and conversions to new programs. The
General Partner is also in communication with financial institutions and
other entities with which the Partnership conducts business to help them
identify and resolve the Year 2000 issue
F-51
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
7. Year 2000 Disclosure, Continued
as it relates to the Partnership's business operations. An assessment of
the readiness of those third party institutions and entities with which the
Partnership does business is ongoing. While PCM and the General Partner are
confident that PCM will complete the assessment and remediation of PCM's
computer software, there can be no assurance that the necessary
modifications and conversions by those third party institutions and
entities with which the Partnership conducts business will be completed in
a timely manner, which could have a material adverse effect on the
Partnership's results of operations. The total cost to the Partnership
associated with the required modifications and conversions is not expected
to be material to the Partnership's results of operations and financial
position and is being expensed as incurred.
8. New Pronouncements
Management has reviewed the following new pronouncements issued in 1996 by
the Financial Accounting Standards Board: SFAS 120, Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Companies;
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of; SFAS 122, Accounting for Mortgage
Servicing Rights; SFAS 123, Accounting for Stock-Based Compensation; SFAS
124, Accounting for Certain Investments Held by Not-for-Profit
Organizations; SFAS 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities; SFAS 126, Exemption
for Certain Required Disclosures about Financial Instruments for Certain
Nonpublic Entities; SFAS 127, Deferral of the Effective Date of Certain
Provisions of SFAS 125; and SOP 96-1, Environmental Remediation
Liabilities. Management believes these pronouncements do not apply or will
not have a material impact to the Partnership.
F-52
<PAGE>
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
9. Net Investment Income
The following schedule summarizes portfolio sales and collections of debt
on portfolios held by the Partnership. Related portfolio basis recoveries
and net investment income are also presented (see Note 1 for the
Partnership's revenue recognition policy). 1996
1996
-------------------------------------------------
Sales to Collection
WCFSC Third Parties of Debt Total
---------- ------------- ---------- ----------
Portfolio collections $4,391,375 $112,820 $220,996 $4,725,191
Portfolio basis recovery 3,511,087 112,820 216,369 3,840,276
---------- ---------- ---------- ----------
Net investment income $880,288 -- $4,627 $884,915
========== ========== ==========
1995
-------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ---------- ----------
Portfolio collections -- $1,337,920 $1,337,920
Portfolio basis recovery -- 1,132,402 1,132,402
---------- ----------
Net investment income -- $205,518 $205,518
========== ==========
1994
-------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ---------- ----------
Portfolio collections -- $1,870,385 $1,870,385
Portfolio basis recovery -- 1,854,725 1,854,725
---------- ----------
Net investment income -- $15,660 $15,660
========== ==========
F-53
<PAGE>
Performance Asset Management
Fund IV, Ltd.,
A California Limited Partnership
Financial Statements
For the Years Ended
December 31, 1996, 1995, and 1994
F-55
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Index to Financial Statements
For the Years Ended December 31, 1996, 1995, and 1994
- -----------------------------------------------------------------------------
Report of Independent Auditors..............................................1
Financial Statements of Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995.........................2
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994.....................................3
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1996, 1995, and 1994.........................4
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994.....................................5
Notes to Financial Statements...............................................6
F-56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Performance Asset Management Fund IV, Ltd.
A California Limited Partnership
We have audited the accompanying balance sheets of Performance Asset Management
Fund IV, Ltd., A California Limited Partnership ("Partnership"), as of December
31, 1996 and 1995, and the related statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Asset Management
Fund IV, Ltd., A California Limited Partnership, as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
February 21, 1997
F-57
<PAGE>
Performance Asset Management Fund IV, Ltd.
A California Limited Partnership
Balance Sheets
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ ------------
<S> <C> <C>
Cash and equivalents $4,408,545 $559,223
Cash held in trust 3,547,268 6,247,207
Investments in distressed loan portfolios, net 9,091,186 9,701,767
Receivable from West Capital -- 1,937,718
Due from affiliates 136,022 680,731
Other assets 104,977 219,153
Organization costs, net 3,454 7,124
------------ ------------
Total assets $17,291,452 $19,352,923
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $6,351 $45,223
Due to affiliates 350,576 8,250
------------ ------------
Total liabilities 356,927 53,473
General partner' deficit (no units outstanding) (748,842) (516,291)
Limited partners capital (12,000 units authorized;
11,472 and 11,488 units issued and
outstanding at December 31, 1996 and
1995, respectively) 17,683,367 19,815,741
------------ ------------
Total partners' capital 16,934,525 19,299,450
------------ ------------
Total liabilities and partners' capital $17,291,452 $19,352,923
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
F-58
<PAGE>
Performance Asset Management Fund IV, Ltd.
A California Limited Partnership
Statements of Operations
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Portfolio collections $5,235,693 $4,041,724 $2,078,150
Less: portfolio basis recovery 5,085,346 3,674,197 2,066,592
----------- ----------- -----------
Net investment income 150,347 367,527 11,558
----------- ----------- -----------
Cost of operations:
Collection expense 227,874 225,318 525,073
Management fee expense 221,422 214,677 144,633
Professional fees 959,297 514,773 60,949
Amortization 3,670 3,669 3,605
General and administrative expense 20,832 21,532 6,321
Provision for portfolio losses -- 109,000 405,000
----------- ----------- -----------
Total operating expenses 1,433,095 1,088,969 1,145,581
----------- ----------- -----------
Loss from operations (1,282,748) (721,442) (1,134,023)
Other income:
Interest 535,431 109,670 96,928
Other 15,151 1,800 900
----------- ----------- -----------
Net loss ($732,166) ($609,972) ($1,036,195)
=========== =========== ===========
Net loss allocable to general partner ($73,217) ($60,997) ($103,620)
=========== =========== ===========
Net loss allocable to limited partners ($658,949) ($548,975) ($932,575)
=========== =========== ===========
Loss per limited partnership unit ($57.49) ($47.79) ($106.20)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
F-59
<PAGE>
Performance Asset Management Fund IV, Ltd.
A California Limited Partnership
Statements of Partners' Capital (Deficit)
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1993 ($4,795) $4,363,250 $4,358,455
Contributions -- 14,207,805 14,207,805
Distributions (174,521) (1,530,263) (1,704,784)
Net loss (103,620) (932,575) (1,036,195)
------------ ------------ ------------
Balance, December 31, 1994 (282,936) 16,108,217 15,825,281
Contributions -- 5,803,524 5,803,524
Distributions (172,358) (1,547,025) (1,719,383)
Net loss (60,997) (548,975) (609,972)
------------ ------------ ------------
Balance, December 31, 1995 (516,291) 19,815,741 19,299,450
Redemption of 16 partnership units -- (40,000) (40,000)
Distributions (159,334) (1,433,425) (1,592,759)
Net loss (73,217) (658,949) (732,166)
------------ ------------ ------------
Balance, December 31, 1996 ($748,842) $17,683,367 $16,934,525
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
F-60
<PAGE>
Performance Asset Management Fund IV, Ltd.
A California Limited Partnership
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($732,166) ($609,972) ($1,036,195)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization 3,670 3,669 3,605
Decrease (increase) in assets:
Other assets 114,176 (200,728) (18,425)
Due from affiliates 544,709 (501,507) 509,757
Provision for portfolio losses -- 109,000 405,000
Increase (decrease) in liabilities:
Accounts payable (38,872) 25,296 14,127
Due to affiliates 342,326 (304,681) (361,735)
------------ ------------ ------------
Net cash provided by (used in) operating activities 233,843 (1,478,923) (483,866)
------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Recovery of portfolio basis 5,085,346 3,674,197 2,066,592
Receivable from West Capital 1,937,718 -- (1,937,718)
Cash held in trust 2,699,939 (6,247,207) --
Purchase of investments in distressed loan portfolios (4,474,765) (4,215,633) (9,804,990)
------------ ------------ ------------
Net cash provided by (used in) investing activities 5,248,238 (6,788,643) (9,676,116)
------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Redemption of partnership units (40,000) -- --
Distributions to partners (1,592,759) (1,719,383) (1,704,784)
Limited partner capital contributions -- 5,803,524 14,274,931
Deposits in escrow for investor subscriptions -- (260,000) (32,500)
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,632,759) 3,824,141 12,537,647
------------ ------------ ------------
Net increase (decrease) in cash 3,849,322 (4,443,425) 2,377,665
Cash at beginning of period 559,223 5,002,648 2,624,983
------------ ------------ ------------
Cash at end of period $4,408,545 $559,223 $5,002,648
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Franchise taxes $800 $800 $800
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
F-61
<PAGE>
Performance Asset Management Fund IV, Ltd.
A California Limited Partnership
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Performance Asset Management Fund IV, Ltd., A California Limited
Partnership (the "Partnership"), was formed in October 1992, for the
purpose of acquiring investments in or direct ownership of distressed loan
portfolios from financial institutions and other sources. Interests in the
Partnership were sold in an intrastate offering to residents of California,
pursuant to the provisions of Section 3(A)(11) of the Securities Act of
1933; however, the Partnership did not begin its primary operations until
March 1993. The general partner is Performance Development, Inc., a
California corporation ("PDI")(the "General Partner").
The Partnership terminates at December 31, 2005. At that time, the
Partnership will distribute any remaining cash after payment of Partnership
obligations following the sale or collection of all assets.
Profits, losses, and cash distributions are allocated 90% to the limited
partners and 10% to the General Partner until such time as the limited
partners have received cash equal to 100% of their contributions to the
Partnership plus. Thereafter, Partnership profits, losses, and cash
distributions are allocated 70% to the limited partners and 30% to the
General Partner.
Cash and Equivalents
The Partnership defines cash equivalents as all highly liquid investments
with an original maturity of three months or less. The Partnership
maintains cash balances at one bank in accounts which exceeded federally
insured limits by approximately $4,300,000 and $460,000 at December 31,
1996 and 1995, respectively. The Partnership uses a cash management system
whereby idle cash balances are transferred daily into a master account and
invested in high quality, short-term securities that do not enjoy the
benefit of the federal insurance. The Partnership's management believes
that these cash balances are not subject to any significant credit risk due
to the nature of the investments and the strength of the bank and has not
experienced any past losses with cash and equivalent investments. The
Partnership received interest income from these investments of $535,431,
$109,670, and $96,928 in 1996, 1995, and 1994, respectively.
F-62
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Cash Held in Trust
The General Partner anticipates that the Partnership and PAM, PAM II, III,
and V, may, in the future, be reorganized and merged into one corporation
(Potential Merger Participant PAM Funds). In an effort to accomplish that
reorganization and merger, the General Partner, on behalf of the
Partnership and the other Potential Merger Participant PAM Funds, entered
into an agreement on December 12, 1995 with the State of California
Department of Corporations, pursuant to the provisions of which the
Performance Asset Management Fund Trust ("Trust") was created. These funds
held in trust are subject to the terms of the Trust Agreement. The Trust
was the recipient of a portion of the funds resulting from the settlement
of certain then pending litigation between the Partnership and its
affiliates and West Capital Financial Services Corp. ("WCFSC") and its
affiliates. The trust fund balance until Trust termination must exceed
$5,000,000 among all other Potential Merger Participant PAM Funds. The
Trust will terminate and the trustee will distribute all of the remaining
funds held by the trustee on August 18, 1998 if reorganization and merger
is not completed by that date. The Partnership's share of the Trust's funds
at December 31, 1996 and 1995 was $3,547,268 and $6,247,207.
Investment in Distressed Loan Portfolios and Revenue Recognition
Investments in distressed loan portfolios are carried at the lower of cost
or estimated net realizable value. Amounts collected are treated as a
reduction to the carrying basis of the related investment on an individual
portfolio basis and are reported in the Statement of Operations as
portfolio basis recovery. Under the cost recovery method of revenue
recognition used by the Partnership, income is not recognized until 100%
recovery of the carrying value of the investment in each portfolio occurs.
Estimated net realizable value represents management's estimates, based on
its present plans and intentions, of the present value of future
collections. Due to the distressed nature of these investments, no interest
is earned on outstanding balances, and there is no assurance that the
unpaid balances of these investments will ultimately be collected. Any
adjustments reducing the carrying value of the individual portfolios are
recorded in the results of operations as a general and administrative
expense.
F-63
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Organization Costs, Net
Organization costs include legal and other professional fees incurred
related to the initial organization of the Partnership. These costs have
been capitalized and amortized using the straight-line method over five
years ending in 1997.
Professional Expenses
Professional expenses are incurred in relation to ongoing accounting and
legal assistance.
Income Taxes
No provision for income taxes has been provided for in the financial
statements, except for the Partnership's minimum state franchise tax
liability of $800. All partners report individually on their share of
Partnership operating results.
Supplemental Non-Cash Disclosure
In 1994 the Partnership recharacterized amounts totaling $67,126 previously
reported as organizational costs, and recorded these amounts as a reduction
to partnership capital accordingly.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from the estimates.
Financial Statement Classification
Certain amounts within the 1995 and 1994 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
F-64
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net
Investments in distressed loan portfolios consist primarily of charged-off
credit card accounts and consumer loan balances, such as auto and personal
lines of credit, originated by independent third-party financial
institutions located throughout the United States. In addition, the
Partnership acquired portfolios of defaulted consumer debts which were
rewritten under terms different from the original obligation. The fair
value of these investments was determined by discounting the estimated
future cash collections on such investments during the estimated portfolio
holding period using a discount rate commensurate with the risks involved.
The discount rate converts the individual portfolio's expected future cash
flows to a calculated present value. The Partnership utilized an industry
specific discount rate from Ibbotson's Cost of Capital Yearbook 1997 which
considered information for the 1996 year. The Partnership utilized the cost
of capital rate experienced in 1996 by personal finance companies. The
Partnership selected the personal finance companies' data as it most
closely reflected comparable economic risk levels and the type of business
operations encountered. The weighted average cost of capital for personal
finance companies was between 7.31 and 9.4 for 1996 and 1995. The
Partnership used a rate within this range.
At December 31, 1996 and 1995, investments in distressed loan portfolios
consisted of the following:
1996
-----------------------------
Carrying Fair
Amount Value
----------- -----------
Credit card accounts $ 6,947,644 $10,485,070
Consumer loans 1,795,999 3,050,595
Notes secured by Deeds of Trust 347,543 347,543
----------- -----------
$ 9,091,186 $13,883,208
=========== ===========
F-65
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net, Continued
1995
-----------------------------
Carrying Fair
Amount Value
----------- -----------
Credit card accounts $ 5,857,955 $ 8,013,319
Performing rewritten accounts 414,056 414,056
Consumer loans 2,984,756 4,552,847
Notes secured by Deeds of Trust 445,000 445,000
----------- -----------
$ 9,701,767 $13,425,222
=========== ===========
At December 31, 1996 and 1995, the allowance for possible losses on
investments (the "allowance") in specific distressed loan portfolios
consisted of the following:
<TABLE>
<CAPTION>
1996
--------------------------------------------
Investment Allowance for Carrying
Balance Portfolio Losses Amount
----------- ---------------- ----------
<S> <C> <C> <C>
Credit card accounts $ 7,461,644 ($514,000) $6,947,644
Consumer loans 1,795,999 -- 1,795,999
Notes secured by Deeds of Trust 347,543 -- 347,543
----------- --------- ----------
$ 9,605,186 ($514,000) $9,091,186
=========== ========= ==========
<CAPTION>
1995
--------------------------------------------
Investment Allowance for Carrying
Balance Portfolio Losses Amount
----------- ---------------- ----------
<S> <C> <C> <C>
Credit card accounts $ 6,371,955 ($514,000) $5,857,955
Performing rewritten accounts 414,056 -- 414,056
Consumer loans 2,984,756 -- 2,984,756
Notes secured by Deeds of Trust 445,000 -- 445,000
----------- --------- ----------
$10,215,767 ($514,000) $9,701,767
=========== ========= ==========
</TABLE>
The Partnership continuously evaluates the collectibility of distressed
loan balances by reviewing the cash flows from the individual portfolios as
well as their respective market values. The Partnership adjusts the
allowance of those portfolios for which the cash flows or market values of
the portfolios are less than the current net book value. The Partnership
has recorded a reserve for possible losses on investments
F-66
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net, Continued
in specific distressed loan portfolios of $514,000 at December 31, 1996 and
1995, respectively, and $405,000 at December 31, 1994.
3. Related Party Transactions
The Partnership has entered into several fee and cost reimbursement
arrangements with affiliated corporations most of which are provided for
and documented in the limited partnership agreement and the offering
prospectus. With the exception of PCM, all of the entities are controlled
by the General Partner and/or its sole shareholder. In the case of PCM,
there is one minority shareholder who holds one and one-half per cent of
the outstanding stock. The affiliated corporations and other affiliated
entities are identified below:
Affiliated Corporations:
Performance Development, Inc. ("PDI")
Performance Capital Management ("PCM")
Income Network Company ("INC")
Spectrum Capital Management, Inc. ("Spectrum")
Other Affiliated Entities:
Performance Asset Management Fund, Ltd. and
Performance Asset Management Funds II, III, and V, Ltd. ("PAM Funds")
PDI was formed as a California corporation in June 1990 to engage in
various aspects of the investment banking industry. PDI is also the General
Partner for the PAM Funds and various other California limited
partnerships. PDI, in accordance with the limited partnership agreement and
offering prospectus, is reimbursed for legal, accounting, and other costs
relating to the limited partnership. In addition, the Partnership pays PDI
an annual management fee of 2.5% of the net asset value of the Partnership
portfolio assets during the operating phase of the Partnership in
accordance with the provisions of the limited partnership agreement. As the
General Partner in the Partnership, PDI is also entitled to a portion of
periodic distributions to partners, in accordance with the provisions of
the limited partnership agreement.
F-67
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
During the years ended December 31, 1995 and 1994, the Partnership paid PDI
syndication fees of $201,825 and $506,100, respectively, which have been
accounted for as a reduction against the Gross Proceeds. The Partnership
also reimbursed PDI for offering expenses totaling $397,095 and $131,151
during the years ended December 31, 1995 and 1994, respectively. PDI's
management fees incurred and recorded by the Partnership totaled $221,422,
$214,677, and $144,633 for the years ended December 31, 1996, 1995, and
1994, respectively. The Partnership made general partner capital
distributions to PDI of $159,334, $172,358, and $174,521 for the years
ended December 31, 1996, 1995, and 1994, respectively. At December 31,
1996, the Partnership had amounts owed to PDI included in amounts due to
affiliates of $349,497. At December 31, 1995, the Partnership had amounts
owed from PDI included in amounts due from affiliates of $325,921.
PCM was formed as a California corporation in February 1993, and since its
formation has performed services for the Partnership and the PAM Funds
relative to locating, evaluating, negotiating, acquiring, servicing, and
collecting investments in distressed loan portfolios. PCM acquires
distressed loan portfolios from third parties and sells the portfolios to
the Partnership for amounts determined by the General Partner to be
reasonable, customary, and competitive in light of the size, type and
character of the acquired portfolios and consistent with the limited
partnership agreement. The Partnership also enters into agreements with PCM
to collect and service the acquired portfolios. The agreements generally
provide that all proceeds generated from the collection of portfolio assets
will be shared by the parties in proportion to their respective
distribution interests, generally 55% to 65% for the Partnership and 35% to
45% for PCM. The Partnership also reimburses PCM for certain costs incurred
in the collection of portfolio assets.
For the years ended December 31, 1996, 1995, and 1994, the Partnership was
charged $227,874, $225,318, and $525,073, respectively, by PCM for
collection expenses which included but were not limited to collection
letters that were sent out to the debtors, debtor tracers utilized in an
attempt to locate current debtors, and administration costs incurred when
setting up each debtor profile in the PCM information database.
F-68
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
For the years ended December 31, 1996, 1995, and 1994, PCM sold to the
Partnership twelve portfolios, seven portfolios, and twenty portfolios,
respectively, and recorded acquisition fees for these portfolios of
$1,181,569, $960,352, and $1,635,474, respectively. These acquisition fees
have been included in the carrying value of the related Partnership
investments. (See Note 1 - Cash Held in Trust).
The Partnership had three portfolio sales for $222,753 in the year ended
December 31, 1996. The Partnership had no sales in 1995 and 1994. PCM
effects the sale of the portfolios for the Partnership to non-related third
parties and retains 15% of the proceeds as a commission. The Partnership
had a net amount due from PCM of $136,022 and $314,221 at December 31, 1996
and 1995, respectively.
INC was formed on February 1, 1988 and subsequently became a registered
broker-dealer and member of the National Association of Security Dealers,
Inc. and the Securities Investor Protection Corporation. INC's sole
shareholder is also the sole shareholder of the General Partner, PDI. INC,
in accordance with the limited partnership agreement and offering
prospectus, was paid commissions equal to 10% of gross proceeds.
During the year ended December 31, 1995, the Partnership paid INC
commissions of $636,000, which have been accounted for as reductions
against the Gross Proceeds. As of December 31, 1995, the Partnership had
amounts owed to INC of $8,250 recorded as due to affiliates.
Spectrum was formed in 1988 to serve as an employment service bureau to
PCM, PDI and the PAM Funds. All employees, while directly employed by
Spectrum, work for the benefit of PCM, PDI and the PAM Funds. The
Partnership pays PDI, as General Partner, a fee equal to the employee
service fee it paid to Spectrum. For the year ended December 31, 1996,
employee service fees were $159,643. The Partnership paid no employee
service fees in 1995 and 1994. Prior to 1994, Spectrum performed and earned
fees related to asset location, research, due diligence, and acquisition
services provided for the Partnership.
F-69
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Settlement with West Capital Financial Services Corp.
On April 8, 1994, the General Partner, on behalf of the Partnership and the
PAM Funds, entered into a Stock Acquisition Agreement ("Stock Agreement")
with WCFSC, for the purpose of acquiring 50% of the then issued and
outstanding no par common shares of WCFSC. The Stock Agreement provided
that the Partnership and the PAM Funds would receive credits for
approximately $1,881,950 due them from WCFSC. The Partnership and the PAM
Funds would then remit cash in the amount of $1,970,000 that was payable
during the five month period subsequent to the agreement date of the
transaction.
Certain differences of opinion developed between the General Partner and
WCFSC regarding the terms and conditions of the Stock Agreement. As a
result, the General Partner, for the benefit of the Partnership and the PAM
Funds, commenced litigation against WCFSC and certain of its affiliates
("WCFSC Dispute").
On February 8, 1996, the parties to the WCFSC Dispute entered into a
Settlement Agreement and Mutual General Release ("Settlement Agreement")
for the purpose of settling and resolving any and all disputes existing
between the various parties to the WCSFC Dispute. The Settlement Agreement
resulted in the dismissal of the WCFSC Dispute, release by all parties of
all claims against other involved parties, including those claims relating
to the Stock Agreement, and the assignment and transfer by the Partnership
and the Pam Funds to WCFSC of certain distressed loan portfolios.
The Settlement Agreement required that WCFSC pay to the Partnership and its
affiliates $16,194,850 in exchange for the general release as well as the
transfer to WCFSC by the Partnership and the PAM Funds of certain interests
in certain distressed loan portfolios, and the transfer of various other
assets and rights. In addition, the Settlement Agreement required the
establishment of a defense fund of $250,000 from the proceeds which has
been available to pay legal fees and costs incurred by WCFSC to defend any
and all actions which may be brought by limited partners of the Partnership
and the PAM Funds. To date no such actions have been brought and no funds
have been expended. The defense fund terminates in July 1999. Any remaining
funds and earned interest will be distributed to the Partnership and the
PAM Funds. The Partnership's portion of the defense fund is included in
other assets.
F-70
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Settlement with West Capital Financial Services Corp., Continued
The proceeds from the Settlement Agreement were allocated to the
Partnership and its affiliates, including the PAM Funds, by the General
Partner in accordance with the respective interests of the Partnership and
those affiliates. Accordingly, the Partnership was allocated $4,304,815 of
the total settlement proceeds with a portion still being held in trust (see
Note 1 - Cash Held in Trust).
The Settlement Agreement was approved by 88.7% of the limited partners of
the Partnership; only 0.6% of the limited partners of the Partnership
disapproved; and 10.7% of the limited partners of the Partnership provided
no responses. A general release in favor of WCFSC was executed by 91.12% of
all the limited partners in the Partnership and the PAM Funds.
5. Partners' Capital
In 1995, the distributions to partners were suspended in order to utilize
cash to enhance the Partnership operations. Cash distributions were
subsequently reinstated in 1996. For the years ended December 31, 1996,
1995, and 1994, the Partnership had 11,472, 11,488, and 8,781 partnership
units, respectively, outstanding of the 12,000 partnership units
authorized.
The income (loss) per limited partnership unit was calculated by dividing
the total limited partner net income (loss) by the number of limited
partnership units issued and outstanding as of December 31, 1996, 1995, and
1994. The General Partner did not own any partnership units as of December
31, 1996, 1995, and 1994.
6. Disclosures about Fair Value of Financial Instruments
The carrying amounts reported on the Balance Sheet for cash and cash
equivalents approximate fair value due to the short-maturity of these
instruments.
The carrying values of due to affiliates and due from affiliates
approximate fair value.
The fair value of investment in distressed loan portfolios is addressed in
Note 2 Investments in Distressed Loan Portfolios.
F-71
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
8. New Pronouncements
Management has reviewed the following new pronouncements issued in 1996 by
the Financial Accounting Standards Board: SFAS 120, Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Companies;
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of; SFAS 122, Accounting for Mortgage
Servicing Rights; SFAS 123, Accounting for Stock-Based Compensation; SFAS
124, Accounting for Certain Investments Held by Not-for-Profit
Organizations; SFAS 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities; SFAS 126, Exemption
for Certain Required Disclosures about Financial Instruments for Certain
Nonpublic Entities; SFAS 127, Deferral of the Effective Date of Certain
Provisions of SFAS 125; and SOP 96-1, Environmental Remediation
Liabilities. Management believes these pronouncements do not apply or will
not have a material impact to the Partnership.
9. Net Investment Income
The following schedule summarizes portfolio sales and collections of debt
on portfolios held by the Partnership. Related portfolio basis recoveries
and net investment income are also presented (see Note 1 for the
Partnership's revenue recognition policy).
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Sales to Collection
WCFSC Third Parties of Debt Total
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Portfolio collections $1,947,394 $ 222,753 $3,065,546 $5,235,693
Portfolio basis recovery 1,797,047 222,753 3,065,546 5,085,346
---------- ---------- ---------- ----------
Net investment income $ 150,347 -- -- $ 150,347
========== ========== ========== ==========
<CAPTION>
1995
----------------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ---------- ----------
<S> <C> <C> <C>
Portfolio collections -- $4,041,724 $4,041,724
Portfolio basis recovery -- 3,674,197 3,674,197
---------- ---------- ----------
Net investment income -- $ 367,527 $ 367,527
========== ========== ==========
</TABLE>
F-72
<PAGE>
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
9. Net Investment Income, Continued
<TABLE>
<CAPTION>
1994
---------------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ---------- ----------
<S> <C> <C> <C>
Portfolio collections -- $2,078,150 $2,078,150
Portfolio basis recovery -- 2,066,592 2,066,592
------------- ---------- ----------
Net investment income -- $ 11,558 $ 11,558
============= ========== ==========
</TABLE>
F-73
<PAGE>
Performance Asset Management
Fund V, Ltd.,
A California Limited Partnership
Financial Statements
For the Years Ended
December 31, 1996 and 1995 and
The Period from April 4, 1994 (Inception)
Through December 31, 1994
F-74
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Index to Financial Statements
For the Years Ended December 31, 1996 and 1995 and
The Period from April 4, 1994 (Inception) Through December 31, 1994
- --------------------------------------------------------------------------------
Report of Independent Auditors.................................................1
Financial Statements of Performance Asset Management Fund V, Ltd.,
A California Limited Partnership:
Balance Sheets as of December 31, 1996 and 1995............................2
Statements of Operations for the years ended
December 31, 1996 and 1995 and the period
from April 4, 1994 (inception) through
December 31, 1994........................................................3
Statements of Partners' Capital (Deficit) for the
years ended December 31, 1996 and 1995 and
the period from April 4, 1994 (inception)
through December 31, 1994................................................4
Statements of Cash Flows for the years ended
December 31, 1996 and 1995 and the period
from April 4, 1994 (inception) through
December 31, 1994........................................................5
Notes to Financial Statements..................................................6
F-75
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Performance Asset Management Fund V, Ltd.
A California Limited Partnership
We have audited the accompanying balance sheets of Performance Asset Management
Fund V, Ltd., A California Limited Partnership ("Partnership"), as of December
31, 1996 and 1995, and the related statements of operations, partners' capital
(deficit) and cash flows for each of the two years in the period ended December
31, 1996 and for the period from April 4, 1994 (inception) through December 31,
1994. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Asset Management
Fund II, Ltd., A California Limited Partnership, as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1996 and for the period from April 4,
1994 (inception) through December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
February 21, 1997
F-76
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Balance Sheets
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
ASSETS
1996 1995
----------- -----------
Cash and equivalents $1,731,112 $215,798
Cash held in trust 8,388 1,014,201
Investments in distressed loan portfolios, net 2,300,662 1,771,568
Receivable from West Capital -- 1,014,882
Due from affiliates 351,718 624,247
Other assets 24,873 36,733
Organization costs, net 2,486 3,520
----------- -----------
Total assets $4,419,239 $4,680,949
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $599 $2,598
Due to affiliates 56,341 1,650
----------- -----------
Total liabilities 56,940 4,248
----------- -----------
General partner's deficit (no units outstanding) (72,218) (43,718)
Limited partners' capital (1,200 units authorized;
1,194 and 1,200 units issued and outstanding
at December 31, 1996, and 1995, respectively) 4,434,517 4,720,419
----------- -----------
Total partners' capital 4,362,299 4,676,701
----------- -----------
Total liabilities and partners' capital $4,419,239 $4,680,949
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-77
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Statements of Operations
For the Years Ended December 31, 1996 and 1995 and
The Period from April 4, 1994 (Inception) through December 31, 1994
- --------------------------------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
Portfolio collections $1,202,048 $483,439 $38,117
Less: portfolio basis recovery 1,115,996 483,439 38,117
---------- ---------- ----------
Net investment income 86,052 -- --
---------- ---------- ----------
Cost of operations:
Collection expense 72,423 64,375 59,052
Management fee expense 57,217 39,146 5,128
Professional fees 133,690 103,202 8,691
Amortization 1,034 1,031 617
General and administrative expense 8,147 2,629 2,072
Provision for portfolio losses -- 26,000 54,000
---------- ---------- ----------
Total operating expenses 272,511 236,383 129,560
---------- ---------- ----------
Loss from operations (186,459) (236,383) (129,560)
Other income:
Interest 101,123 32,864 9,542
Other -- 46 --
---------- ---------- ----------
Net loss ($85,336) ($203,473) ($120,018)
========== ========== ==========
Net loss allocable to general partner ($8,534) ($20,347) ($12,002)
========== ========== ==========
Net loss allocable to limited partners ($76,802) ($183,126) ($108,016)
========== ========== ==========
Net loss per limited partnership unit ($64.32) ($152.60) ($181.54)
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F-78
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Statements of Partners' Capital (Deficit)
For the Years Ended December 31, 1996 and 1995 and
The Period from April 4, 1994 (Inception) through December 31, 1994
- --------------------------------------------------------------------------------
General Limited
Partner Partners Total
----------- ----------- -----------
Balance, April 4, 1994 -- -- --
Contributions -- $2,542,561 $2,542,561
Distributions ($1,583) (14,250) (15,833)
Net loss (12,002) (108,016) (120,018)
----------- ----------- -----------
Balance, December 31, 1994 (13,585) 2,420,295 2,406,710
Contributions -- 2,571,300 2,571,300
Distributions (9,786) (88,050) (97,836)
Net loss (20,347) (183,126) (203,473)
----------- ----------- -----------
Balance, December 31, 1995 (43,718) 4,720,419 4,676,701
Distributions (19,966) (179,100) (199,066)
Redemption of 6 partnership units -- (30,000) (30,000)
Net loss (8,534) (76,802) (85,336)
----------- ----------- -----------
Balance, December 31, 1996 ($72,218) $4,434,517 $4,362,299
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-79
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995 and
The Period from April 4, 1994 (Inception) through December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($85,336) ($203,473) ($120,018)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization 1,034 982 (4,502)
Decrease (increase) in assets:
Other assets 11,860 23,234 (23,234)
Due from affiliate 272,529 (492,785) (90,389)
Provision for portfolio losses -- 26,000 54,000
Increase (decrease) in liabilities:
Due to affiliates 54,691 (232,378) 234,028
Accounts payable (1,999) 1,798 800
----------- ----------- -----------
Net cash provided by (used in) operating activities 252,779 (876,622) 50,685
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Recovery of portfolio basis 1,115,996 415,279 28,474
Receivable from West Capital 1,014,882 -- (1,014,882)
Cash held in trust 1,005,813 (1,014,201) --
Purchase of investments in distressed loan portfolios (1,645,090) (1,843,039) (530,088)
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,491,601 (2,441,961) (1,516,496)
----------- ----------- -----------
Cash flows provided by (used in) financing activities:
Redemption of partnership units (30,000) -- --
Limited parter capital contributrions -- 2,571,300 2,542,561
Distributions to partners (199,066) (97,836) (15,833)
Deposits in escrow for investor subscriptions -- (160,000) 160,000
----------- ----------- -----------
Net cash provided by (used in) financing activities (229,066) 2,313,464 2,686,728
----------- ----------- -----------
Net increase (decrease) in cash 1,515,314 (1,005,119) 1,220,917
Cash at beginning of period 215,798 1,220,917 --
----------- ----------- -----------
Cash at end of period $1,731,112 $215,798 $1,220,917
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Franchise taxes $800 $800 $800
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-80
<PAGE>
Performance Asset Management Fund V, Ltd.
A California Limited Partnership
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
Organization and Description of Business
Performance Asset Management Fund V, Ltd., A California Limited Partnership
(the "Partnership"), was formed in April 1994, for the purpose of acquiring
investments in or direct ownership of distressed loan portfolios from
financial institutions and other sources. Interests in the Partnership were
sold in a private placement offering pursuant to Regulation D promulgated
by the Securities and Exchange Commission on a "best efforts" basis;
however, the Partnership did not begin its primary operations until July
1994. The general partner is Performance Development, Inc., a California
corporation ("PDI")(the "General Partner").
The Partnership terminates at December 31, 2007. At that time, the
Partnership will distribute any remaining cash after payment of Partnership
obligations following the sale or collection of all assets.
Profits, losses, and cash distributions are allocated 90% to the limited
partners and 10% to the General Partner until such time as the limited
partners have received cash equal to 100% of their contributions to the
Partnership. Thereafter, Partnership profits, losses, and cash
distributions are allocated 70% to the limited partners and 30% to the
General Partner.
Cash and Equivalents
The Partnership defines cash equivalents as all highly liquid investments
with an original maturity of three months or less. The Partnership
maintains cash balances at one bank in accounts which exceeded federally
insured limits by approximately $1,690,000 and $116,000 at December 31,
1996 and 1995, respectively. The Partnership uses a cash management system
whereby idle cash balances are transferred daily into a master account and
invested in high quality, short-term securities that do not enjoy the
benefit of the federal insurance. The Partnership's management believes
that these cash balances are not subject to any significant credit risk due
to the nature of the investments and the strength of the bank and has not
experienced any past losses with cash and equivalent investments.
F-81
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Cash and Equivalents, Continued
The Partnership received interest income from these investments, net of
interest expense, of $101,123, $32,864, and $9,542 in 1996, 1995, and 1994,
respectively.
Cash Held in Trust
The General Partner anticipates that the Partnership and PAM, PAM II, III,
and IV, may, in the future, be reorganized and merged into one corporation
(Potential Merger Participant PAM Funds). In an effort to accomplish that
reorganization and merger, the General Partner, on behalf of the
Partnership and the other Potential Merger Participant PAM Funds, entered
into an agreement on December 12, 1995 with the State of California
Department of Corporations, pursuant to the provisions of which the
Performance Asset Management Fund Trust ("Trust") was created. These funds
held in trust are subject to the terms of the Trust Agreement. The Trust
was the recipient of a portion of the funds resulting from the settlement
of certain then pending litigation between the Partnership and its
affiliates and West Capital Financial Services Corp. ("WCFSC") and its
affiliates. The trust fund balance until Trust termination must exceed
$5,000,000 among all other Potential Merger Participant PAM Funds. The
Trust will terminate and the trustee will distribute all of the remaining
funds held by the trustee on August 18, 1998 if reorganization and merger
is not completed by that date. The Partnership's share of the Trust's funds
at December 31, 1996 and 1995 was $8,388 and $1,014,201.
Investment in Distressed Loan Portfolios and Revenue Recognition
Investments in distressed loan portfolios are carried at the lower of cost
or estimated net realizable value. Amounts collected are treated as a
reduction to the carrying basis of the related investment on an individual
portfolio basis and are reported in the Statement of Operations as
portfolio basis recovery. Under the cost recovery method of revenue
recognition used by the Partnership, income is not recognized until 100%
recovery of the carrying value of the investment in each portfolio occurs.
Estimated net realizable value represents management's estimates, based on
its present plans and intentions, of the present value of future
collections. Due to the distressed nature of these investments, no interest
is earned on outstanding balances, and there is no assurance that the
unpaid balances of these investments
F-82
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
Investment in Distressed Loan Portfolios and Revenue Recognition, Continued
will ultimately be collected. Any adjustments reducing the carrying value
of the individual portfolios are recorded in the results of operations as
general and administrative expenses.
Organization Costs, Net
Organization costs include legal and other professional fees incurred
related to the initial organization of the Partnership. These costs have
been capitalized and are being amortized using the straight-line method
over five years ending in 1999.
Professional Expenses
Professional expenses are incurred in relation to ongoing accounting and
legal assistance.
Income Taxes
No provision for income taxes has been provided for in the financial
statements, except for the Partnership's minimum state franchise tax
liability of $800. All partners report individually on their share of
Partnership operating results.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reported period. Actual results could differ from the estimates.
Financial Statement Classification
Certain amounts within the 1995 and 1994 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
F-83
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net
Investments in distressed loan portfolios consist primarily of charged-off
credit card accounts and consumer loan balances, such as auto and personal
lines of credit, originated by independent third-party financial
institutions located throughout the United States. In addition, the
Partnership acquired portfolios of defaulted consumer debts which were
rewritten under terms different from the original obligation. The fair
value of these investments was determined by discounting the estimated
future cash collections on such investments during the estimated portfolio
holding period using a discount rate commensurate with the risks involved.
The discount rate converts the individual portfolio's expected future cash
flows to a calculated present value. The Partnership utilized an industry
specific discount rate from Ibbotson's Cost of Capital Yearbook 1997 which
considered information for the 1996 year. The Partnership utilized the cost
of capital rate experienced in 1996 by personal finance companies. The
Partnership selected the personal finance companies' data as it most
closely reflected comparable economic risk levels and the type of business
operations encountered. The weighted average cost of capital for personal
finance companies was between 7.31 and 9.4 for 1996 and 1995. The
Partnership used a rate within this range.
At December 31, 1996 and 1995, investments in distressed loan portfolios
consisted of the following:
1996
----------------------------
Carrying Fair
Amount Value
---------- ----------
Credit card accounts $1,875,933 $2,788,322
Consumer loans 424,729 480,279
---------- ----------
$2,300,662 $3,268,601
========== ==========
1995
----------------------------
Carrying Fair
Amount Value
---------- ----------
Credit card accounts $1,032,857 $1,678,279
Performing rewritten accounts 105,089 105,089
Consumer loans 633,622 880,399
---------- ----------
$1,771,568 $2,663,767
========== ==========
F-84
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Investments in Distressed Loan Portfolios, Net, Continued
At December 31, 1996 and 1995, the allowance for possible losses on
investments (the "allowance") in specific distressed loan portfolios
consisted of the following:
<TABLE>
<CAPTION>
1996
--------------------------------------------------
Investment Allowance for Carrying
Balance Portfolio Losses Amount
----------- ---------------- -----------
<S> <C> <C> <C>
Credit card accounts $1,928,933 ($53,000) $1,875,933
Consumer loans 451,729 (27,000) 424,729
----------- ----------- -----------
$2,380,662 ($80,000) $2,300,662
=========== =========== ===========
<CAPTION>
1995
--------------------------------------------------
Investment Allowance for Carrying
Balance Portfolio Losses Amount
----------- ---------------- -----------
<S> <C> <C> <C>
Credit card accounts $1,085,857 ($53,000) $1,032,857
Performing rewritten accounts 105,089 -- 105,089
Consumer loans 660,622 (27,000) 633,622
----------- ----------- -----------
$1,851,568 ($80,000) $1,771,568
=========== =========== ===========
</TABLE>
The Partnership continuously evaluates the collectibility of distressed
loan balances by reviewing the cash flows from the individual portfolios as
well as their respective market values. The Partnership adjusts the
allowance of those portfolios for which the cash flows or market values of
the portfolios are less than the current net book value. The Partnership
has recorded a reserve for possible losses on investments in specific
distressed loan portfolios of $80,000 as of December 31, 1996 and 1995 and
$54,000 as of December 31, 1994.
3. Related Party Transactions
The Partnership has entered into several fee and cost reimbursement
arrangements with affiliated corporations most of which are provided for
and documented in the limited partnership agreement and the offering
prospectus. With the exception of PCM, all of the entities are controlled
by the General Partner and/or its sole shareholder. In the case of PCM,
there is one minority shareholder who holds one and one-half per cent of
the outstanding stock. The affiliated corporations and other affiliated
entities are identified below:
F-85
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
Affiliated Corporations:
Performance Development, Inc. ("PDI")
Performance Capital Management ("PCM")
Spectrum Capital Management, Inc. ("Spectrum")
Other Affiliated Entities:
Performance Asset Management Fund, Ltd. and
Performance Asset Management Funds II, III, and IV, Ltd. ("PAM Funds")
PDI was formed as a California corporation in June 1990 to engage in
various aspects of the investment banking industry. PDI is also the General
Partner for the PAM Funds and various other California limited
partnerships. PDI, in accordance with the limited partnership agreement and
offering prospectus, is reimbursed for legal, accounting, and other costs
relating to the limited partnership. In addition, the Partnership pays PDI
an annual management fee of 2.5% of the net asset value of the Partnership
portfolio assets during the operating phase of the Partnership in
accordance with the provisions of the limited partnership agreement. As the
General Partner in the Partnership, PDI is also entitled to a portion of
periodic distributions to partners, in accordance with the provisions of
the limited partnership agreement.
During 1995 and 1994, the Partnership paid PDI syndication fees of $90,750
and $89,250, which have been accounted for as a reduction against Gross
Proceeds. The Partnership also reimbursed PDI for offering expense totaling
$60,450 and $45,689 for the year and period ended December 31, 1995 and
1994.
PDI's management fees incurred and recorded by the Partnership totaled
$57,217, $39,146, and $5,128 for the years and period ended December 31,
1996, 1995, and 1994, respectively. The Partnership made general partner
capital distributions to PDI of $19,966, $9,786, and $1,583 for the years
and period ended December 31, 1996, 1995, and 1994, respectively. At
December 31, 1996, the Partnership had amounts owed to PDI included in
amounts due to affiliates of $56,124. At December 31, 1995, the Partnership
had amounts owed from PDI included in amounts due from affiliates of
$45,809.
F-86
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
PCM was formed as a California corporation in February 1993, and since its
formation has performed services for the Partnership and the PAM Funds
relative to locating, evaluating, negotiating, acquiring, servicing, and
collecting investments in distressed loan portfolios. PCM acquires
distressed loan portfolios from third-parties and sells the portfolios to
the Partnership for amounts determined by the General Partner to be
reasonable, customary, and competitive in light of the size, type and
character of the acquired portfolios and consistent with the limited
partnership agreement. The Partnership also enters into agreements with PCM
to collect and service the acquired portfolios. The agreements generally
provide that all proceeds generated from the collection of portfolio assets
will be shared by the parties in proportion to their respective
distribution interests, generally 55% to 65% for the Partnership and 35% to
45% for PCM. The Partnership also reimburses PCM for certain costs incurred
in the collection of portfolio assets.
For the years and period ended December 31, 1996, 1995, and 1994, the
Partnership was charged $72,423, $64,375, and $59,052, respectively, by PCM
for collection expenses which included but were not limited to collection
letters that were sent out to the debtors, debtor tracers utilized in an
attempt to locate current debtors, and administration costs incurred when
setting up each debtor profile in the PCM information database.
For the years and period ended December 31, 1996, 1995, and 1994, PCM sold
to the Partnership two portfolios, five portfolios, and four portfolios,
respectively, and recorded acquisition fees for these portfolios of
$435,465, $470,971 and $136,953, respectively. These acquisition fees have
been included in the carrying value of the related Partnership investments
(see Note 1 - Cash Held in Trust).
The Partnership had three portfolio sales for $115,394 in the year ended
December 31, 1996. The Partnership had no sales in 1995 and 1994. PCM
effects the sale of the portfolios for the Partnership to non-related third
parties and retains 15% of the proceeds as a commission.
The Partnership had a net amount due from PCM of $351,718 and $89,625 at
December 31, 1996 and 1995, respectively.
F-87
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Related Party Transactions, Continued
INC was formed on February 1988 and subsequently became a registered
broker-dealer and member of the National Association of Security Dealers,
Inc. and the Securities Investor Protection Corporation. INC's sole
shareholder is also the sole shareholder of the General Partner, PDI. INC,
in accordance with the limited partnership agreement and offering
prospectus, was paid commissions equal to 10% of gross proceeds.
During the year ended December 31, 1995 and 1994, the Partnership paid INC
commissions of $302,500 and $297,500, respectively, which have been
accounted for as reductions against the Gross Proceeds. As of December 31,
1995, the Partnership had amounts owed to INC of $1,650 for payments made
by INC on behalf of the Partnership.
Spectrum was formed in 1988 to serve as an employment service bureau to
PCM, PDI and the PAM Funds. All employees, while directly employed by
Spectrum, work for the benefit of PCM, PDI and the PAM Funds. The
Partnership pays PDI, as General Partner, a fee equal to the employee
service fee it paid to Spectrum. For the year ended December 31, 1996,
employee service fees were $32,716. The Partnership paid no employee
service fees in 1995 and 1994. Prior to 1994, Spectrum performed and earned
fees related to asset location, research, due diligence, and acquisition
services provided for the Partnership.
4. Settlement with West Capital Financial Services Corp.
On April 8, 1994, the General Partner, on behalf of the Partnership and the
PAM Funds, entered into a Stock Acquisition Agreement ("Stock Agreement")
with WCFSC, for the purpose of acquiring 50% of the then issued and
outstanding no par common shares of WCFSC. The Stock Agreement provided
that the Partnership and the PAM Funds would receive credits for
approximately $1,881,950 due them from WCFSC. The Partnership and the PAM
Funds would then remit cash in the amount of $1,970,000 that was payable
during the five month period subsequent to the agreement date of the
transaction.
Certain differences of opinion developed between the General Partner and
WCFSC regarding the terms and conditions of the Stock Agreement. As a
result, the General Partner, for the benefit of the Partnership and the PAM
Funds, commenced litigation against WCFSC and certain of its affiliates
("WCFSC Dispute").
F-88
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Settlement with West Capital Financial Services Corp., Continued
On February 8, 1996, the parties to the WCFSC Dispute entered into a
Settlement Agreement and Mutual General Release ("Settlement Agreement")
for the purpose of settling and resolving any and all disputes existing
between the various parties to the WCSFC Dispute. The Settlement Agreement
resulted in the dismissal of the WCFSC Dispute, release by all parties of
all claims against other involved parties, including those claims relating
to the Stock Agreement, and the assignment and transfer by the Partnership
and the Pam Funds to WCFSC of certain distressed loan portfolios.
The Settlement Agreement required that WCFSC pay to the Partnership and its
affiliates $16,194,850 in exchange for the general release as well as the
transfer to WCFSC by the Partnership and the PAM Funds of certain interests
in certain distressed loan portfolios, and the transfer of various other
assets and rights. In addition, the Settlement Agreement required the
establishment of a defense fund of $250,000 from the proceeds which has
been available to pay legal fees and costs incurred by WCFSC to defend any
and all actions which may be brought by limited partners of the Partnership
and the PAM Funds. To date no such actions have been brought and no funds
have been expended. The defense fund terminates in July 1999. Any remaining
funds and earned interest will be distributed to the Partnership and the
PAM Funds. The Partnership's portion of the defense fund is included in
other assets.
The proceeds from the Settlement Agreement were allocated to the
Partnership and its affiliates, including the PAM Funds, by the General
Partner in accordance with the respective interests of the Partnership and
those affiliates. Accordingly, the Partnership was allocated $1,542,641 of
the total settlement proceeds with a portion still being held in trust (see
Note 1 - Cash Held in Trust).
The Settlement Agreement was approved by 89.75% of the limited partners of
the Partnership; none of the limited partners of the Partnership
disapproved; and 10.25% of the limited partners of the Partnership provided
no responses. A general release in favor of WCFSC was executed by 91.12% of
all the limited partners in the Partnership and the other Potential Merger
Participant PAM Funds.
F-89
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
5. Partners' Capital
In 1995 the distributions to partners were suspended in order to utilize
cash to enhance the Partnership operations. Cash distributions were
subsequently reinstated in 1996. For the years and period ended December
31, 1996, 1995, and 1994, the Partnership had 1,194, 1,200, and 595
partnership units, respectively, outstanding of the 1,200 partnership units
authorized.
The net income (loss) per limited partnership unit was calculated by
dividing the total limited partner net income (loss) by the number of
limited partnership units issued and outstanding as of December 31, 1996,
1995, and 1994. The General Partner did not own any partnership units as of
December 31, 1996, 1995, and 1994.
6. Disclosures about Fair Value of Financial Instruments
The carrying amounts reported on the Balance Sheet for cash and cash
equivalents approximate fair value due to the short-maturity of these
instruments.
The carrying values of due to affiliates and due from affiliates
approximate fair value.
The fair value of investment in distressed loan portfolios is addressed in
Note 2 Investments in Distressed Loan Portfolios.
7. New Pronouncements
Management has reviewed the following new pronouncements issued in 1996 by
the Financial Accounting Standards Board: SFAS 120, Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Companies;
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of; SFAS 122, Accounting for Mortgage
Servicing Rights; SFAS 123, Accounting for Stock-Based Compensation; SFAS
124, Accounting for Certain Investments Held by Not-for-Profit
Organizations; SFAS 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities; SFAS 126, Exemption
for Certain Required Disclosures about Financial Instruments for Certain
Nonpublic Entities; SFAS 127, Deferral of the Effective Date of Certain
Provisions of SFAS 125; and SOP 96-1, Environmental
F-90
<PAGE>
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
6. Disclosures about Fair Value of Financial Instruments, Continued
Remediation Liabilities. Management believes these pronouncements do not
apply or will not have a material impact to the Partnership.
8. Net Investment Income
The following schedule summarizes portfolio sales and collections of debt
on portfolios held by the Partnership. Related portfolio basis recoveries
and net investment income are also presented (see Note 1 for the
Partnership's revenue recognition policy).
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------
Sales to Collection
WCFSC Third Parties of Debt Total
----- ------------- ------- -----
<S> <C> <C> <C> <C>
Portfolio collections $418,395 $115,394 $668,259 $1,202,048
Portfolio basis recovery 346,350 115,394 654,252 1,115,996
-------- -------- -------- ----------
Net investment income $72,045 -- $14,007 $86,052
======== ======== ======== ==========
<CAPTION>
1996
-----------------------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ------- -----
<S> <C> <C> <C>
Portfolio collections -- $483,439 $483,439
Portfolio basis recovery -- 483,439 483,439
-------- -------- ----------
Net investment income -- -- --
======== ======== ==========
<CAPTION>
1996
-----------------------------------------------------
Sales to Collection
Third Parties of Debt Total
------------- ------- -----
<S> <C> <C> <C>
Portfolio collections -- $38,117 $38,117
Portfolio basis recovery -- 38,117 38,117
-------- -------- ----------
Net investment income -- -- --
======== ======== ==========
</TABLE>
F-91
<PAGE>
Performance Capital Management, Inc.
Financial Statements
For the Years Ended
December 31, 1996, 1995, and 1994
F-92
<PAGE>
Performance Capital Management, Inc.
Index to the Financial Statements
- --------------------------------------------------------------------------------
Report of Independent Auditors.................................................1
Financial Statements of Performance Capital Management, Inc.:
Balance Sheets as of December 31, 1996 and 1995.......................2
Statements of Operations for the years ended
December 31, 1996, 1995, and 1994.................................3
Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1996, 1995, and 1994.................................4
Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994.................................5
Notes to Financial Statements..................................................6
F-93
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Performance Capital Management, Inc.
We have audited the accompanying balance sheets of Performance Capital
Management, Inc. (the "Company") as of December 31, 1996 and 1995, and the
related statements of operations, shareholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Capital Management,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
February 21, 1997
F-94
<PAGE>
Performance Capital Management, Inc.
Balance Sheets
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash and equivalents ................................................... $2,878,541 $416,274
Due from affiliates .................................................... 352,949 358,183
Invesments in distressed loan portfolios, net .......................... -- 27,405
Property and equipment, net ............................................ 703,195 381,968
Other assets ........................................................... 47,580 137,361
----------- -----------
Total assets ........................................................... $3,982,265 $1,321,191
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable ...................................................... $187,425 $182,369
Due to affiliates ...................................................... 3,783,731 1,225,437
----------- -----------
Total liabilities ............................................... 3,971,156 1,407,806
----------- -----------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock (no par value; 100,000 shares
authorized; 100 shares issued and outstanding
at December 31, 1996 and 1995 ................................. 100 100
Retained earnings (deficit) ..................................... 11,009 (86,715)
----------- -----------
Total shareholders' equity (deficit) 11,109 (86,615)
----------- -----------
Total liabilities and shareholders' equity ............................. $3,982,265 $1,321,191
=========== ===========
</TABLE>
F-95
<PAGE>
Performance Capital Management, Inc.
Statements of Operations
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Revenue:
Portfolio sales ...................................... $12,049,227 $4,998,906 $10,382,393
Collection revenue ................................... 3,458,403 1,380,277 1,039,949
Servicing fees ....................................... 609,220 946,734 517,089
------------ ------------ ------------
16,116,850 7,325,917 11,939,431
------------ ------------ ------------
Expenses:
Cost of portfolio acquisitions ....................... 8,725,019 3,651,388 8,068,979
Personnel and related benefits ....................... 3,473,232 2,403,138 2,928,201
Professional and management fees ..................... 2,920,523 673,545 682,154
Collection expenses .................................. 482,657 285,026 280,136
Other general and administrative expenses ............ 448,987 331,425 296,663
------------ ------------ ------------
Total operating expenses ...................... 16,050,418 7,344,522 12,256,133
------------ ------------ ------------
Income (loss) from operations ................. 66,432 (18,605) (316,702)
Other income:
Interest, net ........................................ 44,478 25,685 725
------------ ------------ ------------
Income (loss) before provision for income taxes 110,910 7,080 (315,977)
Provision for income taxes .................................. 13,186 800 800
------------ ------------ ------------
Net income (loss) ........................................... $97,724 $6,280 ($316,777)
============ ============ ============
Basic earnings (loss) per common share ...................... $977.24 $62.80 ($3,167.77)
============ ============ ============
</TABLE>
F-96
<PAGE>
Performance Capital Management, Inc.
Statements of Shareholders' Equity (Deficit)
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
Retained
Common Common Earnings
Shares Stock (Deficit) Total
---- ---- --------- ----------
Balance, December 31, 1993 ...... 100 $100 $223,782 $223,882
Net loss ................... -- -- (316,777) (316,777)
---- ---- --------- ---------
Balance, December 31, 1994 ...... 100 100 (92,995) (92,895)
Net income ................. -- -- 6,280 6,280
---- ---- --------- ---------
Balance, December 31, 1995 ...... 100 100 (86,715) (86,615)
Net income ................. -- -- 97,724 97,724
---- ---- --------- ---------
Balance, December 31, 1996 ...... 100 $100 $11,009 $11,109
==== ==== ========= =========
F-97
<PAGE>
Performance Capital Management, Inc.
Statements of Cash Flows
For the Years Ended December 31, 1996 , 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 97,724 $ 6,280 ($ 316,777)
Adjustments to reconcile income (loss) to net
cash provided by operating activities:
Depreciation and amortization 150,813 81,454 50,559
Decrease (increase) in assets:
Due from affiliate 5,234 (382,072) 526,530
Other assets 89,781 40,586 (148,921)
Increase (decrease) in liabilities:
Accounts payable 5,056 (12,318) 115,408
Due to affiliate 2,558,294 763,783 150,927
----------- ----------- -----------
Net cash provided by operating activities 2,906,902 497,713 377,726
----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment (472,040) (138,610) (168,596)
Recovery of portfolio basis 27,405 15,273 29,164
Acquisition of distressed loan portfolios held for sale -- -- (71,842)
----------- ----------- -----------
Net cash used in investing activities (444,635) (123,337) (211,274)
----------- ----------- -----------
Cash flows used in financing activities:
Repayment of loans from affiliates -- -- (4,145)
Loans to shareholder -- (133,458) (96,620)
----------- ----------- -----------
Net cash used in financing activities -- (133,458) (100,765)
----------- ----------- -----------
Net increase in cash 2,462,267 240,918 65,687
Cash at beginning of period 416,274 175,356 109,669
----------- ----------- -----------
Cash at end of period $ 2,878,541 $ 416,274 $ 175,356
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
1996 1995 1994
----------- ----------- -----------
Income taxes $ 1,000 $ 3,140 $ 1,600
Interest $ 531 -- 5,993
</TABLE>
The accompanying notes are an integral part of the financial statements
F-98
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Organization and Description of Business
Performance Capital Management, Inc. (the "Company") was incorporated in
January 1992 for the purpose of identifying, analyzing, negotiating,
acquiring, and servicing investments in distressed loan portfolios. The
Company, however, did not commence its primary operations until May 1993.
The Company acquires investments primarily for the benefit of affiliate
investors, and enters into servicing arrangements with such affiliates to
participate in the proceeds upon collection of debtor obligations. The
Company also acquires and services portfolios for its own account.
Revenue Recognition
Portfolio sales are recorded when all contractual benefits and obligations
are transferred, which normally occurs at the time of closing. Collection
revenues are recognized when received and servicing fees are recognized
when earned. Acquisition fees are charged for due diligence work that is
completed by PCM in establishing a purchase price from the prior portfolio
holders. The acquisition fee averages 36% of the purchase price for the
portfolio and is recognized when contractual benefits and obligations are
transferred to the applicable PAM partnership.
Cash and Equivalents
The Company defines cash equivalents as all highly liquid investments with
an original maturity of three months or less. The Company maintains cash
balances at two banks in accounts which, collectively, exceeded federally
insured limits by approximately $2,557,000 and $213,472 at December 31,
1996 and 1995, respectively. The Company uses a cash management system
whereby idle cash balances are swept daily into a master account and
invested in high quality, short term securities. The Company's management
believes that these cash balances are not subject to any significant credit
risk due to the nature of the investments and has not experienced any past
losses with cash and equivalent investments. The Company received interest
income, net of interest expense, of $44,478, $25,685, and $725 in the years
ended December 31, 1996, 1995, and 1994, respectively.
F-99
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
Distressed Loan Portfolios Held for Sale
Distressed loan portfolios held for sale are troubled debt portfolios which
have been acquired from non-related sources with the intent to resell them
to affiliated limited partnerships and independent third parties. These
portfolios are carried at the lower of cost or estimated net realizable
value. Estimated net realizable value represents management=s estimates,
based on its present plans and intentions. No interest is recognized on the
individual debtor=s outstanding account balances during the period the
Company owns the troubled debt portfolios.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, which
range from five to seven years. Expenditures for normal maintenance and
repairs are charged to expense, and significant improvements are
capitalized. The cost and related accumulated depreciation of assets are
removed from the accounts upon retirement or other disposition, and any
resulting profit or loss is reflected in the statement of operations.
Income Taxes
The Company accounts for deferred income taxes using the liability method.
Deferred income taxes are computed based on the tax liability or benefit in
future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting
purposes. The net difference between tax expense and taxes currently
payable is reflected in the balance sheet as deferred taxes. Deferred tax
assets and/or liabilities are classified as current and noncurrent based on
the classification of the related asset or liability for financial
reporting purposes, or based on the expected reversal date for deferred
taxes that are not related to an asset or liability.
Earnings Per Share
The financial statements are presented in accordance with Statements on
Financial Accounting Standards No. 128, "Earnings per Share." Basic
earnings per common share are computed using the weighted average number of
common shares outstanding during the period. For the years ended December
31, 1996, 1995, and 1994, the Company had 100 common shares issued and
outstanding.
F-100
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
1. Organization and Summary of Significant Accounting Policies, Continued
----------------------------------------------------------------------
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenue and expenses during
the reported period. Actual results could differ from the estimates.
Financial Statement Classification
Certain amounts within the 1995 and 1994 financial statements have been
reclassified in order to conform with the 1996 financial statement
presentation.
2. Non-Cash Investing and Financing Activity
-----------------------------------------
In 1995, the Company assumed the responsibility to repay an affiliated
partnership on behalf of an affiliated company in exchange for the
satisfaction of an outstanding loan balance of $95,855 with the affiliate
company. In addition, in 1995 an outstanding balance of $230,078 due from
the Company's shareholder was assumed by an affiliate company as partial
satisfaction of amounts owed to it by the Company.
3. Investments in Distressed Loan Portfolios
-----------------------------------------
Investments in distressed loan portfolios consist primarily of charged-off
credit card accounts originated by independent third-party financial
institutions located throughout the United States. In addition, the Company
acquired portfolios of defaulted consumer debts which were rewritten under
terms different from the original obligation. The fair value of these
investments was determined by discounting the estimated future cash
collections on such investments during the estimated portfolio holding
period using a discount rate commensurate with the risks involved.
The discount rate converts the individual portfolio's expected future cash
flows to a calculated present value. The Company utilized an industry
specific discount rate from Ibbotson's Cost of Capital Yearbook 1997 which
considered information for the 1996 year. The Company utilized the cost of
capital rate experienced in 1996 by personal finance companies. The Company
selected the personal finance companies' data as it
F-101
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Investments in Distressed Loan Portfolios, Continued
----------------------------------------------------
most closely reflected comparable economic risk levels and the type of
business operations encountered. The weighted average cost of capital for
personal finance companies was between 7.31 and 9.4 for 1996 and 1995. The
Company used rates within this range.
At December 31, 1995, investments in distressed loan portfolios consisted
of the following:
1995
--------------------------
Carrying Fair
Amount Value
-------- -----
Credit card accounts $27,405 $449,281
------- --------
$27,405 $449,281
======= ========
In May 1996, the investment in distressed loan portfolios was sold in
conjunction with the Settlement Agreement (see Note 8 - Settlement
Agreement) for $449,281.
4. Property and Equipment, Net
---------------------------
Property and equipment consists of the following:
1996 1995
---- ----
Computer equipment $435,082 $294,137
Computer software 346,369 33,255
Office equipment 45,932 43,832
Furniture and fixtures 173,253 157,372
--------- --------
1,000,636 528,596
Less: accumulated depreciation (297,441) (146,628)
--------- -------
Property and equipment, net $703,195 $381,968
========= ========
Depreciation and amortization expense for the years ended December 31,
1996, 1995, and 1994 totaled $150,813, $81,454, and $50,559, respectively.
F-102
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
5. Related Party Transactions
--------------------------
The Company has entered into several fee and cost reimbursement
arrangements with affiliated corporations and limited partnerships either
wholly-owned or controlled by the Company=s sole shareholder, most of which
are provided for and documented by formal agreements. The affiliated
corporations and limited partnerships are identified below:
Affiliated Corporations:
Performance Development, Inc. ("PDI")
Spectrum Capital Management, Inc. ("Spectrum")
Atlas Equity, Inc. ("AEI")
Affiliated Limited Partnerships:
Performance Asset Management Fund, Ltd. and
Performance Asset Management Fund II, III, IV, and
V Ltd. ("PAM Funds")
PDI was formed in June 1990 to engage in various aspects of the investment
banking industry. PDI is also the General Partner for the PAM Funds and
various other affiliated California limited partnerships. PDI incurs
certain expenses related to the operations of the Company and is
subsequently reimbursed by the Company.
On October 1, 1993, the Company entered into an agreement to borrow
$100,000 from PDI to finance operations. The debt accrued interest at 8%
per annum and was payable on demand. During the year ended December 31,
1995, the Company incurred interest expense of $7,668 on this debt. In
December 1995, the Company satisfied this obligation when it agreed to
assume the responsibility to repay an affiliated partnership on behalf of
PDI, and accordingly, the Company has amounts due from PDI recorded as due
from affiliates totaling $338,051 and $347,913 at December 31, 1996 and
1995, respectively.
Spectrum was formed in 1988 and provides personnel and human resource
services to both affiliate and non-affiliate entities. Prior to 1994,
Spectrum performed and earned fees for certain services similar to those
currently performed by PCM.
During 1993, the Company entered into an agreement with Spectrum ("Spectrum
Agreement") whereby Spectrum provides human resource services to the
Company. The terms of the agreement provide for fees of 150% of gross wages
of each contract
F-103
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
5. Related Party Transactions, Continued
-------------------------------------
employee provided by Spectrum to the Company, with fee rate adjustments
subject to 30 day notice by either party. PCM incurred $2,078,121,
$1,392,601, and $1,510,512 in fees for employment services for the years
ended December 31, 1996, 1995, and 1994, respectively.
During 1996, Spectrum located and acquired the right to purchase certain
distressed loan portfolios from an unrelated third party. In order to
induce Spectrum to assign to the Company its right to acquire the
distressed loan portfolios the Company agreed to pay to Spectrum, all net
profit from the sale or other disposition of these distressed loan
portfolios. However, the Company retains the right to all profits generated
from the collection of these distressed loan portfolios.
The Company had amounts owed to Spectrum of $3,139,522 and $157,681
recorded as due to affiliates at December 31, 1996 and 1995, respectively.
AEI is a California corporation formed in 1988 which provides services to
facilitate the operations of affiliate companies. AEI also does business as
Performance Communication Services ("PCS") and has participated in numerous
telecommunications ventures since its inception. At December 1, 1995, the
Company had an amount due to PCS for expenses paid on behalf of the Company
of $120,000 included in an amount due to affiliates.
The Company acquires distressed loan portfolios from third-party sellers
and subsequently sells the portfolios to the PAM Funds for amounts
consistent with the respective PAM Funds limited partnerships agreements.
In addition, the Company also enters into arrangements with the PAM Funds
to service the distressed loan portfolios. The arrangements generally
provide that all proceeds generated from the collection of distressed loan
portfolios will be shared by the parties in proportion to the respective
servicing arrangement, generally, 55% to 60% for the PAM Funds and 45% to
40% for the Company. The Company also earns servicing fees as
reimbursements of collection costs incurred by the Company on behalf of the
PAM Funds.
For the year ended December 31, 1996, the Company sold two portfolios to
PAM, PAM II, and PAM V for $1,315,610, $1,502,705, and $1,645,090,
respectively. In addition, the Company also sold three and twelve
portfolios to PAM III and PAM IV for $2,754,470 and $4,463,753,
respectively. For the year ended December 31, 1995, the Company sold one
portfolio to PAM, PAM II, and PAM III for $5,463, $114,184, and
F-104
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
5. Related Party Transactions, Continued
-------------------------------------
$160,605, respectively. In addition, the Company also sold seven and five
portfolios to PAM IV and PAM V for $3,142,259 and $1,576,395, respectively.
For the year ended December 31, 1994, the Company sold three portfolios,
twenty portfolios, and four portfolios to PAM II, PAM IV, and PAM V for
$674,871, $6,197,332, and $530,088, respectively.
During the year ended December 31, 1996, the Company earned collection
revenue from PAM of $217,421; PAM II, $221,577; PAM III, $166,345; PAM IV,
$2,110,626; and PAM V, $477,498. During the year ended December 31, 1995,
the Company earned collection revenue from PAM of $34,693; PAM II,
$136,308; PAM III, $29,091; PAM IV, $1,144,313; and PAM V, $186,513. During
the year ended December 31, 1994, the Company earned collection revenue
from PAM, PAM II, PAM III, PAM IV and PAM V of $197,241, $74,604, $755,
$725,066 and $25,412.
During the year ended December 31, 1996, the Company earned servicing fees
from PAM of $43,509; PAM II, $67,720; PAM III, $81,560; PAM IV, $270,531;
and PAM V, $74,502. During the year ended December 31, 1995, the Company
earned servicing fees from PAM of $365; PAM II, $30,607; PAM III, $4,578;
PAM IV, $225,318; and PAM V, $64,375. During the year ended December 31,
1994, the Company earned servicing fees from PAM II, PAM III, PAM IV and
PAM V of $44,429, $940, $427,180 and $59,052.
The Company had amounts owed to PAM, PAM II, PAM III, PAM IV and PAM V
recorded as due to affiliates at December 31, 1996 of $56,483, $43,947,
$56,039, $136,022, and $351,718, respectively. The Company had amounts owed
to PAM II, PAM IV and PAM V recorded as due to affiliates of $9,288,
$314,221 and $624,247, respectively, and amounts owed from PAM and PAM III
totaling $860 and $9,411, respectively, recorded as due from affiliates at
December 31, 1995.
At December 31, 1994, the Company entered into an agreement with the
Company's major shareholder. The agreement provided for the shareholder's
borrowings to be payable on demand at an interest rate of 8% per annum.
During the year ended December 31, 1995, the Company recorded interest
income relating to such borrowings of $14,360. At December 31, 1996, the
outstanding balance from the shareholder was assumed by an affiliate as
partial satisfaction of amounts owed to it by the Company.
F-105
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
6. Income Taxes
------------
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Current expense:
Federal $ 4,748 -- --
State 12,197 $ 800 $ 800
------- ------- --------
16,945 800 800
------- ------- -------
Deferred benefit:
Federal (3,759) -- --
State -- -- --
------- ------- -------
(3,759) -- --
------- ------- -------
Total provision for income taxes $13,186 $ 800 $ 800
======= ======= =======
</TABLE>
Significant components of the Company's deferred income tax liability are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Deferred income tax asset:
State taxes $ 3,759 $ 272 $ 272
Net operating loss -- 43,518 46,312
------- ------- -------
Total deferred income tax assets 3,759 43,790 46,584
Valuation allowance -- (43,790) (46,584)
------- ------- -------
Net deferred income tax assets $ 3,759 $ -- $ --
======= ======= =======
</TABLE>
Deferred income tax assets result from temporary differences due primarily
to accruals and net operating loss carryforwards. The decrease in the
deferred income tax asset and corresponding valuation allowance was due to
the Company's utilization of a portion of its net operating loss
carryforward. The deferred tax asset is included in other assets on the
balance sheet.
F-106
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
7. Commitments and Contingencies
-----------------------------
The Company is a party to a real property lease executed by Spectrum, an
affiliate entity. The Company has assumed primary responsibility for
paying the total monthly obligations pursuant to the terms of a sublet
agreement with Spectrum. The lease agreement terminates in August 1998 and
requires future minimum lease payments as follows:
1997 $91,659
1998 63,109
--------
$154,768
========
Rent expenses under this agreement totaled $85,875, $81,167, and $56,984
for the years ended December 31, 1996, 1995, and 1994, respectively.
8. Settlement Agreement
--------------------
On February 8, 1996, PDI, for itself and on behalf of the Company and the
PAM Funds, entered into an agreement ("Settlement Agreement") for the
purpose of settling and resolving any and all disputes existing between the
various affiliate parties and an independent third-party servicer
("Servicer"), including release by all parties of claims against other
respective parties and assignments and transfer by the Company and the PAM
Funds to the Servicer of certain distressed loan portfolios. The Company
received proceeds totaling $606,877 in conjunction with the Settlement
Agreement with the Servicer.
In May 1996, the Company received proceeds totaling $449,281 from the sale
of its remaining two distressed loan portfolios in conjunction with the
Settlement Agreement with the Servicer.
On August 31, 1996, the Company sold acquired portfolios to the PAM Funds
for $7,984,825.
F-107
<PAGE>
Performance Capital Management, Inc.
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
9. Year 2000 Disclosure
--------------------
The Company began the process of identifying, evaluating and implementing
changes to its computer programs necessary to address the Year 2000 issue.
The Company is currently addressing the Year 2000 issue by modification of
its existing programs and conversions to new programs. The Company is also
in communication with financial institutions and other entities with which
it conducts business to help them identify and resolve the Year 2000 issue
as it relates to the Company's business operations. An assessment of the
readiness of those third party institutions and entities with which the
Company does business is ongoing. While the Company is confident that it
will complete the assessment and remediation of its computer software,
there can be no assurance that the necessary modifications and conversions
by those third party institutions and entities with which the Company
conducts business will be completed in a timely manner, which could have a
material adverse effect on the Company's results of operations. The total
cost to the Company associated with the required modifications and
conversions is not expected to be material to the Company's results of
operations and financial position and is being expensed as incurred.
10. New Pronouncements
------------------
Management has reviewed the following new pronouncements issued in 1996 by
the Financial Accounting Standards Board: SFAS 120, Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Companies;
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of; SFAS 122, Accounting for Mortgage
Servicing Rights; SFAS 123, Accounting for Stock-Based Compensation; SFAS
124, Accounting for Certain Investments Held by Not-for-Profit
Organizations; SFAS 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities; SFAS 126, Exemption
for Certain Required Disclosures about Financial Instruments for Certain
Nonpublic Entities; SFAS 127, Deferral of the Effective Date of Certain
Provisions of SFAS 125; and SOP 96-1, Environmental Remediation
Liabilities. Management believes these pronouncements do not apply or will
not have a material impact to the Partnership.
F-108
<PAGE>
Performance Asset Management Company
Financial Statements
For the Period from May 7, 1996 (Inception)
Through December 31, 1996
F-109
<PAGE>
Performance Asset Management Company
Index to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
Report of Independent Auditors.................................................1
Financial Statements of Performance Asset Management Company:
Balance Sheet, December 31, 1996......................................2
Statement of Operations for the period from
May 7, 1996 (inception) through
December 31, 1996................................................3
Statement of Shareholder's Deficit for the period from
May 7, 1996 (inception) through
December 31, 1996................................................4
Statement of Cash Flows for the period from
May 7, 1996 (inception) through
December 31, 1996................................................5
Notes to Financial Statements..................................................6
F-110
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------------
To the Board of Directors
Performance Asset Management Company
We have audited the accompanying balance sheet of Performance Asset Management
Company as of December 31, 1996, and the related statements of operations,
shareholder's deficit and cash flows for the period from May 7, 1996 (inception)
through December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Asset Management
Company as of December 31, 1996, and the results of its operations and its cash
flows for the period from May 7, 1996 (inception) through December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Kelly & Company
Kelly & Company
Newport Beach, California
October 30, 1997
F-111
<PAGE>
Performance Asset Management Company
BALANCE SHEET
December 31, 1996
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Accrued interest receivable $828
--------
Total assets $828
========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Income taxes payable $920
Shareholder's deficit:
Preferred stock ($.001 par value; 10,000,000
shares authorized, 100,000 shares issued
and outstanding) 100
Common stock ($.001 par value; 100,000,000
shares authorized, 1,000 shares issued
and outstanding) 1
Additional paid in capital 19,899
Notes receivable, shareholder (20,000)
Retained deficit (92)
--------
Total shareholder's deficit (92)
--------
Total liabilities and shareholder's deficit $828
========
The accompanying notes are an integral part of the financial statements.
F-112
<PAGE>
Performance Asset Management Company
STATEMENT OF OPERATIONS
For the Period from May 7, 1996 (Inception)
Through December 31, 1996
- --------------------------------------------------------------------------------
Revenues --
Cost of sales --
-----
Gross profit --
Operating expenses --
-----
Operating income --
Other income (expense):
Interest income $828
Income taxes (920)
-----
Total other income (expense) (92)
-----
Loss before provision for income taxes (92)
Provision for income taxes --
-----
Net loss ($92)
=====
The accompanying notes are an integral part of the financial statements.
F-113
<PAGE>
Performance Asset Management Company
Statement of Shareholder's Deficit
For the Period from May 7, 1996 (Inception)
Through December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Notes
Preferred Common Preferred Common Paid-In Receivable, Retained
Shares Shares Stock Stock Capital Shareholder Earnings Total
-------- ------ ---- ------ ------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Formation of corporation:
Issuance of stock 100,000 1,000 $100 $1 $19,899 ($20,000) -- --
Net loss -- -- -- -- -- -- ($92) ($92)
------- ----- ---- --- ------- -------- ----- ----
Balance, December 31, 1996 100,000 1,000 $100 $1 $19,899 ($20,000) ($92) ($92)
======= ===== ==== === ======= ======== ===== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-114
<PAGE>
Performance Asset Management Company
Statement of Cash Flows
For the Period from May 7, 1996 (Inception)
Through December 31, 1996
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($92)
Decrease (increase) in assets:
Accrued interest receivable (828)
Increase (decrease) in liabilities:
Income taxes payable 920
----------
Cash provided by operating activities --
Cash flows used for investing activities:
Cash used in investing activities --
Cash flows provided by financing activities:
Cash provided by financing activities --
----------
Net increase in cash --
Cash at inception --
----------
Cash at December 31, 1996 --
==========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest --
Income tax --
F-115
<PAGE>
Performance Asset Management Company
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Performance Asset Management Company (the "Company") was incorporated in
the State of Delaware on May 7, 1996, and has been inactive.
Income Taxes
The Company accounts for deferred income taxes using the liability method
in accordance with Statement of Financial Accounting Standards No. 109
(SFAS No. 109). Deferred income taxes are computed based on the tax
liability or benefit in future years of the reversal of temporary
differences in the recognition of income or deduction of expenses between
financial and tax reporting purposes. The net difference between tax
expense and taxes currently payable is reflected in the financial
statements as deferred taxes. Deferred tax assets and/or liabilities are
classified as current and noncurrent based on the classification of the
related asset or liability for financial reporting purposes, or based on
the expected reversal date for deferred taxes that are not related to an
asset or liability. For tax purposes, the Company will be capitalizing all
expenses incurred during the development stage.
2. Notes Receivable - Related Party
--------------------------------
Notes receivable from related party at December 31, 1996, consist of the
following:
Two notes receivable with face values of $10,000 each,
at annual interest rates of 7%, with principal and
interest due on December 31, 1998. $20,000
=======
3. Income Taxes
------------
The components of the provision for income taxes for the period ended
December 31, 1996 are:
Current expense:
Federal $4
State 916
----
Total provision $920
====
As of December 31, 1996, date the Company has no deferred income tax asset
or liability.
F-116
<PAGE>
Performance Asset Management Company
Notes to Financial Statements, Continued
- --------------------------------------------------------------------------------
4. Preferred Stock
---------------
The Certificate of Incorporation of the Company, as amended, authorizes the
issuance of 10,000,000 shares of preferred stock, par value $.001 per
share, from time to time, in one or more series. The initial series of
preferred stock has been designated as "Series A Convertible Preferred
Stock", consisting initially of 100,000 shares. The Series A convertible
preferred stock has a conversion feature which provides that each share is
convertible into twenty fully paid shares of common stock with no
additional cost or payment.
F-117
<PAGE>
Performance Asset Management Company
Financial Statements
As of and for the Six Months Ended
June 30, 1997 (Unaudited)
F-118
<PAGE>
Performance Asset Management Company
Balance Sheet (Unaudited)
June 30, 1997
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Accrued interest receivable $1,551
--------
Total assets $1,551
========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Income taxes payable $1,720
Shareholder's deficit:
Preferred stock ($.001 par value; 10,000,000
shares authorized, 100,000 shares issued
and outstanding) 100
Common stock ($.001 par value; 100,000,000
shares authorized, 1,000 shares issued
and outstanding) 1
Additional paid in capital 19,899
Notes receivable, shareholder (20,000)
Retained deficit (169)
--------
Total shareholder's deficit (169)
--------
Total liabilities and shareholder's deficit $1,551
========
The accompanying notes are an integral part of the financial statements.
F-119
<PAGE>
Performance Asset Management Company
Statement of Operations (Unaudited)
For the Six Months Ended June 30, 1997
- --------------------------------------------------------------------------------
Revenues --
Cost of sales --
-----
Gross profit --
Operating expenses --
-----
Operating income --
Other income (expense):
Interest income $723
Income taxes (800)
-----
Total other income (expense) (77)
-----
Loss before provision for income taxes (77)
-----
Provision for income taxes --
-----
Net loss ($77)
=====
The accompanying notes are an integral part of the financial statements.
F-120
<PAGE>
Performance Asset Management Company
Statement of Shareholder's Deficit (Unaudited)
For the Six Months Ended June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Note
Preferred Common Preferred Common Paid-In Receivable, Retained
Shares Shares Stock Stock Capital Shareholder Earnings Total
-------- -------- -------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Formation of corporation:
Issuance of stock 100,000 1,000 $100 $1 $19,899 ($20,000) -- --
Net loss -- -- -- -- -- -- ($92) ($92)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1996 100,000 1,000 100 1 19,899 (20,000) (92) (92)
Net loss -- -- -- -- -- -- (77) (77)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, June 30, 1997 100,000 1,000 $100 $1 $19,899 ($20,000) ($169) ($169)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-121
<PAGE>
Performance Asset Management Company
Statement of Cash Flows (Unaudited)
For the Six Months Ended June 30, 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($77)
Decrease (increase) in assets:
Accrued interest receivable (723)
Increase (decrease) in liabilities:
Income taxes payable 800
-----
Cash provided by operating activities --
Cash flows used for investing activities:
Cash used in investing activities --
Cash flows provided by financing activities:
Cash provided by financing activities --
-----
Net increase in cash --
Cash at December 31, 1996 --
-----
Cash at June 30, 1997 --
=====
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest --
Income tax --
The accompanying notes are an integral part of the financial statements.
F-122
<PAGE>
Performance Asset Management Company
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Performance Asset Management Company (the "Company") was incorporated in
the State of Delaware on May 7, 1996, and has been inactive.
Income Taxes
The Company accounts for deferred income taxes using the liability method
in accordance with Statement of Financial Accounting Standards No. 109.
Deferred income taxes are computed based on the tax liability or benefit in
future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting
purposes. The net difference between tax expense and taxes currently
payable is reflected in the financial statements as deferred taxes.
Deferred tax assets and/or liabilities are classified as current and
noncurrent based on the classification of the related asset or liability
for financial reporting purposes, or based on the expected reversal date
for deferred taxes that are not related to an asset or liability. For tax
purposes, the Company will be capitalizing all expenses incurred during the
development stage.
2. Notes Receivable - Related Party
Notes receivable from related party at June 30, 1997, consist of the
following:
Two notes receivable with face values of $10,000
each, at annual interest rates of 7%, with
principal and interest due on December 31, 1998. $20,000
=======
3. Income Taxes
The components of the provision for income taxes for the six months ended
June 30, 1997 are:
Current expense
Federal --
State $800
----
Total provision $800
====
As of June 30, 1997, the Company has no deferred income tax asset or
liability.
F-123
<PAGE>
Performance Asset Management Company
Notes to Financial Statement, Continued
- --------------------------------------------------------------------------------
4. Preferred Stock
The Certificate of Incorporation of the Company, as amended, authorizes the
issuance of 10,000,000 shares of preferred stock, par value $.001 per
share, from time to time, in one or more series. The initial series of
preferred stock has been designated as "Series A Convertible Preferred
Stock," consisting initially of 100,000 shares. The Series A convertible
preferred stock has a conversion feature which provides that each share is
convertible into twenty fully paid shares of common stock with no
additional cost or payment.
F-124
<PAGE>
MERGER AGREEMENT
AND PLAN OF REORGANIZATION
THIS MERGER AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and
entered into this 1st day of May, 1998, by and among (i) Performance Asset
Management Fund, Ltd., A California Limited Partnership ("PAM"); (ii)
Performance Asset Management Fund II, Ltd., A California Limited Partnership
("PAM II"); (iii) Performance Asset Management Fund III, Ltd., A California
Limited Partnership ("PAM III"); (iv) Performance Asset Management Fund IV,
Ltd., A California Limited Partnership ("PAM IV"); (v) Performance Asset
Management Fund V, Ltd., A California Limited Partnership ("PAM V"); (vi)
Vincent E. Galewick, an unmarried man ("Galewick"); (vii) Michael A. Cushing, a
married man ("Cushing"); and (viii) Performance Asset Management Company, a
Delaware corporation ("Company"). For convenience, PAM, PAM II, PAM III, PAM IV,
and PAM V shall be referred to in this Agreement as the "Partnerships" and any
of them may be referred to in this Agreement as a "Partnership". For
convenience, Galewick and Cushing may be referred to in this Agreement as the
"Shareholders".
RECITALS
A. The Shareholders are the only holders of the issued and outstanding
shares of common stock of Performance Capital Management, Inc., a California
corporation ("PCM"). The Boards of Directors of (i) the Company, and (ii)
Performance Development, Inc., a California corporation and the General Partner
of the Partnerships, and the Shareholders have each determined that a business
combination between the Company, PCM and the Partnerships is in the best
interests of their shareholders and partners, respectively, and presents an
opportunity for their respective businesses to achieve strategic and financial
benefits and, accordingly, have agreed to effect a plan of reorganization and
merger, on the terms and subject to conditions specified in this Agreement.
B. The Partnerships, the Shareholders and the Company, and each of them,
desire that there occur the reorganization and merger ("Merger") of the
businesses and operations of the Partnerships and PCM, combining them with and
into the business and operations of the Company by, among other things:
(1) The transfer by the Partnerships to the Company of all of the
assets, properties, rights and liabilities of the Partnerships and the
transfer by the Shareholders to the Company of all of the shares of issued
and outstanding common stock of PCM in exchange for the issuance by the
Company to the Partnerships and the Shareholders of shares of the Company's
$.001 par value common stock ("Transfer");
(2) The shares of $.001 par value common stock of the Company issued
in exchange for the (i) assets, properties, rights, interests and
liabilities of the Partnerships and (ii) issued and outstanding shares of
no par value common stock of PCM may be referred to in this Agreement as
the "Merger Stock";
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<PAGE>
(3) Combining and merging the business and operations of PCM and the
Partnerships with and into the business and operations of the Company, as a
result of which the Company will be the sole surviving entity;
(4) Terminating PCM's legal existence and the Partnerships' legal
existences by operation of law;
(5) Exchanging each partner's interest in each Partnership for the
appropriate number of shares of Merger Stock; and
(6) Adopting certain amendments to the Company's Certificate of
Incorporation and Bylaws which may have the effect of discouraging
unsolicited proposals to acquire control of the Company.
C. The Company, the Shareholders and the General Partner of the
Partnerships desire to make certain representations, warranties and agreements
in connection with the Merger.
NOW, THEREFORE, IN CONSIDERATION OF THE RECITALS SPECIFIED ABOVE THAT SHALL BE
DEEMED TO BE A SUBSTANTIVE PART OF THIS AGREEMENT, AND THE MUTUAL COVENANTS,
PROMISES, AGREEMENTS, REPRESENTATIONS AND WARRANTIES SPECIFIED IN THIS AGREEMENT
AND OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF WHICH
ARE HEREBY ACKNOWLEDGED, WITH THE INTENT TO BE OBLIGATED LEGALLY AND EQUITABLY,
THE PARTIES DO HEREBY COVENANT, PROMISE, AGREE, REPRESENT AND WARRANT AS
FOLLOWS:
I. RECITALS; TRUE AND CORRECT
The above specified recitals are true and correct and, by this reference,
are made a part of this Agreement.
II. REORGANIZATION AND MERGER
2.1. MERGER. The Partnerships, the Shareholders and the Company shall
effect the Transfer on the terms and subject to the conditions specified in this
Agreement, and in consideration of the Transfer, the Partnerships and the
Shareholders will receive the Merger Stock. The Merger Stock delivered by the
Company to the Partnerships will be distributed to the partners of the
Partnerships in a manner consistent with the value determined by the Company and
the General Partner for limited partnership interests ("Exchange Value"),
pursuant to which the Company shall issue shares of its $.001 par value common
stock to effect the Merger. The Exchange Value has been reviewed by Willamette
Management Associates, Inc. ("Willamette") and Willamette has determined that
the Exchange Value is fair to the Company, the Shareholders and the
Partnerships. Upon distribution of the Merger Stock, the Partnerships and PCM
will wind up and dissolve.
A-2
<PAGE>
2.2. CLOSING DATE. If all of the conditions precedent to the obligations of
each of the parties, as specified in this Agreement, shall have been satisfied
or shall have been waived, the Merger shall become effective on the date
("Closing Date") of the Transfer. For state law purposes, the Merger shall
become effective upon the issuance of a certificate of merger by the Secretary
of State of the State of Delaware in accordance with Delaware law or at such
later time which the parties shall have agreed upon and designated in such
filings in accordance with applicable law.
2.3. SECURITIES OF THE COMPANY. The authorized capital stock of the Company
is (i) 100,000,000 shares of $.001 par value common stock ("Common Stock"),
1,000 shares of which are issued and outstanding; and (ii) 10,000,000 shares of
$.001 par value preferred stock ("Preferred Stock"), with such designation,
rights and preferences as may be determined from time to time by the Board of
Directors of the Company, of which 100,000 shares are issued and outstanding.
2.4. MERGER STOCK. The manner and basis of issuing and restrictions
affecting the Merger Stock are as follows:
(a) At the Closing Date, the Partnerships shall receive the following
number of shares of Merger Stock:
(1) To PAM, 93,400 shares of Merger Stock, to be distributed to the
holders of that Partnership's interests;
(2) To PAM II, 311,200 shares of Merger Stock, to be distributed to
the holders of that Partnership's interests;
(3) To PAM III, 600,000 shares of Merger Stock, to be distributed to
the holders of that Partnership's interests;
(4) To PAM IV, 1,584,600 shares of Merger Stock, to be distributed to
the holders of that Partnership's interests; and
(5) To PAM V, 470,000 shares of Merger Stock, to be distributed to the
holders of that Partnership's interests.
(b) At the Closing Date, Galewick shall receive 4,385,515 shares of Merger
Stock.
(c) At the Closing Date, Cushing shall receive 66,785 shares of Merger
Stock.
(d) Each outstanding share of the Common Stock is entitled to one vote on
all matters submitted to a vote of shareholders. Shareholders have a right to
receive a report of the vote taken at any annual, regular, or special meeting of
shareholders. Shareholder approval is required for sales of all or substantially
all of the assets of the Company and reorganizations of
A-3
<PAGE>
the Company. Dissenters' rights will be provided to dissenting shareholders in
any reorganization involving the Company. Shareholders with the same type of
shares will be treated equally in a merger involving the Company.
(e) Upon the liquidation, dissolution or winding up of the Company, holders
of the Common Stock will be entitled to receive pro rata the assets of the
Company which are legally available for distribution, after payment of all debts
and other liabilities. The voluntary sale, conveyance, lease, exchange or
transfer (for cash, shares of stock, securities or other consideration) of all
or substantially all the property or assets of the Company to, or a
consolidation or merger of the Company with, one or more other corporations
(whether or not the Company is the entity surviving such consolidation or
merger) will not be deemed to be a liquidation, dissolution or winding-up,
voluntary or involuntary.
(f) Holders of the Common Stock shall have the right to receive dividends
paid on the Common Stock, subject to the dividend policy of the Company. The
Company shall not pay any cash dividends on the Common Stock or the Preferred
Stock for the foreseeable future, as all available cash will be utilized to
continue the growth of the Company's business subsequent to the Closing Date.
The payment of any subsequent cash dividends will be in the discretion of the
Board of Directors of the Company and will be dependent upon the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by that Board of Directors.
(g) No fractional shares of the Common Stock shall be issued as a result of
the Merger. In lieu of the issuance of any fractional shares of the Common Stock
as a result of the Merger, cash adjustments will be paid in respect of any
fractional shares that would otherwise be issuable, and the amount of such cash
adjustment shall be equal to such fractional proportion of a share of the Common
Stock.
(h) To accomplish the purposes of the Merger, the transfer, assignment,
sale, conveyance, hypothecation, encumbrance, or other alienation of the shares
of the Merger Stock shall be restricted as follows:
(1) 25% of the shares of the Merger Stock shall be freely transferable
on the Closing Date;
(2) 25% of the shares of the Merger Stock shall be restricted until,
and shall be freely tradable on, that date which is the last day of the
Company's first full fiscal quarter following the Closing Date;
(3) 25% of the shares of the Merger Stock shall be restricted until,
and shall be freely tradable on, that date which is the last day of the
Company's second full fiscal quarter following the Closing Date;
A-4
<PAGE>
(4) 25% of the shares of the Merger Stock shall be restricted until,
and shall be freely tradable on, that date which is the last day of the
Company's third full fiscal quarter following the Closing Date.
(i) Any transfer, sale, assignment, conveyance, hypothecation, encumbrance,
or alienation of the any of the shares of the Merger Stock, other than according
to the provisions of Section 2.4(h), shall be, and hereby is, null and void and
shall transfer to the purported transferee, purchaser, assignee, pledgee, or
encumbrance holder, no right, title or interest in or to the restricted shares
of Merger Stock purported to be transferred, sold, assigned, hypothecated,
encumbered, or alienated.
(j) At such time as the Company (i) has issued and outstanding equity
securities listed on the (A) New York Stock Exchange or (B) the American Stock
Exchange or (ii) has issued and outstanding securities designated as qualified
for trading as a national market system security on the National Association of
Securities Dealers Automatic Quotation System (or any successor national market
system) and has at least eight hundred (800) holders of its equity securities as
of the record date of the Company's most recent annual meeting of shareholders,
the Company shall be a "listed corporation." At such time as the Company shall
be a listed corporation:
(1) The directors of the Company shall be divided into two (2)
classes, designated Class I and Class II. Each class shall consist, as
nearly as may be possible, of one-half of the total number of directors
constituting the entire Board of Directors of the Company. In the event
that the number of directors of the Company is odd, Class I shall have one
more director than Class II. At such time as the directors are divided into
two (2) classes, the total number of directors constituting the entire
Board of Directors of the Company shall be seven (7). The term of each
class of directors shall be two (2) years. The terms of the initial Class I
directors shall terminate on the date of the second (2nd) annual meeting of
shareholders following the annual meeting of shareholders at which those
directors were elected; and the terms of the initial Class II directors
shall terminate on the date of the second (2nd) annual meeting of
shareholders following the annual meeting of shareholders at which those
directors were elected. At each annual meeting of shareholders during a
year in which the termination of the term of a class of directors occurs,
successors to that class of directors shall be elected for a two (2) year
term. If the number of directors is changed, any increase or decrease in
directorships shall be apportioned among the classes so as to maintain the
number of directors in each class as nearly equal as possible, and any
additional directors of any class elected to fill a vacancy resulting from
an increase in such class shall hold office only until the next election of
directors by the shareholders, but in no case will a decrease in the number
of directors shorten the term of any incumbent director. Directors shall
hold office until the annual meeting for the year in which their terms
expire and until their successors shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification
or removal from office. Any vacancy on the Board of Directors of the
Company, howsoever resulting, may be filled by the affirmative vote of a
majority of the remaining directors then in office, even if
A-5
<PAGE>
less than a quorum. Any director elected to fill a vacancy shall hold
office only until the next election of directors by the shareholders of the
Company.
(2) The shareholders of the Company shall not be entitled to cumulate
their votes for directors of the Company.
2.5. EFFECT OF THE MERGER. As of the Closing Date, all of the following
shall occur:
(a) The corporate identity, existence, purposes, powers, franchises, rights
and immunities of the Company shall continue unaffected and unimpaired by the
Merger.
(b) The Company shall be liable for all of the obligations and liabilities
of the Partnerships, including, without limitation, obligations and liabilities
(1) resulting from employment agreements and (2) owing to affiliates of the
Partnerships.
(c) The rights, privileges, goodwill, inchoate rights, assets, franchises
and property, real, personal and mixed, and indebtedness due on whatever account
and all other things in action belonging to the Partnerships shall be, and
hereby are, bargained, conveyed, granted, confirmed, transferred, assigned and
set over to and vested in the Company, without further act or deed.
(d) All right, title and interest of Galewick in and to the shares of no
par common stock issued by PCM to Galewick shall be, and they hereby are,
bargained, conveyed, granted, confirmed, transferred, assigned and set over to
and vested in the Company, without further act or deed.
(e) All right, title and interest of Cushing in and to the shares of no par
common stock issued by PCM to Cushing shall be, and they hereby are, bargained,
conveyed, granted, confirmed, transferred, assigned and set over to and vested
in the Company, without further act or deed.
(f) No claim pending at the Closing Date by or against the Partnerships or
any partner thereof shall abate or be discontinued by the Merger, but may be
enforced, prosecuted, settled or compromised as if the Merger had not occurred.
(g) All rights of employees and creditors and all liens upon the property
of the Partnerships shall be preserved unimpaired, limited to the property
affected by such liens at the Closing Date, and all the indebtedness,
liabilities and duties of the Partnerships shall attach to the Company and shall
be enforceable against the Company to the same extent as if all such
indebtedness, liabilities and duties had been incurred or contracted by the
Company.
A-6
<PAGE>
(h) The Certificate of Incorporation of the Company, as in effect on the
Closing Date, shall continue to be the Certificate of Incorporation of the
Company, as it may be amended thereafter in accordance with the provisions
thereof and applicable laws.
(i) The Bylaws of the Company, as in effect on the Closing Date, shall
continue to be the Bylaws of the Company, without change or amendment until such
time, if ever, as they may be amended thereafter in accordance with the
provisions thereof and applicable laws.
(j) The directors of the Company immediately prior to the Closing Date
shall be the directors of the Company as of the Closing Date.
(k) The officers of the Company immediately prior to the Closing Date shall
be the officers of the Company as of the Closing Date.
2.6. DISCLOSURE SCHEDULE. The Disclosure Schedule dated even with this
Agreement ("Disclosure Schedule") specifies the matters required to be specified
in the Disclosure Schedule, as described elsewhere in this Agreement. The
Disclosure Schedule shall be, and hereby is, a part of this Agreement.
III. REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS
Each Partnership represents and warrants to the Company and the
Shareholders as follows, with the knowledge and understanding that the Company
and the Shareholders are relying materially upon such representations and
warranties:
3.1. ORGANIZATION AND STANDING. Such Partnership is a limited partnership
duly organized, validly existing and in good standing under the laws of the
State of California. Such Partnership has all requisite power to conduct its
business as that business is now conducted and is duly qualified to do business
as a foreign limited partnership and is in good standing in each jurisdiction
where such qualification is necessary under applicable law, except where the
failure to qualify (individually or in the aggregate) does not have any material
adverse effect on the assets, business or financial condition of such
Partnership, and all states in which such Partnership is qualified to do
business as of the date of this Agreement, are specified in the Disclosure
Schedule. Copies of such Partnership's Certificate of Limited Partnership
(certified by the Secretary of State of California), and the Agreement of
Limited Partnership of such Partnership, as amended to date, delivered to the
Company on date even with this Agreement, are true and complete copies of those
documents as now in effect. Except as otherwise set forth in the Disclosure
Schedule, such Partnership does not own any interest in any other limited
partnership, joint venture, corporation, business trust or similar entity.
3.2. CAPITALIZATION. The number of limited partnership interests ("Units")
which are issued and outstanding for such Partnership is set forth in the
Disclosure Schedule. All of such Units are duly authorized, validly issued and
outstanding, fully paid and nonassessable, and owned of record and beneficially
by the partners of such Partnership, in such amounts as are set
A-7
<PAGE>
forth opposite their respective names set forth in the Disclosure Schedule, and
were not issued in violation of the preemptive rights of any person. There are
no subscriptions, options, warrants, rights or calls or other commitments or
agreements to which any partner of such Partnership is a party or by which any
such partner is obligated, calling for any issuance, transfer, sale or other
disposition of any Units. There are no outstanding securities convertible or
exchangeable, actually or contingently, into Units.
3.3. AUTHORITY. This Agreement constitutes, and all other agreements
contemplated hereby will constitute, when executed and delivered by such
Partnership in accordance therewith, the valid and binding obligations of such
Partnership, enforceable in accordance with their respective terms, subject to
general principles of equity and bankruptcy or other laws relating to or
affecting the rights of creditors generally.
3.4. PROPERTIES. Except as set forth in the Disclosure Schedule, such
Partnership has good title to all of the assets and properties which it purports
to own as (i) presented on the balance sheet included in the Respective
Partnership Financial Statements (as hereinafter defined), or (ii) otherwise, or
thereafter acquired. Such Partnership is not in material default in the
performance of any of its joint venture agreements with PCM or any other party.
Neither the whole nor any material portion of the assets of such Partnership is
subject to any governmental decree or order to be sold or is being condemned,
expropriated or otherwise taken by any public authority with or without payment
of compensation therefor, nor, to the knowledge of the General Partner of such
Partnership, has any such condemnation, expropriation or taking been proposed.
None of the assets of such Partnership is subject to any restriction which would
prevent continuation of the use currently made thereof or materially adversely
affect the value thereof.
3.5. CONTRACTS. All contracts, agreements, licenses, leases, easements,
permits, rights of way, commitments, and understandings, written or oral,
connected with or relating in any respect to present or proposed future
operations of such Partnership (except employment or other agreements terminable
at will and other agreements which, in the aggregate, are not material to the
business, properties or prospects of those parties and except governmental
licenses, permits, authorizations, approvals and other matters referred to in
Section 3.15 of this Agreement), which would be required to be listed as
exhibits to an Annual Report on Form 10-K, if such Partnership is subject to the
reporting requirements of the Securities Exchange Act of 1934 ("Exchange Act")
(individually, a "Respective Partnership Contract" and, collectively, the
"Respective Partnership Contracts"), are listed and described in the Disclosure
Schedule. Subsequent to the consummation of the Merger, such Partnership shall
use its best efforts to cause the transfer to, and otherwise assign for the
benefit of, the Company the Respective Partnership Contracts.
3.6. LITIGATION. Except as disclosed in the Disclosure Schedule, to the
knowledge of the General Partner of such Partnership, there is no claim, action,
proceeding or investigation pending or threatened against or affecting such
Partnership before or by any court, arbitrator or governmental agency or
authority which, in the reasonable judgment of such General Partner,
A-8
<PAGE>
could have any material adverse effect on such Partnership. There are no
decrees, injunctions or orders of any court, governmental department, agency or
arbitration outstanding against such Partnership.
3.7. TAXES. For purposes of this Agreement, (i) "Tax" (and, with
correlative meaning, "Taxes") shall mean any federal, state, local or foreign
income, alternative or add-on minimum, business, employment, franchise,
occupancy, payroll, property, sales, transfer, use, value added, withholding or
other tax, levy, fee, imposition, assessment or similar charge, together with
any related addition to tax, interest, penalty or fine thereon; and (ii)
"Returns" shall mean all returns, including, without limitation, information
returns and other material information, reports and forms relating to Taxes or
to any benefit plans. To the knowledge of the General Partner of such
Partnership:
(a) Such Partnership has duly filed all Returns required by any law or
regulation to be filed by such Partnership, except for extensions duly
obtained. All such Returns were, when filed, and are, accurate and complete
in all material respects and were prepared in conformity with applicable
laws and regulations in all material respects. Such Partnership has paid or
will pay in full or has adequately reserved against all Taxes otherwise
assessed against it through the Closing Date (as hereinafter defined), and
the assessment of any material amount of additional Taxes in excess of
those paid and reported is not reasonably expected.
(b) Such Partnership is not a party to any pending action or
proceeding by any governmental authority for the assessment of any Tax, and
no claim or assessment or collection of any Tax has been asserted against
such Partnership that has not been paid. There are no Tax liens upon the
assets (other than the lien of personal property taxes not yet due and
payable) of such Partnership. There is no valid basis, except as set forth
in the Disclosure Schedule, for any assessment, deficiency, notice, 30-day
letter or similar intention to assess any Tax to be issued to such
Partnership by any governmental authority.
3.8 COMPLIANCE WITH LAWS AND REGULATIONS. To the knowledge of the General
Partner of such Partnership, such Partnership is in compliance, in all material
respects, with all laws, rules, regulations, orders and requirements (federal,
state and local) applicable to it in all jurisdictions where the business of
such Partnership is currently conducted or to which such Partnership is
currently subject which have a material impact on such Partnership, including,
without limitation, all applicable civil rights and equal opportunity employment
laws and regulations, and all state and federal antitrust, antimonopolies and
fair trade practice laws and the federal Occupational Health and Safety Act.
Such General Partner does not know of any assertion by any party that such
Partnership is in violation of any such laws, rules, regulations, orders,
restrictions or requirements with respect to its current operations, and no
notice in that regard has been received by the General Partner of such
Partnership. To the knowledge of the General Partner of such Partnership, there
is not presently pending any proceeding, hearing or investigation with respect
to the adoption of amendments or modifications to existing laws, rules,
A-9
<PAGE>
regulations, orders, restrictions or requirements which, if adopted, would
materially adversely affect the operations of such Partnership.
3.9. GOVERNMENTAL APPROVALS; CONSENTS. To the knowledge of the General
Partner of such Partnership, except for (i) the granting of effectiveness by the
Securities and Exchange Commission of the Merger; (ii) the approval and granting
of effectiveness by the appropriate various state securities regulators of the
Merger; (iii) the approval by the National Association of Securities Dealers,
Inc. of the Merger; and (iv) the reports required to be filed in the future by
such Partnership as a reporting registrant pursuant to the Exchange Act, if any,
no authorization, license, permit, franchise, approval, order or consent of, and
no registration, declaration or filing by such Partnership with, any
governmental authority, federal, state, or local, is required in connection with
such Partnership's execution, delivery and performance of this Agreement. No
consents of any other parties are required to be received by or on the part of
such Partnership to enable such Partnership to enter into and carry out this
Agreement.
3.10. CONDITION OF ASSETS. The equipment, fixtures, and other personal
property of such Partnership are in good operating condition and repair
(ordinary wear and tear excepted) for the conduct of the business of such
Partnership as presently conducted.
3.11. NO BREACHES. To the knowledge of the General Partner of such
Partnership, the making and performance of this Agreement and the other
agreements contemplated hereby by such Partnership will not (i) conflict with or
violate the Certificate of Limited Partnership or Agreement of Limited
Partnership of such Partnership; (ii) violate any material laws, ordinances,
rules or regulations, or any order, writ, injunction or decree to which such
Partnership is a party or by which such Partnership, or any of its assets,
business, or operations may be obligated or affected; or (iii) result in any
breach or termination of, or constitute a default under, or constitute an event
which, with notice or lapse of time, or both, would become a default under, or
result in the creation of any encumbrance upon any asset of such Partnership, or
create any rights of termination, cancellation or acceleration in any person,
under any Respective Partnership Contract.
3.12. DISCLOSURE SCHEDULE COMPLETE. Such Partnership shall promptly
complete and furnish to the Company, the Shareholders and each other Partnership
one or more supplements to the Disclosure Schedule if any event occurs prior to
the Closing Date that would have been required to be disclosed had those events
existed at the time of executing this Agreement. The Disclosure Schedule, as
supplemented prior to the Closing Date, will contain a true, correct and
complete list and description of all items required to be set forth therein. The
Disclosure Schedule, as supplemented prior to the Closing Date, is expressly
incorporated herein by reference. Notwithstanding the foregoing, any such
supplement to the Disclosure Schedule following the date hereof shall not in any
way affect the right of the Shareholders, the other Partnerships or the Company
not to consummate the Merger, as specified later in this Agreement.
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<PAGE>
3.13. FINANCIAL STATEMENTS. To the knowledge of the General Partner of such
Partnership, the Disclosure Schedule contains audited balance sheets as of
December 31, 1996, and December 31, 1995, and related statements of operations,
statements of cash flows and statements of partners' equity, for the one-year
periods ended December 31, 1996, and December 31, 1995, and compiled balance
sheets as of June 30, 1997, and related statements of operations, statements of
cash flows and statements of partners' equity, for the six-month period ended
June 30, 1997, for such Partnership ("Respective Partnership Financial
Statements"). The Respective Partnership Financial Statements present fairly, in
all respects, the financial position and results of operations of such
Partnership as of the dates and periods indicated, prepared in accordance with
generally accepted accounting principles consistently applied ("GAAP"). Without
limiting the generality of the foregoing, (i) there is no basis for any
assertion against such Partnership as of the date of the Respective Partnership
Financial Statements of any material indebtedness, liability or obligation of
any nature not fully presented or reserved against in the Respective Partnership
Financial Statements; and (ii) there are no assets of such Partnership as of the
date of the Respective Partnership Financial Statements the value of which is
overstated in the Respective Partnership Financial Statements. Except as
disclosed in the Respective Partnership Financial Statements, such Partnership
does not have any known contingent liabilities, including liabilities for Taxes,
forward or long-term commitments or unrealized or anticipated losses from
unfavorable commitments, other than in the ordinary course of business.
3.14. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
Disclosure Schedule, since December 31, 1996, there has not been:
(a) any material adverse change in the financial condition,
properties, assets, liabilities or business or a decrease in net worth of
such Partnership;
(b) any material damage, destruction or loss of any material
properties of such Partnership, whether or not covered by insurance;
(c) any material change in the manner in which the business of such
Partnership has been conducted, including, without limitation, collection
of accounts receivable and payment of accounts receivable;
(d) any change in the accounting principles, methods or practices or
any change in the depreciation or amortization policies or rates utilized
by such Partnership;
(e) any voluntary or involuntary sale, assignment, abandonment,
surrender, termination, transfer, license or other disposition, of any kind
or nature, of any property or right, including, without limitation, any
equipment, office equipment, accounts receivable, intangible assets, and
business records of such Partnership's Respective Partnership Contracts,
excepting only transfers in accordance with past practices or collection of
accounts receivable in the ordinary course of business;
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(f) any material change in the treatment and protection of trade
secrets or other confidential information of such Partnership;
(g) any material change in the business or contractual relationship of
such Partnership with any debtor, customer or supplier which might
reasonably be expected to materially and adversely affect the business or
prospects of such Partnership;
(h) any strike, material grievance proceeding or other labor dispute,
any union organizational activity or other occurrence, event or condition
of any similar character which might reasonably be expected to adversely
affect the business of such Partnership;
(i) any loan or advance by such Partnership to any party, other than
indebtedness acquired in the ordinary course of business, as conducted;
(j) any incurrence by such Partnership of debts, liabilities or
obligations of any nature, whether accrued, absolute, contingent, direct,
indirect or inchoate, or otherwise, and whether due or to become due,
except:
(1) current liabilities incurred for services rendered in the
ordinary course of such Partnership's business;
(2) obligations incurred in the ordinary course of such
Partnership's business;
(3) liabilities on account of taxes and governmental charges, but
not penalties, interest or fines in respect thereof;
(4) obligations or liabilities incurred by virtue of the
execution of this Agreement;
(5) liabilities pursuant to the litigation listed in the
Disclosure Schedule; or
(k) any agreement by such Partnership, whether written or oral, to do
any of the foregoing; and
(l) any occurrence not included in paragraphs (a) through (k),
inclusive, of this Section 3.14 which has resulted, or which the General
Partner of such Partnership has reason to believe, in its reasonable
judgment, might be expected to result, in a material adverse change in the
business or prospects of such Partnership.
3.15. GOVERNMENTAL LICENSES, PERMITS, AUTHORIZATIONS AND APPROVALS. To the
knowledge of the General Partner of such Partnership, such Partnership has all
governmental licenses, permits, authorizations and approvals necessary for the
conduct
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of its business as currently conducted ("Respective Partnership Licenses and
Permits"). The Disclosure Schedule includes a list of all Respective Partnership
Licenses and Permits. All Respective Partnership Licenses and Permits are in
full force and effect, and no proceedings for the suspension or cancellation of
any thereof is pending or threatened.
3.16. EMPLOYEE PLANS.
(a) For purposes of this Agreement, the following definitions apply:
(1) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any and all regulations promulgated thereunder;
(2) "Multi-employer Plan" means a plan, as defined in Section
3(37) of ERISA, to which such Partnership contributes or is required
to contribute;
(3) "Employee Plan" means any pension, retirement, profit
sharing, deferred compensation, vacation, bonus, incentive, medical,
vision, dental, disability, life insurance or any other employee
benefit plan as defined in Section 3(3) of ERISA, other than a
Multi-employer Plan, to which such Partnership contributes, sponsors,
maintains or otherwise is obligated to with regard to any benefits on
behalf of the employees of such Partnership;
(4) "Employee Pension Plan" means any Employee Plan for the
provision of retirement income to employees or which results in the
deferral of income by employees extending to the termination of
covered employment or beyond as defined in Section 3(2) of ERISA;
(5) "Employee Welfare Plan" means any Employee Plan other than an
Employee Pension Plan; and
(6) "Compensation Arrangement" means any plan or compensation
arrangement other than an Employee Plan, whether written or unwritten,
which provides to employees of such Partnership or to former employees
of such Partnership, any compensation or other benefits, whether
deferred or not, in excess of base salary or wages, including, without
limitation, any bonus or incentive plan, stock rights plan, deferred
compensation arrangement, life insurance, stock purchase plan,
severance pay plan and any other employee fringe benefit plan.
(b) Such Partnership has no Employee Plans or Compensation Agreements.
3.17. BROKERS. Such Partnership shall indemnify and hold the Company, the
other Partnerships and the Shareholders harmless from any claim by any broker or
other person for commissions or other compensation for causing the Merger to
occur, where such claim is based
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on the purported employment or authorization of such broker or other person by
such Partnership.
3.18. BUSINESS LOCATIONS. Such Partnership does not own, lease or sublease
any real or personal property in any state, except as set forth in the
Disclosure Schedule. Such Partnership does not have any places of business,
including, without limitation, executive offices or places where such
Partnership's books and records are kept, except as otherwise set forth in the
Disclosure Schedule.
3.19. INTELLECTUAL PROPERTY. The Disclosure Schedule lists all of such
Partnership's "Partnership Intellectual Property" (as hereinafter defined) and
which constitutes a material patent, trade name, trademark, service mark or
application for any of the foregoing. "Partnership Intellectual Property" means
all of such Partnership's right, title and interest in and to all patents, trade
names, assumed names, trademarks, service marks, and proprietary names,
copyrights, including any registration and pending applications for any such
registration of any of them, together with all the goodwill relating thereto and
all other intellectual property of such Partnership. Other than as disclosed in
the Disclosure Schedule, such Partnership does not have any licenses granted by
or to any person or other agreements to which any other person is a party,
relating in whole or in part to any of such Partnership's Intellectual Property.
All of the patents, trademark registrations and copyrights listed in the
Disclosure Schedule that are owned by such Partnership are valid and in full
force and effect. To the knowledge of the General Partner of such Partnership,
such Partnership is not infringing upon, or otherwise violating, the rights of
any third party with respect to any of such Partnership's Intellectual Property.
No proceedings have been instituted against or claims received by such
Partnership, nor, to the knowledge of the General Partner of such Partnership,
are there any proceedings threatened alleging any such violation, nor does such
General Partner know of any valid basis for any such proceeding or claim. To the
knowledge of the General Partner of such Partnership, there is no infringement
or other adverse claim against any of such Partnership's Intellectual Property
owned or used by such Partnership. To the best knowledge of such General
Partner, the use of software by such Partnership does not violate or otherwise
infringe upon the rights of any person.
3.20. WARRANTIES. The Disclosure Schedule sets forth a true and complete
list of the forms of all express warranties and guaranties made by such
Partnership to third parties with respect to any services rendered by such
Partnership to those third parties or to other third parties.
3.21. CLIENTS AND SUPPLIERS. Except as set forth in the Disclosure
Schedule, the General Partner of such Partnership does not know or does not have
reason to believe that, either as a result of the Merger, or for any other
reason (exclusive of expiration of a contract upon the passage of time), any
present material client or supplier of such Partnership will not continue to
conduct business with such Partnership after the Closing Date in substantially
the same manner as such client or supplier has conducted business prior thereto.
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3.22. GOVERNMENTAL APPROVAL OF MERGER. To the knowledge of the General
Partner of such Partnership, other than those filings required pursuant to the
provisions of the Securities Act of 1933 ("Securities Act"), the Exchange Act
and applicable state securities and "Blue Sky" laws ("Regulatory Filings"), no
authorization, license, permit, franchise, approval, order or consent of, and no
registration, declaration or filing by such Partnership with any governmental
authority, federal, state or local, is required in connection with such
Partnership's execution, delivery and performance of this Agreement.
3.23. SECURITIES AND EXCHANGE COMMISSION DOCUMENTS. (a) Such Partnership
has made available or will make available to the Company, the Shareholders and
other Partnerships prior to the Closing Date, each registration statement,
report, proxy statement or information statement and all exhibits thereto
prepared by such Partnership or relating to its properties, each in the form
(including exhibits and any amendments thereto) filed with the Securities and
Exchange Commission ("Commission") ("Respective Partnership Securities
Filings"). The Respective Partnership Securities Filings, which were or will be
filed with the Commission in a timely manner, constitute all forms, reports and
documents required to be filed by such Partnership under the Securities Act, the
Exchange Act, applicable state securities and "Blue Sky" laws, and the rules and
regulations promulgated thereunder ("Securities Laws").
(b) To the knowledge of the General Partner of such Partnership, as of
their respective dates, the Respective Partnership Securities Filings (i)
complied as to form in all material respects with the applicable requirements of
the Securities Laws and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in the light of the circumstances under
which they were made, not misleading. To the knowledge of the General Partner of
such Partnership, each of the balance sheets of such Partnership included in or
incorporated by reference into the Respective Partnership Securities Filings
(including the related notes and schedules) fairly presents the financial
position of such Partnership as of its date and each of the statements of income
and cash flows of such Partnership included in or incorporated by reference into
the Respective Partnership Securities Filings (including any related notes and
schedules) fairly presents the results of operations and cash flows, as the case
may be, of such Partnership for the periods set forth therein (subject, in the
case of unaudited statements, to normal year-end audit adjustments which would
not be material in amount or effect), in each case in accordance with GAAP
during the periods involved, except as may be noted therein and except, in the
case of the unaudited statements, as permitted by the Securities Laws.
(c) Except as and to the extent set forth on the balance sheet of such
Partnership at June 30, 1997, including all notes thereto, or as set forth in
the Respective Partnership Securities Filings, such Partnership has no material
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) that would be required to be presented or reserved against in, a
balance sheet of such Partnership or in the notes thereto, prepared in
accordance with GAAP, except liabilities arising in the ordinary course of
business since such date and which would not have a material adverse effect on
such Partnership.
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3.24. NO OMISSIONS OR UNTRUE STATEMENTS. To the knowledge of the General
Partner of such Partnership, no representation or warranty made by such
Partnership to the Company or the Shareholders in this Agreement or in any
document relating to such Partnership required to be delivered to the Company or
the Shareholders pursuant to the terms of this Agreement contains or will
contain any untrue statement of a material fact, or omits or will omit to state
a material fact necessary to make the statements contained herein or therein not
misleading as of the date hereof and as of the Closing Date.
3.25. CONVERTIBLE SECURITIES. Such Partnership has no outstanding options,
warrants or other securities exercisable for, or convertible into, Units of such
Partnership, the terms of which would require any anti-dilution adjustments by
reason of the consummation of the Merger.
3.26. RELATED PARTY TRANSACTIONS. Except as specified in the Disclosure
Schedule, there are no arrangements, agreements or contracts entered into by
such Partnership with (i) any consultant; (ii) any person who is an officer,
director or affiliate of the General Partner of such Partnership, any relative
of any of the foregoing, or any entity of which of any of the foregoing is an
affiliate; or (iii) any person who acquired Units in such Partnership in a
private placement transaction. The copies of such documents, all of which have
been or will be delivered or made available to the Company and the Shareholders
prior to the Closing Date, are or will be true, complete and correct when
delivered or made available.
3.27. LABOR MATTERS. Such Partnership is not a party to, or obligated by,
any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor union organization. There is no unfair
labor practice or labor arbitration proceeding pending or, to the knowledge of
the General Partner of such Partnership, threatened against such Partnership
relating to its business, except for any such proceeding which would not have a
material adverse effect on such Partnership or its business. To the knowledge of
such General Partner, there are no organizational efforts with respect to a
collective bargaining unit presently being made or threatened involving those
persons who provide human resource services for the benefit of such Partnership.
IV. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Each Shareholder represents and warrants to the Company, the other
Shareholder and the Partnerships as follows, with the knowledge and
understanding that the Company, the other Shareholder and the Partnerships are
relying materially upon such representations and warranties:
4.1 ORGANIZATION AND STANDING. PCM is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and has
the corporate power to carry on its business as now conducted and to own its
assets and is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction
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where such qualification is necessary under applicable law, except where the
failure to qualify (individually or in the aggregate) does not have any material
adverse effect on the assets, business or financial condition of PCM. The copies
of the Articles of Incorporation and Bylaws of PCM (certified by the Secretary
of PCM) delivered to the Partnerships and the Company herewith, are true and
complete copies of those documents as now in effect. Except as set forth in the
Disclosure Schedule, PCM does not own any capital stock in any other
corporation, business trust or similar entity, and is not engaged in a
partnership, joint venture or similar arrangement with any person or entity. The
minute book of PCM contains accurate records of all meetings of its
incorporator, stockholders and Board of Directors since its date of
incorporation.
4.2. CAPITALIZATION. The authorized capital stock of PCM is 100,000 shares
of no par value common stock, 1,000 shares of which are issued and outstanding.
All of the issued and outstanding shares of no par value common stock of PCM are
duly authorized, validly issued, fully paid and nonassessable, and were not
issued in violation of the preemptive rights of any person. Other than as
specified in this Section 4.2, there are no outstanding subscriptions, options,
warrants, calls or rights of any nature whatsoever issued or granted by, or
obligating, PCM, to purchase or otherwise acquire any shares of capital stock of
PCM, or other equity securities or equity interests of PCM or any debt
securities of PCM.
4.3. AUTHORITY. This Agreement constitutes, and all other agreements
contemplated hereby will constitute, when executed and delivered by such
Shareholder in accordance therewith, the valid and binding obligation of such
Shareholder, enforceable in accordance with their respective terms, subject to
general principles of equity and bankruptcy or other laws relating to or
affecting the rights of creditors generally.
4.4. PROPERTIES. Except as set forth in the Disclosure Schedule, PCM has
good title to all of the assets and properties which it purports to own as (i)
presented on the balance sheet included in the PCM Financial Statements (as
hereinafter defined), or (ii) otherwise, or thereafter acquired. PCM has a valid
leasehold interest in all material property of which it is the lessee and each
such lease is valid, binding and enforceable against PCM and, to the knowledge
of such Shareholder, the other parties thereto are in accordance with its terms.
Neither PCM nor the other parties thereto are in material default in the
performance of any material provisions thereunder. Neither the whole nor any
material portion of the assets of PCM are subject to any governmental decree or
order to be sold or are being condemned, expropriated or otherwise taken by any
public authority with or without payment of compensation therefor, nor, to the
knowledge of such Shareholder has any such condemnation, expropriation or taking
been proposed. None of the assets of PCM are subject to any restriction which
would prevent continuation of the use currently made thereof or materially
adversely affect the value thereof.
4.5. CONTRACTS. All contracts, agreements, licenses, leases, easements,
permits, rights of way, commitments, and understandings, written or oral,
connected with or relating in any respect to present or proposed future
operations of PCM (except employment or other agreements terminable at will and
other agreements which, in the aggregate, are not material to
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the business, properties or prospects of those parties and except governmental
licenses, permits, authorizations, approvals and other matters referred to in
Section 4.15 of this Agreement), which would be required to be listed as
exhibits to an Annual Report on Form 10-K if PCM were subject to the reporting
requirements of the Exchange Act (individually, a "PCM Contract" and
collectively, the "PCM Contracts"), are listed and described in the Disclosure
Schedule.
4.6. LITIGATION. Except as disclosed in the Disclosure Schedule, to the
knowledge of such Shareholder, there is no claim, action, proceeding or
investigation pending or threatened against or affecting PCM before or by any
court, arbitrator or governmental agency or authority which, in the reasonable
judgment of such Shareholder, could have any materially adverse effect on PCM.
There are no decrees, injunctions or orders of any court, governmental
department, agency or arbitration outstanding against PCM.
4.7 TAXES. (a) To the knowledge of such Shareholder, PCM has duly filed all
Returns required by any law or regulation to be filed by PCM, except for
extensions duly obtained. All such Returns were, when filed, and are, accurate
and complete in all material respects and were prepared in conformity with
applicable laws and regulations in all material respects. PCM has paid or will
pay in full or has adequately reserved against all Taxes otherwise assessed
against it through the Closing Date, and the assessment of any material amount
of additional Taxes in excess of those paid and reported is not reasonably
expected.
(b) To the knowledge of such Shareholder, PCM is not a party to any pending
action or proceeding by any governmental authority for the assessment of any
Tax, and no claim for assessment or collection of any Tax has been asserted
against PCM that has not been paid. There are no Tax liens upon the assets
(other than the lien of personal property taxes not yet due and payable) of PCM.
There is no valid basis, except as set forth in the Disclosure Schedule, for any
assessment, deficiency, notice, 30-day letter or similar intention to assess any
Tax to be issued to PCM by any governmental authority.
4.8. COMPLIANCE WITH LAWS AND REGULATIONS. To the knowledge of such
Shareholder, PCM is in compliance, in all material respects, with all laws,
rules, regulations, orders and requirements (federal, state and local)
applicable to it in all jurisdictions where the business of PCM is currently
conducted or to which PCM is currently subject which have a material impact on
PCM, including, without limitation, all applicable civil rights and equal
opportunity employment laws and regulations, and all state and federal
antitrust, antimonopolies and fair trade practice laws and the federal
Occupational Health and Safety Act. Such Shareholder does not know of any
assertion by any party that PCM is in violation of any such laws, rules,
regulations, orders, restrictions or requirements with respect to its current
operations, and no notice in that regard has been received by the management of
PCM. To the knowledge of such Shareholder, there is not presently pending any
proceeding, hearing or investigation with respect to the adoption of amendments
or modifications to existing laws, rules, regulations, orders, restrictions or
requirements which, if adopted, would materially adversely affect the current
operations of PCM.
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4.9. GOVERNMENTAL APPROVALS; CONSENTS. To the knowledge of such
Shareholder, except for (i) the granting of effectiveness by the Commission of
the Merger; (ii) the approval and granting of effectiveness by the appropriate
various state securities regulators of the Merger; and (iii) the approval by the
National Association of Securities Dealers, Inc. of the Merger, no
authorization, license, permit, franchise, approval, order or consent of, and no
registration, declaration or filing by such Shareholder with, any governmental
authority, federal, state, or local, is required in connection with such
Shareholder's execution, delivery and performance of this Agreement. No consents
of any other parties are required to be received by or on the part of such
Shareholder to enable such Shareholder to enter into and carry out this
Agreement.
4.10. CONDITION OF ASSETS. The equipment, fixtures, and other personal
property of PCM are in good operating condition and repair (ordinary wear and
tear excepted) for the conduct of the business of PCM as presently conducted.
4.11. NO BREACHES. To the knowledge of such Shareholder, the making and
performance of this Agreement and the other agreements contemplated hereby by
such Shareholder will not (i) conflict with or violate the Articles of
Incorporation or By-laws of PCM; (ii) violate any material laws, ordinances,
rules or regulations, or any order, writ, injunction or decree to which such
Shareholder or PCM is a party or by which any of such assets, business, or
operations may be obligated or affected; or (iii) result in any breach or
termination of, or constitute a default under, or constitute an event which,
with notice or lapse of time, or both, would become a default under, or result
in the creation of any encumbrance upon any asset of PCM, or create any rights
of termination, cancellation or acceleration in any person, under any PCM
Contract.
4.12. DISCLOSURE SCHEDULE COMPLETE. Such Shareholder shall promptly
complete and furnish to the Company, the Partnerships and the other Shareholder
one or more supplements to the Disclosure Schedule if any event occurs prior to
the Closing Date that would have been required to be disclosed had those events
existed at the time of executing this Agreement. The Disclosure Schedule, as
supplemented prior to the Closing Date, will contain a true, correct and
complete list and description of all items required to be set forth therein. The
Disclosure Schedule, as supplemented prior to the Closing Date, is expressly
incorporated herein by reference. Notwithstanding the foregoing, any such
supplement to the Disclosure Schedule following the date hereof shall not in any
way affect the right of the Partnerships, the Company or the other Shareholder
not to consummate the Merger, as specified later in this Agreement.
4.13. FINANCIAL STATEMENTS. To the knowledge of such Shareholder, the
Disclosure Schedule contains audited balance sheets as of December 31, 1996, and
December 31, 1995, and related statements of operations, statements of cash
flows and statements of shareholders' equity, respectively, for the one-year
periods ended December 31, 1996, and December 31, 1995, and compiled balance
sheets as of June 30, 1997, and related statements of operations, statements of
cash flows and statement of shareholders' equity, respectively, for the
six-month period ended June 30, 1997, for PCM ("PCM Financial Statements"). The
PCM
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Financial Statements present fairly, in all respects, the financial position and
results of operations of PCM as of the dates and periods indicated, prepared in
accordance with GAAP. Without limiting the generality of the foregoing, (i)
there is no basis for any assertion against PCM as of the date of the PCM
Financial Statements of any material debt, liability or obligation of any nature
not fully presented or reserved against in the PCM Financial Statements; and
(ii) there are no assets of PCM as of the date of the PCM Financial Statements,
the value of which is overstated in the PCM Financial Statements. Except as
disclosed in the PCM Financial Statements, PCM does not have any known
contingent liabilities, including liabilities for Taxes, forward or long-term
commitments or unrealized or anticipated losses from unfavorable commitments
other than in the ordinary course of business.
4.14. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
Disclosure Schedule, since December 31, 1996, there has not been:
(a) any material adverse change in the financial condition, properties,
assets, liabilities or business or a decrease in net worth of PCM;
(b) any material damage, destruction or loss of any material properties of
PCM, whether or not covered by insurance;
(c) any material change in the manner in which the business of PCM has been
conducted, including, without limitation, collection of accounts receivable and
payment of accounts payable;
(d) any change in the accounting principles, methods or practices or any
change in the depreciation or amortization policies or rates utilized by PCM;
(e) any voluntary or involuntary sale, assignment, abandonment, surrender,
termination, transfer, license or other disposition, of any kind or nature, of
any property or right, including, without limitation, any equipment, office
equipment, accounts receivable, intangible assets, business records or PCM
Contracts, excepting only transfers in accordance with past practices or
collection of accounts receivable in the ordinary course of business;
(f) any material change in the treatment and protection of trade secrets or
other confidential information of PCM;
(g) any material change in the business or contractual relationship of PCM
with any customer or supplier which might reasonably be expected to affect the
business or prospects of PCM materially and adversely;
(h) any strike, material grievance proceeding or other labor dispute, any
union organizational activity or other occurrence, event or condition of any
similar character which might reasonably be expected to adversely affect the
business of PCM;
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(i) any loan or advance by PCM to any party, other than credit extended in
the ordinary course of business, as previously conducted;
(j) any incurrence by PCM of indebtedness, liabilities or obligations of
any nature, whether accrued, absolute, contingent, direct, indirect or inchoate,
or otherwise, and whether due or to become due, except:
(i) current liabilities incurred for services rendered in the ordinary
course of PCM's business;
(ii) obligations incurred in the ordinary course of PCM's business;
(iii) liabilities on account of Taxes and governmental charges, but
not penalties, interest or fines in respect thereof;
(iv) obligations or liabilities incurred by virtue of the execution of
this Agreement; or
(v) liabilities pursuant to the litigation listed in the Disclosure
Schedule;
(k) any agreement by PCM, whether written or oral, to do any of the
foregoing; and
(l) any occurrence not included in paragraphs (a) through (k), inclusive,
of this Section 4.14 which has resulted, or which such Shareholder has reason to
believe might be expected to result, in a material adverse change in the
business or prospects of PCM.
4.15. GOVERNMENTAL LICENSES, PERMITS, AUTHORIZATIONS AND APPROVALS. To the
knowledge of such Shareholder, PCM has all governmental licenses, permits,
authorizations and approvals necessary for the conduct of its business as
currently conducted ("PCM Licenses and Permits"). The Disclosure Schedule
includes a list of all PCM Licenses and Permits. All PCM Licenses and Permits
are in full force and effect, and no proceedings for the suspension or
cancellation of any PCM Licenses and Permits is pending or threatened.
4.16. EMPLOYEE PLANS. (a) For purposes of this section, the definitions set
forth at length in Section 3.16(a) of this Agreement apply.
(b) PCM has no Employee Plans or Compensation Agreements.
4.17. BROKERS. Such Shareholder shall indemnify and hold the Company, the
Partnerships and the other Shareholder harmless from any claim by any broker or
other person for commissions or other compensation for causing the Merger to
occur, when such claim is based on the purported employment or authorization of
such broker or other person by such Shareholder.
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4.18. BUSINESS LOCATIONS. PCM does not own, lease or sublease any real or
personal property in any state, except as set forth in the Disclosure Schedule.
PCM does not have any place of business, including, without limitation,
executive offices or places where PCM's books and records are kept, except as
otherwise set forth in the Disclosure Schedule.
4.19. INTELLECTUAL PROPERTY. The Disclosure Schedule lists all of the PCM
Intellectual Property (as hereinafter defined) used by PCM which constitutes a
material patent, trade name, trademark, service mark or application for any of
the foregoing. "PCM Intellectual Property" means all of PCM's right, title and
interest in and to all patents, trade names, assumed names, trademarks, service
marks, and proprietary names, copyrights, including any registration and pending
applications for any such registration for any of them, together with all the
goodwill relating thereto and all other intellectual property of PCM. Other than
as disclosed in the Disclosure Schedule, PCM does not have any licenses granted
by or to any person or other agreements to which any other person is a party,
relating in whole or in part to any PCM Intellectual Property. All of the
patents, trademark registrations and copyrights listed in the Disclosure
Schedule that are owned by PCM are valid and in full force and effect. To the
knowledge of such Shareholder, PCM is not infringing upon, or otherwise
violating, the rights of any third party with respect to any PCM Intellectual
Property. No proceedings have been instituted against or claims received by PCM,
nor to the knowledge of such Shareholder are there any proceedings threatened
alleging any such violation, nor does such Shareholder know of any valid basis
for any such proceeding or claim. To the knowledge of such Shareholder, there is
no infringement or other adverse claim against any of the PCM Intellectual
Property. To the knowledge of such Shareholder, the use of any software by PCM
does not violate or otherwise infringe upon the rights of any third party.
4.20. WARRANTIES. The Disclosure Schedule sets forth a true and complete
list of the forms of all express warranties and guaranties made by PCM to third
parties with respect to any services rendered by PCM to those third parties or
to other third parties.
4.21. CLIENTS AND SUPPLIERS. Except as set forth in the Disclosure
Schedule, such Shareholder does not know, and has no reason to believe that,
either as a result of the Merger or for any other reason (exclusive of
expiration of a contract upon the passage of time), any present material client
or supplier of PCM will not continue to conduct business with PCM after the
Closing Date in substantially the same manner as such client or supplier has
conducted business prior thereto.
4.22. GOVERNMENTAL APPROVAL OF MERGER. To the knowledge of such
Shareholder, other than those filings required pursuant to the provisions of the
Securities Act, the Exchange Act, and applicable state securities and "Blue Sky"
laws ("Regulatory Filings"), no authorization, license, permit, franchise,
approval, order or consent of, and no registration, declaration or filing by PCM
with any governmental authority, federal, state or local, is required in
connection with such Shareholder's execution, delivery and performance of this
Agreement.
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4.23. NO OMISSIONS OR UNTRUE STATEMENTS. To the knowledge of such
Shareholder, no representation or warranty made by such Shareholder to the
Company, the other Shareholder or the Partnerships in this Agreement or in any
document relating to the Merger required to be delivered to the Company, the
other Shareholder or the Partnerships by such Shareholder pursuant to the terms
of this Agreement contains or will contain any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading as of the date hereof and
as of the Closing Date.
4.24. CONVERTIBLE SECURITIES. PCM has no outstanding options, warrants or
other securities exercisable for, or convertible into, shares of PCM's Common
Stock, the terms of which would require any anti-dilution adjustments by reason
of the consummation of the Merger.
4.25. RELATED PARTY TRANSACTIONS. Set forth in the Disclosure Schedule will
be a list of all arrangements, agreements and contracts entered into by PCM with
(i) any person who is an officer, director or affiliate of PCM, any relative of
any of the foregoing or any entity of which any of the foregoing is an affiliate
or (ii) any person who acquired securities issued by PCM in a private placement
transaction. The copies of such documents, all of which have been or will be
delivered or made available to the Company, the other Shareholder and the
Partnerships prior to Closing Date, are or will be true, complete and correct
when delivered or made available.
4.26. LABOR MATTERS. PCM is not a party to, or obligated by, any collective
bargaining agreement, contract or other agreement or understanding with a labor
union or labor union organization. There is no unfair labor practice or labor
arbitration proceeding pending or, to the knowledge of such Shareholder,
threatened against PCM relating to its business, except for any such proceeding
which would not have a material adverse effect on PCM or its business. To the
knowledge of such Shareholder, there are no organizational efforts with respect
to a collective bargaining unit presently being made or threatened involving
those persons who provide human resource services for the benefit of PCM.
V. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Partnerships and the
Shareholders, and each of them, as follows, with the knowledge and understanding
that the Partnerships and the Shareholders are each relying materially on such
representations and warranties:
5.1. ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the corporate power to carry on its business as now conducted
and to own its assets and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where such
qualification is necessary under applicable law, except where the failure to
qualify (individually or in the aggregate) does not have any material adverse
effect on the assets,
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business or financial condition of the Company. The copies of the Certificate of
Incorporation and Bylaws of the Company (certified by the Secretary of the
Company), delivered to the Partnerships and the Shareholders herewith, are true
and complete copies of those documents as now in effect. Except as set forth in
the Disclosure Schedule, the Company does not own any capital stock in any other
corporation, business trust or similar entity, and is not engaged in a
partnership, joint venture or similar arrangement with any person or entity. The
minute book of the Company contains accurate records of all meetings of its
incorporator, stockholders and Board of Directors since its date of
incorporation.
5.2. CAPITALIZATION. The authorized capital stock of the Company is (i)
100,000,000 shares of the Common Stock, 1,000 shares of which are issued and
outstanding; and (ii) 10,000,000 shares of the Preferred Stock, of which 100,000
shares are issued and outstanding. All of the outstanding shares of the Common
Stock and the Preferred Stock are duly authorized, validly issued, fully paid
and nonassessable, and were not issued in violation of the preemptive rights of
any person. The Merger Stock, to be issued upon effectiveness of the Merger,
when issued in accordance with the terms of this Agreement, shall be duly
authorized, validly issued, fully paid and nonassessable. Other than as
specified in this Section 5.2, there are no outstanding subscriptions, options,
warrants, calls or rights of any kind issued or granted by, or obligating, the
Company, to purchase or otherwise acquire any shares of capital stock of the
Company, or other equity securities or equity interests of the Company or any
debt securities of the Company.
5.3. AUTHORITY. The Company's Board of Directors has approved and adopted
this Agreement and the Merger. This Agreement constitutes, and all other
agreements contemplated hereby will constitute, when executed and delivered by
the Company in accordance herewith (and assuming due execution and delivery by
the other parties hereto), the valid and binding obligations of the Company,
enforceable in accordance with their respective terms, subject to general
principles of equity and bankruptcy or other laws relating to or affecting the
rights of creditors generally.
5.4. PROPERTIES. Except as set forth in the Disclosure Schedule, the
Company has good title to all of the assets and properties which it purports to
own as (i) presented on the balance sheet included in the Company's Financial
Statements (as hereinafter defined), (ii) or otherwise, or thereafter acquired.
The Company has a valid leasehold interest in all material property of which it
is the lessee and each such lease is valid, binding and enforceable against the
Company and, to the best knowledge of the Company, the other parties thereto, in
accordance with its terms. Neither the Company nor the other parties thereto are
in material default in the performance of any material provisions thereunder.
Neither the whole nor any material portion of the assets of the Company are
subject to any governmental decree or order to be sold or are being condemned,
expropriated or otherwise taken by any public authority with or without payment
of compensation therefor, nor, to the knowledge of the Company, has any such
condemnation, expropriation or taking been proposed. None of the assets of the
Company are subject to any restriction which would prevent continuation of the
use currently made thereof or materially adversely affect the value thereof.
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5.5. CONTRACTS. All contracts, agreements, licenses, leases, easements,
permits, rights of way, commitments, and understandings, written or oral,
connected with or relating in any respect to present or proposed future
operations of the Company, except employment or other agreements terminable at
will and other agreements which, in the aggregate, are not material to the
business, properties or prospects of the Company and except governmental
licenses, permits, authorizations, approvals and other matters referred to in
Section 5.16 of this Agreement, which would be required to be listed as exhibits
to an Annual Report on Form 10-K if the Company were subject to the reporting
requirements of the Exchange Act (individually, a "Company Contract" and
collectively the "Company Contracts"), are listed and described in the
Disclosure Schedule. The Company is the holder of, or party to, all of the
Company Contracts. To the knowledge of the Company, the Company Contracts are
valid, binding and enforceable by each party thereto against the other parties
thereto in accordance with their terms. Neither the Company nor any party
thereto is in default or breach of any material provision of the Company
Contracts. The Company's operation of its business has been, is, and will,
between the date hereof and the Closing Date, continue to be, consistent with
the material terms and conditions of the Company Contracts.
5.6. LITIGATION. Except as disclosed in the Disclosure Schedule, to the
knowledge of the Company, there is no claim, action, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting the
Company before or by any court, arbitrator or governmental agency or authority
which could have a material adverse effect on the Company. There are no decrees,
injunctions or orders of any court, governmental department, agency or
arbitration outstanding against the Company.
5.7. TAXES. (a) To the knowledge of the Company, the Company has duly filed
all Returns required by any law or regulation to be filed by it, except for
extensions duly obtained. All such Returns were, when filed, and are, accurate
and complete in all material respects and were prepared in conformity with
applicable laws and regulations. The Company has paid or will pay in full or has
adequately reserved against all Taxes otherwise assessed against it through the
Closing Date, and the assessment of any material amount of additional Taxes in
excess of those paid and reported is not reasonably expected.
(b) The Company is not a party to any pending action or proceeding by any
governmental authority for the assessment of any Tax, and no claim for
assessment or collection of any Tax has been asserted against the Company that
has not been paid. There are no Tax liens upon the assets of the Company (other
than the lien of personal property taxes not yet due and payable). There is no
valid basis, except as set forth in the Disclosure Schedule, for any assessment,
deficiency, notice, 30-day letter or similar intention to assess any Tax to be
issued to the Company by any governmental authority.
5.8. COMPLIANCE WITH LAWS AND REGULATIONS. To the knowledge of the Company,
the Company is in compliance, in all material respects, with all laws, rules,
regulations, orders and requirements (federal, state, and local) applicable to
it in all jurisdictions in which the business of the Company is currently
conducted or to which the
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Company is currently subject, which may have a material impact on the Company,
including, without limitation, all applicable civil rights and equal opportunity
employment laws and regulations, all state and federal antitrust, antimonopoly
and fair trade practice laws and the Federal Occupational Health and Safety Act.
The Company does not know of any assertion by any party that the Company is in
violation of any such laws, rules, regulations, orders, restrictions or
requirements with respect to its current operations, and no notice in that
regard has been received by the Company. To the knowledge of the Company, there
is not presently pending any proceeding, hearing or investigation with respect
to the adoption of amendments or modifications of existing laws, rules,
regulations, orders, restrictions or requirements which, if adopted, would
materially adversely affect the current operations of the Company.
5.9. GOVERNMENTAL APPROVAL; CONSENTS. To the knowledge of the Company,
except for (i) the granting of effectiveness by the Commission of the Merger;
(ii) the approval and granting of effectiveness by the appropriate various state
securities regulators of the Merger; (iii) the approval by the National
Association of Securities Dealers, Inc. of the Merger; and (iv) the reports
required to be filed in the future by the Company as a reporting company under
the Exchange Act, no authorization, license, permit, franchise, approval, order
or consent of, and no registration, declaration or filing by the Company with,
any governmental authority, federal, state, or local, is required in connection
with the Company's execution, delivery and performance of this Agreement. No
consents of any other parties are required to be received by or on the part of
the Company to enable the Company to enter into and carry out this Agreement.
5.10. CONDITION OF ASSETS. The equipment, fixtures, and other personal
property of the Company are in good operating condition and repair (ordinary
wear and tear excepted) for the conduct of the business of the Company as
presently conducted.
5.11. NO BREACHES. To the knowledge of the Company, the making and
performance of this Agreement, including, without limitation, the issuance by
the Company of the Merger Stock, will not (i) conflict with the Certificate of
Incorporation or By-laws of the Company; (ii) violate any order, writ,
injunction, or decree applicable to the Company; or (iii) result in any breach
or termination of, or constitute a default under, or constitute an event which,
with notice or lapse of time, or both, would become a default under, or result
in the creation of any encumbrance upon any asset of the Company, or create any
rights of termination, cancellation or acceleration in any person under, any
agreement, arrangement or commitment, or violate any provisions of any laws,
ordinances, rules or regulations or any order, writ, injunction or decree to
which the Company is a party or by which the Company or any of its assets may be
obligated.
5.12. DISCLOSURE SCHEDULE COMPLETE. The Company shall promptly complete and
furnish to the Partnerships and the Shareholders one or more supplements to the
Disclosure Schedule if any event occurs prior to the Closing Date that would
have been required to be disclosed in the event that those events existed at the
time of executing this Agreement. The Disclosure Schedule, as supplemented prior
to the Closing Date, will contain a true, correct
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and complete list and description of all items required to be set forth therein.
The Disclosure Schedule, as supplemented prior to the Closing Date, is expressly
incorporated herein by reference. Notwithstanding the foregoing, any such
supplement to the Disclosure Schedule following the date hereof shall not in any
way affect the right of the Shareholders or the Partnerships not to consummate
the Merger, as set forth later in this Agreement.
5.13. FINANCIAL STATEMENTS. To the knowledge of the Company, the Disclosure
Schedule contains audited balance sheets as of December 31, 1996, and related
statements of operations, statements of cash flows and statements of
stockholders' equity of the Company for the one-year period ended December 31,
1996, and compiled balance sheets as of June 30, 1997, and related statements of
operations, statements of cash flows and statement of stockholders' equity for
the six-month period ended June 30, 1997 for the Company ("Company Financial
Statements"). The Company Financial Statements present fairly, in all respects,
the financial position and results of operations of the Company as of the dates
and periods indicated, prepared in accordance with GAAP. Without limiting the
generality of the foregoing, (i) there is no basis for any assertion against the
Company, as of the date of the Company Financial Statements, of any material
debt, liability or obligation of any nature not fully presented or reserved
against in the Company Financial Statements; and (ii) there are no assets of the
Company as of the date of the Company Financial Statements, the value of which
is overstated in the Company Financial Statements. Except as disclosed in the
Company Financial Statements, the Company does have any known contingent
liabilities, including liabilities for Taxes, forward or long-term commitments
or unrealized or anticipated losses from unfavorable commitments other than in
the ordinary course of business.
5.14. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in the
Disclosure Schedule, since December 31, 1996, there has not been:
(a) any material adverse change in the financial condition, properties,
assets, liabilities or business or a decrease in net worth of the Company;
(b) any material damage, destruction or loss of any material properties of
the Company, whether or not covered by insurance;
(c) any material change in the manner in which the business of the Company
has been conducted, including, without limitation, collection of accounts
receivable and payment of accounts payable;
(d) any change in the accounting principles, methods or practices or any
change in the depreciation or amortization policies or rates utilized by the
Company;
(e) any voluntary or involuntary sale, assignment, abandonment, surrender,
termination, transfer, license or other disposition, of any kind or nature, of
any property or right, including, without limitation, any equipment, office
equipment, accounts receivable, intangible assets,
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business records or the Company Contracts, excepting only transfers in
accordance with past practices or collection of accounts receivable in the
ordinary course of business;
(f) any material change in the treatment and protection of trade secrets or
other confidential information of the Company;
(g) any material change in the business or contractual relationship of the
Company with any customer or supplier which might reasonably be expected to
affect the business or prospects of the Company materially and adversely;
(h) any strike, material grievance proceeding or other labor dispute, any
union organizational activity or other occurrence, event or condition of any
similar character which might reasonably be expected to adversely affect the
business of the Company;
(i) any loan or advance by the Company to any party, other than credit
extended in the ordinary course of business, as previously conducted;
(j) any incurrence by the Company of indebtedness, liabilities or
obligations of any nature whether accrued, absolute, contingent, direct,
indirect or inchoate, or otherwise, and whether due or to become due, except:
(i) current liabilities incurred for services rendered in the ordinary
course of the Company's business;
(ii) obligations incurred in the ordinary course of the Company's
business;
(iii) liabilities on account of Taxes and governmental charges, but
not penalties, interest or fines in respect thereof;
(iv) obligations or liabilities incurred by virtue of the execution of
this Agreement; or
(v) liabilities pursuant to the litigation listed in the Disclosure
Schedule;
(k) any agreement by the Company, whether written or oral, to do any of the
foregoing; and
(l) any occurrence not included in paragraphs (a) through (k), inclusive,
of this Section 5.14 which has resulted, or which the Company has reason to
believe might be expected to result, in a material adverse change in the
business or prospects of the Company.
5.15. GOVERNMENTAL LICENSES, PERMITS, AUTHORIZATIONS AND APPROVALS. To the
knowledge of the Company, the Company has all governmental licenses, permits,
authorizations and approvals necessary for the conduct of its business as
currently
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conducted ("Company Licenses and Permits"). The Disclosure Schedule includes a
list of all Company Licenses and Permits. All Company Licenses and Permits are
in full force and effect, and no proceedings for the suspension or cancellation
of any thereof is pending or threatened.
5.16. EMPLOYEE PLANS. (a) For purposes of this section, the definitions set
forth in Section 3.16(a) of this Agreement apply.
(b) The Company has no Employee Plans or Compensation Agreements.
5.17. BROKERS. The Company has not made any agreement or taken any action
which would cause any person to be entitled to any agent's, broker's or finder's
fee or commission in connection with the Merger.
5.18. BUSINESS LOCATIONS. The Company does not own, lease or sublease any
real or personal property in any state, except as set forth in the Disclosure
Schedule. The Company does not have any place of business, including, without
limitation, executive offices or places where the Company's books and records
are kept, except as otherwise set forth in the Disclosure Schedule.
5.19. INTELLECTUAL PROPERTY. The Disclosure Schedule lists all of the
Company Intellectual Property (as hereinafter defined) used by the Company which
constitutes a material patent, trade name, trademark, service mark or
application for any of the foregoing. "Company Intellectual Property" means all
of the Company's right, title and interest in and to all patents, trade names,
assumed names, trademarks, service marks, and proprietary names, copyrights,
including any registration and pending applications for any such registration
for any of them, together with all the goodwill relating thereto and all other
intellectual property of the Company. Other than as disclosed in the Disclosure
Schedule, the Company does not have any licenses granted by or to any person or
other agreements to which any other person is a party, relating in whole or in
part to any Company Intellectual Property. All of the patents, trademark
registrations and copyrights listed in the Disclosure Schedule that are owned by
the Company are valid and in full force and effect. To the knowledge of the
Company, the Company is not infringing upon, or otherwise violating, the rights
of any third party with respect to any Company Intellectual Property. No
proceedings have been instituted against or claims received by the Company, nor
to the knowledge of the Company, are there any proceedings threatened alleging
any such violation, nor does the Company know of any valid basis for any such
proceeding or claim. To the knowledge of the Company, there is no infringement
or other adverse claim against any of the Company Intellectual Property. To the
knowledge of the Company, the use of any software by the Company does not
violate or otherwise infringe upon the rights of any third party.
5.20. WARRANTIES. The Disclosure Schedule sets forth a true and complete
list of the forms of all express warranties and guaranties made by the Company
to third parties with respect to any services rendered by the Company to those
third parties or to other third parties.
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5.21. CLIENTS AND SUPPLIERS. Except as set forth in the Disclosure
Schedule, the Company does not know, and has no reason to believe that, either
as a result of the Merger or for any other reason (exclusive of expiration of a
contract upon the passage of time), any present material client or supplier of
the Company will not continue to conduct business with the Company after the
Closing Date in substantially the same manner as such client or supplier has
conducted business prior thereto.
5.22. NO OMISSIONS OR UNTRUE STATEMENTS. No representation or warranty made
by the Company to the Partnerships and the Shareholders in this Agreement or in
any other document, or in any other communication, written or oral, including,
without limitation, the documents required to be delivered to the Partnerships
and to the Shareholders pursuant to the terms of this Agreement, contains or
will contain any untrue statement of a material fact, omits or will omit to
state a material fact necessary to make the statements contained herein or
therein not misleading as of the date hereof and as of the Closing Date.
5.23. SECURITIES AND EXCHANGE COMMISSION DOCUMENTS. (a) The Company has
made available or will make available to the Partnerships and the Shareholders
prior to the Closing Date, each registration statement, report, proxy statement
or information statement and all exhibits thereto prepared by the Company or
relating to its properties, each in the form (including exhibits and any
amendments thereto) filed with the Commission ("Company Securities Filings").
The Company Securities Filings, which were or will be filed with the Commission
in a timely manner, constitute all forms, reports and documents required to be
filed by the Company under the Securities Act, the Exchange Act, applicable
state securities and "Blue Sky" laws, and the rules and regulations promulgated
thereunder ("Securities Laws").
(b) To the knowledge of the Company as of its respective dates, the Company
Securities Filings (i) complied as to form in all material respects with the
applicable requirements of the Securities Laws and (ii) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in the light
of the circumstances under which they were made, not misleading. To the
knowledge of the Company each of the balance sheets of the Company included in
or incorporated by reference into the Company Securities Filings (including the
related notes and schedules) fairly presents the financial position of the
Company as of its date and each of the statements of income and cash flows of
the Company included in or incorporated by reference into the Company Securities
Filings (including any related notes and schedules) fairly presents the results
of operations and cash flows, as the case may be, of the Company for the periods
set forth therein (subject, in the case of unaudited statements, to normal
year-end audit adjustments which would not be material in amount or effect), in
each case in accordance with GAAP during the periods involved, except as may be
noted therein and except, in the case of the unaudited statements, as permitted
by the Securities Laws.
(c) Except as and to the extent set forth on the balance sheet of the
Company at June 30, 1997, including all notes thereto, or as set forth in the
Company Securities Filings, the Company has no material liabilities or
obligations of any nature (whether accrued, absolute, contingent or
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otherwise) that would be required to be presented or reserved against in, a
balance sheet of the Company or in the notes thereto, prepared in accordance
with GAAP, except liabilities arising in the ordinary course of business since
such date and which would not have a material adverse effect on the Company.
5.24. CONVERTIBLE SECURITIES. Galewick owns 100,000 shares of the Preferred
Stock, which are all of the issued and outstanding shares of the Preferred
Stock. Each share of the issued and outstanding Preferred Stock is convertible
into twenty (20) shares of the Company's Common Stock, subject to certain
conditions precedent. Other than those 100,000 shares of Preferred Stock, the
Company has no outstanding options, warrants or other securities exercisable
for, or convertible into, shares of the Company's Common Stock, the terms of
which would require any anti-dilution adjustments by reason of the consummation
of the Merger.
5.25. RELATED PARTY TRANSACTIONS. Set forth in the Disclosure Schedule will
be a list of all arrangements, agreements and contracts entered into by the
Company with (i) any person who is an officer, director or affiliate of the
Company, any relative of any of the foregoing or any entity of which any of the
foregoing is an affiliate or (ii) any person who acquired securities issued by
the Company in a private placement transaction. The copies of such documents,
all of which have been or will be delivered or made available to the
Shareholders and the Partnerships prior to the Closing Date, are or will be
true, complete and correct when delivered or made available.
5.26. LABOR MATTERS. The Company is not a party to, or obligated by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor union organization. There is no unfair labor
practice or labor arbitration proceeding pending or, to the knowledge of the
Company, threatened against the Company relating to its business, except for any
such proceeding which would not have a material adverse effect on the Company or
its business. To the knowledge of the Company, there are no organizational
efforts with respect to a collective bargaining unit presently being made or
threatened involving those persons who provide human resource services for the
benefit of the Company.
ARTICLE VI. COVENANTS
6.1. ACQUISITION PROPOSALS. Prior to the Closing, the parties each agree
(i) that none of them shall, and each of them shall direct and use its best
efforts to cause its respective officers, general partner, directors, employees,
agents, affiliates and representatives, including, without limitation, any
investment banker, attorney or accountant retained by it, as applicable, not to
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer, including, without
limitation, any proposal or offer to its shareholders or limited partners, as
the case may be, with respect to a merger, acquisition, tender offer, exchange
offer, consolidation or similar transaction involving, or any purchase of all or
any significant portion of the assets or any equity securities (or any debt
securities convertible into equity securities) of, such party, other than the
Merger (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal") or engage in any negotiations
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concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal;
(ii) that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and each will take the necessary steps to
inform the persons referred to above of the obligations undertaken in this
Section 6.1; and (iii) that it will notify the other parties immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it; provided, however, that nothing contained in this Section
6.1 shall prohibit the General Partner of any of the Partnerships from (A)
furnishing information to, or entering into discussions or negotiations with,
any person or entity that makes an unsolicited bona fide Acquisition Proposal,
if, and only to the extent that, (1) such General Partner determines in good
faith that such action is required for it to comply with its fiduciary duties to
limited partners imposed by law, (2) prior to furnishing such information to, or
entering into discussions or negotiations with, such person, such party provides
written notice to the other parties to the effect that it is furnishing
information to, or entering into discussions with, such person, and (3) subject
to any confidentiality agreement with such person, (which such party determined
in good faith was required to be executed in order for the General Partner to
comply with its fiduciary duties to limited partners imposed by law), such party
keeps the other parties informed of the status (but not the terms) of any such
discussions or negotiations; and (4) to the extent applicable, the General
Partner complies with Rule 14e-2 promulgated under the Exchange Act with regard
to an Acquisition Proposal. Nothing in this Section 6.1 shall (i) permit any
party to terminate this Agreement (except as specifically provided later in this
Agreement); (ii) permit any party to enter into any agreement with respect to an
Acquisition Proposal during the term of this Agreement, because during the term
of this Agreement, no party shall enter into any agreement with any person that
provides for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form); or (iii) affect any other
obligation of any party under this Agreement.
6.2. CONDUCT OF BUSINESSES. (a) Prior to the Closing Date, except as may be
set forth in the Disclosure Schedule or as contemplated by this Agreement,
unless all the parties have consented in writing thereto, each party:
(1) Shall use its reasonable efforts to preserve intact its business
organizations and goodwill and keep available the services of its officers
and employees;
(2) Shall confer on a regular basis with one or more representatives
of the other parties to report operational matters of materiality and,
subject to Section 6.1 of this Agreement, any proposals to engage in
material transactions;
(3) Shall promptly notify the other parties of any material emergency
or other material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material governmental
complaints, investigations or hearings
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(or communications indicating that the same may be contemplated), or the
breach in any material respect of any representation, warranty, covenant or
agreement contained herein;
(4) Shall not pay dividends or make distributions payable with respect
to the its equity securities; and
(5) Shall promptly deliver to the other parties true and correct
copies of any report, statement or schedule filed with the Commission
subsequent to the date of this Agreement.
(b) Prior to the Closing Date, except as may be set forth in the Disclosure
Schedule, unless the other parties have consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, each Partnership:
(1) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
(2) Shall not amend such Partnership's Agreement of Limited
Partnership;
(3) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing on the
date hereof and disclosed pursuant to this Agreement, issue any equity or
debt securities, make any distribution, effect any recapitalization or
other similar transaction; (B) grant, confer or award any option, warrant,
conversion right or other right not existing on the date hereof to acquire
any interest in such Partnership; (C) increase any compensation to, or
enter into or amend any agreement with, the General Partner of such
Partnership, or (D) adopt any employee benefit plan;
(4) Shall not declare, set aside or make any distribution or payment
with respect to any interest in such Partnership or directly or indirectly
redeem, purchase or otherwise acquire any interest in such Partnership, or
make any commitment for any such action;
(5) Shall not sell or otherwise dispose of (i) any assets or
properties of such Partnership, or (ii) except in the ordinary course of
business, any of its other assets which are material, individually or in
the aggregate;
(6) Shall not make any loans, advances or capital contributions to, or
investments in, any other person;
(7) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business, consistent with past practice or in accordance
with their terms, of liabilities presented or reserved against in,
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or contemplated by, Respective Partnership Financial Statements (or the
notes thereto) or incurred in the ordinary course of business consistent
with past practice;
(8) Shall not enter into any commitment which individually may result
in total payments or liability by or to such Partnership in excess of
$250,000 in the case of any one commitment or in excess of $500,000 for all
commitments, except in the ordinary course of business;
(9) Shall not enter into any commitment with any affiliate of such
Partnership or its General Partner, except to the extent the same occurs in
the ordinary course of business consistent with past practice and would not
have a material adverse effect on such Partnership or its business.
(c) Prior to the Closing Date, except as may be set forth in the Disclosure
Schedule, unless the other parties have consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, PCM:
(1) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
(2) Shall not amend its Articles of Incorporation or Bylaws, except as
contemplated by this Agreement;
(3) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including
existing on the date hereof and disclosed pursuant to this Agreement, issue
any shares of its capital stock, effect any share split, reverse share
split, share dividend, recapitalization or other similar transaction, (B)
grant, confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital
shares, (C) amend any employment agreement with any of its present or
future officers or directors, or (D) adopt any employee benefit plan
(including any share option, share benefit or share purchase plan);
(4) Shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of PCM's common stock or
directly or indirectly redeem, purchase or otherwise acquire any shares of
PCM's common stock or make any commitment for any such action;
(5) Except as will be set forth in the Disclosure Schedule, shall not
sell or otherwise dispose of any of its assets or properties, except in the
ordinary course of business;
(6) Shall not make any loans, advances or capital contributions to, or
investments in, any other person other than in connection with the sale of
properties;
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(7) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business, consistent with past practice or in accordance
with their terms, of liabilities presented or reserved against in, or
contemplated by, the PCM Financial Statements (or the notes thereto) or
incurred in the ordinary course of business consistent with past practice;
(8) Shall not enter into any commitment which individually may result
in total payments or liability by or to PCM in excess of $250,000 in the
case of any one commitment or in excess of $500,000 for all commitments,
except in the ordinary course of business; and
(9) Shall not enter into any commitment with any officer, director or
affiliate of PCM, except to the extent the same occurs in the ordinary
course of business consistent with past practice and would not have a
material adverse effect on PCM or its business.
(d) Prior to the Closing Date, except as may be set forth in the Disclosure
Schedule, unless the other parties have consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, the Company:
(1) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
(2) Shall not amend its Certificate of Incorporation or Bylaws, except
as contemplated by this Agreement;
(3) Shall not (A) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights (including those
existing on the date hereof and disclosed pursuant to this Agreement, issue
any shares of its capital stock, effect any share split, reverse share
split, share dividend, recapitalization or other similar transaction, (B)
grant, confer or award any option, warrant, conversion right or other right
not existing on the date hereof to acquire any shares of its capital
shares, (C) amend any employment agreement with any of its present or
future officers or directors, or (D) adopt any new employee benefit plan
(including any share option, share benefit or share purchase plan);
(4) Shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of the Common Stock or
directly or indirectly redeem, purchase or otherwise acquire any shares of
the Common Stock or make any commitment for any such action;
(5) Except as will be set forth in the Disclosure Schedule, shall not
sell or otherwise dispose of any of its assets or properties, except in the
ordinary course of business;
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(6) Shall not make any loans, advances or capital contributions to, or
investments in, any other person other than in connection with the sale of
properties;
(7) Shall not pay, discharge or satisfy any claims, liabilities or
obligations absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business, consistent with past practice or in accordance
with their terms, of liabilities presented or reserved against in, or
contemplated by, the Company's Financial Statements (or the notes thereto)
or incurred in the ordinary course of business consistent with past
practice;
(8) Shall not enter into any commitment which individually may result
in total payments or liability by or to the Company in excess of $250,000
in the case of any one commitment or in excess of $500,000 for all
commitments, except in the ordinary course of business; and
(9) Shall not enter into any commitment with any officer, director or
affiliate of the Company, except as specified herein or in the Disclosure
Schedule and except in the ordinary course of business.
For purposes of this Section 6.2, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three (3) days of request. Further, if no response is received
by the end of business on such third day, the party receiving the request shall
be deemed to have consented to such action.
6.3. CONSENTS OF SHAREHOLDERS AND PARTNERS. Each party will take all action
necessary in accordance with applicable law and its organizational documents to
obtain the written consents of its shareholders or partners, as applicable, as
promptly as practicable to approve this Agreement and the Merger. The Board of
Directors of the Company and the General Partner of the Partnerships shall each
recommend such approval to their shareholders and partners, respectively, and
each party shall each take all lawful action to solicit such approval,
including, without limitation, timely mailing the Joint Consent
Statement/Prospectus (as defined later in this Agreement); provided, however,
that such recommendation or solicitation is subject to any action taken by, or
upon authority of, the Board of Directors of the Company or the General Partner
of the Partnerships, as the case may be, in the exercise of its good faith
judgment as to its fiduciary duties to their shareholders or partners, as
applicable, imposed by law.
6.4. FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, the parties shall (a) use all reasonable efforts to cooperate with
each other in (i) determining which filings are required to be made prior to the
Closing Date with, and which consents, approvals, permits, or authorizations are
required to be obtained prior to the Closing Date from, governmental or
regulatory authorities of the United States and the various states in connection
with the execution and delivery of this Agreement and the consummation of the
Merger and (ii) timely making all such filings and timely seeking all such
consents, approvals, permits or
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authorizations; (b) use all reasonable efforts to obtain in writing any consents
required from third parties, in form reasonably satisfactory to the parties,
necessary to effectuate the Merger; and (c) use all reasonable efforts to take,
or cause to be taken, all other action and do, or cause to be done, all other
things necessary, proper or appropriate to consummate and make effective the
Merger. If, at any time after the Closing Date, any further action is necessary
or desirable to carry out the purpose of this Agreement, the Shareholders and
the proper officers and directors of the Company and the General Partner of the
Partnerships shall take all such necessary action.
6.5. INSPECTION OF RECORDS. From the date hereof to the Closing Date, each
party shall allow all designated officers, attorneys, accountants, and other
representatives of the other parties access at all reasonable times to the
records and files, correspondence, audits and properties of such party, as well
as to all information relating to commitments, contracts, titles and financial
position, or otherwise pertaining to the business and affairs of such party.
6.6. PUBLICITY. The parties shall, subject to their respective legal
obligations (including requirements of regulatory bodies), consult with each
other, and use reasonable efforts to agree upon the text of any press release
before issuing any such press release or otherwise making public statements with
respect to the transactions contemplated hereby and in making any filings with
any federal or state governmental or regulatory agency or with any national
securities exchange with respect thereto.
6.7. REGISTRATION STATEMENT. The parties shall cooperate and prepare and,
as appropriate, amend promptly and the Company shall file with the Commission as
soon as practicable a Registration Statement on Form S-4 and such amendments
thereto as may be necessary or appropriate to close and consummate the Merger
("Form S-4") under the Securities Act, with respect to Merger Stock, a portion
of which registration statement shall also serve as the Joint Consent
Statement/Prospectus with respect to the meetings of the shareholders and
partners of the Company and the Partnerships, respectively, in connection with
the Merger ("Joint Consent Statement/Prospectus"). The respective parties will
cause the Joint Consent Statement/Prospectus and the Form S-4 to comply as to
form in all material respects with the applicable provisions of the Securities
Act, the Exchange Act and the rules and regulations promulgated thereunder. The
Shareholders and the Partnerships shall use all reasonable efforts, and will
cooperate with the Company to cause the Form S-4 to be declared effective by the
Commission as promptly as practicable. The Company shall use its best efforts to
obtain, prior to the effective date of the Form S-4, all necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
Merger and will pay all expenses incident thereto. The Company agrees that the
Joint Consent Statement/Prospectus and each amendment or supplement thereto, at
the time of mailing thereof, or, in the case of the Form S-4 and each amendment
or supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that the foregoing shall not apply to the extent that any such untrue
statement of a material fact or omission to state a material fact was made by
the Company in reliance upon and in conformity with written information
concerning the other
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parties furnished to the Company by the other parties specifically for use in
the Joint Consent Statement/Prospectus. The Shareholders and the Partnerships
agree that the written information provided by them specifically for inclusion
in the Joint Consent Statement/Prospectus and each amendment or supplement
thereto, at the time of mailing thereof, or, in the case of written information
provided by the Shareholders and the Partnerships specifically for inclusion in
the Form S-4 or any amendments or supplement thereto, at the time it is filed or
becomes effective, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Company will inform the Shareholders and the
Partnerships, promptly after it receives notice thereof, of the time when the
Form S-4 has become effective or any supplement or amendment has been filed, the
issuance of any stop order, the suspension of the registration or qualification
of the Merger in any jurisdiction, or any request by the Commission for
amendment of the Joint Consent Statement/Prospectus or the Form S-4 or comments
thereon and responses thereto or requests by the Commission for additional
information.
6.8. FURTHER ACTION. Each party shall, subject to the fulfillment at or
before the Closing Date of each of the conditions or performances set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger.
6.9. INDEMNIFICATION. For a period of six years from and after the Closing
Date, the Company shall indemnify the partners, directors, officers, and agents
of the Partnerships and PCM, as appropriate, who at any time prior to the
Closing Date were entitled to indemnification under the Agreements of Limited
Partnership of the Partnerships or indemnification agreements existing on the
date hereof to the same extent as such partners, directors, officers and agents
are entitled to indemnification under such Agreements of Limited Partnership or
indemnification agreements in respect to actions or omissions occurring at or
prior to the Closing Date, including, without limitation, the Merger.
6.10. SURVIVAL OF OBLIGATIONS; ASSUMPTION OF PARTNERSHIP AND PCM
LIABILITIES BY THE COMPANY. All of the obligations of the Partnerships and PCM
that are outstanding on the Closing Date shall survive the Merger and shall not
be merged therein. Upon the consummation of the Merger, such obligations shall
be assumed, automatically, by the Company; provided, however, that such
assumption shall not impose upon or expose the Company to any liability for
which any Partnership or PCM was not liable, and provided, further, that the
Company shall be entitled to the same defenses, offsets and counterclaims to
which such Partnership or PCM would have been entitled, but for the Merger.
6.11. THIRD PARTY CONSENTS. The parties shall take all necessary action and
will use their commercially reasonable efforts to obtain the consents and
applicable approvals from third parties that may be required to enable them to
carry out the Merger.
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6.12. EFFORTS TO FULFILL CONDITIONS. The parties shall use their reasonable
efforts to insure that all conditions precedent to their obligations hereunder
are fulfilled at or prior to the Closing Date .
6.13. CHANGES IN REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS.
Between the date of this Agreement and the Closing Date, the Partnerships shall
not, directly or indirectly, enter into any transaction, take any action, or by
inaction permit an event to occur, which would result in any of the
representations and warranties of the Partnerships herein contained to be not
true and correct at and as of (a) the time immediately following the occurrence
of such transaction or event, or (b) the Closing Date. Each Partnership shall
promptly give written notice to the Company and the Shareholders upon becoming
aware of (i) any fact which, if known on the date hereof, would have been
required to be set forth or disclosed pursuant to this Agreement; and (ii) any
impending or threatened breach in any material respect of any of the
representations and warranties of such Partnership contained in this Agreement
and, with respect to the latter, shall use all reasonable efforts to remedy the
same.
6.14. CHANGES IN REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Between the
date of this Agreement and the Closing Date, the Company shall not, directly or
indirectly, enter into any transaction, take any action, or by inaction permit
an event to occur, which would result in any of the representations and
warranties of the Company herein contained to be not true and correct at and as
of (a) the time immediately following the occurrence of such transaction or
event; or (b) the Closing Date. The Company shall promptly give written notice
to the Partnerships and the Shareholders upon becoming aware of (i) any fact
which, if known on the date hereof, would have been required to be set forth or
disclosed pursuant to this Agreement; and (ii) any impending or threatened
breach in any material respect of any of the representations and warranties of
the Company contained in this Agreement and, with respect to the latter, shall
use all reasonable efforts to remedy the same.
6.15. CHANGES IN REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS.
Between the date of this Agreement and the Closing Date, the Shareholders shall
not, directly or indirectly, enter into any transaction, take any action or by
inaction permit an event to occur, which would result in any of the
representations and warranties of the Shareholders herein contained to be not
true and correct at and as of (a) the time immediately following the occurrence
of such transaction or event; or (b) the Closing Date. The Shareholders shall
promptly give written notice to the Partnerships and the Company upon becoming
aware of (i) any fact which, if known on the date hereof, would have been
required to be set forth or disclosed pursuant to this Agreement; and (ii) any
impending or threatened breach in any material respect of any of the
representations and warranties of the Shareholders contained in this Agreement
and, with respect to the latter, shall use all reasonable efforts to remedy the
same.
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6.16. COOPERATION OF THE PARTIES. The parties will cooperate with each
other in supplying such information as may be reasonably requested in connection
with obtaining consents or approvals to the Merger.
6.17. COSTS OF THE MERGER. For purposes of this Agreement, the costs of the
Merger shall be and hereby are divided into two categories. The first category
is "transaction costs" and the second category is "solicitation expenses."
(a) "Transaction costs" are those costs of printing and mailing the Joint
Consent Statement/Prospectus and other documents; legal fees not related to the
solicitation of votes, consents, or tenders; financial advisory fees; investment
banking fees; appraisal fees; accounting fees; independent committee fees;
travel expenses; and all other fees related to the preparatory work of the
Merger. Transaction costs do not include (i) those costs would have otherwise
been incurred by the Partnerships in the ordinary course of business or (ii)
solicitation expenses. "Solicitation expenses" include direct marketing
expenses, such as telephone calls, facsimile machine transmissions, costs
related to preparation and distribution of broker/dealer fact sheets, and legal
and other expenses related to the solicitation of consents, including direct
solicitation compensation to brokers and dealers.
(b) In the event the Merger is rejected, the limited partners of the
Partnerships shall not bear an unfair portion of the transaction costs of the
Merger. In the event the Merger is rejected, (i) the Company shall bear all
transaction costs in proportion to the number of votes of the limited partners
of the Partnerships that voted to reject the Merger; and (ii) each Partnership
shall bear the transaction costs in proportion to the number of votes of the
limited partners of such Partnership that voted to approve the Merger.
(c) In the event the Merger is rejected, the Company shall pay all of the
solicitation expenses.
(d) In the event the Merger is approved, the Partnerships shall bear the
transaction costs in proportion to the number of votes of the limited partners
of the Partnerships that voted to approve the Merger.
(e) In the event the Merger is approved, the Partnerships shall bear the
solicitation costs in proportion to the number of votes of the limited partners
of the Partnerships that vote to approve the Merger.
ARTICLE VII. CONDITIONS
7.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE REORGANIZATION.
In addition to those other conditions specified elsewhere in this Article VII,
the respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
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(a) This Agreement and Merger shall have been approved in the manner
required by the Bylaws of the Company and the Agreements of Limited Partnership
of the Partnerships, as appropriate, by applicable law or by applicable
regulations of any regulatory body, by the holders of the Common Stock, by the
Shareholders and by holders of Units in the Partnerships entitled to vote
thereon.
(b) None of the parties shall be subject to any order or injunction of a
court of competent jurisdiction which prohibits the consummation of the Merger.
In the event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) The Form S-4 shall have become effective and all necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
Merger shall have been obtained and no stop order with respect to any of the
foregoing shall be in effect.
(d) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental commission, board, other regulatory body or
third parties required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to be
filed after the Closing Date and except where the failure to have obtained or
made any such consent, authorization, order, approval, filing or registration
would not have a material adverse effect on the business, results of operations
or financial condition of any party taken as a whole, following the Closing
Date.
7.2. CONDITIONS TO OBLIGATIONS OF THE PARTNERSHIPS TO EFFECT THE
REORGANIZATION. In addition to those other conditions specified elsewhere in
this Article VII, the obligations of the Partnerships to effect the Merger shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions, unless waived by each of the Partnerships:
(a) The Company and the Shareholders shall have performed their agreements
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of the Company and the Shareholders
contained in this Agreement shall be true and correct in all material respects
as of the Closing Date, as if made on the Closing Date, and each Partnership
shall have received certificates of the President of the Company and the
Shareholders, dated the Closing Date, certifying to such effect.
(b) Each Partnership shall have received the opinion of tax counsel
selected by the Company and approved by each Partnership, dated the Closing
Date, to the effect that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 351 of the Code, and
that each of the parties will be a party to that reorganization within the
meaning of Section 351 of the Code. In rendering his opinion, said counsel shall
be entitled to rely as to any factual matter upon certificates given by the
Shareholders and executive officers of the Company.
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(c) From the date of the Agreement through the Closing Date, there shall
not have occurred any change in the financial condition, business or operations
of the Company, taken as a whole, that would have or would be reasonably
probable to have a material adverse effect on the Company or PCM other than any
such change that affects all parties in a substantially similar manner.
(d) The opinion of Willamette addressed to the Partnerships that the Merger
is fair, from a financial point of view, to the Partnerships shall not have been
withdrawn or materially modified.
(e) The Partnerships shall have received the opinion of counsel selected by
the Company and approved by each Partnership dated the Closing Date, as to such
customary matters as the Partnerships may reasonably request and such opinion
shall be reasonably satisfactory to the Partnerships.
(f) The shareholders of the Company shall have approved this Agreement and
the Merger.
(g) The Shareholders shall have approved this Agreement and the Merger.
(h) The representations and warranties of the Company and the Shareholders
regarding PCM contained in this Agreement (including the Disclosure Schedule) or
any schedule, certificate or other instrument delivered pursuant to the
provisions hereof or in connection with the Merger shall be true and correct in
all material respects at and as of the Closing Date (except for such changes
permitted by this Agreement) and shall be deemed to be made again as of the
Closing Date.
(i) No material adverse change shall have occurred subsequent to June 30,
1997, in the financial position, results of operations, assets, liabilities or
prospects of the Company or PCM nor shall any event or circumstance have
occurred which would result in a material adverse change in the financial
position, results of operations, assets, liabilities or prospects of the Company
or PCM within the reasonable discretion of each Partnership.
(j) All documents and instruments delivered by the Company and the
Shareholders to the Partnerships on the Closing Date shall be in form and
substance reasonably satisfactory to the Partnerships.
(k) On the Closing Date, the number of shares of no par value common stock
issued by PCM and outstanding shall be set forth in the Disclosure Schedule. At
the Closing Date, the number of shares of Common Stock issued by the Company and
outstanding shall be as set forth in the Disclosure Schedule. At the Closing
Date, the number of shares of Preferred Stock issued by the Company and
outstanding shall be set forth in the Disclosure Schedule.
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(l) No litigation seeking to enjoin the Merger or to obtain damages on
account thereof shall be pending, or to the knowledge of either the Company or
the Shareholders, be threatened.
7.3. CONDITIONS TO OBLIGATIONS OF THE COMPANY TO EFFECT THE REORGANIZATION.
In addition to those other conditions specified elsewhere in this Article VII,
the obligations of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by the Company:
(a) The Partnerships and the Shareholders shall have performed their
agreements contained in this Agreement required to be performed on or prior to
the Closing Date, and the representations and warranties of the Partnerships and
the Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date as if made on the Closing Date, and the
Company shall have received certificates of the President of the General Partner
of each Partnership and the Shareholders dated the Closing Date, certifying to
such effect.
(b) From the date of this Agreement through the Closing Date, there shall
not have occurred any change in the financial condition, business or operations
of the Partnerships or PCM, taken as a whole, that would have or would be
reasonably probable to have a material adverse effect, other than any such
change that affects all parties in a substantially similar manner.
(c) The Company shall have received the opinion of counsel selected by the
Partnerships and approved by the Company, dated the Closing Date, as to such
customary matters as the Company may reasonably request and such opinion shall
be reasonably satisfactory to the Company.
(d) The limited partners of all the Partnerships holding the required
number of Units shall have approved this Agreement and the Merger.
(e) The Shareholders shall have approved this Agreement and the Merger.
(f) The representations and warranties of the Partnerships and the
Shareholders contained in this Agreement (including the Disclosure Schedule) or
any schedule, certificate or other instrument delivered pursuant to the
provisions hereof or in connection with the Merger shall be true and correct in
all material respects at and as of the Closing Date (except for such changes
permitted by this Agreement) and shall be deemed to be made again as of the
Closing Date.
(g) No material adverse change shall have occurred subsequent to June 30,
1997, in the financial position, results of operations, assets, liabilities or
prospects of the Partnerships or PCM, nor shall any event or circumstance have
occurred which would result in a material adverse change in the financial
position, results of operations, assets, liabilities or prospects of the
Partnerships or PCM within the reasonable discretion of the Company.
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(h) All documents and instruments delivered by the Partnerships and the
Shareholders on the Closing Date shall be in form and substance reasonably
satisfactory to the Company.
(i) On the Closing Date, the number of shares of common stock issued by PCM
and outstanding shall be set forth in the Disclosure Schedule. At the Closing
Date, the number of limited partnership interests ("Units") issued by each
Partnership and outstanding shall be as set forth in the Disclosure Schedule.
(j) No litigation seeking to enjoin the Merger or to obtain damages on
account thereof shall be pending or, to the knowledge of the Partnerships or the
Shareholders, be threatened.
7.4. CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS TO EFFECT THE
REORGANIZATION. In addition to those other conditions specified elsewhere in
this Article VII, the obligations of the Shareholders to effect the Merger shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions, unless waived by the Shareholders:
(a) The Partnerships and the Company shall have performed their agreements
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of the Partnerships and the Company
contained in this Agreement shall be true and correct in all material respects
as of the Closing Date as if made on the Closing Date, and the Shareholders
shall have received certificates of the President of the General Partner of each
Partnership and the President of the Company dated the Closing Date, certifying
to such effect.
(b) From the date of this Agreement through the Closing Date, there shall
not have occurred any change in the financial condition, business or operations
of the Partnerships or the Company, taken as a whole, that would have or would
be reasonably probable to have a material adverse effect, other than any such
change that affects all parties in a substantially similar manner.
(c) The Shareholders shall have received the opinion of counsel selected by
the Partnerships and approved by the Company dated the Closing Date, as to such
customary matters as the Shareholders may reasonably request, such opinion to be
reasonably satisfactory to the Shareholders.
(d) The limited partners of all the Partnerships holding the required
number of Units shall have approved this Agreement and the Merger.
(e) The shareholders of the Company shall have approved this Agreement and
the Merger.
(f) The representations and warranties of the Company and the Partnerships
contained in this Agreement (including the Disclosure Schedule) or any schedule,
certificate or other
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instrument delivered pursuant to the provisions hereof or in connection with the
Merger shall be true and correct in all material respects at and as of the
Closing Date (except for such changes permitted by this Agreement) and shall be
deemed to be made again as of the Closing Date.
(g) No material adverse change shall have occurred subsequent to June 30,
1997, in the financial position, results of operations, assets, liabilities or
prospects of the Company or the Partnerships nor shall any event or circumstance
have occurred which would result in a material adverse change in the financial
position, results of operations, assets, liabilities or prospects of the Company
or the Partnerships within the reasonable discretion of the Shareholders.
(h) All documents and instruments delivered by the Company and the
Partnerships to the Shareholders on the Closing Date shall be in form and
substance reasonably satisfactory to the Shareholders.
(i) On the Closing Date, the number of shares of Common Stock issued by the
Company and outstanding shall be set forth in the Disclosure Schedule. On the
Closing Date, the number of shares of Preferred Stock issued by the Company and
outstanding shall be set forth in the Disclosure Schedule. At the Closing Date,
the number of Units issued by each Partnership and outstanding shall be as set
forth in the Disclosure Schedule.
(j) No litigation seeking to enjoin the Merger or to obtain damages on
account thereof shall be pending, or to the knowledge of either the Company or
the Partnerships, be threatened.
ARTICLE VIII. TERMINATION
8.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Closing Date, before or
after the approval of this Agreement by the partners of the Partnerships, the
shareholders of the Company, and the Shareholders or by the mutual written
consent of the parties, with the prior approval of the Board of Directors of the
Company and General Partner of the Partnerships.
8.2. TERMINATION BY ANY PARTY. This Agreement may be terminated and the
Merger may be abandoned by action of the General Partner of the Partnerships or
the Shareholders or the Company if (i) the Merger shall not have been
consummated by December 31, 1998; (ii) the approval of the Partnerships'
partners shall not have been obtained; (iii) the approval of the Company's
shareholders shall not have been obtained; (iv) as a result of due diligence
investigation by one of the parties, it is determined in good faith by such
party that certain facts or circumstances not previously known by such party
constitute a material adverse effect on the business, results of operations or
financial condition of the other party; (v) a United States federal or state
court of competent jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other action
shall have become final
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and non-appealable, provided that the party seeking to terminate this Agreement
pursuant to this clause (v) shall have used all reasonable efforts to remove
such order, decree, ruling or injunction; or (vi) any of the conditions set
forth in Article VII of this Agreement shall not have been satisfied, and
provided, in the case of a termination pursuant to clause (i) or (iv) of this
Section 8.2, that the terminating party shall not have breached in any material
respect its obligations under this Agreement in any manner that shall have
proximately contributed to the occurrence of the failure referred to in said
clause. Each party shall (i) deliver its information required to complete the
Disclosure Schedule to the other parties not later than 5:00 P.M., Pacific Time,
October 15, 1998, and (ii) complete its due diligence investigations not later
than 5:00 P.M., Pacific Time, on September 30, 1998 (the period from the date of
this Agreement through September 30, 1998 being hereinafter referred to as the
"Due Diligence Period"). Until the expiration of the Due Diligence Period, any
party may terminate this Agreement without liability or penalty due to the
discovery of a fact or circumstance that reasonably could be expected to
constitute a material adverse effect on the business, results of operations or
financial condition of any other party.
8.3 TERMINATION BY A PARTNERSHIP. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Closing Date, before or after
the adoption and approval by the partners of such Partnership, by action of the
General Partner of such Partnership, if (i) in the exercise of such General
Partner's good faith judgment as to its fiduciary duties to the partners of such
Partnership imposed by law, such General Partner determines that such
termination is required; (ii) the Company withdraws, materially modifies or
changes in a manner materially adverse to such Partnership its recommendations
to the Company's shareholders of this Agreement or the Merger; (iii) the
Shareholders withdraw, materially modify or change in a manner materially
adverse to such Partnership their disclosures required hereunder; (iv) there has
been a breach by the Company of any representation or warranty contained in this
Agreement which would have or would be reasonably probable to have a material
adverse effect on such Partnership, and which breach is not cured by September
30, 1998; (v) there has been a breach by the Shareholders of any representation
or warranty contained in this Agreement which would have or would have been
reasonably probable to have a material adverse effect on such Partnership, and
which breach is not cured by September 30, 1998; (vi) there has been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of the Company, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by such Partnership
to the Company; or (vii) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of the
Shareholders, which breach is not curable or, if curable, is not cured within
thirty (30) days after written notice of such breach is given by the Partnership
to the Shareholders.
8.4 TERMINATION BY THE COMPANY. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Closing Date, before or after
the approval by the shareholders of the Company, by action of the Company, if
(i) in the exercise of its good faith judgment as to its fiduciary duties to its
shareholders imposed by law, the Company determines that such termination is
required; (ii) the General Partner of a Partnership withdraws,
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materially modifies or changes in a manner materially adverse to the Company its
recommendation to a Partnership's partners of this Agreement or the Merger;
(iii) the Shareholders withdraw, materially modify or change in a manner
materially adverse to the Company their disclosures required hereunder; (iv)
there has been a breach by a Partnership of any representation or warranty
contained in this Agreement which would have or would be reasonably probable to
have a material adverse effect on the Company, and which breach is not cured by
September 30, 1998; (v) there has been a breach by the Shareholders of any
representation or warranty contained in this Agreement which would have or would
be reasonably probable to have a material adverse effect on the Company, and
which breach is not cured by September 30, 1998; (vi) there has been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of a Partnership, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by the Company to
such Partnership; (vi) there has been a material breach of any of the covenants
or agreements set forth in this Agreement on the part of the Shareholders, which
breach is not curable or, if curable, is not cured within thirty (30) days after
written notice of such breach is given by the Company to the Shareholders.
8.5 TERMINATION BY THE SHAREHOLDERS. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Closing Date, before or
after the approval by the Shareholders, by action by the Shareholders if (i) the
General Partner of a Partnership withdraws, materially modifies or changes in a
manner materially adverse to the Shareholders its recommendation to a
Partnership's partners of this Agreement or the Merger; (ii) the Company
withdraws, materially modifies or changes in any manner materially adverse to
the Shareholders its recommendations to its shareholders of this Agreement or
the Merger; (iii) there has been a breach by a Partnership of any representation
or warranty contained in this Agreement which would have or would be reasonably
probable to have a material adverse effect on the Shareholders, and which breach
is not cured by September 30, 1998; (iv) there has been a breach by the Company
of any representation or warranty contained in this Agreement which would have
or would be reasonably probable to have a material adverse effect on the
Shareholders, and which breach is not cured by September 30, 1998; (v) there has
been a material breach of any of the covenants or agreements set forth in this
Agreement on the part of a Partnership, which breach is not curable or, if
curable, is not cured within 30 days after written notice of such breach is
given by the Shareholders to such Partnership; or (vi) there has been material
breach of any of the covenants or agreements set forth in this Agreement on the
part of the Company, which breach is not curable, or, if curable, is not cured
within thirty (30) days after written notice of such breach is given to the
Company by the Shareholders.
8.6. EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article VIII,
all obligations of the parties hereto shall terminate and no party shall assert
or pursue in any manner, directly or indirectly, any claim or cause of action
against any other party or any of its officers, directors or general partners,
as applicable, or their employees, accountants, attorneys, agents or
representatives, based in whole or part upon the exercise by (i) the Company of
its right to termination, (ii) a Partnership of its right to termination, or
(iii) the Shareholders of their
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right to termination. No termination of this Agreement, however, shall operate
to release any party from any liability to any other party incurred before the
date of such termination or from any liability resulting from any willful
misrepresentation made in connection with this Agreement, or willful breach
hereof.
8.7. EFFECT OF WILLFUL VIOLATION. If any party willfully fails to perform
its duties and obligations under this Agreement, each nonbreaching party is
entitled to all remedies available to it at law or in equity and to recover its
expenses from the breaching party.
8.8. EXTENSION; WAIVER. At any time prior to the Closing Date, any party,
by action taken by such party, or its Board of Directors or General Partner, as
applicable, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties, (ii)
waive any inaccuracies in the representations and warranties made to such party
contained herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions for the benefit of such
party contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
IX. PARTNER AND STOCKHOLDER APPROVAL;
CLOSING; CLOSING DELIVERIES
9.1. PARTNER AND STOCKHOLDER APPROVAL. (a) The affirmative vote of the
holders of at least seventy-five percent (75%) of all of the outstanding voting
rights of the Units of each Partnership is necessary for such Partnership to
approve and adopt the Merger. If a limited partner of a Partnership does not
consent to the Merger, but the Merger is approved by the requisite vote of other
limited partners in that Partnership, such limited partner may exercise
"Dissenter's Rights" as set forth in the Joint Consent Statement/Prospectus
delivered to such limited partner, the terms of which are incorporated herein as
though set forth in their entirety.
(b) The Board of Directors of PCM, without dissent or abstention, has
approved the Merger.
(c) The Shareholders have approved this Agreement and the Merger.
(d) The Board of Directors of the Company, without dissent or abstention,
has approved the Merger.
(e) The shareholders of the Company have approved this Agreement and the
Merger.
9.2. CLOSING. Subject to the other provisions of this Agreement, the
parties shall hold a closing on (a) the Closing Date (or such later date as the
parties hereto may agree); or (b) the business day on which the last of the
conditions set forth in Article VII of this Agreement is
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fulfilled or waived at 10:00 a.m. at the offices of the Company, or at such
other time and place as the parties may agree.
9.3. CLOSING DELIVERIES. (a) On the Closing Date, each Partnership shall
deliver, or cause to be delivered, to the Shareholders and the Company:
(1) a certificate, dated as of the Closing Date, to the effect that
the representations and warranties of such Partnership contained in this
Agreement are true and correct in all material respects at and as of the
Closing Date and that such Partnership has complied with or performed in
all material respects all terms, covenants and conditions to be complied
with or performed by such Partnership on or prior to the Closing Date;
(2) a certificate, dated as of the Closing Date, executed by such
Partnership's General Partner, certifying the Certificate of Limited
Partnership and Agreement of Limited Partnership of such Partnership, and
further certifying that Partnership's limited partners have voted to
approve and authorize the execution and delivery of this Agreement, and the
consummation of the Merger.
(3) a resolution, dated as of the Closing Date, executed by the
directors of the General Partner of such Partnership, approving and
authorizing the execution and delivery of this Agreement, and the
consummation of the Merger;
(4) the books and records of such Partnership;
(5) documentation satisfactory to the Company evidencing the fact that
the signatories on all relevant bank accounts of such Partnership have been
changed to signatories designated by the Company;
(6) such other documents, at the Closing or subsequently, as may be
reasonably requested by the Company as necessary for the implementation and
consummation of this Agreement and the Merger; and
(7) an opinion of such Partnership's counsel in form and substance
reasonably satisfactory to the Company.
(b) On the Closing Date, the Company shall deliver, or cause to be
delivered, to the Partnerships and the Shareholders:
(1) a certificate, dated as of the Closing Date, to the effect that
the representations and warranties of the Company contained in this
Agreement are true and correct in all material respects and that the
Company has complied with or performed in all material respects all terms,
covenants and conditions to be complied with or performed by the Company on
or prior to the Closing Date;
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(2) a certificate, dated as of the Closing Date, executed by the
President of the Company, certifying the Certificate of Incorporation and
Bylaws of the Company, the incumbency and signatures of the officers of the
Company and copies of the directors' resolutions of the Company approving
and authorizing the execution and delivery of this Agreement and the
consummation of the Merger;
(3) certificates representing the Merger Stock issuable upon
consummation of the Merger; and
(4) an opinion of the Company's counsel in form and substance
reasonably satisfactory to the Partnerships and the Shareholders.
(c) On the Closing Date, the Shareholders shall deliver or cause to be
delivered, to the Partnerships and the Company;
(1) a certificate, dated as of the Closing Date, to the effect that
the representations and warranties of the Shareholders regarding PCM
contained in this Agreement are true and correct in all material respects
and that the Shareholders have complied with or performed in all material
respects all terms, covenants and conditions to be complied with or
performed by the Shareholders on or before the Closing Date;
(2) a certificate, dated as of the Closing Date, executed by the
President of PCM, certifying the Articles of Incorporation and Bylaws of
PCM, the incumbency and signatures of the officers of PCM and copies of the
directors' resolutions of PCM approving and authorizing the consummation of
the Merger;
(3) the books and records of PCM;
(4) documentation satisfactory to the Company evidencing the fact that
the signatories on all relevant bank accounts of PCM have been changed to
signatories designated by the Company; and
(5) an opinion of the Shareholders' counsel in form and substance
reasonably satisfactory to the Company.
X. INDEMNIFICATION
10.1. BY THE PARTNERSHIPS. Each Partnership shall indemnify, defend and
hold the Shareholders, the Company and PCM, and their directors, officers,
shareholders, accountants, attorneys, agents and affiliates, harmless from and
against any and all losses, costs, liabilities, damages, and expenses, including
legal and other expenses incident thereto, of every kind, nature and description
("Losses") that result from or arise out of (i) the breach of any representation
or warranty of such Partnership set forth in this Agreement or in any
certificate
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delivered to the Company or the Shareholders pursuant hereto; or (ii) the breach
of any of the covenants of such Partnership contained in or arising out of this
Agreement or the Merger.
10.2. BY THE COMPANY. The Company shall indemnify, defend, and hold the
Partnerships (and the General Partner and the limited partners of the
Partnerships, as well as the agents, representatives, accountants and attorneys
of the Partnerships), the Shareholders (and the agents, representatives,
accountants and attorneys of the Shareholders) and PCM (and the officers,
directors, agents, representatives, accountants, and attorneys of PCM) harmless
from and against any and all losses or damages of any kind that arise out of (i)
the breach of any representation or warranty of the Company set forth in this
Agreement or in any certificate delivered to the Partnerships or the
Shareholders pursuant hereto; or (ii) the breach of any of the covenants of the
Company contained in or arising out of this Agreement or the Merger.
10.3. BY THE SHAREHOLDERS. The Shareholders shall indemnify, defend, and
hold the Partnerships (and the General Partner and the limited partners of the
Partnerships, as well as the agents, representatives, accountants and attorneys
of the Partnerships) and the Company (and the officers, directors, agents,
representatives, accountants, attorneys and shareholders of the Company)
harmless from and against any and all losses or damages of any kind that arise
out of (i) the breach of any representation or warranty of the Shareholders set
forth in this Agreement or in any certificate delivered to the Partnerships or
the Company, or (ii) the breach of any of the covenants of the Shareholders
contained in or arising out of this Agreement or the Merger.
10.4 CLAIMS PROCEDURE. Should any claim be asserted against a party
entitled to indemnification under this article ("Indemnitee"), the Indemnitee
shall promptly notify the party obligated to make indemnification
("Indemnitor"); provided, however, that any delay or failure in notifying the
Indemnitor shall not affect the Indemnitor's liability under this article if
such delay or failure was not prejudicial to the Indemnitor. The Indemnitor,
upon receipt of such notice, shall assume the defense thereof with counsel
reasonably satisfactory to the Indemnitee and the Indemnitee shall extend
reasonable cooperation to the Indemnitor in connection with such defense. No
settlement of any such claim shall be made without the consent of the Indemnitor
and Indemnitee. Such consent not to be unreasonably withheld or delayed, nor
shall any such settlement be made by the Indemnitor which does not provide for
the absolute, complete and unconditional release of the Indemnitee from such
claim. In the event that the Indemnitor shall fail, within a reasonable time, to
defend a claim, the Indemnitee shall have the right to assume the defense
thereof without prejudice to its rights to indemnification hereunder.
10.5. LIMITATIONS ON LIABILITIES. Neither the Partnerships nor the
Shareholders nor the Company shall be liable hereunder as a result of any
misrepresentation or breach of such party's representations, warranties or
covenants contained in this Agreement unless and until the losses or damages
incurred by the Partnerships, the Shareholders or the Company, as the case may
be, as a result of such misrepresentations or breaches under this
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Agreement shall exceed, in the aggregate, $50,000 (in which case the party
liable therefor shall be liable for the entire amount of such claims, including
the first $50,000).
XI. MISCELLANEOUS
11.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All statements
contained in this Agreement or in any certificate delivered by or on behalf of
each Partnership or the Shareholders or the Company pursuant hereto or in
connection with the Merger shall be deemed representations, warranties and
covenants by such Partnership, the Shareholders or the Company, as the case may
be, hereunder. All representations, warranties and covenants made by each
Partnership, the Shareholders or the Company in this Agreement, or pursuant
hereto, shall survive for a period of two (2) years subsequent to the Closing.
11.2. NONDISCLOSURE. (a) No Partnership shall at any time after the date of
this Agreement, without the consent of the Company (except as may be required by
law), divulge, furnish to or make accessible to any person (other than to such
Partnership's representatives as part of such Partnership's due diligence or
investigation) any knowledge or information with respect to confidential or
secret processes, inventions, discoveries, improvements, formulae, plans,
material, devices or ideas or know-how, whether patentable or not, with respect
to any confidential or secret aspects (including, without limitation, customers
or suppliers) ("Confidential Information") of the Company.
(b) The Company will not at any time after the date of this Agreement,
without the consent of the Shareholders (except as may be required by law), use,
divulge, furnish to or make accessible to any person any Confidential
Information (other than to the Company's representatives as part of the
Company's due diligence or investigation) of PCM.
(c) The Shareholders shall not at any time after the date of this
Agreement, without the consent of the Company (except as may be required by
law), divulge, furnish to or make assessable to any person (other than to the
Shareholders' representatives as part of their due diligence or investigation)
any Confidential Information of the Company.
(d) No Partnership shall at any time after the date of this Agreement,
without the consent of the Shareholders (except as may be required by law),
divulge, furnish to or make assessable to any person (other than to such
Partnership's representatives as part of such Partnership's due diligence or
investigation) any Confidential Information of PCM.
(e) The Company will not at any time after the date of this Agreement,
without the consent of such Partnership (except as may be required by law), use,
divulge, furnish to or make assessable to any person (other than to the
Company's representatives as part of the Company's due diligence or
investigation) any knowledge or information with respect to the Confidential
Information of any Partnership.
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(f) The covenants set forth in this Section 11.2 shall terminate in the
event the Merger is consummated.
(g) Any information, which (i) at or prior to the time of disclosure by (A)
a Partnership, (B) the Shareholders or (C) the Company was generally available
to the public through no breach of this covenant; (ii) was available to the
public on a nonconfidential basis prior to its disclosure by (A) a Partnership,
(B) the Shareholders or (C) the Company; or (iii) was made available to the
public from a third party, provided that such third party did not obtain or
disseminate such information in breach of any legal obligation to (A) a
Partnership, (B) the Shareholders or (C) the Company, shall not be deemed
Confidential Information for purposes hereof, and the undertakings in this
covenant with respect to Confidential Information shall not apply thereto.
11.3. SUCCESSION AND ASSIGNMENTS; THIRD PARTY BENEFICIARIES. This Agreement
may not be assigned (either voluntarily or involuntarily) by any party hereto
without the express written consent of the other parties. Any attempted
assignment in violation of this section shall be void and ineffective for all
purposes. In the event of an assignment permitted by this section, this
Agreement shall obligate the heirs, successors and assigns of the parties
hereto. Except as expressly set forth in this section, there shall be no third
party beneficiaries of this Agreement.
11.4. NOTICES. All notices, requests, demands or other communications with
respect to this Agreement shall be in writing and shall be (i) sent by facsimile
transmission; (ii) sent by the United States Postal Service, registered or
certified mail, return receipt requested; or (iii) personally delivered by a
nationally recognized express overnight courier service, charges prepaid, to the
following addresses (or such other addresses as the parties may specify from
time to time in accordance with this Section):
If to the Partnerships: Performance Asset Management Fund, Ltd.
4100 Newport Place, Suite 400
Newport Beach, California 92660
Facsimile: 714.752.3535
Performance Asset Management Fund II, Ltd.
4100 Newport Place, Suite 400
Newport Beach, California 92660
Facsimile: 714.752.3535
Performance Asset Management Fund III, Ltd.
4100 Newport Place, Suite 400
Newport Beach, California 92660
Facsimile: 714.752.3535
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Performance Asset Management Fund IV, Ltd.
4100 Newport Place, Suite 400
Newport Beach, California 92660
Facsimile: 714.752.3535
Performance Asset Management Fund V, Ltd.
4100 Newport Place, Suite 400
Newport Beach, California 92660
Facsimile: 714.752.3535
If to the Shareholders: c/o Performance Capital Management, Inc.
4100 Newport Place, Suite 400
Newport Beach, California 92660
Facsimile: 714.752.3535
If to the Company: Performance Asset Management Company
4100 Newport Place, Suite 400
Newport Beach, California 92660
Facsimile: 714.752.3535
Any such notice shall, when sent in accordance with the preceding sentence,
be deemed to have been given and received on the earliest of (i) the day
delivered to such address or sent by facsimile transmission, (ii) the third
(3rd) business day following the date deposited with the United States Postal
Service, or (iii) twenty-four (24) hours after shipment by such courier service.
11.5. CONSTRUCTION. This Agreement shall be construed and enforced in
accordance with the laws of the State of California.
11.6. COUNTERPARTS. This Agreement may be executed in three or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same Agreement.
11.7. NO IMPLIED WAIVER; REMEDIES. No failure or delay on the part of the
parties hereto to exercise any right, power or privilege hereunder or under any
instrument executed pursuant hereto shall operate as a waiver, nor shall any
single or partial exercise of any right, power or privilege preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. All rights, powers and privileges granted herein shall be in addition
to other rights and remedies to which the parties may be entitled at law or in
equity.
11.8. ENTIRE AGREEMENT. This Agreement, including the Exhibits and
Schedules attached hereto, sets forth the entire understanding of the parties
with respect to the subject matter hereof, and it incorporates and merges any
and all previous communications,
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understandings, oral or written, as to the subject matter hereof, and cannot be
amended or changed except in writing, signed by the parties.
11.9. HEADINGS. The headings of the sections of this Agreement, where
employed, are for the convenience of reference only and do not form a part
hereof and in no way modify, interpret or construe the meanings of the parties.
11.10. SEVERABILITY. To the extent that any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted therefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
11.11. NON-RECOURSE. The officers, directors, and shareholders of the
Company shall not be personally obligated or have any personal liability
hereunder. The Partnerships will not seek recourse or commence any action
against any of the Shareholders or shareholders of the Company or any of their
personal assets, and will not commence any action for money judgments against
any of the directors or officers of the Company or seek recourse against any of
their personal assets, for the performance or payment of any obligation of the
Company or the Shareholders hereunder or thereunder. The partners of the
Partnerships shall not be personally obligated or have any personal liability
hereunder. Neither the Shareholders nor the Company will seek recourse or
commence any action against any of the partners of the Partnerships or any of
their personal assets, and will not commence any action for money judgments
against any of the directors or officers of the General Partner of any
Partnership or seek recourse against any of their personal assets, for the
performance or payment of any obligation of any Partnership hereunder or
thereunder.
THE PARTIES TO THIS AGREEMENT HAVE READ THIS AGREEMENT, HAVE HAD THE OPPORTUNITY
TO CONSULT WITH INDEPENDENT COUNSEL OF THEIR OWN CHOICE, AND UNDERSTAND EACH OF
THE PROVISIONS OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
Performance Asset Management Company,
a Delaware corporation
By: _______________________________
Vincent E. Galewick
Its: Chairman of the Board
(Signature) _________________________ (Signature) _________________________
Director Director
(Date) _________________, 1998 (Date) _________________, 1998
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(Signature) _________________________ (Signature) _________________________
Director Director
(Date) _________________, 1998 (Date) _________________, 1998
Performance Asset Performance Asset Management
Management Fund, Ltd., Fund II, Ltd.,
A California Limited Partnership A California Limited Partnership
By: Performance Development Inc., By: Performance Development Inc.,
a California corporation a California corporation
Its: General Partner Its: General Partner
By: __________________________ By: _________________________
Vincent E. Galewick Vincent E. Galewick
Its: President Its: President
Performance Asset Management Performance Asset Management
Fund III, Ltd., Fund IV, Ltd.,
A California Limited Partnership A California Limited Partnership
By: Performance Development Inc., By: Performance Development Inc.,
a California corporation a California corporation
Its: General Partner Its: General Partner
By: __________________________ By: ___________________________
Vincent E. Galewick Vincent E. Galewick
Its: President Its: President
Performance Asset Management
Fund V, Ltd.,
A California Limited Partnership
By: Performance Development Inc.,
a California corporation
Its: General Partner
By: _________________________
Vincent E. Galewick
Its: President
____________________________ _________________________
Vincent E. Galewick Michael A. Cushing
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APPENDIX B
Supplement For
Performance Asset Management Fund, Ltd.,
A California Limited Partnership
(S-K Reg. 229.902)
Notice to Limited Partners of Performance Asset Management Fund, Ltd., A
California Limited Partnership:
Purpose of Partnership Supplement. This separate partnership supplement
highlights information presented in the Joint Consent Statement/Prospectus as
that information relates to Performance Asset Management Fund, Ltd., A
California Limited Partnership ("Partnership") and its limited partners
("Limited Partners"), regarding a proposed merger ("Merger Proposal") of the
Partnership and other, similar California limited partnerships ("Other
Partnerships") and Performance Capital Management, Inc., a California
corporation ("PCM"), with and into Performance Asset Management Company, a
Delaware corporation ("Company") ("Merger"). Similar supplements have been
prepared for the Other Partnerships. The effects of the Merger may differ for
the limited partners in the Other Partnerships. If you want to obtain a
supplement for any of the Other Partnerships, please call the Information Agent,
Bud Webb at (888) 754-4145. You may also send a written request for copies of
any documents referenced in the Joint Consent Statement/Prospectus to
Performance Development, Inc., Attn: Information Agent, 4100 Newport Place,
Suite 400, Newport Beach, California 92660. As you know, Performance
Development, Inc. is a California corporation and the General Partner of the
Partnership and each of the Other Partnerships ("General Partner"). Supplements
for any of the Other Partnerships will be provided without charge to any Limited
Partner. The Partnership and the Other Partnerships are sometimes collectively
referred to as the "PAM Funds."
Potential Adverse Effects of the Merger. The most significant potential
adverse effects of the Merger to the Limited Partners are the significant
reduction in distributions (the Company does not intend to pay cash dividends);
the possibility that the shares of the Company's $.001 par value common stock
received by the Limited Partners upon the winding up and dissolution of the
Partnership ("Merger Stock") will trade at a price substantially below the value
assigned in the Merger Proposal; the limited public market for the Merger Stock;
the potential price volatility of the Merger Stock; possible dilution of the
Merger Stock; and the significant influence of Vincent E. Galewick, in his
capacity as the majority shareholder of the Company. There are also possible
adverse tax consequences to individual Limited Partners which could result from
their particular financial circumstances. Limited Partners should carefully
consider the matters set forth under the Caption "RISK FACTORS" beginning on
Page 22 of the Joint Consent Statement/Prospectus, and summarized herein
beginning at Page 19. Significant risk factors include:
o PCM and the Partnerships Have History of Losses
o Significant Reduction in Distributions
o Shares of the Merger Stock May Trade at a Price Substantially Below
the Value Assigned in the Merger Proposal
o Limited Public Market for Shares of the Merger Stock
o Potential Price Volatility of Shares of the Merger Stock
o Possible Dilution of the Merger Stock
o Uncertainty of Future Financial Results of the Company
o Dependence on Key Personnel of the Company
o Control by Principal Shareholder of the Company
o Possible Adverse Tax Consequences
o The Company may fail to comply with Year 2000 computer programming
issues
B-1
<PAGE>
Performance Asset Management Fund, Ltd., A California Limited Partnership
("Partnership"), was formed on April 1, 1991, as a limited partnership in
California under the Revised Limited Partnership Act of the State of California,
as enacted and in effect on or after July 1, 1984. The Partnership sold 1,049
limited partnership interests ("Units") at the price of $5,000.00 per Unit. The
terms "Unit" and "Units", when used in this Supplement, shall also mean and
refer to the limited partnership interests offered and sold by the Other
Partnerships. The total amount received by the Partnership from purchasers of
its Units is $5,245,000.00. As of June 30, 1997 ("Determination Date"), the
Partnership had 369 Limited Partners. The Partnership termination date is
December 31, 2000, unless sooner terminated.
<TABLE>
<CAPTION>
PERFORMANCE ASSET MANAGEMENT FUND, LTD.
PER UNIT DATA
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Units outstanding at year end 1,049.00 1,050.00 1,050.00 1,050.00 1,052.00
Earnings (loss) per Unit $352.50 $126.73 $162.45 $53.49 ($262.10)
Book value per Unit 1,546.27 1,266.90 1,328.42 1,766.51 3,220.89
Annual return of capital
distributions per Unit 147.43 200.00 750.00 1,200.00 904.74
Cumulative return of capital
distributions per Unit 3,206.80 3,056.46 2,856.46 2,106.46 904.74
Assigned value for Merger Stock $890.37/Unit
</TABLE>
Each Limited Partner should review thoroughly the selected financial
statements included in the portions of the Joint Consent Statement/Prospectus
captioned "RESULTS OF OPERATIONS," "SELECTED HISTORICAL AND PRO FORMA FINANCIAL
DATA AND COMPARATIVE PER SHARE DATA," "PRO FORMA CONDENSED FINANCIAL
INFORMATION," and the financial statements of the Company, PCM and the
Partnership and the Other Partnerships included in the Joint Consent
Statement/Prospectus.
The Partnership has continued to invest in distressed loan
portfolios. As set forth above, these portfolios consist primarily of
charged-off credit card accounts and consumer loan balances, such as auto loans
and personal lines of credit originated by independent third-party financial
institutions located throughout the United States. In addition, the Partnership
acquired certain portfolios of default consumer debts which were rewritten under
terms different from the original obligation. In 1994, 1995 and 1996, the
Partnership's investments in distressed loan portfolios consisted of the
following (amounts are carrying amounts):
Type of Portfolio 1994 1995 1996
----------------- ---- ---- ----
Credit Card Accounts ........... $343,585 $287,551 $912,597
Consumer Loans ................. $466,574 $418,540 $356,989
---------- ---------- ----------
Total .................... $810,159 $706,091 $1,269,586
========== ========== ==========
In 1994, the Partnership recorded net investment income of $205,208 and
interest income of $13,095. Operating expenses in that year for the Partnership
consist of management fee expense of $17,584; amortization expense of $798; and
general and administrative expenses of $3,159; for total operating expenses of
$21,541. Therefore, the Partnership recorded net income of $170,572 for 1994.
In 1995, the Partnership recorded net investment income of $180,797 and
interest income
B-2
<PAGE>
of $13,294. Operating expenses in that year for the Partnership consist of
management fee expense of $23,096; collection expense of $365; professional fees
of $7,233; amortization expense of $798; and general and administrative expenses
of $2,947; for total operating expenses of $34,439. Therefore, the Partnership
recorded net income of $133,064 for 1995.
In 1996, the Partnership recorded net investment income of $538,428, net
interest income of $3,389 and other income of $755. Operating expenses in that
year for the Partnership consist of management fee expense of $25,979;
collection expense of $43,257; professional fees of $96,527; amortization
expense of $665; and general and administrative expenses of $6,369; for total
operating expenses of $172,797. Therefore, the Partnership recorded net income
of $369,775 for 1996.
Value of Assets Held by the Partnership. As of December 31 of each of the
years specified in the following table, the Partnership held the following
assets with the following values, which values were determined by the General
Partner and reviewed by Willamette Management Associates, Inc. ("Fairness
Analyst"), as part of the Fairness Analyst's review of the Merger Proposal to
determine if the terms of the Merger Proposal are fair to the Partnership and
the Other Partnerships:
Asset 1994 1995 1996
----- ---- ---- ----
Cash and equivalents .................... $23,487 $15,295 $283,232
Cash held in trust ...................... $4,221
-------- --------
Investment in Distressed Loan Portfolios $810,159 $706,091 $1,269,586
Receivable from Unaffiliated Service
Provider(1) ........................... $559,730 $559,730 --------
Due from Affiliates ..................... $56,483
-------- --------
Other Assets ............................ $44,239 $12,732
--------
Organization Costs, Net ................. $1,463 $665
--------
(1) West Capital Financial Services Corp., a California corporation.
The Partnership defines cash equivalents as all highly liquid investments
with a maturity of three months or less when purchased. The Partnership
maintains cash balances at one bank and aggregate accounts at that bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
Compensation to the General Partner and Affiliates For the Last Three
Fiscal Years. The following table sets forth the compensation paid by the
Partnership to the General Partner and its Affiliates for the last three fiscal
years and the most recently completed interim period.
Entity 1994 1995 1996 1997*
------ ---- ---- ---- -----
General Partner
Management Fees .......... $17,584 $23,096 $25,979 $7,821
Distributions ............ $87,500 $23,422 $17,483 $34,944
PCM
Acquisition Fees ......... $363,405
Collection Fees .......... $12,608 $10,989 $216,796 $163,214
Total ............ $117,692 $57,507 $623,663 $205,979
======== ======== ======== ========
* Through June 30, 1997
B-3
<PAGE>
The following table sets forth the compensation that would have been paid
to the General Partner and its Affiliates if the compensation and distributions
structure to be in effect after the Merger had been in effect during the last
three fiscal years.
Entity 1994 1995 1996
------ ---- ---- ----
General Partner $0 $0 $0
PCM $0 $0 $0
---- ---- ----
Total $0 $0 $0
==== ==== ====
As stated above, the Partnership enters into various joint ventures with
Performance Capital Management, Inc., a California corporation and an Affiliate
of the General Partner. Vincent E. Galewick owns all of the issued and
outstanding common stock of the following Affiliates:
Performance Development, Inc., a California corporation ("General Partner")
Income Network Company, Inc., a California corporation ("INC")
Vision Capital Services Corporation, a California corporation ("Vision")
Vincent E. Galewick owns 98.5% of the issued and outstanding common stock
of the following Affiliate:
Performance Capital Management, Inc., a California corporation ("PCM")
The Other Partnerships are:
Performance Asset Management Fund, Ltd., A California Limited Partnership
("Partnership")
Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II")
Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III")
Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM IV")
Performance Asset Management Fund V, Ltd., A California Limited Partnership
("PAM V")
For convenience, the Partnership and the Other Partnerships may be referred
to in this Supplement as the "PAM Funds."
The General Partner was formed in June, 1990 to engage in various aspects
of the distressed loan industry. The General Partner serves as the general
partner for all the PAM Funds and certain other California limited partnerships.
The General Partner's management fees incurred and recorded by the Partnership
totalled $17,574, $23,096 and $25,979 for the years ended December 31, 1994,
1995, and 1996, respectively. The Partnership also accrued distributions to the
General Partner of $87,500 and $23,422 for the years ended December 31, 1994 and
1995, respectively and $17,483 for the year ended December 31, 1996. At December
31, 1994 and 1995, the Partnership had amounts owed to the General Partner
recorded as amounts due to Affiliates, of $160,914 and $221,329, respectively,
and $271,145 for the year ended December 31, 1996.
Income Network Company, a California corporation ("INC"), was formed on
February 1, 1988 as a registered Broker-Dealer and member of the National
Association of Security Dealers, Inc. and the Securities Investor Protection
Corporation. The sole shareholder of INC, Vincent E. Galewick, is also the sole
shareholder of the General Partner and Vision. Additionally, Mr. Galewick owns
98.5% of the issued and outstanding stock of PCM. INC, in accordance with the
Agreement of Limited Partnership for the Partnership and offering memorandum of
the Partnership, was paid commissions equal to 10%
B-4
<PAGE>
of gross proceeds received from the offer and sale of interests in the
Partnership ("Units"). INC is the Soliciting Agent for the Merger Proposal.
Performance Capital Management, Inc., a California corporation ("PCM"), was
formed in February, 1993 to perform services related to locating, evaluating,
negotiating, acquiring and collecting distressed loan portfolio assets. PCM
acquires portfolio assets from third-party financial institutions and sells the
portfolios to the Partnership and the Other Partnerships at cost plus an
acquisition fee of approximately 30% to 37%, as provided in the related purchase
agreements. The Partnership also enters into servicing agreements with PCM to
collect and service the portfolios. Those agreements generally provide that all
proceeds generated from the collection of portfolio assets shall be shared by
the venturers (PCM and the Partnership) in proportion to their respective
percentage interests, generally, 55% to 60% for the Partnership and 40% to 45%
for PCM. The Partnership also reimburses PCM for certain costs associated with
the collection of portfolio proceeds.
Moreover, in addition to providing collection efforts on distressed loan
portfolios to the Partnership, PCM identifies and acquires distressed loan
portfolios and other discounted portfolios of financial debt instruments and
obligations and sells them to the Partnership and the Other Partnerships at
negotiated prices.
For the years ended December 31, 1995 and 1996, the Partnership purchased
one portfolio and two portfolios, respectively, from PCM and recorded
acquisition fees for these portfolios of $0 and $363,405, respectively. These
acquisition fees have been included in the carrying value of the related
investments. Also, for the years ended December 31, 1995 and 1996, the
Partnership incurred and reimbursed PCM for collection costs of $365 and
$43,257, respectively.
The Partnership had amounts owed to PCM from reimbursement of collection
expenses and other expenses totaling $101 and $860, recorded as due to
Affiliates, at December 31, 1994 and 1995, respectively. For the year ended
December 31, 1996 the Partnership had amounts owed from PCM of $56,483, recorded
as due from Affiliates.
Distributions and Dividends. The Partnership has made quarterly cash
distributions to the Limited Partners, which distributions terminated effective
as of June 30, 1997. All of the distributions represented a return of capital.
The following table specifies the cash distributions made to the Limited
Partners during each of the last five fiscal years and most recently completed
interim period.
<TABLE>
<CAPTION>
General Limited
Total Partner Partner
Year Distributions Distributions Distributions
---- ------------- ------------- -------------
<S> <C> <C> <C>
1992 .............................. $1,057,536 $ 105,754 $ 951,782
1993 .............................. $1,400,000 $ 140,000 $1,260,000
1994 .............................. $ 875,000 $ 87,500 $ 787,500
1995 .............................. $ 233,422 $ 23,422 $ 210,000
1996 .............................. $ 172,133 $ 17,483 $ 154,650
June 30, 1997 ..................... $ 208,644 $ 34,944 $ 173,700
</TABLE>
B-5
<PAGE>
Selected Financial Information. The following table sets forth a historical
summary of gross collections and partner distributions for the PAM Funds from
the date of formation of each PAM Fund through June 30, 1997:
<TABLE>
<CAPTION>
Cost of
Portfolios Original Portfolio Portfolios Gross Partner
Partnership Acquired Face Value Acquired Collections* Distributions**
- ----------- -------- ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Partnership..............16 $305,438,442 $4,932,616 $5,526,429 $3,678,632
PAM II(1)................19 433,632,566 6,230,345 8,749,682 4,059,775
PAM III(2)...............21 521,408,657 9,685,926 7,826,584 3,463,815
PAM IV(3)................57 709,008,534 20,416,167 20,014,508 6,269,988
PAM V(4).................12 209,901,705 4,997,992 2,889,555 639,600
Total ................125 $2,179,389,904 $46,263,046 $45,006,758 $18,111,810
=== ============== =========== =========== ============
</TABLE>
* Gross collections include any sale of accounts and collection activity
through June 30, 1997
** Through June 30, 1997
(1) Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II").
(2) Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III").
(3) Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM IV").
(4) Performance Asset Management Fund V, Ltd., A California Limited Partnership
("PAM V").
REASONS FOR THE MERGER PROPOSAL
The primary purpose of the Merger is to provide the Limited Partners with
the opportunity to participate in the growth of Performance Capital Management,
Inc., a California corporation ("PCM"), while also increasing the liquidity of
their investments. Additional purposes include the possibility of greater access
to capital markets; greater flexibility regarding capital resources; the ability
to provide employees with incentive performance compensation by a stock option
plan; the opportunity to offer greater employee ownership; more simplified
record keeping, accounting and tax reporting; and to permit the shares of $.001
par value common stock issued by the Company to the Limited Partners in the
Merger ("Merger Stock") to be eligible for listing on a regional or national
market quotation system. No prediction can be made, however, as to the price at
which the Merger Stock will trade. Moreover, no assurance or guaranty can be
given that the Merger Stock will trade at all or that the application for such
listing will be approved.
Liquidity and Market Valuation. The Units and currently issued and
outstanding shares of no par value common stock of PCM are not publicly traded
and have limited, if any, liquidity. The primary means of liquidity for holders
of the Units has been requesting the Partnership to redeem their Units. Although
the Partnership is not obligated to comply with any such request, such
redemptions have occurred from time to time, using available cash to redeem
Units at a percentage of book value. After consummation of the Merger, the
Merger Stock may be made eligible for trading on a regional or national stock
exchange and there may be a readily accessible market for selling the Merger
Stock and a readily determinable market price for the Merger Stock. With a
readily accessible market for Merger Stock, Unit holders would no longer be
required to rely solely on the Partnership as a source of liquidity,
B-6
<PAGE>
and the Company would not be required to use its cash to provide such liquidity.
Instead, it is expected that holders of Merger Stock will be able to sell their
Merger Stock publicly from time to time, subject to certain restrictions, at a
fair market price. No prediction can be made, however, as to the price at which
the Merger Stock will trade. Moreover, no assurance or guaranty can be given
that the Merger Stock will trade at all or that the application for such listing
will be approved.
Access to Equity Markets. Although the Company currently has no plans for
any equity offerings, the existence of publicly traded equity securities is
expected to provide the Company with future access to the public equity markets.
Greater Flexibility Regarding Capital Resources. The Company should have
greater flexibility with respect to the use of capital resources, because it
will not have to use available cash to redeem shares of its common stock. As
discussed above, the Partnership has from time to time used its available cash
to redeem Units when requested to do so by certain of its Limited Partners.
There are also potential tax advantages (and corresponding financial advantages)
to conducting a business as a corporation that should allow the Company greater
flexibility with respect to the management of its capital resources.
Shareholders of the Company will defer the payment of taxes on income earned by
the Company until the Company distributes such income in the form of dividends.
Limited Partners, by contrast, are taxed at such time as the Partnership
recognizes taxable income. The Limited Partners are taxed on such income at
their individual federal, state and, sometimes, municipal tax rates, which may
exceed the maximum corporate tax rates. Therefore, the Company, as a
corporation, can accumulate income for business expansion without adversely
affecting a shareholder's tax liability.
Acquisition Consideration. After consummation of the Merger, the Company
may be able to use shares of its common stock as consideration in its
acquisition of assets or other businesses. The use of equity securities as an
acquisition currency is advantageous, because it may be more tax efficient to
the seller of a business than a cash transaction, and it allows the Company to
consummate acquisitions without depleting cash resources. It also allows a
seller to continue to hold an equity interest in the business acquired by the
Company, by equity ownership in the Company after such acquisition. The use of
common stock in acquisitions can also enable the Company to use the advantageous
pooling accounting method, if certain conditions are satisfied.
Incentive Compensation. The availability of shares of the Company's common
stock will permit the Company to provide its key employees with equity based
incentive compensation. The Company believes providing equity based incentive
compensation by the use of common stock will allow greater employee
participation in the Company's ownership, provide a more accurate measure of the
Company's performance (as a result of common stock having a readily
ascertainable value), and provide the Company with more flexibility in designing
equity based incentive compensation. The Company believes that this method of
compensation conserves the Company's cash and promotes management stability.
Greater Employee Ownership. As a result of the complex tax reporting
requirements associated with being a Limited Partner and the administrative
burden placed on the Partnership, as a result of having a significant number of
additional limited partners, it has not been feasible for the Partnership to
offer ownership opportunities to a broad range of employees. By having the
shares of its common stock available, however, the Company will be able to offer
ownership opportunities to its employees. The Board of Directors of the Company
believes that employee ownership is in the best interests of the Company and its
shareholders.
Simplified Record Keeping, Accounting and Tax Reporting. The Limited
Partners will not continue to be burdened with the cumbersome and complex tax
reporting requirements imposed on them
B-7
<PAGE>
under federal and multiple state partnership tax laws, or with the related
record keeping and accounting requirements.
Certain Disadvantages of the Merger Proposal and Related Transactions
Taxation. The Partnership does not pay any federal or state income taxes.
After consummation of the Merger, the Company will be subject to federal and
state income tax. Shareholders of the Company will also be required to pay
federal, state and, in some circumstances, municipal income taxes on any
dividends that they receive from the Company and on any gain from the sale or
exchange of their Merger Stock. Therefore, while in partnership form, income
taxes are imposed only once (i.e., on the Limited Partners), in corporate form
income taxes are imposed twice (i.e., once on the Company and once on its
shareholders, to the extent they receive dividends or recognize gain on the sale
or exchange of securities). See those portions of the Joint Consent
Statement/Prospectus captioned "FEDERAL INCOME TAX CONSEQUENCES" and "CERTAIN
STATE AND LOCAL INCOME TAX CONSEQUENCES."
Significant Reduction in Distributions. The dividends distributed by the
Company to its shareholders after consummation of the Merger may be
significantly less that the distributions historically made by the Partnership
to the Limited Partners. Moreover, the Company shall not pay any cash dividends
on its common stock or preferred stock during the foreseeable future. See those
portions of the Joint Consent Statement/Prospectus captioned "Distribution
Policy" and "DISTRIBUTION POLICY -- HISTORICAL DISTRIBUTIONS OF THE
PARTNERSHIPS."
Uncertainty Regarding Trading and Market Price of Common Shares. The Merger
Stock may not be listed or approved for listing on any regional or national
securities exchange or otherwise designated or approved for designation upon
notice of issuance as a national market system security on an interdealer
quotation system maintained by the National Association of Securities Dealers,
Inc. To the extent that the Merger Stock may trade, trading prices for the
Merger Stock will be influenced by many factors, including the market for the
Merger Stock, the Company's dividend policy, the possibility of future sales by
the Company or its shareholders of shares of the Company's common stock,
investors' perception of the Company and its businesses, and general economic
and stock market conditions. No prediction can be made as to the price at which
the Merger Stock will trade, if it will trade at all. Moreover, there is a
probability that the Merger Stock may trade at a price below the value per share
assigned in the Merger Proposal. The Limited Partners and shareholders of PCM
("PCM Shareholders") have not previously had access to an active trading market
for the Units and shares of PCM's common stock, respectively. Therefore, it is
possible that they may wish to sell their Merger Stock from time to time after
the consummation of the Merger. The sale of Merger Stock after the consummation
of the Merger might have an adverse effect on the market price of the Merger
Stock; provided, however, to mitigate as much as possible any such adverse
effect, trading of the Merger Stock shall be limited during the first one year
period following the closing date of the Merger ("Closing Date").
EFFECTS OF THE MERGER
As a result of the Merger, all of the assets now held directly or
indirectly by PCM and the PAM Funds will be held by the Company, and PCM and the
PAM Funds will cease to exist by operation of law. The Company will possess all
of the assets, properties, rights and privileges, and will be subject to all the
liabilities and obligations, of PCM, the PAM Funds and the Company existing on
the Closing Date.
The following is a brief description of each material risk and effect of
the Merger Proposal, including, but not limited to, federal income tax
consequences, for the Limited Partners. Also included
B-8
<PAGE>
is a brief discussion of the effect of the Merger Proposal on the Partnership's
financial condition and results of operations. Pro forma financial information
based on the participation of the Partnership in the Merger is set forth in the
Joint Consent Statement/Prospectus under the heading entitled "SELECTED
HISTORICAL AND PRO FORMA FINANCIAL DATA AND COMPARATIVE PER SHARE DATA."
The Merger. The proposed merger transaction contemplates that each of the
PAM Funds, including the Partnership, shall receive shares of $.001 par common
stock of the Company in exchange for the assets of the PAM Funds. Additionally,
by amending the provisions of the Agreements of Limited Partnership for the PAM
Funds, the PAM Funds shall be wound up and dissolved and the shares of $.001 par
value common stock of the Company received by the PAM Funds in exchange for
their assets shall be distributed to the General Partner and the limited
partners of the PAM Funds, all in accordance with an exchange value determined
by the Company, PCM and the General Partner and reviewed by Willamette
Management Associates, Inc. ("Fairness Analyst"). A copy of the Fairness Opinion
is attached to the Joint Consent Statement/Prospectus as Appendix G.
The Determination Date is a date set by the Board of Directors of the
Company. At this time, the Board of Directors of the Company expects that the
Determination Date will be June 30, 1997. To accommodate the Merger, the General
Partner suspended distributions by the Partnership to the Limited Partners,
effective as of the Determination Date. This is necessary to assure that the
Limited Partners' capital accounts do not change after the Determination Date.
The Board of Directors of the Company has the authority to postpone the
Determination Date and declare a new Determination Date, in its discretion. The
Board of Directors of the Company might postpone the Determination Date and
declare a new Determination Date, if the matters contemplated in the Merger
Proposal are postponed for any reason.
Effect of the Merger on Cash Distributions. Until June 30, 1997, the
Partnership made cash distributions to the Limited Partners. The Company
currently anticipates that the Company will not pay cash dividends. However,
this policy may change, as the actual amount of dividends, if any, to be paid
will be determined by the Board of Directors of the Company, in its sole
discretion, generally taking into account a number of factors, including
operating performance, liquidity and capital requirements. There can be no
assurances that any cash dividends will be paid, just as there can be no
assurances that the Partnership's distributions will continue at previous
levels.
DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
COMPANY'S ACTUAL CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S FINANCIAL
CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS AS THE
COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Effects of the Merger May Be Different For Investors in the Various Limited
Partnerships. If the Merger Proposal is approved and the Merger is consummated,
the Limited Partners will receive $890.37 in Merger Stock per Unit of the
Partnership. Limited partners in PAM II will received $2,010.34 in Merger Stock
per Unit of PAM II. Limited partners in PAM III will receive $3,003 in Merger
Stock per Unit of PAM III. Limited partners in PAM IV will receive $1,381.52 in
Merger Stock per Unit of PAM IV. Limited Partners in PAM V will receive
$3,936.35 in Merger Stock per Unit of PAM V.
The General Partner believes that the Limited Partners would receive
significantly less if the Partnership was liquidated, and the assets distributed
to the Limited Partners, because even an orderly liquidation would result in
prohibitive discounts on the value of the Partnership assets, which are
distressed debt portfolios. Continuing the Partnership in accordance with its
present business plan would
B-9
<PAGE>
result in each Limited Partner maintaining the current book value per Unit of
the Partnership. The book value at the Determination Date of the Partnership was
$536.07 per Unit; of PAM II, $1,855.19 per Unit; of PAM III, $2,340.34 per Unit;
of PAM IV, $1,249.22 per Unit; and of PAM V, $3,158.55 per Unit. Therefore,
under the Merger Proposal, the limited partners of the PAM Funds will receive
significantly more in Merger Stock per Unit than the book value per Unit.
In reaching its conclusions as to the fairness of the Merger Proposal, the
General Partner gave significant consideration to the Fairness Opinion prepared
by the Fairness Analyst. To estimate the value of PCM and the PAM Funds, the
Fairness Analyst considered an asset-based approach and an income-based approach
to value. Therefore, the amount of capital raised from the limited partners in
each of the PAM Funds, and the returns on investment experienced by each PAM
Fund, were factors in determining the Exchange Value of each PAM Fund. The
extent to which each PAM Fund achieved its investment objectives was another
factor. PCM's value was calculated based on the present value of debt-free net
cash flow and the present value of the terminal value of PCM's cash receipts.
In the asset-based approach, the Fairness Analyst considered the total
expected net proceeds (i.e., after consideration of interim operating and
liquidation costs) which would accrue to the limited partners of each PAM Fund
as a result of the orderly liquidation of the assets on hand. The Fairness
Analyst determined that the liquidation equity values of the PAM Funds are as
follows: the Partnership - $28,256; PAM II - $2,404,533; PAM III - $3,826,861;
PAM IV - $11,865,592; and PAM V - $2,594,885. The present value of PCM's
terminal value of cash flows was determined to be $38,764,000.
In the income-based approach, the Fairness Analyst considered the expected
annual cash flows which would be generated by PCM and each PAM Fund over a
projected, finite operating period primarily as a result of collection efforts
and the sale of distressed loan portfolios. The expected cash flows, including
the terminal value, or projected cash flows resulting from the sale of assets or
business at the end of the projection period, were then discounted to a present
value by a rate of return deemed to be reflective of the risks inherent within a
projected stream of cash flows generated by assets such as distressed loan
portfolios.
The projected cash distributions from 1997 through the life each PAM Fund
were as follows: the Partnership - $2,718,150; PAM II - $6,560,773; PAM III -
$8,625,225; PAM IV - $25,117,113; and PAM V - $5,618,400. Present value of the
projected cash distributions was calculated using a discount rate based on a
weighted average yield to maturity of 14 high yield issues in fiscal 1996, as
specified in Exhibit A-12 to the Fairness Opinion. This figure was added to the
terminal value of the portfolios of the PAM Funds, to arrive at a total present
value of each PAM Fund. The Fairness Analyst determined that the present value
of the PAM Funds as of the date of the Fairness Opinion was as follows: the
Partnership - $1,432,934; PAM II - $1,571,591; PAM III - $3,357,876; PAM IV -
$9,737,878; and PAM V - $3,786,364. These valuations were added to each PAM
Fund's adjusted net asset value, for a combined portfolio and adjusted net asset
value of $933,609 for the Partnership; $3,111,728 for PAM II; $5,999,944 for PAM
III; $15,846,278 for PAM IV; and $4,699,954 for PAM V.
The present value of PCM was determined to be the sum of its terminal value
of cash flows, $38,764,000, plus the present value of its debt free net cash
flow, $5,759,000, for a total present value of $44,523,211.
These values formed the basis for the Exchange Value for each PAM Fund and
PCM.
The only material difference in the operation of the PAM Funds is a
difference in the Agreement of Limited Partnership of PAM IV. Section 6.2 of the
Agreement of Limited Partnership of PAM IV
B-10
<PAGE>
provides that, until such time as the limited partners of PAM IV have received a
cash return equal to their capital contributions, plus an amount equal to 6% of
their capital contributions, the limited partners of PAM IV will receive 90% of
the cash available for distribution, and the General Partner will receive the
remaining 10% of the cash available for distribution. After the limited partners
of PAM IV have received the specified cash return, the distribution ratio
changes to 70% to those limited partners and 30% to the General Partner. The
Fairness Analyst considered this provision in calculating the income-based value
of PAM IV.
Allocation to Limited Partners and General Partner. Upon dissolution of the
PAM Funds, the General Partner will receive 10% of the Merger Stock allocated to
each PAM Fund pursuant to the ownership allocations in the Agreement of Limited
Partnership for each PAM Fund. The Partnership has been allocated 124,343 shares
of Merger Stock. If the Merger is consummated, the General Partner will receive
12,435 shares of Merger Stock received by the Partnership and the Limited
Partners will receive 111,908 shares of Merger Stock received by the
Partnership.
The Merger Agreement. The Merger will be consummated pursuant to the Merger
Agreement, if the Merger Proposal, as set forth in the Joint Consent
Statement/Prospectus, receives the requisite approval of the limited partners of
each PAM Fund, the approval of the PCM Shareholders, and the approval of the
shareholders of the Company, and if the other applicable conditions to the
Merger are satisfied or waived, including any approvals required from any state
or federal regulatory agency. The Merger Agreement is designated as Exhibit 2 to
the Registration Statement on Form S-4 filed by the Company with the Securities
and Exchange Commission in connection with the Merger and is included in the
Joint Consent Statement/Prospectus as Appendix A.
Until such time as the Merger Agreement has been approved and adopted by
all the parties thereto, it may be amended or terminated by the Board of
Directors of the General Partner, on behalf of any of the PAM Funds; the PCM
Shareholders, on their own behalf, or the Board of Directors of the Company, on
behalf of the Company; provided, however, that at any time after the Merger
Agreement has been adopted by the PCM Shareholders, the Company shareholders or
the limited partners of the PAM Funds, the Company's Board of Directors may not
amend, modify or supplement the Merger Agreement to change the amount or kind of
interests to be received by the limited partners of the PAM Funds, the PCM
Shareholders or the Company shareholders or to make any change if such change
would, alone or in the aggregate, materially adversely affect the limited
partners of the PAM Funds.
Approval by All of the Limited Partnerships Is Required. The Merger
Proposal may be consummated only if all of the PAM Funds approve the Merger
Proposal. The Merger Agreement provides that limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. A PAM Fund which rejects the Merger Proposal shall not be required to
pay any of the costs of the Merger, in accordance with the provisions of Section
25014.7(e)(3) of the California Corporations Code. The General Partner, the PCM
Shareholders and the Company have considered the possibility of approval of the
Merger Proposal and related transactions by less than all of the PAM Funds, and
do not believe that the Merger can be fairly consummated unless all of the PAM
Funds approve the Merger Proposal, because, among other things, (i) it would be
unduly burdensome or impossible to evaluate and apportion the value of the
various services provided to the PAM Funds by PCM, considering the complexity
and scope of the various joint ventures between the PAM Funds and PCM; and (ii)
if the Merger Proposal is approved, PCM will cease to exist by operation of law,
and would no longer be available to provide the same services to dissenting PAM
Funds. Willamette Management Associates, Inc., as the Fairness Analyst, was
retained by Kelly & Company, the independent auditing firm for the PAM Funds,
the General Partner, PCM, and INC, to render the Fairness Opinion concerning the
Merger Proposal. See the section in the Joint Consent
B-11
<PAGE>
Statement/Prospectus entitled "DETERMINATION OF THE EXCHANGE STOCK AND
ALLOCATION OF THE MERGER."
Conditions of the Merger. The Merger will not be consummated unless the
Merger Proposal receives the requisite approval of the limited partners of each
PAM Fund and the approval of the requisite state and federal regulatory
agencies. Consummation of the Merger is also subject to the receipt of the
opinion described in the section in the Joint Consent Statement/Prospectus
entitled "FEDERAL INCOME TAX CONSEQUENCES." Receipt of this opinion may be
waived in whole or in part by the PAM Funds, the PCM Shareholders and the
Company in each respective party's sole discretion.
Prior to the consummation of the Merger, the obligations of the parties to
the Merger Agreement may be terminated at any time (including after approval of
the Merger by the limited partners of the PAM Funds and the respective
shareholders) if, among other things, (a) the General Partner or the Company
adopts a resolution terminating the Merger Agreement or (b) a final injunction,
order, or other action of a court or other governmental body prevents the
consummation of the Merger.
Completing the Merger. If the Merger Proposal is approved and the other
conditions of the Merger Agreement are waived or satisfied, the Closing Date
will be selected by agreement of the General Partner, the PCM Shareholders and
the Company. Upon consummation of the Merger and dissolution of the
Partnerships, the limited partners of the PAM Funds and PCM Shareholders will be
entitled to receive certificates for Merger Stock issued in exchange for the
assets of the Partnerships and shares of PCM's no par value common stock,
respectively.
Costs of the Merger. For purposes of the Thompson-Killea Act, which is that
portion of the California Corporations Code relating to "rollup" transactions
(the Merger Proposal is a "rollup" transaction), the costs of the Merger will be
divided into two categories, (i) transaction costs; and (ii) solicitation
expenses. Transaction costs are defined as the costs of printing and mailing the
Joint Consent Statement/Prospectus, or other documents; legal fees not related
to the solicitation of votes or tenders; financial advisory fees; investment
banking fees; valuation fees; accounting fees; independent committee expenses;
travel expenses; and all other fees related to the preparatory work of the
transaction, but not including costs that would have otherwise been incurred by
the Partnership in the ordinary course of business, or solicitation expenses.
Solicitation expenses include direct marketing expenses such as telephone calls,
broker-dealer fact sheets, legal and other fees related to the solicitation, as
well as direct solicitation compensation to brokers and dealers.
The Company estimates that the total costs and expenses of the Merger will
be approximately $1,400,000 if consummated and $1,200,000 if not consummated.
The Company estimates that the total solicitation expenses will be approximately
$600,000. This amount will be incurred whether or not the Merger is consummated.
The remainder of the costs and expenses estimated for consummation or
non-consummation will be attributable to transaction costs.
The Merger Agreement provides that those limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. Should the Merger Proposal be rejected by all of the PAM Funds, the
transaction costs will be apportioned between the Company and each PAM Fund
according to the final vote on the Merger Proposal as follows: (a) the Company
shall bear all transaction costs in proportion to the number of votes of the
limited partners of that PAM Fund to reject the Merger Proposal; and (b) that
PAM Fund shall bear transaction costs in proportion to the number of votes of
limited partners of that PAM Fund to approve the Merger Proposal. Should the
Merger Proposal be approved by one or more PAM Funds and rejected by at least
one PAM Fund, each PAM Fund rejecting the Merger Proposal shall not be required
to pay any of the costs of the Merger, in accordance
B-12
<PAGE>
with the provisions of Section 25014.7(e)(3) of the Thompson-Killea Act.
Further, in the event that the Merger Proposal is rejected by all of the PAM
Funds, the Company shall pay all of the solicitation expenses in accordance with
the provisions of Section 25014.7(g) of the Thompson-Killea Act.
In 1996, the total approximate amounts distributed to the partners of each
PAM Fund are as set forth on the following table:
<TABLE>
<CAPTION>
Distributions to the Distributions to the
PAM Fund Limited Partners General Partner
-------- ---------------- ---------------
<S> <C> <C>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership.............. $ 154,650 $ 17,483
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership.............. $ 230,023 $ 25,810
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership.............. $ 295,925 $ 35,775
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership.............. $ 1,433,425 $ 159,334
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership.............. $ 179,100 $ 19,966
</TABLE>
The total amount distributed by all of the PAM Funds was $2,551,491. All of
the distributions to the limited partners were in the form of cash
distributions. Some of the distributions to the General Partner were accrued.
In contrast to the Partnership, the Company will itself be subject to
federal tax on its income. Holders of Merger Stock will not be subject to
federal tax on such income except to the extent dividends are paid by the
Company. See the section in the Joint Consent Statement/Prospectus entitled
"FEDERAL INCOME TAX CONSEQUENCES." The Company is expected to make significantly
smaller distributions, if any, than the Partnership has made.
There can be no assurance that the Merger will achieve any of the benefits
and objectives described above. In addition, certain possible disadvantages and
other risks and special considerations associated with the Merger exist, as
described in the section in the Joint Consent Statement/Prospectus entitled
"RISK FACTORS." Limited Partners should analyze the Merger Proposal and related
transactions, considering all the matters presented in the Joint Consent
Statement/Prospectus.
ALTERNATIVES TO THE MERGER
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal and related transactions. Some of
these alternatives do not contemplate a reorganization. In the mutual opinion of
the PCM Shareholders, the Company and the General Partner, the only viable
alternatives not contemplating a reorganization involve some form of public
registration or offering of securities. The General Partner has considered the
possibility of a registration of Units. In the opinion of the General Partner,
this possibility would fail to provide the Limited Partners with the liquidity
that the Merger Proposal might provide, because of the unsatisfactory market for
publicly traded limited partnership interests. The PCM Shareholders and the
Company have also considered the possibility of merging PCM and the Company
without merging with any of the PAM Funds and thereafter making a public
offering of shares of common stock in the surviving corporation. In the event
the Merger is not consummated, the PCM Shareholders and the Company may elect
this alternative.
B-13
<PAGE>
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal, each of which contemplates a
reorganization. The General Partner considered the possibility of selling all
Units of the PAM Funds to the Company, and the Company considered purchasing all
such Units, in exchange for shares of common stock of the Company. This
alternative would require the Company and the PAM Funds to comply with certain
tender offer requirements which would make the proposed reorganization more
complicated in terms of statutory compliance. The PCM Shareholders also
considered the possibility of selling all of PCM's assets to the Company, and
the Company considered purchasing all such assets, in exchange for shares of
common stock of the Company. Alternatively, the General Partner considered
winding up and dissolving the PAM Funds and distributing the proceeds of
liquidation to their limited partners. Although a dissolution would provide
those limited partners with immediate liquidity, the General Partner believes
that, because of the type of assets held by the PAM Funds, even an orderly
liquidation would result in a prohibitive discount on the value of the debt
portfolios. Such a dissolution would also result in additional legal,
accounting, appraisal, advertising and sales costs to the PAM Funds, further
diminishing the value of the PAM Funds' assets.
The General Partner believes that the value of the consideration to be
received by the PAM Funds in the Merger would far exceed any of the alternatives
constituting a reorganization listed above, specifically because the PAM Funds'
assets consist primarily of distressed loan portfolios, and such portfolios have
a liquidation value far below their value to either the PAM Funds or the
Company, which can generate substantial revenues from collection activities on
the portfolios.
The PCM Shareholders and the General Partner considered the results of
continuing PCM and the PAM Funds in accordance with their current business plans
and joint venture agreements. A continuation of the PAM Funds in accordance with
their existing business plans would benefit their limited partners to the extent
that those limited partners would receive cash distributions from the proceeds
of the PAM Funds' collection on debt portfolios. If the Merger is consummated,
limited partners of the PAM Funds would no longer receive such cash
distributions. Moreover, the Company currently does not anticipate paying its
shareholders cash dividends. Therefore, a continuation of the Partnership
provides the Limited Partners with cash flow which they will not have if the
Merger is consummated. Finally, if the Merger Proposal is approved, the Limited
Partners will be minority shareholders in the Company, and will lose the
ultimate control over Partnership affairs, which they currently hold.
Alternatively, the Partnership's servicing entity, PCM, currently has the
capacity to service portfolios in excess of those owned by the Partnership and
has the potential for significant growth. PCM has been offered access to
commercial lines of credit and its growth is not contingent upon a continuing
relationship with the Partnership. After consummation of the Merger, Limited
Partners who approve the Merger Proposal will participate in this growth.
Moreover, after consummation of the Merger, the Company will be able to compete
for available portfolios by taking advantage of economies of scale not available
to PCM and the Partnership acting individually. The General Partner believes
that the Limited Partners should have the opportunity to consider and vote upon
these opportunities.
The General Partner believes that the value of the consideration to be
received by the Partnership in the Merger is equal to or greater than the
present value of the Partnership, which assumes that PCM and the Partnership
continue with their current business plans and joint venture agreements.
However, the Company, with access to commercial lines of credit, will be able to
compete more effectively with its competitors for debt portfolios. The General
Partner believes that there will be increased competition for debt portfolios,
as finance companies, collection agencies, and even Wall Street firms, which
offer asset- backed securities, enter the market. Therefore, the General Partner
believes that the Merger
B-14
<PAGE>
Proposal, if approved, would ultimately provide Limited Partners with a greater
return on their investments than they would obtain if the Partnership continued
in its present business arrangements, and would increase the longevity, and the
ultimate return, on the Limited Partners' investments.
The PCM Shareholders and the General Partner also considered going forward
with the Merger Proposal with the approval of less than all of the PAM Funds,
but rejected this alternative because of economies of scale, the scope and
complexity of existing joint ventures between PCM and the PAM Funds, and the
economics of purchasing, holding, servicing, collecting and selling distressed
debt portfolios. Specifically, as discussed in detail in the section of the
Joint Consent Statement/Prospectus captioned "APPROVAL BY ALL OF THE
PARTNERSHIPS IS REQUIRED", the General Partner does not believe that the Merger
can be fairly consummated unless all of the PAM Funds approve the Merger
Proposal, because it would be unduly burdensome or impossible to evaluate and
apportion the value of the various services provided to the PAM Funds by PCM, on
the one hand, considering the complexity and scope of the various joint ventures
between the PAM Funds and PCM, on the other hand; and, if the Merger Proposal is
approved, PCM will cease to exist by operation of law, and would no longer be
available to provide the same services to a dissenting PAM Fund. The elimination
of PCM as a separate entity would result in the elimination of the acquisition
fees PCM currently charges the PAM Funds. Existing joint ventures, and the
management and servicing fees related to various separate joint ventures between
PCM and the PAM Funds, would similarly merge into a single large business
venture, eliminating those duplicative management and servicing fees. Because
PCM would no longer exist as an independent entity, PAM Funds which did not
participate in the Merger Proposal would lose their present source of portfolio
acquisitions. PCM, which currently has access to commercial lines of credit, has
the right to assign such commercial lines to a successor entity, allowing for
the Company, as such a successor entity, if the Merger is consummated, to enjoy
the benefits of increased credit lines for portfolio acquisitions which are not
currently available to the PAM Funds individually. Moreover, one of the primary
benefits of the Merger Proposal is the consolidation of record keeping and
simplification of the complex accounting requirements imposed on the PAM Funds
under federal and multiple state partnership tax laws.
The General Partner is not aware of any offers made during the preceding 18
months for a merger, consolidation, or combination of any of the PAM Funds; an
acquisition of any of the PAM Funds or a material amount of their assets; a
tender offer for or other acquisition of securities of any class issued by any
of the PAM Funds; or a change in control of the PAM Funds. Other than as set
forth herein, the General Partner is not aware of any factors which may affect
materially the value of the consideration to be received by the Limited Partners
in the Merger or the fairness of the Merger Proposal to the Limited Partners.
RECOMMENDATIONS
After considering the advantages and disadvantages of the Merger Proposal
described above, the General Partner believes that the Merger Proposal is fair
to, and in the best interests of, the Partnership and the Limited Partners. The
General Partner recommends that each Limited Partner vote to approve the Merger
Proposal.
EXCHANGE VALUE AND FAIRNESS OPINION
Bases for the General Partner's Belief as to Fairness. The Fairness Opinion
is specified at length in the section in the Joint Consent Statement/Prospectus
entitled "FAIRNESS OPINION." The General Partner believes that the Merger
Proposal is fair to the Limited Partners, because the General Partner believes
that the Merger will provide Limited Partners with liquidity in their
investments
B-15
<PAGE>
and more simplified tax reporting.
No Limitations Imposed on Scope of Investigation. Kelly & Company,
independent auditors for the General Partner, PCM, the PAM Funds, Income Network
Company and the Company, retainedthe Fairness Analyst to determine the fairness
from a financial point of view of the Exchange Value in connection with the
Merger Proposal. There were no limitations or restrictions placed on the scope
of the Fairness Analyst's analysis and investigation, and the Fairness Analyst
performed a complete due diligence examination by, among other things, visiting
PCM's facilities in Newport Beach, California; interviewing the President and
Vice-President of PCM; interviewing the President, Chief Financial Officer,
Director of Business Development, and Secretary of the General Partner;
interviewing various personnel employed by Kelly & Company; and interviewing
counsel to the various entities. The Fairness Analyst was allowed full access to
all financial records of PCM, the General Partner, the PAM Funds and all service
providers to those entities, including privileged documents such as tax returns
and audit workpapers.
No Instructions from General Partner, PCM or the Company. Neither the
General Partner, the PCM Shareholders, PCM nor the Company provided instructions
to the Fairness Analyst. Kelly & Company instructed the Fairness Analyst to
conduct an independent investigation, and thereafter render a written opinion to
Kelly & Company, as of the Determination Date, as to whether the Exchange Value
established by the General Partner, the PCM Shareholders and the Company is fair
from a financial point of view to the PAM Funds. Kelly & Company also instructed
the Fairness Analyst to prepare a Fairness Opinion (i) satisfying the valuation
requirements of the Thompson-Killea Act; (ii) potentially useful in meeting the
valuation requirements of Sections 1300 et seq. of the California General
Corporation Law pertaining to PCM Shareholders and Company shareholders who do
not consent to the Merger Proposal and, instead, exercise their rights as
dissenting shareholders ("Dissenting Shareholders"); and (iii) sufficient to
support an opinion regarding the fairness from a financial point of view of the
Merger Proposal and related transactions, addressing the fairness from a
financial point of view of the Merger and related transactions as a whole and to
each of the PAM Funds. Kelly & Company instructed the Fairness Analyst to
perform a due diligence investigation and to review all pertinent documents,
including, but not limited to, financial statements; tax returns; audit work
papers; banking records; balance sheets; income statements; Securities and
Exchange Commission reporting forms; corporate documents such as Certificates or
Articles of Incorporation, Bylaws and minutes; furniture and equipment
schedules; insurance policies and coverages; operating budgets through December
31, 2008 for PCM and the PAM Funds; office leases; management profiles;
portfolio stratification reports; and daily productivity reports. Kelly &
Company also instructed the Fairness Analyst to research industry sources and
databases and economic outlook sources regarding the financial services and
distressed debt industry.
Procedures Followed. As set forth above, the Fairness Analyst conducted a
complete independent investigation focusing on the valuation issues relating to
the "adequate consideration" rule. Adequate consideration is generally
understood to represent the fair market of an asset. Accordingly, in order to
arrive at its opinion regarding the fairness from a financial point of view of
the Exchange Value established for the Units, the Fairness Analyst performed its
research and analyses with the intent of establishing whether the Limited
Partners would receive at least fair market value in exchange for their Units.
"Fair market value" is defined as the price at which an asset would change hands
between a willing buyer and a willing seller when the former is not under any
compulsion to buy and the latter is not under any compulsion to sell, both
parties are able, as well as willing, to trade, and both parties are well
informed about the asset and the market for that asset. The Fairness Analyst
performed an analysis of the material features and characteristics of the
Partnership, the Other Partnerships and PCM, as well as an analysis of the
financial statements and results of operations of each entity. The Fairness
Analyst assumed that PCM will continue its current business plan and structure
and made other reasonable assumptions
B-16
<PAGE>
and estimates regarding distressed loan portfolio acquisition and pricing,
operating expenses, and partnership distribution policies.
Determinations. The Company, PCM and the General Partner determined the
total indicated values for PCM and for each of the PAM Funds, as set forth in
the following table:
<TABLE>
<CAPTION>
NAME OF PARTNERSHIP OR CORPORATION TOTAL VALUE
- ---------------------------------- -----------
Performance Asset Management Fund, Ltd.,
<S> <C>
A California Limited Partnership.................................... $ 934,000
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership.................................... $ 3,112,000
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership.................................... $ 6,000,000
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership.................................... $15,846,000
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership.................................... $ 4,700,000
Performance Capital Management, Inc.,
a California corporation............................................ $44,523,000
</TABLE>
Basis for Methods of Arriving at Findings and Recommendations. The Fairness
Analyst valued the assets of each entity by determining the combined value of
such entity's assets, including the value of such entity's cash flows and the
terminal value of such entity's distressed loan portfolios. The Fairness Analyst
determined the asset liquidation value of each entity and calculated the
allocation of assets of each PAM Fund between the General Partner and the
limited partners of such PAM Fund based on such PAM Fund's Agreement of Limited
Partnership. Additional factors considered by the Fairness Analyst, in making
its valuation, include discount factors based on the age and composition of the
various distressed loan portfolios and the Fairness Analyst's determination of
the present value of the respective cash receipts of each entity, as well as the
historical and projected collection costs of distressed loan portfolios.
DETERMINATION OF EXCHANGE VALUE AND ALLOCATION OF MERGER STOCK
Exchange Value. The net equity values determined by PCM, the Company and
the General Partner and reviewed by the Fairness Analyst of all of the assets of
the PAM Funds, PCM and the Company, considered together and separately, together
with the book value of the other financial assets of such entities, have been
used to establish the Exchange Value. The Fairness Analyst is unaffiliated with
the Company, Vision, Income Network Company, the PCM Shareholders, PCM or the
General Partner. Kelly & Company, the independent auditors for PCM, the Company,
Income Network Company, the General Partner and the PAM Funds, were referred to
the Fairness Analyst by an accountant unaffiliated with the PCM Shareholders,
PCM, the Company, Income Network Company, the PAM Funds, or the General Partner
and with whom neither the PCM Shareholders, PCM, the Company, Income Network
Company, the PAM Funds, nor the General Partner has conducted any business. The
Fairness Analyst was selected by Kelly & Company entirely on the basis of its
qualifications.
The Company, the General Partner and PCM valued the assets of the
Partnership and PCM, respectively, as if sold in an orderly manner in a
reasonable period of time, plus or minus other balance sheet items, and less the
cost of sale. The valuation was conducted in accordance with the provisions of
Section 25014.7(b)(1) of the Thompson-Killea Act. The valuation was also
conducted in accordance with the provisions of Sections 1300 et seq. of the
California General Corporation Law pertaining to the
B-17
<PAGE>
Dissenting Shareholders. The compensation to dissenting Limited Partners and
Dissenting Shareholders entitled to compensation for their Units or shares of
common stock, respectively, is based upon the valuation described above. See the
section in the Joint Consent Statement/Prospectus entitled "RIGHTS OF DISSENTING
SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
The purpose of the Fairness Opinion is to confirm to the Company, the PCM
Shareholders and the General Partner the fairness from a financial point of view
of the Merger Proposal and related transactions to the PAM Funds. Neither the
Company, the PCM Shareholders, PCM, nor the General Partner gave the Fairness
Analyst any specific instructions other than the instruction from Kelly &
Company to prepare a fairness opinion (i) meeting the valuation requirements of
the Thompson-Killea Act; (ii) potentially useful in meeting the valuation
requirements of Sections 1300 et seq. of the California General Corporation Law
pertaining to Dissenting Shareholders; and (iii) sufficient to support an
opinion regarding the fairness of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Pursuant to
the Thompson-Killea Act, the Units were valued as if sold in an orderly manner
in a reasonable period of time, plus or minus other balance sheet items, and
less the costs of sale. Pursuant to the provisions of Section 1300 of the
California General Corporation Law, the fair market value of the shares of
common stock held by the Dissenting Shareholders shall be determined as of the
day before the first announcement of the terms of the Merger Proposal and
related transactions, excluding any appreciation or depreciation in consequence
of the Merger Proposal or related transactions, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
The Fairness Opinion will not be updated.
Fairness Opinion. The Exchange Value was determined by PCM, the Company and
the General Partner. The consideration to be paid to the Fairness Analyst was
negotiated by the Fairness Analyst, on the one hand, and Kelly & Company, on the
other hand. The Fairness Analyst has determined that the Exchange Value, as such
consideration, is fair from a financial point of view to each PAM Fund, as
specified in the Fairness Opinion. The compensation paid to the Fairness Analyst
was not contingent upon the findings of the fairness of the Exchange Value, such
consideration or the Merger or the consummation or approval of the Merger
Proposal or related transactions. The Fairness Opinion relates to the fairness
from a financial point of view of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Because the
Merger is contingent upon the approval of the Merger Proposal by all of the PAM
Funds, the PCM Shareholders, and the Company shareholders, the Fairness Opinion
did not consider possible combinations of less than all of the PAM Funds in the
Merger. A copy of the Fairness Opinion is included in the Joint Consent
Statement/Prospectus as Appendix G.
The Fairness Opinion takes into account all of the assets of each of the
PAM Funds, PCM, and the Company. The intangible assets of the PAM Funds and PCM
consist of distressed financial debt instruments and obligations. The Fairness
Analyst also considered tangible assets of the PAM Funds, PCM and the Company.
The tangible assets of the PAM Funds and the Company were determined to be
negligible. The tangible assets of PCM were determined to be more considerable
and include furniture, computers and business equipment. The aggregate value of
the assets of the PAM Funds has been determined to be $30,592,000. The aggregate
value of the assets of PCM has been determined to be $44,523,000.
Fairness Opinion Will Not Be Updated. The Fairness Opinion will not be
updated. A copy of the Fairness Opinion is included with the Joint Consent
Statement/Prospectus as Appendix G. Although the General Partner is not aware of
any factors that may materially affect the fairness of the Merger Proposal or
the determination of the Exchange Value referenced in the Fairness Opinion, it
is possible
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<PAGE>
that changes in the financial markets between the date of the Fairness Opinion
and the date the Merger, if approved, is consummated, might affect the
conclusions of the Fairness Analyst as specified in the Fairness Opinion. If the
Fairness Opinion were to be updated by the Fairness Analyst at or near the date
of the consummation of the Merger, there can be no assurances that the Fairness
Analyst's opinions and conclusions would not be materially amended or revised.
Exchange of Assets for Shares. On the Closing Date, if the limited partners
of all five PAM Funds approve the Merger Proposal, the PAM Funds and PCM will
merge with and into the Company. Pursuant to the Merger Agreement, all of the
assets of the PAM Funds will be exchanged for shares of the Merger Stock in
accordance with the Exchange Value, determined to be fair to the PAM Funds by
the Fairness Analyst.
The following table summarizes the valuation of PCM and the PAM Funds based
on 7,511,500 allocable shares of Merger Stock:
<TABLE>
<CAPTION>
Percentage of
Aggregate Number of
Indicated Value Indicated Value Shares of Merger
(Rounded to the (Rounded to the Stock Allocated
Nearest $1,000) Nearest 1/10 of 1%) to Entity
--------------- ------------------- ---------
<S> <C> <C> <C>
The Partnership ..................... $ 934,000 1.2% 93,398
PAM II .............................. 3,112,000 4.1 311,202
PAM III ............................. 6,000,000 8.0 600,003
PAM IV .............................. 15,846,000 21.1 1,584,596
PAM V ............................... 4,700,000 6.3 470,002
----------- ----- ---------
Sub-Total ...................... $30,592,000 40.7% 3,059,201
PCM ................................. 44,523,000 59.3 4,452,29
----------- ----- ----------
Total .......................... $75,115,000 100.0% 7,511,500
=========== ===== =========
</TABLE>
RISKS AND POTENTIAL ADVERSE EFFECTS
THE MERGER AND ACQUISITION OF SHARES OF THE MERGER STOCK INVOLVES VARIOUS RISKS,
AND LIMITED PARTNERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER THE
SECTION ENTITLED "RISK FACTORS" IN THE JOINT CONSENT STATEMENT/PROSPECTUS,
INCLUDING THE FOLLOWING:
History of Losses. PCM and the PAM Funds have a history of losses, because
PCM and the PAM Funds' accounting is predicated on return of capital and not a
return on capital. For financial statement purposes, the cash received from
collections on distressed loan portfolios does not appear as revenue, but goes
to offset the particular entity's basis in the respective portfolios. This has
the effect of reducing the respective entity's assets as presented on the
financial statements.
No Operating History. Since its formation, the Company has had no
operations. The only historical financial information presented in the Joint
Consent Statement/Prospectus relates to the business operations of the PAM Funds
and PCM.
Significant Reduction in Distributions. The Partnership historically made
monthly cash
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<PAGE>
distributions to the Limited Partners until those distributions were suspended
in preparation for the Merger Proposal. THE COMPANY CURRENTLY ANTICIPATES THAT
IT WILL NOT PAY CASH DIVIDENDS. See that portion of the Joint Consent
Statement/Prospectus entitled "Dividend Policy" and "SUMMARY -- Disadvantages of
the Merger and Related Transactions."
In contrast to the Partnership, the Company will be subject to federal and
state income taxes imposed on its income. Holders of Merger Stock will not be
subject to federal or state income taxes imposed on such income, except to the
extent dividends are paid by the Company. See that portion of the Joint Consent
Statement/Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES." Additionally,
the Company expects to pay no dividends in the foreseeable future. It is
important for each Limited Partner to realize that the actual amount of
dividends, if any, to be paid will be determined by the Board of Directors of
the Company, in its sole and absolute discretion, generally taking into account
a number of factors, including operating performance, liquidity, capital
requirements, and the Company's business plan and growth strategies. There can
be no assurance that the Company's anticipated policy in regard to dividend
payments will not be modified by the Board of Directors of the Company.
DIVIDEND DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE IN THE SOLE AND ABSOLUTE
DISCRETION OF THE COMPANY'S BOARD OF DIRECTORS AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE COMPANY'S CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S
FINANCIAL CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS
AS THE COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Change in Nature of Investment. The Partnership is a limited partnership
organized under California law. The Company is a Delaware corporation. The
Partnership has a finite term of existence and is structured to dissolve when
its assets are liquidated. In contrast, the Company has a perpetual term and
intends to continue its operations for an indefinite time period. To the extent
the Company sells or refinances its assets, the net proceeds therefrom generally
will be retained by the Company for working capital and new investments, rather
than being distributed to shareholders in the form of dividends.
Change in Voting Rights. Under the Partnership's Agreement of Limited
Partnership ("Partnership Agreement") and applicable California law, the Limited
Partners have voting rights only as to major transactions of the Partnership
(e.g., amendment of the Partnership Agreement, removal of the General Partner,
election of a new General Partner, sale of all the assets of the Partnership,
and dissolution of the Partnership). Otherwise, all decisions relating to the
operation and management of the Partnership are made by the General Partner.
Certain major transactions of the Company, including most amendments to the
Company's Certificate of Incorporation, may not be consummated without the
approval of shareholders holding at least a majority of the outstanding voting
stock entitled to vote. Notwithstanding the foregoing, certain transactions of
the Company, such as the sale of all of the assets of the Company to an
affiliate of the Company, must be approved by at least 90% of the issued and
outstanding voting stock of the Company entitled to vote. To the extent that the
Company will have issued and outstanding shares of its voting stock held of
record by 100 or more persons, adoption of additional anti-takeover provisions
may require a supermajority (i.e., two thirds) vote to adopt. Subject to the
provisions of the Company's Certificate of Incorporation, as amended, and Bylaws
regarding certain anti-takeover provisions specified in the portion of the Joint
Consent Statement/Prospectus captioned "Anti-Takeover Provisions," each share of
the Company's common stock will have one vote, and the Company's Certificate of
Incorporation, as amended, permits the Board of Directors of the Company to
classify and issue capital stock in one or more classes having voting power
which may differ from that of the Merger Stock. See that portion of the Joint
Consent Statement/Prospectus entitled "COMPARISON OF UNITS AND MERGER STOCK."
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<PAGE>
Change in Duties Owed by General Partner. Regarding the Partnership and the
Company, the General Partner and the Board of Directors of the Company,
respectively, owe fiduciary duties to their constituent parties. Some courts
have interpreted the fiduciary duties of members of a board of directors in the
same manner as the duties of a general partner in a limited partnership. Other
courts, however, have indicated that the fiduciary obligations of a general
partner to limited partners are greater than those owed by a director to
stockholders. Therefore, although it is unclear whether, or to what extent,
there are differences in such fiduciary duties, it is possible that the
fiduciary duties of the directors of the Company to its shareholders may be less
than those of the General Partner to the Limited Partners. See that portion of
the Joint Consent Statement/Prospectus entitled "COMPARISON OF UNITS AND MERGER
STOCK."
Changes in Compensation Arrangements. Under the Partnership Agreement,
distributions payable to the General Partner are specified and cannot be changed
by the General Partner without the approval of the Limited Partners. If the
Merger is consummated, the compensation paid to officers and directors of the
Company will be determined by a Compensation Committee for the Company
established by the Company's Board of Directors, and the terms and conditions of
employment of those officers and directors, including changes in compensation
arrangements, will not be subject to the direct approval or control of the
shareholders of the Company. See the summary compensation tables under the
caption "Executive Compensation" in the portion of the Joint Consent
Statement/Prospectus captioned"MANAGEMENT OF THE GENERAL PARTNER, PCM AND THE
COMPANY".
Taxation of Corporation and Shareholders. The Partnership does not pay any
federal or state income taxes. After consummation of the Merger, the Company
will be subject to federal and state income taxes. Shareholders of the Company
will also be required to pay federal and state income taxes on any dividends
that they may receive from the Company and on any gain from the sale or exchange
of the Company's common stock, including the Merger Stock. Therefore, while in
partnership form the income of the Partnership will be subject to federal state
and state income tax only once (i.e., on the Limited Partners) in corporate form
the income of the Company will be subject to federal and state income taxes
twice (i.e., once on the Company and once on its shareholders to the extent they
receive dividends or recognize gain on the sale or exchange of securities). See
that portion of the Joint Consent Statement/Prospectus entitled "FEDERAL INCOME
TAX CONSEQUENCES" and "OTHER TAX CONSEQUENCES."
Uncertainty Regarding Trading and Market Price of Common Shares. There is a
probability that the Merger Stock may initially trade at prices substantially
below the value assigned to the Merger Stock in the Merger Proposal. Moreover,
the Merger Stock may not immediately be listed or approved for listing on any
regional or national securities exchange or otherwise designated or approved for
designation upon notice of issuance as a national market system security on an
interdealer quotation system maintained by the National Association of
Securities Dealers, Inc. To the extent that the Merger Stock may trade, trading
prices for the Merger Stock will be influenced by many factors, including the
market for the Merger Stock, the Company's dividend policy, the possibility of
future sales of Merger Stock by the Company or its shareholders of the Company's
common stock, investors' perception of the Company and its businesses, and
general economic and stock market conditions. No prediction can be made as to
the price at which the Merger Stock will trade. Moreover, no guaranty or
assurance can be given that the Merger Stock will trade at all. Limited Partners
and PCM Shareholders have not previously had access to an active trading market
for the Units and shares of PCM's common stock, respectively. Therefore, it is
possible that they may wish to sell their Merger Stock from time to time after
consummation of the Merger. There can be no assurance that the Company's efforts
to stabilize the price of the Merger Stock by limiting the sale of the Merger
Stock will be successful. The sale of the Merger Stock after the Merger might
have an adverse effect on the market price of the Merger Stock. Moreover,
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<PAGE>
various state regulatory agencies may require further limitations on the
transfer of the Merger Stock.
Limited Public Market. There has been no public trading market for the
Company's securities. Although the Company intends to apply for listing of the
Merger Stock on a regional or national securitiesexchange, there is no assurance
that the will be so listed. If the Merger Stock is so listed, such a listing
provides no assurance that an active, receptive trading market will develop for
the Merger Stock or, if developed, will be sustained.
Potential Price Volatility. If a public market develops for the Merger
Stock, there may be significant volatility in the market price of the Merger
Stock. Period-to-period fluctuations in the Company's revenues and financial
results may have a significant impact on the perceived value of the Company and,
therefore, on the market price of the Merger Stock. The price of the Merger
Stock may be significantly affected by such factors as the financial results and
operating performance of the Company. Additionally, in recent years, the stock
market has experienced significant price and volume volatility, and market
prices for many companies, particularly small and emerging growth companies,
have experienced significant price fluctuations not necessarily related to the
operating performance of those companies. The market price for the Merger Stock
may be affected by general stock market volatility.
Possible Dilution. The percentage interest of holders of Merger Stock in
the assets, liabilities, cash flow and results of operations of the Company, as
well as the percentage voting power of such holders, may be diluted (a) if the
Company has, prior to solicitation of consents to the Merger Proposal, issued
either preferred shares or common shares which are currently outstanding and
held by existing shareholders of the Company, or (b) by the issuance of shares
of the Company's common stock in any future offering. In addition, the Company
may issue additional equity securities in the future (for example, in a public
offering), which would dilute the percentage ownership of the then current
shareholders of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock, and which is convertible to common stock subject to
certain conditions precedent. See a further discussion of Mr. Galewick's
preferred stock under the caption "Control by Principal Shareholder;
Anti-takeover Measures" below. Under NASDAQ National Market rules, the Company
may not issue shares of its common stock equal to 20% or more of the then
outstanding shares of its common stock in connection with the acquisition of the
shares or assets of another entity without shareholder approval. Issuances by
the Company of additional shares of its common stock or preferred stock could
adversely affect existing shareholders' equity interests in the Company and the
market price of the Merger Stock.
Shares Eligible for Future Sale. Sales of shares of the Company's common
stock in the public market after consummation of the Merger could adversely
affect the market price of the Merger Stock and could impair the Company's
future ability to raise capital through the sale of equity securities. Upon
consummation of the Merger, the Company will have 7,512,500 shares of common
stock issued and outstanding. The transfer, assignment, sale, conveyance,
hypothecation, encumbrance, or other alienation of the shares of the Merger
Stock shall be limited. See the portion of the Joint Consent
Statement/Prospectus entitled "Merger Stock Will Be Restricted."
Control by Principal Shareholder; Anti-takeover Measures. If the Merger
Proposal is approved and the Merger is consummated, Vincent E. Galewick shall
beneficially own approximately 62% of the then issued and outstanding shares of
the Company's common stock. As a result, Vincent E. Galewick, in his capacity as
a shareholder of the Company, would be able to significantly influence or
control many matters acquiring approval by the shareholders of the Company,
including the election of directors. The Company's Certificate of Incorporation
provides for preferred stock, the terms of which
B-22
<PAGE>
may be fixed by the Board of Directors of the Company. Vincent E. Galewick owns
100,000 shares of the Company's preferred stock, which is all of the issued and
outstanding shares of that preferred stock. Each share of that preferred stock
is convertible into 20 shares of the Company's common stock, subject to certain
conditions precedent relating to the acquisition, by any single shareholder, of
10% or more of the issued and outstanding shares of the Company's common stock.
Moreover, if the Company becomes a "listed corporation", as that term is defined
in the portion of the Joint Consent Statement/Prospectus entitled "Elimination
of Cumulative Voting", the directors of the Company will be divided into 2
classes, and the holders of the Merger Stock will not be permitted to cumulate
their votes for directors. Those provisions could have the effect of delaying,
deferring or preventing a change in control of the Company.
Addition of Provisions That May Discourage Changes of Control. The
Company's organizational documents and Delaware law contain provisions that may
delay, defer or prevent a takeover attempt that a shareholder might consider to
be in such shareholder's best interest, including offers that might result in a
premium over the market price for Merger Stock.
Conflicts of Interest. The General Partner has a fiduciary duty to the
Partnership. However, the General Partner is also affiliated with Income Network
Company, which is the Soliciting Agent, Vision, PCM and the Company. The
Company, Vision, Income Network Company, PCM and the General Partner have a
common shareholder, Vincent E. Galewick, and common directors and officers.
Several of the directors of the Company are employed independently of the
Company and those persons may continue to engage in other activities. The
persons serving as officers and directors of the Company shall have conflicts of
interest in allocating time, services, and functions between the other business
ventures in which those persons may be or become involved and, also, the affairs
of the Company. As a result, conflicts of interest between the Company and the
other activities of those persons may occur from time to time.
The Company will attempt to resolve any such conflicts of interest in favor
of the Company. The officers and directors of the Company are accountable to the
Company and the shareholders of the Company as fiduciaries (subject to the
restrictions set forth in the paragraph headed "Limitation on Liability of
Officers and Directors of the Company" below), which requires that such officers
and directors exercise good faith and integrity in handling the Company's
affairs. Moreover, the officers and directors of the Company believe that the
Company will have sufficient staff, consultants, employees, agents, contractors,
and managers to adequately conduct the business of the Company.
The General Partner has not retained an unaffiliated representative to act
on behalf of the Limited Partners for purposes of negotiating the Merger
Proposal. The General Partner does not believe retaining such a representative
is necessary, because an unaffiliated third party, Willamette Management
Associates, Inc., as the Fairness Analyst, has been retained to provide the
Fairness Opinion as to the fairness of the Merger Proposal to the Company, the
PCM Shareholders and the PAM Funds. A copy of the Fairness Opinion is included
with the Joint Consent Statement/Prospectus as Appendix G. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
However, because there has been no separate unaffiliated representation of
the Limited Partners in the negotiation of the Merger Proposal, the Limited
Partners are presented with risks inherent in multiple representation.
Specifically, the persons negotiating the Merger Proposal may have attempted to
balance the interests of the Partnership and the Limited Partners with the
interests of the PCM Shareholders and the Company. Aggressive advocacy solely on
behalf of the Limited Partners in the negotiations relating to the Merger
Proposal might have resulted in more favorable treatment for the Limited
Partners compared to the more even-handed approach which was followed in
negotiating the
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<PAGE>
Merger Proposal.
The General Partner and the Limited Partners have conflicts of interest
relating to the Merger Proposal because, if the Merger Proposal is approved, the
General Partner will cease providing management services to the Partnership,
with a resulting loss of income. The Merger Stock which the General Partner
receives upon the winding up and dissolution of the Partnership may be less
valuable than the participation in the distributions of the Partnership which
the General Partner currently receives.
A more significant conflict of interest exists between Vincent E. Galewick,
the sole shareholder of the General Partner, on the one hand, and the Limited
Partners, on the other hand, because Mr. Galewick is also the majority
shareholder of PCM and the sole shareholder of the Company. The allocation of
Merger Stock pursuant to the Merger Proposal creates a conflict between all the
parties included in the Merger Proposal, including the Limited Partners, on the
one hand, and Mr. Galewick and the General Partner, on the other hand. If the
Merger Proposal is approved, Mr. Galewick will own approximately 62% of the then
issued and outstanding common stock of the Company. Because of this conflict of
interest, Mr. Galewick did not participate in the negotiations regarding the
Merger Proposal.
No Arm's Length Agreements. Certain agreements and arrangements, including
those relating to compensation and payments between the Company and its
affiliates, are not the result of arm's length negotiations. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS". Most significantly, PCM and the Partnership are parties
to joint venture agreements pursuant to which PCM provides collection and
servicing activities. The joint venture agreements between PCM and the
Partnership have been filed as exhibits to the Company's Registration Statement
on Form S-4, of which the Joint Consent Statement/Prospectus is a part. PCM also
identifies and acquires distressed loan portfolios and sells them to the
Partnership at negotiated prices, which typically include a mark-up of as much
as 37%. Vision, an affiliate of PCM, the General Partner, Income Network Company
and the Company, provides human resources (employees) to PCM and the General
Partner pursuant to an arrangement not the result of arm's-length negotiations.
In the event the Merger is consummated, Vision will no longer provide those
human resources to the Company.
Speculative Investment Due to Market Factors. The business objectives of
the Company must be considered speculative because the market for distressed
consumer indebtedness will have a significant influence on the operations of the
Company. As there can be no assurance that changing market factors will not
adversely affect the operations of the Company, no assurance can be given that
the PCM Shareholders and Limited Partners will realize a return on their
exchange of shares of common stock of PCM or Units, respectively, for Merger
Stock, or that the Company shareholders will not ultimately lose their
investments in the Company completely.
Dependence on Management. All decisions regarding management of the
Company's affairs will be made exclusively by the officers and directors of the
Company. Accordingly, no person should vote in favor of the Merger Proposal
unless that person has carefully evaluated the personal experience and business
performance of the officers and directors of the Company and is willing to
entrust all aspects of management to the officers and directors of the Company,
or their successors.
Dependence on Key Personnel. The Company is dependent upon the efforts and
abilities of its senior management, particularly those of Vincent E. Galewick.
The loss of Mr. Galewick could have a material adverse affect on the business
and prospects of the Company. The officers of the Company believe that all
commercially reasonable efforts have been made to minimize the risks attendant
with such dependence on Mr. Galewick and the loss or departure of Mr. Galewick.
The General Partner currently
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<PAGE>
maintains a key person life insurance policy in the amount of $2,000,000 on Mr.
Galewick and, if the Merger is consummated, the Company anticipates maintaining
such a policy on Mr. Galewick. Moreover, as the prospective owner of a
significant portion of the issued and outstanding common stock of the Company,
Mr. Galewick will have an incentive to remain with the Company. However, there
is no assurance that Mr. Galewick will remain with the Company or that, if he
should elect to leave the Company, his replacement would cause the Company to
operate profitably.
Limitation on Liability of Officers and Directors of the Company. Section
145 of the Delaware General Corporation Law specifies that the Certificate of
Incorporation of a Delaware corporation may include a provision eliminating or
limiting the personal liability of a director or officer to that corporation or
its shareholders for damages for breach of fiduciary duty as a director or
officer, but such a provision must not eliminate or limit the liability of a
director or officer for (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) unlawful distributions
to stockholders. The Certificate of Incorporation of the Company includes a
provision eliminating or limiting the personal liability of the officers and
directors of the Company to the Company and its shareholders for damages for
breach of fiduciary duty as a director or officer. Moreover, the Company's
Bylaws provide certain indemnification to a controlling person, director or
officer which affects such a person's liability while acting in a corporate
capacity. The Company entered into various indemnification agreements with its
officers and directors, copies of which are attached to the Registration
Statement on Form S-4 as exhibits thereto. Moreover, the Merger Agreement
provides indemnification for directors and officers of the Company. Accordingly,
the officers and directors of the Company may have no liability to the
shareholders of the Company for any mistakes or errors of judgment or for any
act or omission, unless such act or omission involves intentional misconduct,
fraud, or a knowing violation of law or results in unlawful distributions to the
shareholders of the Company.
DISCLOSURE OF POSITION OF SECURITIES AND EXCHANGE COMMISSION
REGARDING INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE, UNENFORCEABLE.
No Limitation on Indebtedness. The Certificate of Incorporation and Bylaws
of the Company do not contain any limitation on the amount or percentage of
indebtedness, funded or otherwise, the Company might incur. The Indenture
Agreement pursuant to which those Limited Partners who exercise their dissenters
rights ("Dissenting Limited Partners") will be paid for their Units ("Indenture
Agreement") provides that the assets of the Partnership will not be leveraged
more than 70% in relation to any unsecured subordinated debentures issued
pursuant to the Merger Agreement. Accordingly, the Company could become
leveraged to the extent permitted by the Indenture Agreement, resulting in an
increase in debt service that could adversely affect the Company's ability to
make distributions to its stockholders and result in an increased risk of
default on its obligations. The Company does not believe that the debt
limitations imposed by the Indenture Agreement will have a significant impact on
the operations of the Company. However, if the Merger is consummated, the Board
of Directors of the Company will determine policies with respect to financing or
refinancing of assets and policies with respect to borrowings by the Company.
Loss on Dissolution of the Company. In the event of a dissolution of the
Company, the
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<PAGE>
proceeds realized from the liquidation of the Company's assets, if any, will be
distributed to holders of the Company's common stock only after satisfaction of
claims of the Company's creditors and, in some situations, holders of the
Company's preferred stock. The ability of a holder of shares of the Company's
common stock, including Merger Stock, to recover any monies whatsoever in that
event will depend on the amount of funds realized and the claims to be satisfied
therefrom.
Remuneration of Directors, Officers and Employees. Compensation received by
officers, directors and employees of the Company will be determined from time to
time by the Board of Directors of the Company. Officers, directors, and
employees of the Company will be reimbursed for any out-of-pocket expenses
incurred on behalf of the Company.
Receipt of Compensation Regardless of Profitability. The officers,
directors and employees of the Company may receive significant compensation,
payments, and reimbursements regardless of whether the Company operates at a
profit or at a loss.
Year 2000 Computer Compliance. Over the next two years, most large
companies will face a potentially serious business problem because many computer
software applications and computer equipment developed in the past may not
properly recognize calendar dates beginning in the Year 2000. As the century
date change occurs, date-sensitive systems may recognize the Year 2000 as the
Year 1900, or not at all. This inability to recognize or treat properly the Year
2000 may cause computer systems to process financial and operational information
incorrectly, which could have a material adverse effect on the results of
operations of all of the parties to the Merger. There can be no assurance that
PCM (or, if the Merger Proposal is approved and the Merger is consummated, the
Company) will complete the necessary modifications and conversions to the
computer software and operating systems necessary to properly operate or manage
date-sensitive information beyond December 31, 1999. Even if PCM (or, if the
Merger Proposal is approved and the Merger is consummated, the Company)
completes all necessary modifications and conversions to its computer software
and operating systems, there can be no assurance that the necessary
modifications and conversions by those third party institutions and entities
with which PCM and the PAM Funds conduct business will be completed in a timely
manner, which could have a material adverse effect on the results of operations
of PCM and the PAM Funds (or, if the Merger Proposal is approved and the Merger
is consummated, on the results of operations of the Company).
RIGHTS OF DISSENTING LIMITED PARTNERS
Offer to Purchase Units of Dissenting Limited Partners. The Merger Proposal
is also being structured to provide Limited Partners who dissent to the Merger
("Dissenting Limited Partners") the dissenter's rights specified in the
Thompson-Killea Act. The Thompson-Killea Act requires that the Dissenting
Limited Partners receive the appraised value of their Units in the form of cash,
freely tradeable securities, or secured or unsecured debt instruments satisfying
certain statutory requirements or, in the alternative, receive or retain a
security with substantially the same terms and conditions as the security
originally held, provided that the receipt or retention of that security is not
a step in a series of subsequent transactions that directly or indirectly
involves future combinations or reorganizations of one or more roll-up
participants. Securities received or retained will be considered to have the
same terms and conditions as the security originally held if (a) there is no
material adverse change to Dissenting Limited Partners' rights, including, but
not limited to, rights with respect to voting, the business plan, or the
investment, distribution, management compensation and liquidation policies of
the Partnership or resulting entity; and (b) the Dissenting Limited Partners
receive the same preferences, privileges, and priorities as they had pursuant to
the security originally held.
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The Company is satisfying this requirement by offering to purchase the
Units of any Dissenting Limited Partner with an unsecured subordinated debenture
("Debenture") issued under an Indenture Agreement ("Indenture Agreement"). The
Merger Proposal and the related transactions, including the dissolution and
liquidation of the Partnerships ("Dissolutions" and "Liquidations") have also
been structured to comply with the other protections afforded by the
Thompson-Killea Act. A copy of the Indenture Agreement is included with the
Joint Consent Statement/Prospectus as Appendix M. A copy of the Debenture is
included with the Joint Consent Statement/Prospectus as Appendix N. See that
portion of the Joint Consent Statement/Prospectus entitled "RIGHTS OF DISSENTING
SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
Unsecured Subordinated Debentures. A Dissenting Limited Partner who
exercises his or her dissenter's rights will receive an unsecured subordinated
debenture ("Debenture") under an Indenture Agreement ("Indenture Agreement").
The Indenture Agreement provides for a Trustee and specifies that (a) the title
of the Debenture shall be "Unsecured Subordinated Debenture Due January 31,
2005"; (b) the amount at which such Debenture will be issued shall be the value,
in United States currency, of such Dissenting Limited Partner's interest in the
Partnership, determined in accordance with the Exchange Value, as of the
Determination Date, if such Dissenting Limited Partner perfects his or her
dissenter's rights pursuant to the terms of the Merger; (c) the date on which
the principal of the Debenture is payable shall be January 31, 2005, which date
or dates may be fixed or extendible; (d) the rate or rates at which the
Debenture shall bear interest shall be a variable interest rate equal to the
federal rate as determined in accordance with Section 1274 of the Internal
Revenue Code of 1986, payable on January 1 and July 1 of each year and based on
a 365-day year; (e) the Debenture shall be issued within 30 days of the closing
date of the Merger; (f) the Debenture shall limit total leverage to 70 percent
of the appraised value of the assets previously owned by the Partnership; and
(g) the Debenture shall be prepaid with 80 percent of the net proceeds of any
sale or refinancing of the assets previously owned by the Partnership. The
Indenture Agreement does not provide for a sinking fund.
A Limited Partner who does not consent to the Merger Proposal may, but is
not required to, exercise his or her dissenter's rights by completing and
signing Part V of the Letter of Transmittal and Consent Statement ("Consent
Statement"). Such a non-consenting Limited Partner, therefore, will become a
"Dissenting Limited Partner". Dissenting Limited Partners will receive, pursuant
to those dissenter's rights, a Debenture issued under the Indenture Agreement in
an amount equal to the Exchange Value of such Dissenting Limited Partner's
Units. Each Dissenting Limited Partner will be provided with a Debenture within
30 days following the consummation of the Merger and related transactions for
his or her Units in the amount as specified above.
LIMITED PARTNERS WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS ARE CAUTIONED THAT
FAILURE TO COMPLETE PART V OF THE CONSENT STATEMENT WILL RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
See the portion of the Joint Consent Statement/Prospectus entitled "RIGHTS
OF DISSENTING LIMITED PARTNERS" for additional information regarding Limited
Partners' dissenters' rights.
Compliance with and Approval from Federal and State Authorities. The Merger
Proposal and related transactions will not be completed if any moratorium on
transactions of its type are imposed by federal, state or regulatory authorities
or if any state securities authority imposes any restriction upon, or prohibits
any aspect of, the transactions contemplated by the Merger Proposal and related
transactions, which in the judgment of the Company, renders the Merger Proposal
and related transactions undesirable or impractical.
B-27
<PAGE>
Comparison of Units and Merger Stock. The portion of the Joint Consent
Statement/Prospectus entitled "SUMMARY COMPARISON OF UNITS AND MERGER STOCK"
highlights a number of the significant differences between the Partnership (and
the Units) and the Company (and the Merger Stock) relating to, among other
things, form of organization, investment objectives, policies and restrictions,
asset diversification, capitalization, management structure compensation and
fees, and investor rights, and compares certain legal rights associated with the
ownership of the Units and Merger Stock, respectively. These comparisons are
intended to assist the Limited Partners in understanding how their investments
will be changed if, as a result of the Merger and related transactions, their
Units are exchanged for shares of Merger Stock.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following information is intended to provide the Limited
Partners with a summary of all material federal income tax consequences of
general application to the Company and Limited Partners associated with the
Merger Proposal. This summary does not consider all tax matters that may affect
the Partnership, the Company, or the Limited Partners, including any state,
local, foreign or other matters, and does not consider various facts or
limitations applicable to any particular Limited Partner, or special tax rules
that may apply to certain Limited Partners that may modify or alter the results
described herein.
Except as otherwise indicated, statements of legal conclusions regarding
tax treatments, tax effects or tax consequences present the opinions of John H.
Brainerd, Attorney at Law and tax counsel for the Company, based on the Internal
Revenue Code of 1986 ("Code") and applicable Treasury Regulations thereunder,
each as amended and in effect on the date hereof, and on reported judicial
decisions and published positions of the Internal Revenue Service ("IRS"). No
rulings have been requested from the IRS concerning any of the matters presented
in the Joint Consent Statement/Prospectus and the IRS will generally not issue
rulings on transactions such as the Merger Proposal. In some cases, particularly
those as to which tax counsel's opinion is qualified, there is a risk that the
IRS will disagree with the conclusions of tax counsel. The laws, regulations,
administrative rulings and judicial decisions that form the basis for
conclusions with respect to the tax consequences of the Merger Proposal are very
complex and are subject to change at any time.
The tax opinion of John H. Brainerd is filed as Exhibit 8 to the
Registration Statement, of which the Joint Consent Statement/Prospectus
constitutes a part. Upon receipt of a written request of a Limited Partner (or
such Limited Partner's representative who has been so designated in writing)
addressed to the Information Agent at 4100 Newport Place, Suite 400, Newport
Beach, California 92660, a copy of the tax opinion will be transmitted promptly,
without charge, by the General Partner.
The Limited Partners, PCM shareholders and Company shareholders should be
aware that there is no direct authority of general applicability governing the
federal income tax treatment of transactions such as the Merger Proposal that
are structured as partnership mergers, because this structure is an approach
made available by recent developments in California partnership law. Therefore,
in rendering his opinions, John H. Brainerd has relied on authorities addressing
the consequences of analogous transactions that used similar structures.
Accordingly, although there appears to be no controlling authority contrary to
Mr. Brainerd's conclusions, it is possible that the IRS would take a different
position if it reviewed the tax consequences of the Merger Proposal.
Differences Between Partnership Units and Merger Stock. A limited
partnership is a pass-through entity for federal income tax purposes. This means
that a limited partnership is not liable for federal income tax on its taxable
income. Rather, a limited partnership passes its income (or loss)
B-28
<PAGE>
through to its owners (i.e., general and limited partners) in proportion to
their relative interests in profits and losses. This is known as allocating a
partnership's income and loss. Many items of income, deduction, gain, loss, and
credits are allocated separately to each partner in proportion to such partner's
interest in those items as specified in such limited partnership's agreement of
limited partnership. The character of each item passed through to a partner
remains the same with such partner as it was with the limited partnership. Each
partner includes these items on such partner's income tax return and pays tax
based on those items combined with such partner's other items of income,
deduction, gain, loss or credits. Thus, tax is imposed on the partner regardless
of whether the limited partnership actually distributes any cash or property to
that partner. Therefore, it is the allocation, not the distribution, of income
(or loss) to a partner that results in tax effect for that partner.
A partner has a basis in the limited partnership interest he or she holds
which is generally equal to either the cost of that limited partnership
interest, if purchased, or, if not purchased, the amount of any cash or adjusted
basis of any other property that partner transferred to the limited partnership,
increased (or decreased) by that partner's share of the limited partnership's
income (or loss) and decreased by the amount of any cash (or the basis of any
property) distributed to that partner. Upon sale of his or her limited
partnership interest, a partner realizes gain equal to the amount received for
the limited partnership interest (including their share of partnership
liabilities) less that partner's adjusted basis in the limited partnership
interest. The partner's gain (or loss) upon sale is generally capital gain (or
loss), but may be characterized as ordinary gain (or loss) to the extent of that
partner's share of certain "hot" assets held by the limited partnership.
Because a limited partnership does not pay tax on income it earns (but
rather the general partner and limited partners pay tax on such income),
partners of a limited partnership are subject to federal income tax on income
earned in the business conducted by the limited partnership only once.
Accordingly, as owners of the Partnership, by their Units, Limited Partners
receive the federal income tax treatment just described. Regarding the
Partnership, the number of Units owned by a partner (either the General Partner
or any Limited Partner) will determine the amount of income or loss allocated to
such partner by the Partnership.
A corporation is a taxable entity and pays federal income tax at rates
ranging from 15% to 39% on its taxable income. A shareholder of a corporation is
generally not taxed on any income earned by that corporation until that
corporation distributes either cash or property to that shareholder or that
shareholder sells or exchanges his or her shares of stock issued by that
corporation at a gain. A corporation often makes distributions to its
shareholders in proportion to their interests in that corporation, but it need
not do so. When cash or property is distributed, each portion of the
distribution will be characterized in one of the following three ways: (i) as a
dividend, (ii) as a capital gain, or (iii) as a return of capital. The portion
of a distribution treated as a dividend is taxed at ordinary federal income tax
rates, which, for individuals, are as much as 39.6%. Upper tax bracket
individuals are subject to a phaseout of their personal exemptions, and a
restriction on itemized deductions, which, however, in combination under certain
circumstances, can bring the actual maximum effective federal rate to more than
47%. The portion treated as capital gain will reduce the adjusted basis in the
shareholder's stock and generally be taxed at a maximum 28% rate until the
adjusted basis reaches zero. The portion treated as return of capital will not
be taxed. The amount of any distribution treated in any of the three alternative
ways may differ for each shareholder, and will depend upon the value of the cash
and property received, the percentage interest in the corporation owned by the
shareholders receiving distributions and each shareholder's basis in his or her
shares. Because corporations are taxable on their own taxable income, and
because shareholders may be taxed again on that same income, if it is
distributed to shareholders in the form of cash or property, or if that income
is realized by the sale or exchange of shares at a gain, there are two levels of
potential tax upon income earned by a corporation. A shareholder's basis in his
or her shares
B-29
<PAGE>
is generally equal to the cost of the shares, if purchased, or, if not
purchased, the amount of any cash and basis of other property contributed to the
corporation, decreased by the amount of any distributions treated as a return of
capital. Upon a sale of shares, a shareholder's gain (or loss) will be equal to
the amount received for those shares less his or her basis in those shares. The
character of such gain (or loss) will generally be capital in nature. As holders
of interests in a corporation (the Company), the owners of Merger Stock will be
subject to the tax treatment just described.
As a holder of a Unit, a Limited Partner holds an interest in an entity
that earns income subject to federal income tax only once, whereas the holder of
Merger Stock would hold an interest in an entity that earns income conceivably
subject to federal income tax twice (if dividends or similar distributions are
made by the Company to its shareholders).
There are, however, potential tax advantages (and corresponding financial
advantages) to conducting a business in a corporation. These include the ability
of shareholders to defer tax on income earned by the corporation until the
corporation distributes such income. Partners in a partnership, by contrast, are
taxed as the partnership earns income, even if cash is not distributed to those
partners. Partners pay such tax at their individual federal tax rate, which may
exceed the maximum federal corporate tax rate. Alternatively, because
shareholders pay no tax until they receive distributions from the corporation,
the Company, as a corporation, may accumulate income for business expansion
without financially interfering with its shareholders' abilities to pay their
taxes. Finally, because tax is paid by the corporation, it is better able to
manage its tax liability by tax planning.
The Partnership. The Partnership will be deemed to have transferred all of
its assets and liabilities to the Company and to have received the Merger Stock
in exchange, and then to have distributed such Merger Stock to the Limited
Partners and the General Partner in complete liquidation. The Partnership will
realize, but not be required to recognize, gain or loss as if the Partnership
had transferred of all of its assets to the Company for an amount equal to the
value of such Merger Stock, plus the liabilities of the Partnership assumed in
the Merger. The Partnership will avoid recognition of gain or loss if it
contributes property to the Company and immediately thereafter, together with
the other PAM Funds and the PCM Shareholders, is in control of 80% of the
Company. The Partnership will, however, be taxed on any boot received in the
Merger. Boot is defined as cash or property (including securities other than the
stock) received by the Partnership. Gain or loss is not recognized and deferred
by the Partnership by the transfer of the Partnership's adjusted basis in its
assets, reduced by any liabilities assumed by the Company, to the shares of
Merger Stock that it is deemed to receive in the Merger. The gain or loss
realized will be recognized when these shares of Merger Stock are sold or
exchanged in a taxable transaction.
The Partnership will have a split holding period for each share of Merger
Stock received. A share of Merger Stock received in exchange for Units will have
a holding period that begins on the day following the Closing Date to the extent
that the value of such share of Merger Stock on the Closing Date is attributable
to certain of the Partnership's assets (essentially, its ordinary income
assets), and, to the extent of any excess value, such share of Merger Stock will
have a holding period that includes the period the Units were held by the
Limited Partners.
The Company. The Partnership will be deemed to have transferred all of its
assets and liabilities to the Company and to have received Merger Stock in
exchange, and then to have distributed the Merger Stock to the Limited Partners
and the General Partner in complete liquidation.
The Company will not recognize gain or loss resulting from the Merger, but
the Company's tax basis in the assets acquired from the Partnership will be the
same as that basis was in the hands of the
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<PAGE>
Partnership. The Company's holding period in the assets will include the
Partnership's holding periods received by the Company. The Partnership, on the
other hand, will not be required to recognize gain or loss resulting from the
Merger.
After consummation of the Merger, the Partnership will cease to exist for
both state law and federal income tax purposes. The Company will be taxed as a
corporation on its taxable income. The income and deductions attributable to the
assets and liabilities received in the Merger will be included in the Company's
taxable income. The adjusted tax basis of certain of the assets will be
depreciable or amortizable for federal tax purposes, thereby reducing the amount
of the Company's income subject to tax.
Gain or Loss to the Limited Partners. Each Limited Partner will realize
gain or loss on the receipt of Merger Stock or a Debenture in exchange for his
or her Units. As the Merger Stock will probably be considered to be marketable
securities, the Merger Stock will be treated as cash received and gain to the
Limited Partners will be measured by the difference between the fair market
value of the Merger Stock received by the Limited Partners and their adjusted
basis in their Units. This gain will be limited by the prorata share of the net
gain, if any, which would be recognized if all the marketable securities (Merger
Stock) held by the Partnership were sold. If all Dissenting Limited Partners
have had their interests redeemed before the distribution of the Merger Stock,
each Limited Partner's gains will be reduced to zero. This means that the
adjusted basis of the Merger Stock received would be the same as the adjusted
basis the Limited Partners had in their Units. If gain is recognized, the
adjusted basis in the Merger Stock would be increased by the amount of that
gain.
A Limited Partner that receives a Debenture (with respect to his or her
Units) because of such Limited Partner's exercise of dissenter's or similar
rights under California law (with respect to his or her Units) may recognize
gain depending upon such Limited Partner's aggregate basis in the Partnership
prior to the Closing Date. The aggregate basis of any Merger Stock received by a
Limited Partner in exchange for his or her Units will be equal to the aggregate
basis in such Units immediately before the Merger, decreased by the amount of
cash received by such Limited Partner for such Units in lieu of fractional
shares of Merger Stock. Such basis will be prorated among all shares of Merger
Stock received for such Units.
Limited Partners will have a split holding period for each share of Merger
Stock received. A share of Merger Stock will have a holding period that begins
on the day following the Closing Date to the extent that the value of such share
of Merger Stock on such date is attributable to certain of the Partnership's
assets (essentially, the Partnership's ordinary income assets), and, to the
extent of any excess value, such share of Merger Stock will have a holding
period that includes the period that Units were held by each recipient Limited
Partner.
Each Dissenting Limited Partner will receive a Debenture which will be
treated the same as cash, resulting in gain that will be realized and recognized
by such Limited Partner. It is not anticipated that such Debenture will be
readily transferable. Accordingly, this gain may be eligible to be deferred
until payment is received under such Debenture. Limited Partners should consult
their tax advisor as to how these rules might apply to them.
Each Limited Partner who receives Merger Stock will be required to file
with his or her federal income tax return for the year in which the Merger is
consummated a statement that provides details relating to his or her Units
(which will be considered to be property transferred), the Merger Stock, and his
or her share of any liabilities assumed by the Company, as the surviving
corporation in the Merger. The Company will provide its shareholders with
information to assist them in preparing those statements.
B-31
<PAGE>
After the Merger is consummated, the income and deductions attributable to
the assets and liabilities of the Company will not be allocated to the
shareholders of the Company. A shareholder of the Company will be taxed only on
dividends and other distributions received from the Company, if any. Such
distributions generally will be taxable as dividends to the extent of any
current or accumulated earnings and profits of the Company. Any other
distributions will be treated as a nontaxable return of capital to the extent of
such shareholder's basis in his or her shares of the Company's common stock and
as capital gain to the extent of the remaining portion of such distribution.
THE FOREGOING INFORMATION RELATES ONLY TO THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER PROPOSAL APPLICABLE TO LIMITED PARTNERS GENERALLY. EACH LIMITED
PARTNER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE
CONSEQUENCES OF THE MERGER PROPOSAL ON SUCH PERSON'S PARTICULAR TAX SITUATION.
B-32
<PAGE>
APPENDIX C
Supplement For
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership
(S-K Reg. 229.902)
Notice to Limited Partners of Performance Asset Management Fund II, Ltd., A
California Limited Partnership:
Purpose of Partnership Supplement. This separate partnership supplement
highlights information presented in the Joint Consent Statement/Prospectus as
that information relates to Performance Asset Management Fund II, Ltd., A
California Limited Partnership ("Partnership") and its limited partners
("Limited Partners"), regarding a proposed merger ("Merger Proposal") of the
Partnership and other, similar California limited partnerships ("Other
Partnerships") and Performance Capital Management, Inc., a California
corporation ("PCM"), with and into Performance Asset Management Company, a
Delaware corporation ("Company") ("Merger"). Similar supplements have been
prepared for the Other Partnerships. The effects of the Merger may differ for
the limited partners in the Other Partnerships. If you want to obtain a
supplement for any of the Other Partnerships, please call the Information Agent,
Bud Webb at (888) 754-4145. You may also send a written request for copies of
any documents referenced in the Joint Consent Statement/Prospectus to
Performance Development, Inc., Attn: Information Agent, 4100 Newport Place,
Suite 400, Newport Beach, California 92660. As you know, Performance
Development, Inc. is a California corporation and the General Partner of the
Partnership and each of the Other Partnerships ("General Partner"). Supplements
for any of the Other Partnerships will be provided without charge to any Limited
Partner. The Partnership and the Other Partnerships are sometimes collectively
referred to as the "PAM Funds."
Potential Adverse Effects of the Merger. The most significant potential
adverse effects of the Merger to the Limited Partners are the significant
reduction in distributions (the Company does not intend to pay cash dividends);
the possibility that the shares of the Company's $.001 par value common stock
received by the Limited Partners upon the winding up and dissolution of the
Partnership ("Merger Stock") will trade at a price substantially below the value
assigned in the Merger Proposal; the limited public market for the Merger Stock;
the potential price volatility of the Merger Stock; possible dilution of the
Merger Stock; and the significant influence of Vincent E. Galewick, in his
capacity as the majority shareholder of the Company. There are also possible
adverse tax consequences to individual Limited Partners which could result from
their particular financial circumstances. Limited Partners should carefully
consider the matters set forth under the Caption "RISK FACTORS" beginning on
Page 22 of the Joint Consent Statement/Prospectus, and summarized herein
beginning at Page __ . Significant risk factors include:
o PCM and the Partnerships Have History of Losses
o Significant Reduction in Distributions
o Shares of the Merger Stock May Trade at a Price Substantially Below
the Value Assigned in the Merger Proposal
o Limited Public Market for Shares of the Merger Stock
o Potential Price Volatility of Shares of the Merger Stock
o Possible Dilution of the Merger Stock
o Uncertainty of Future Financial Results of the Company
o Dependence on Key Personnel of the Company
o Control by Principal Shareholder of the Company
o Possible Adverse Tax Consequences
o The Company may fail to comply with Year 2000 computer programming
issues
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<PAGE>
Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("Partnership"), was formed on April 1, 1992, as a limited
partnership in California under the Revised Limited Partnership Act of the State
of California, as enacted and in effect on or after July 1, 1984. The
Partnership sold 1,548 limited partnership interests ("Units") at the price of
$5,000.00 per Unit. The terms "Unit" and "Units", when used in this Supplement,
shall also mean and refer to the limited partnership interests offered and sold
by the Other Partnerships. The total amount received by the Partnership from
purchasers of its Units is $7,740,000.00. As of June 30, 1997 ("Determination
Date") this Partnership had 489 Limited Partners. The Partnership termination
date is December 31, 2005, unless sooner terminated.
PERFORMANCE ASSET MANAGEMENT FUND II, LTD.
PER UNIT DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Units outstanding at year end 1,548.00 1,549.00 1,549.00 1,561.00 1,568.00
Earnings (loss) per Unit $196.84 $248.72 $244.91 ($40.41) ($26.79)
Book value per Unit 2,276.83 2,249.61 2,287.45 2,880.09 4,100.43
Annual return of capital
distributions per Unit 148.59 200.10 738.93 1,068.40 163.11
Cumulative return of capital
distributions per Unit 2,330.81 2,180.81 1,980.71 1,232.24 163.11
Assigned value for Merger Stock $2,010.34/Unit
</TABLE>
Each Limited Partner should review thoroughly the selected financial
statements included in the portions of the Joint Consent Statement/Prospectus
captioned "RESULTS OF OPERATIONS," "SELECTED HISTORICAL AND PRO FORMA FINANCIAL
DATA AND COMPARATIVE PER SHARE DATA," "PRO FORMA CONDENSED FINANCIAL
INFORMATION," and the financial statements of the Company, PCM and the
Partnership and the Other Partnerships included in the Joint Consent
Statement/Prospectus.
The Partnership has continued to invest in distressed loan portfolios. As
set forth above, these portfolios consist primarily of charged-off credit card
accounts and consumer loan balances, such as auto loans and personal lines of
credit originated by independent third-party financial institutions located
throughout the United States. In addition, the Partnership acquired certain
portfolios of default consumer debts which were rewritten under terms different
from the original obligation . In 1994, 1995 and 1996, the Partnership's
investments in distressed loan portfolios consisted of the following (amounts
are carrying amounts):
<TABLE>
<CAPTION>
Type of Portfolio 1994 1995 1996
----------------- ---------- ---------- ----------
<S> <C> <C> <C>
Credit Card Accounts .................................... $196,945 $254,681 $1,305,291
Performing Rewritten Accounts ........................... $10,319 $5,187 $0
Consumer Loans .......................................... $1,692,353 $810,857 $65,885
Trade Receivables ....................................... $21,226 $0 $0
---------- ---------- ----------
Total ......................................... $1,920,843 $1,070,725 $1,371,176
========== ========== ==========
</TABLE>
In 1994, the Partnership recorded net investment income of $458,892,
additional income in the form of interest income of $22,912 and other income of
$9,250. Operating expenses for the Partnership consists of the following:
management fee expense of $70,022; collection expense of $27,191; professional
fees of $5,957; amortization expense of $1,107; and general and administrative
expenses of
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<PAGE>
$7,412; for total operating expenses of $111,689. Therefore, the Partnership
recorded net income of $379,365 for 1994.
In 1995, the Partnership recorded net investment income of $634,187, and
interest income of $16,792. Operating expenses for the Partnership consists of
the following: management fee expense of $68,385; collection expense of $12,336;
professional fees of $180,540; amortization expense of $1,107; and general and
administrative expenses of $3,345; for total operating expenses of $265,713.
Therefore, the Partnership recorded net income of $385,266 for 1995.
In 1996, the Partnership recorded net investment income of $504,836, net
interest income of $141,209 and other income of $886. Operating expenses for the
Partnership consists of the following: management fee expense of $75,464;
collection expense of $67,854; professional fees of $189,709; amortization
expense of $1,107; and general and administrative expenses of $8,082; for total
operating expenses of $342,216. Therefore, the Partnership recorded net income
of $304,715 for 1996.
Value of Assets Held by the Partnership. As of December 31 of each of the
years specified in the following table, the Partnership held the following
assets with the following values, which values were determined by the General
Partner and reviewed by Willamette Management Associates, Inc. ("Fairness
Analyst"), as part of the Fairness Analyst's review of the Merger Proposal to
determine if the terms of the Merger Proposal are fair to the Partnership and
the Other Partnerships:
Asset 1994 1995 1996
----- ---------- ---------- ----------
Cash and equivalents .................... $748,107 $144,800 $1,024,507
Cash held in trust ...................... 0 $1,171,869 $1,003,215
Investment in Distressed Loan Portfolios $1,920,842 $1,070,725 $1,371,176
Receivable from Unaffiliated Service
Provider(1) ........................... $778,565 $778,565 0
Due from Affiliates ..................... $12,876 $201,632 $82,114
Other Assets ............................ $80,069 $115,367 $42,942
Organization Costs, Net ................. $2,799 $1,692 $585
(1) West Capital Financial Services Corp., a California corporation.
The Partnership defines cash equivalents as all highly liquid investments
with a maturity of three months or less when purchased. The Partnership
maintains cash balances at one bank and aggregate accounts at that bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
Compensation to the General Partner and Affiliates For the Last Three
Fiscal Years. The following table sets forth the compensation paid by the
Partnership to the General Partner and its Affiliates for the last three fiscal
years and the most recently completed interim period.
Entity 1994 1995 1996 1997*
-------- -------- -------- --------
General Partner
Management Fees .......... $70,022 $68,385 $75,464 $31,086
Distributions ............ $127,178 $34,439 $25,810 $51,572
PCM
Acquisition Fees ......... $178,678 $30,225 $412,930 $46,405
Collection Fees .......... $74,605 $136,309 $216,973 $153,711
-------- -------- -------- --------
Total ............ $450,483 $269,358 $731,177 $282,774
======== ======== ======== ========
* Through June 30, 1997
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<PAGE>
The following table sets forth the compensation that would have been paid
by the Partnership to the General Partner and its Affiliates if the compensation
and distributions structure to be in effect after the Merger had been in effect
during the last three fiscal years.
Entity 1994 1995 1996
------ ---- ---- ----
General Partner ...................... $0 $0 $0
PCM .................................. $0 $0 $0
Total ............................ $0 $0 $0
== == ==
As stated above, the Partnership enters into various joint ventures with
Performance Capital Management, Inc., a California corporation and an Affiliate
of the General Partner. Vincent E. Galewick owns all of the issued and
outstanding common stock of the following Affiliates:
Performance Development, Inc., a California corporation ("General Partner")
Income Network Company, Inc., a California corporation ("INC")
Vision Capital Services Corporation, a California corporation ("Vision")
Vincent E. Galewick owns 98.5% of the issued and outstanding common stock
of the following Affiliate: Performance Capital Management, Inc., a California
corporation ("PCM")
The Other Partnerships are:
Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM")
Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("Partnership")
Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III")
Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM IV")
Performance Asset Management Fund V, Ltd., A California Limited Partnership
("PAM V")
For convenience, as set forth above, the Partnership and the Other Partnerships
may be referred to in this Supplement as the "PAM Funds."
The General Partner was formed in June, 1990 to engage in various aspects
of the distressed loan industry. The General Partner serves as the general
partner for all the PAM Funds and certain other California limited partnerships.
The General Partner's management fees incurred and recorded by the Partnership
totalled $70,022, $68,385 and $75,464 for the years ended December 31, 1994,
1995, and 1996, respectively. The Partnership also accrued distributions to the
General Partner of $127,178 and $34,439 for the years ended December 31, 1994
and 1995, respectively and $25,810 for the year ended December 31, 1996. At
December 31, 1994 and 1995, the Partnership had amounts owed to the General
Partner recorded as amounts due to Affiliates, of $101,198 and $148,374,
respectively, and $38,488 for the year ended December 31, 1996.
Income Network Company, a California corporation ("INC"), was formed on
February 1, 1988, as a registered Broker-Dealer and member of the National
Association of Security Dealers, Inc. and the
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<PAGE>
Securities Investor Protection Corporation. The sole shareholder of INC, Vincent
E. Galewick, is also the sole shareholder of the General Partner and Vision.
Additionally, Mr. Galewick owns 98.5% of the issued and outstanding stock of
PCM. INC, in accordance with the Agreement of Limited Partnership for the
Partnership and offering memorandum of the Partnership, was paid commissions
equal to 10% of gross proceeds received from the offer and sale of interests in
the Partnership ("Units"). INC is the Soliciting Agent for the Merger Proposal.
Performance Capital Management, Inc., a California corporation ("PCM"), was
formed in February, 1993, to perform services related to locating, evaluating,
negotiating, acquiring and collecting distressed loan portfolio assets. PCM
acquires portfolio assets from third-party financial institutions and sells the
portfolios to the Partnership and the Other Partnerships at cost plus an
acquisition fee of approximately 30% to 37%, as provided in the related purchase
agreements. The Partnership also enters into servicing agreements with PCM to
collect and service the portfolios. Those agreements generally provide that all
proceeds generated from the collection of portfolio assets shall be shared by
the venturers (PCM and the Partnership) in proportion to their respective
percentage interests, generally, 55% to 60% for the Partnership and 40% to 45%
for PCM. The Partnership also reimburses PCM for certain costs associated with
the collection of portfolio proceeds.
Moreover, in addition to providing collection efforts on distressed loan
portfolios to the Partnership, PCM identifies and acquires distressed loan
portfolios and other discounted portfolios of financial debt instruments and
obligations and sells them to the Partnership and the Other Partnerships at
negotiated prices.
For the years ended December 31, 1994 and 1995, the Partnership purchased
four portfolios and one portfolio, respectively, from PCM and recorded
acquisition fees for these portfolios of $178,678 and $30,225, respectively. For
the year ended December 31, 1996, the Partnership purchased two portfolios from
PCM and recorded acquisition fees for these portfolios of $412,930. These
acquisition fees have been included in the carrying value of the related
investments. Also, for the years ended December 31, 1994, 1995 and 1996, the
Partnership incurred and reimbursed PCM for collection costs of $27,191,
$12,336, and $67,854, respectively.
The Partnership had amounts owed from PCM from reimbursement of collection
expenses and other expenses totaling $12,876 and $9,008 recorded as due from
affiliates at December 31, 1994 and 1995, respectively. For the year ended
December 31, 1996 the Partnership had amounts owed from PCM of $43,947 recorded
as due from affiliates.
Distributions and Dividends. The Partnership has made quarterly cash
distributions to the Limited Partners, which distributions terminated effective
as of June 30, 1997. All of the distributions represented a return of capital.
The following table specifies the cash distributions made to the Limited
Partners during each of the last five fiscal years and most recently completed
interim period.
General Limited
Total Partner Partner
Year Distributions Distributions Distributions
---- ------------- ------------- -------------
1992 ..................... $284,167 $28,417 $255,750
1993 ..................... $1,853,083 $185,308 $1,667,775
1994 ..................... $1,271,778 $127,178 $1,144,600
1995 ..................... $344,389 $34,439 $309,950
1996 ..................... $255,833 $25,810 $230,023
June 30, 1997 ............ $503,248 $51,573 $451,675
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<PAGE>
Selected Financial Information. The following table sets forth a historical
summary of gross collections and partner distributions for the PAM Funds from
the date of formation of each PAM Fund through June 30, 1997:
<TABLE>
<CAPTION>
Cost of
Portfolios Original Portfolio Portfolios Gross Partner
Partnership Acquired Face Value Acquired Collections* Distributions**
----------- -------- ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
PAM(1) ....... 16 $305,438,442 $4,932,616 $5,526,429 $3,678,632
Partnership .. 19 433,632,566 6,230,345 8,749,682 4,059,775
PAM III(2) ... 21 521,408,657 9,685,926 7,826,584 3,463,815
PAM IV(3) .... 57 709,008,534 20,416,167 20,014,508 6,269,988
PAM V(4) ..... 12 209,901,705 4,997,992 2,889,555 639,600
Total 125 $2,179,389,904 $46,263,046 $45,006,758 $18,111,810
=== ============== ============== ============== ==============
</TABLE>
* Gross collections include any sale of accounts and collection activity
through June 30, 1997
** Through June 30, 1997
(1) Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM").
(2) Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III").
(3) Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM IV").
(4) Performance Asset Management Fund V, Ltd., A California Limited Partnership
("PAM V").
REASONS FOR THE MERGER PROPOSAL
The primary purpose of the Merger is to provide the Limited Partners with
the opportunity to participate in the growth of Performance Capital Management,
Inc., a California corporation ("PCM"), while also increasing the liquidity of
their investments. Additional purposes include the possibility of greater access
to capital markets; greater flexibility regarding capital resources; the ability
to provide employees with incentive performance compensation by a stock option
plan; the opportunity to offer greater employee ownership; more simplified
record keeping, accounting and tax reporting; and to permit the shares of $.001
par value common stock issued by the Company to the Limited Partners in the
Merger ("Merger Stock") to be eligible for listing on a regional or national
market quotation system. No prediction can be made, however, as to the price at
which the Merger Stock will trade. Moreover, no assurance or guaranty can be
given that the Merger Stock will trade at all or that the application for such
listing will be approved.
Liquidity and Market Valuation. The Units and currently issued and
outstanding shares of no par value common stock of PCM are not publicly traded
and have limited, if any, liquidity. The primary means of liquidity for holders
of the Units has been requesting the Partnership to redeem their Units. Although
the Partnership is not obligated to comply with any such request, such
redemptions have occurred from time to time, using available cash to redeem
Units at a percentage of book value. After consummation of the Merger, the
Merger Stock may be made eligible for trading on a regional or national stock
exchange and there may be a readily accessible market for selling the Merger
Stock and a readily determinable market price for the Merger Stock. With a
readily accessible market for Merger Stock, Unit holders would no longer be
required to rely solely on the Partnership as a source of liquidity, and the
Company would not be required to use its cash to provide such liquidity.
Instead, it is expected
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<PAGE>
that holders of Merger Stock will be able to sell their Merger Stock publicly
from time to time, subject to certain restrictions, at a fair market price. No
prediction can be made, however, as to the price at which the Merger Stock will
trade. Moreover, no assurance or guaranty can be given that the Merger Stock
will trade at all or that the application for such listing will be approved.
Access to Equity Markets. Although the Company currently has no plans for
any equity offerings, the existence of publicly traded equity securities is
expected to provide the Company with future access to the public equity markets.
Greater Flexibility Regarding Capital Resources. The Company should have
greater flexibility with respect to the use of capital resources, because it
will not have to use available cash to redeem shares of its common stock. As
discussed above, the Partnership has from time to time used its available cash
to redeem Units when requested to do so by certain of its Limited Partners.
There are also potential tax advantages (and corresponding financial advantages)
to conducting a business as a corporation that should allow the Company greater
flexibility with respect to the management of its capital resources.
Shareholders of the Company will defer the payment of taxes on income earned by
the Company until the Company distributes such income in the form of dividends.
Limited Partners, by contrast, are taxed at such time as the Partnership
recognizes taxable income. The Limited Partners are taxed on such income at
their individual federal, state and, sometimes, municipal tax rates, which may
exceed the maximum corporate tax rates. Therefore, the Company, as a
corporation, can accumulate income for business expansion without adversely
affecting a shareholder's tax liability.
Acquisition Consideration. After consummation of the Merger, the Company
may be able to use shares of its common stock as consideration in its
acquisition of assets or other businesses. The use of equity securities as an
acquisition currency is advantageous, because it may be more tax efficient to
the seller of a business than a cash transaction, and it allows the Company to
consummate acquisitions without depleting cash resources. It also allows a
seller to continue to hold an equity interest in the business acquired by the
Company, by equity ownership in the Company after such acquisition. The use of
common stock in acquisitions can also enable the Company to use the advantageous
pooling accounting method, if certain conditions are satisfied.
Incentive Compensation. The availability of shares of the Company's common
stock will permit the Company to provide its key employees with equity based
incentive compensation. The Company believes providing equity based incentive
compensation by the use of common stock will allow greater employee
participation in the Company's ownership, provide a more accurate measure of the
Company's performance (as a result of common stock having a readily
ascertainable value), and provide the Company with more flexibility in designing
equity based incentive compensation. The Company believes that this method of
compensation conserves the Company's cash and promotes management stability.
Greater Employee Ownership. As a result of the complex tax reporting
requirements associated with being a Limited Partner and the administrative
burden placed on the Partnership, as a result of having a significant number of
additional limited partners, it has not been feasible for the Partnership to
offer ownership opportunities to a broad range of employees. By having the
shares of its common stock available, however, the Company will be able to offer
ownership opportunities to its employees. The Board of Directors of the Company
believes that employee ownership is in the best interests of the Company and its
shareholders.
Simplified Record Keeping, Accounting and Tax Reporting. The Limited
Partners will not continue to be burdened with the cumbersome and complex tax
reporting requirements imposed on them under federal and multiple state
partnership tax laws, or with the related record keeping and accounting
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<PAGE>
requirements.
Certain Disadvantages of the Merger Proposal and Related Transactions
Taxation. The Partnership does not pay any federal or state income taxes.
After consummation of the Merger, the Company will be subject to federal and
state income tax. Shareholders of the Company will also be required to pay
federal, state and, in some circumstances, municipal income taxes on any
dividends that they receive from the Company and on any gain from the sale or
exchange of their Merger Stock. Therefore, while in partnership form, income
taxes are imposed only once (i.e., on the Limited Partners), in corporate form
income taxes are imposed twice (i.e., once on the Company and once on its
shareholders, to the extent they receive dividends or recognize gain on the sale
or exchange of securities). See those portions of the Joint Consent
Statement/Prospectus captioned "FEDERAL INCOME TAX CONSEQUENCES" and "CERTAIN
STATE AND LOCAL INCOME TAX CONSEQUENCES."
Significant Reduction in Distributions. The dividends distributed by the
Company to its shareholders after consummation of the Merger may be
significantly less that the distributions historically made by the Partnership
to the Limited Partners. Moreover, the Company shall not pay any cash dividends
on its common stock or preferred stock during the foreseeable future. See those
portions of the Joint Consent Statement/Prospectus captioned "Distribution
Policy" and "DISTRIBUTION POLICY --HISTORICAL DISTRIBUTIONS OF THE
PARTNERSHIPS."
Uncertainty Regarding Trading and Market Price of Common Shares. The Merger
Stock may not be listed or approved for listing on any regional or national
securities exchange or otherwise designated or approved for designation upon
notice of issuance as a national market system security on an interdealer
quotation system maintained by the National Association of Securities Dealers,
Inc. To the extent that the Merger Stock may trade, trading prices for the
Merger Stock will be influenced by many factors, including the market for the
Merger Stock, the Company's dividend policy, the possibility of future sales by
the Company or its shareholders of shares of the Company's common stock,
investors' perception of the Company and its businesses, and general economic
and stock market conditions. No prediction can be made as to the price at which
the Merger Stock will trade, if it will trade at all. Moreover, there is a
probability that the Merger Stock may trade at a price below the value per share
assigned in the Merger Proposal. The Limited Partners and shareholders of PCM
("PCM Shareholders") have not previously had access to an active trading market
for the Units and shares of PCM's common stock, respectively. Therefore, it is
possible that they may wish to sell their Merger Stock from time to time after
the consummation of the Merger. The sale of Merger Stock after the consummation
of the Merger might have an adverse effect on the market price of the Merger
Stock; provided, however, to mitigate as much as possible any such adverse
effect, trading of the Merger Stock shall be limited during the first one year
period following the closing date of the Merger ("Closing Date").
EFFECTS OF THE MERGER
As a result of the Merger, all of the assets now held directly or
indirectly by PCM and the PAM Funds will be held by the Company, and PCM and the
PAM Funds will cease to exist by operation of law. The Company will possess all
of the assets, properties, rights and privileges, and will be subject to all the
liabilities and obligations, of PCM, the PAM Funds and the Company existing on
the Closing Date.
The following is a brief description of each material risk and effect of
the Merger Proposal, including, but not limited to, federal income tax
consequences, for the Limited Partners. Also included is a brief discussion of
the effect of the Merger Proposal on the Partnership's financial condition and
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<PAGE>
results of operations. Pro forma financial information based on the
participation of the Partnership in the Merger is set forth in the Joint Consent
Statement/Prospectus under the heading entitled "SELECTED HISTORICAL AND PRO
FORMA FINANCIAL DATA AND COMPARATIVE PER SHARE DATA."
The Merger. The proposed merger transaction contemplates that each of the
PAM Funds, including the Partnership, shall receive shares of $.001 par common
stock of the Company in exchange for the assets of the PAM Funds. Additionally,
by amending the provisions of the Agreements of Limited Partnership for the PAM
Funds, the PAM Funds shall be wound up and dissolved and the shares of $.001 par
value common stock of the Company received by the PAM Funds in exchange for
their assets shall be distributed to the General Partner and the limited
partners of the PAM Funds, all in accordance with an exchange value determined
by the Company, PCM and the General Partner and reviewed by Willamette
Management Associates, Inc. ("Fairness Analyst"). A copy of the Fairness Opinion
is attached to the Joint Consent Statement/Prospectus as Appendix G.
The Determination Date is a date set by the Board of Directors of the
Company. At this time, the Board of Directors of the Company expects that the
Determination Date will be June 30, 1997. To accommodate the Merger, the General
Partner suspended distributions by the Partnership to the Limited Partners,
effective as of the Determination Date. This is necessary to assure that the
Limited Partners' capital accounts do not change after the Determination Date.
The Board of Directors of the Company has the authority to postpone the
Determination Date and declare a new Determination Date, in its discretion. The
Board of Directors of the Company might postpone the Determination Date and
declare a new Determination Date, if the matters contemplated in the Merger
Proposal are postponed for any reason.
Effect of the Merger on Cash Distributions. Until June 30, 1997, the
Partnership made cash distributions to the Limited Partners. The Company
currently anticipates that the Company will not pay cash dividends. However,
this policy may change, as the actual amount of dividends, if any, to be paid
will be determined by the Board of Directors of the Company, in its sole
discretion, generally taking into account a number of factors, including
operating performance, liquidity and capital requirements. There can be no
assurances that any cash dividends will be paid, just as there can be no
assurances that the Partnership's distributions will continue at previous
levels.
DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
COMPANY'S ACTUAL CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S FINANCIAL
CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS AS THE
COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Effects of the Merger May Be Different For Investors in the Various Limited
Partnerships. If the Merger Proposal is approved and the Merger is consummated,
the Limited Partners will receive $2,010.34 in Merger Stock per Unit of the
Partnership. Limited partners in PAM will receive $890.37 in Merger Stock per
Unit of PAM. Limited partners in PAM III will receive $3,003 in Merger Stock per
Unit of PAM III. Limited partners in PAM IV will receive $1,381.52 in Merger
Stock per Unit of PAM IV. Limited Partners in PAM V will receive $3,936.35 in
Merger Stock per Unit of PAM V.
The General Partner believes that the Limited Partners would receive
significantly less if the Partnership was liquidated, and the assets distributed
to the Limited Partners, because even an orderly liquidation would result in
prohibitive discounts on the value of the Partnership assets, which are
distressed debt portfolios. Continuing the Partnership in accordance with its
present business plan would result in each Limited Partner maintaining the
current book value per Unit of the Partnership. The book
per Unit;
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<PAGE>
value at the Determination Date of the Partnership was $1,855.19 per Unit; of
PAM, $536.07 of PAM III, $2,340.34 per Unit; of PAM IV, $1,249.22 per Unit; and
of PAM V, $3,158.55 per Unit. Therefore, under the Merger Proposal, the limited
partners of the PAM Funds will receive significantly more in Merger Stock per
Unit than the book value per Unit.
To estimate the value of PCM and the PAM Funds, the Fairness Analyst
considered an asset-based approach and an income-based approach to value.
Therefore, the amount of capital raised from the limited partners in each of the
PAM Funds, and the returns on investment experienced by each PAM Fund, were
factors in determining the Exchange Value of each PAM Fund. The extent to which
each PAM Fund achieved its investment objectives was another factor. PCM's value
was calculated based on the present value of debt-free net cash flow and the
present value of the terminal value of PCM's cash receipts.
In the asset-based approach, the Fairness Analyst considered the total
expected net proceeds (i.e., after consideration of interim operating and
liquidation costs) which would accrue to the limited partners of each PAM Fund
as a result of the orderly liquidation of the assets on hand. The Fairness
Analyst determined that the liquidation equity values of the PAM Funds are as
follows: the Partnership - $2,404,533; PAM - $28,256; PAM III - $3,826,861; PAM
IV - $11,865,592; and PAM V - $2,594,885. The present value of PCM's terminal
value of cash flows was determined to be $38,764,000.
In the income-based approach, the Fairness Analyst considered the expected
annual cash flows which would be generated by PCM and each PAM Fund over a
projected, finite operating period primarily as a result of collection efforts
and the sale of distressed loan portfolios. The expected cash flows, including
the terminal value, or projected cash flows resulting from the sale of assets or
business at the end of the projection period, were then discounted to a present
value by a rate of return deemed to be reflective of the risks inherent within a
projected stream of cash flows generated by assets such as distressed loan
portfolios.
The projected cash distributions from 1997 through the life each PAM Fund
were as follows: the Partnership - $6,560,773; PAM - $2,718,150; PAM III -
$8,625,225; PAM IV - $25,117,113; and PAM V - $5,618,400. Present value of the
projected cash distributions was calculated using a discount rate based on a
weighted average yield to maturity of 14 high yield issues in fiscal 1996, as
specified in Exhibit A-12 to the Fairness Opinion. This figure was added to the
terminal value of the portfolios of the PAM Funds, to arrive at a total present
value of each PAM Fund. The General Partner determined (and the Fairness Analyst
agreed that such determination is fair to the PAM Funds from a financial point
of view) that the present value of the PAM Funds as of the date of the Fairness
Opinion was as follows: the Partnership - $1,571,591; PAM - $1,432,934; PAM III
- - $3,357,876; PAM IV - $9,737,878; and PAM V - $3,786,364. These valuations were
added to each PAM Fund's adjusted net asset value, for a combined portfolio and
adjusted net asset value of $3,111,728 for the Partnership; $933,609 for PAM;
$5,999,944 for PAM III; $15,846,278 for PAM IV; and $4,699,954 for PAM V.
The present value of PCM was determined to be the sum of its terminal value
of cash flows, $38,764,000, plus the present value of its debt free net cash
flow, $5,759,000, for a total present value of $44,523,211.
These values formed the basis for the Exchange Value for each PAM Fund and
PCM.
The only material difference in the operation of the PAM Funds is a
difference in the Agreement of Limited Partnership of PAM IV. Section 6.2 of the
Agreement of Limited Partnership of PAM IV provides that, until such time as the
limited
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<PAGE>
capital contributions, plus an amount equal to 6% of their capital
contributions, the limited partners of PAM IV will receive 90% of the cash
available for distribution, and the General Partner will receive the remaining
10% of the cash available for distribution. After the limited partners of PAM IV
have received the specified cash return, the distribution ratio changes to 70%
to those limited partners and 30% to the General Partner. The General Partner
considered this provision in calculating the income-based value of PAM IV.
Allocation to Limited Partners and General Partner. Upon dissolution of the
PAM Funds, the General Partner will receive 10% of the Merger Stock allocated to
each PAM Fund pursuant to the ownership allocations in the Agreement of Limited
Partnership for each PAM Fund. The Partnership has been allocated 311,200 shares
of Merger Stock. If the Merger is consummated, the General Partner will receive
31,120 shares of Merger Stock received by the Partnership and the Limited
Partners will receive 280,080 shares of Merger Stock received by the
Partnership.
The Merger Agreement. The Merger will be consummated pursuant to the Merger
Agreement, if the Merger Proposal, as set forth in the Joint Consent
Statement/Prospectus, receives the requisite approval of the limited partners of
each PAM Fund, the approval of the PCM Shareholders, and the approval of the
shareholders of the Company, and if the other applicable conditions to the
Merger are satisfied or waived, including any approvals required from any state
or federal regulatory agency. The Merger Agreement is designated as Exhibit 2 to
the Registration Statement on Form S-4 filed by the Company with the Securities
and Exchange Commission in connection with the Merger and is included in the
Joint Consent Statement/Prospectus as Appendix A.
Until such time as the Merger Agreement has been approved and adopted by
all the parties thereto, it may be amended or terminated by the Board of
Directors of the General Partner, on behalf of any of the PAM Funds; the PCM
Shareholders, on their own behalf, or the Board of Directors of the Company, on
behalf of the Company; provided, however, that at any time after the Merger
Agreement has been adopted by the PCM Shareholders, the Company shareholders or
the limited partners of the PAM Funds, the Company's Board of Directors may not
amend, modify or supplement the Merger Agreement to change the amount or kind of
interests to be received by the limited partners of the PAM Funds, the PCM
Shareholders or the Company shareholders or to make any change if such change
would, alone or in the aggregate, materially adversely affect the limited
partners of the PAM Funds.
Approval by All of the Limited Partnerships Is Required. The Merger
Proposal may be consummated only if all of the PAM Funds approve the Merger
Proposal. The Merger Agreement provides that limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. A PAM Fund which rejects the Merger Proposal shall not be required to
pay any of the costs of the Merger, in accordance with the provisions of Section
25014.7(e)(3) of the California Corporations Code. The General Partner, the PCM
Shareholders and the Company have considered the possibility of approval of the
Merger Proposal and related transactions by less than all of the PAM Funds, and
do not believe that the Merger can be fairly consummated unless all of the PAM
Funds approve the Merger Proposal, because, among other things, (i) it would be
unduly burdensome or impossible to evaluate and apportion the value of the
various services provided to the PAM Funds by PCM, considering the complexity
and scope of the various joint ventures between the PAM Funds and PCM; and (ii)
if the Merger Proposal is approved, PCM will cease to exist by operation of law,
and would no longer be available to provide the same services to dissenting PAM
Funds. Willamette Management Associates, Inc., as the Fairness Analyst, was
retained by Kelly & Company, the independent auditing firm for the PAM Funds,
the General Partner, PCM, and INC, to render the Fairness Opinion concerning the
Merger Proposal. See the section in the Joint Consent Statement/Prospectus
entitled "DETERMINATION OF THE EXCHANGE STOCK AND ALLOCATION
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<PAGE>
OF THE MERGER."
Conditions of the Merger. The Merger will not be consummated unless the
Merger Proposal receives the requisite approval of the limited partners of each
PAM Fund and the approval of the requisite state and federal regulatory
agencies. Consummation of the Merger is also subject to the receipt of the
opinion described in the section in the Joint Consent Statement/Prospectus
entitled "FEDERAL INCOME TAX CONSEQUENCES." Receipt of this opinion may be
waived in whole or in part by the PAM Funds, the PCM Shareholders and the
Company in each respective party's sole discretion.
Prior to the consummation of the Merger, the obligations of the parties to
the Merger Agreement may be terminated at any time (including after approval of
the Merger by the limited partners of the PAM Funds and the respective
shareholders) if, among other things, (a) the General Partner or the Company
adopts a resolution terminating the Merger Agreement or (b) a final injunction,
order, or other action of a court or other governmental body prevents the
consummation of the Merger.
Completing the Merger. If the Merger Proposal is approved and the other
conditions of the Merger Agreement are waived or satisfied, the Closing Date
will be selected by agreement of the General Partner, the PCM Shareholders and
the Company. Upon consummation of the Merger and dissolution of the
Partnerships, the limited partners of the PAM Funds and PCM Shareholders will be
entitled to receive certificates for Merger Stock issued in exchange for the
assets of the Partnerships and shares of PCM's no par value common stock,
respectively.
Costs of the Merger. For purposes of the Thompson-Killea Act, which is that
portion of the California Corporations Code relating to "rollup" transactions
(the Merger Proposal is a "rollup" transaction), the costs of the Merger will be
divided into two categories, (i) transaction costs; and (ii) solicitation
expenses. Transaction costs are defined as the costs of printing and mailing the
Joint Consent Statement/Prospectus, or other documents; legal fees not related
to the solicitation of votes or tenders; financial advisory fees; investment
banking fees; valuation fees; accounting fees; independent committee expenses;
travel expenses; and all other fees related to the preparatory work of the
transaction, but not including costs that would have otherwise been incurred by
the Partnership in the ordinary course of business, or solicitation expenses.
Solicitation expenses include direct marketing expenses such as telephone calls,
broker-dealer fact sheets, legal and other fees related to the solicitation, as
well as direct solicitation compensation to brokers and dealers.
The Company estimates that the total costs and expenses of the Merger will
be approximately $1,400,000 if consummated and $1,200,000 if not consummated.
The Company estimates that the total solicitation expenses will be approximately
$600,000. This amount will be incurred whether or not the Merger is consummated.
The remainder of the costs and expenses estimated for consummation or
non-consummation will be attributable to transaction costs.
The Merger Agreement provides that those limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. Should the Merger Proposal be rejected by all of the PAM Funds, the
transaction costs will be apportioned between the Company and each PAM Fund
according to the final vote on the Merger Proposal as follows: (a) the Company
shall bear all transaction costs in proportion to the number of votes of the
limited partners of that PAM Fund to reject the Merger Proposal; and (b) that
PAM Fund shall bear transaction costs in proportion to the number of votes of
limited partners of that PAM Fund to approve the Merger Proposal. Should the
Merger Proposal be approved by one or more PAM Funds and rejected by at least
one PAM Fund, each PAM Fund rejecting the Merger Proposal shall not be required
to pay any of the costs of the Merger, in accordance with the provisions of
Section 25014.7(e)(3) of the Thompson-Killea Act. Further, in the event that the
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Merger Proposal is rejected by all of the PAM Funds, the Company shall pay all
of the solicitation expenses in accordance with the provisions of Section
25014.7(g) of the Thompson-Killea Act.
In 1996, the total approximate amounts distributed to the partners of each
PAM Fund are as set forth on the following table:
<TABLE>
<CAPTION>
Distributions to the Distributions to the
PAM Fund Limited Partners General Partner
-------- ---------------- ---------------
<S> <C> <C>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership.............. $ 154,650 $ 17,483
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership.............. $ 230,023 $ 25,810
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership.............. $ 295,925 $ 35,775
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership.............. $ 1,433,425 $ 159,334
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership.............. $ 179,100 $ 19,966
</TABLE>
The total amount distributed by all of the PAM Funds was $2,551,491. All of
the distributions to the limited partners were in the form of cash
distributions. Some of the distributions to the General Partner were accrued.
In contrast to the Partnership, the Company will itself be subject to
federal tax on its income. Holders of Merger Stock will not be subject to
federal tax on such income except to the extent dividends are paid by the
Company. See the section in the Joint Consent Statement/Prospectus entitled
"FEDERAL INCOME TAX CONSEQUENCES." The Company is expected to make significantly
smaller distributions, if any, than the Partnership has made.
There can be no assurance that the Merger will achieve any of the benefits
and objectives described above. In addition, certain possible disadvantages and
other risks and special considerations associated with the Merger exist, as
described in the section in the Joint Consent Statement/Prospectus entitled
"RISK FACTORS." Limited Partners should analyze the Merger Proposal and related
transactions, considering all the matters presented in the Joint Consent
Statement/Prospectus.
ALTERNATIVES TO THE MERGER
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal and related transactions. Some of
these alternatives do not contemplate a reorganization. In the mutual opinion of
the PCM Shareholders, the Company and the General Partner, the only viable
alternatives not contemplating a reorganization involve some form of public
registration or offering of securities. The General Partner has considered the
possibility of a registration of Units. In the opinion of the General Partner,
this possibility would fail to provide the Limited Partners with the liquidity
that the Merger Proposal might provide, because of the unsatisfactory market for
publicly traded limited partnership interests. The PCM Shareholders and the
Company have also considered the possibility of merging PCM and the Company
without merging with any of the PAM Funds and thereafter making a public
offering of shares of common stock in the surviving corporation. In the event
the Merger is not consummated, the PCM Shareholders and the Company may elect
this alternative.
The PCM Shareholders, the Company and the General Partner have considered
several
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alternatives to the Merger Proposal, each of which contemplates a
reorganization. The General Partner considered the possibility of selling all
Units of the PAM Funds to the Company, and the Company considered purchasing all
such Units, in exchange for shares of common stock of the Company. This
alternative would require the Company and the PAM Funds to comply with certain
tender offer requirements which would make the proposed reorganization more
complicated in terms of statutory compliance. The PCM Shareholders also
considered the possibility of selling all of PCM's assets to the Company, and
the Company considered purchasing all such assets, in exchange for shares of
common stock of the Company. Alternatively, the General Partner considered
winding up and dissolving the PAM Funds and distributing the proceeds of
liquidation to their limited partners. Although a dissolution would provide
those limited partners with immediate liquidity, the General Partner believes
that, because of the type of assets held by the PAM Funds, even an orderly
liquidation would result in a prohibitive discount on the value of the debt
portfolios. Such a dissolution would also result in additional legal,
accounting, appraisal, advertising and sales costs to the PAM Funds, further
diminishing the value of the PAM Funds' assets.
The General Partner believes that the value of the consideration to be
received by the PAM Funds in the Merger would far exceed any of the alternatives
constituting a reorganization listed above, specifically because the PAM Funds'
assets consist primarily of distressed loan portfolios, and such portfolios have
a liquidation value far below their value to either the PAM Funds or the
Company, which can generate substantial revenues from collection activities on
the portfolios.
The PCM Shareholders and the General Partner considered the results of
continuing PCM and the PAM Funds in accordance with their current business plans
and joint venture agreements. A continuation of the PAM Funds in accordance with
their existing business plans would benefit their limited partners to the extent
that those limited partners would receive cash distributions from the proceeds
of the PAM Funds' collection on debt portfolios. If the Merger is consummated,
limited partners of the PAM Funds would no longer receive such cash
distributions. Moreover, the Company currently does not anticipate paying its
shareholders cash dividends. Therefore, a continuation of the Partnership
provides the Limited Partners with cash flow which they will not have if the
Merger is consummated. Finally, if the Merger Proposal is approved, the Limited
Partners will be minority shareholders in the Company, and will lose the
ultimate control over Partnership affairs, which they currently hold.
Alternatively, the Partnership's servicing entity, PCM, currently has the
capacity to service portfolios in excess of those owned by the Partnership and
has the potential for significant growth. PCM has been offered access to
commercial lines of credit and its growth is not contingent upon a continuing
relationship with the Partnership. After consummation of the Merger, Limited
Partners who approve the Merger Proposal will participate in this growth.
Moreover, after consummation of the Merger, the Company will be able to compete
for available portfolios by taking advantage of economies of scale not available
to PCM and the Partnership acting individually. The General Partner believes
that the Limited Partners should have the opportunity to consider and vote upon
these opportunities.
The General Partner believes that the value of the consideration to be
received by the Partnership in the Merger is equal to or greater than the
present value of the Partnership, which assumes that PCM and the Partnership
continue with their current business plans and joint venture agreements.
However, the Company, with access to commercial lines of credit, will be able to
compete more effectively with its competitors for debt portfolios. The General
Partner believes that there will be increased competition for debt portfolios,
as finance companies, collection agencies, and even Wall Street firms, which
offer asset-backed securities, enter the market. Therefore, the General Partner
believes that the Merger Proposal, if approved, would ultimately provide Limited
Partners with a greater return on their
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investments than they would obtain if the Partnership continued in its present
business arrangements, and would increase the longevity, and the ultimate
return, on the Limited Partners' investments.
The PCM Shareholders and the General Partner also considered going forward
with the Merger Proposal with the approval of less than all of the PAM Funds,
but rejected this alternative because of economies of scale, the scope and
complexity of existing joint ventures between PCM and the PAM Funds, and the
economics of purchasing, holding, servicing, collecting and selling distressed
debt portfolios. Specifically, as discussed in detail in the section of the
Joint Consent Statement/Prospectus captioned "APPROVAL BY ALL OF THE
PARTNERSHIPS IS REQUIRED", the General Partner does not believe that the Merger
can be fairly consummated unless all of the PAM Funds approve the Merger
Proposal, because it would be unduly burdensome or impossible to evaluate and
apportion the value of the various services provided to the PAM Funds by PCM, on
the one hand, considering the complexity and scope of the various joint ventures
between the PAM Funds and PCM, on the other hand; and, if the Merger Proposal is
approved, PCM will cease to exist by operation of law, and would no longer be
available to provide the same services to a dissenting PAM Fund. The elimination
of PCM as a separate entity would result in the elimination of the acquisition
fees PCM currently charges the PAM Funds. Existing joint ventures, and the
management and servicing fees related to various separate joint ventures between
PCM and the PAM Funds, would similarly merge into a single large business
venture, eliminating those duplicative management and servicing fees. Because
PCM would no longer exist as an independent entity, PAM Funds which did not
participate in the Merger Proposal would lose their present source of portfolio
acquisitions. PCM, which currently has access to commercial lines of credit, has
the right to assign such commercial lines to a successor entity, allowing for
the Company, as such a successor entity, if the Merger is consummated, to enjoy
the benefits of increased credit lines for portfolio acquisitions which are not
currently available to the PAM Funds individually. Moreover, one of the primary
benefits of the Merger Proposal is the consolidation of record keeping and
simplification of the complex accounting requirements imposed on the PAM Funds
under federal and multiple state partnership tax laws.
The General Partner is not aware of any offers made during the preceding 18
months for a merger, consolidation, or combination of any of the PAM Funds; an
acquisition of any of the PAM Funds or a material amount of their assets; a
tender offer for or other acquisition of securities of any class issued by any
of the PAM Funds; or a change in control of the PAM Funds. Other than as set
forth herein, the General Partner is not aware of any factors which may affect
materially the value of the consideration to be received by the Limited Partners
in the Merger or the fairness of the Merger Proposal to the Limited Partners.
RECOMMENDATIONS
After considering the advantages and disadvantages of the Merger Proposal
described above, the General Partner believes that the Merger Proposal is fair
to, and in the best interests of, the Partnership and the Limited Partners. The
General Partner recommends that each Limited Partner vote to approve the Merger
Proposal.
EXCHANGE VALUE AND FAIRNESS OPINION
Bases for the General Partner's Belief as to Fairness. The Fairness Opinion
is specified at length in the section in the Joint Consent Statement/Prospectus
entitled "FAIRNESS OPINION." The General Partner believes that the Merger
Proposal is fair to the Limited Partners, because the General Partner believes
that the Merger will provide Limited Partners with liquidity in their
investments and more simplified tax reporting.
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No Limitations Imposed on Scope of Investigation. Kelly & Company,
independent auditors for the General Partner, PCM, the PAM Funds, Income Network
Company and the Company, retained the Fairness Analyst to determine the fairness
from a financial point of view of the Exchange Value in connection with the
Merger Proposal. There were no limitations or restrictions placed on the scope
of the Fairness Analyst's analysis and investigation, and the Fairness Analyst
performed a complete due diligence examination by, among other things, visiting
PCM's facilities in Newport Beach, California; interviewing the President and
Vice-President of PCM; interviewing the President, Chief Financial Officer,
Director of Business Development, and Secretary of the General Partner;
interviewing various personnel employed by Kelly & Company; and interviewing
counsel to the various entities. The Fairness Analyst was allowed full access to
all financial records of PCM, the General Partner, the PAM Funds and all service
providers to those entities, including privileged documents such as tax returns
and audit workpapers.
No Instructions from General Partner, PCM or the Company. Neither the
General Partner, the PCM Shareholders, PCM nor the Company provided instructions
to the Fairness Analyst. Kelly & Company instructed the Fairness Analyst to
conduct an independent investigation, and thereafter render a written opinion to
Kelly & Company, as of the Determination Date, as to whether the Exchange Value
established by the General Partner, the PCM Shareholders and the Company is fair
from a financial point of view to the PAM Funds. Kelly & Company also instructed
the Fairness Analyst to prepare a Fairness Opinion (i) satisfying the valuation
requirements of the Thompson-Killea Act; (ii) potentially useful in meeting the
valuation requirements of Sections 1300 et seq. of the California General
Corporation Law pertaining to PCM Shareholders and Company shareholders who do
not consent to the Merger Proposal and, instead, exercise their rights as
dissenting shareholders ("Dissenting Shareholders"); and (iii) sufficient to
support an opinion regarding the fairness from a financial point of view of the
Merger Proposal and related transactions, addressing the fairness from a
financial point of view of the Merger and related transactions as a whole and to
each of the PAM Funds. Kelly & Company instructed the Fairness Analyst to
perform a due diligence investigation and to review all pertinent documents,
including, but not limited to, financial statements; tax returns; audit work
papers; banking records; balance sheets; income statements; Securities and
Exchange Commission reporting forms; corporate documents such as Certificates or
Articles of Incorporation, Bylaws and minutes; furniture and equipment
schedules; insurance policies and coverages; operating budgets through December
31, 2008 for PCM and the PAM Funds; office leases; management profiles;
portfolio stratification reports; and daily productivity reports. Kelly &
Company also instructed the Fairness Analyst to research industry sources and
databases and economic outlook sources regarding the financial services and
distressed debt industry.
Procedures Followed. As set forth above, the Fairness Analyst conducted a
complete independent investigation focusing on the valuation issues relating to
the "adequate consideration" rule. Adequate consideration is generally
understood to represent the fair market of an asset. Accordingly, in order to
arrive at its opinion regarding the fairness from a financial point of view of
the Exchange Value established for the Units, the Fairness Analyst performed its
research and analyses with the intent of establishing whether the Limited
Partners would receive at least fair market value in exchange for their Units.
"Fair market value" is defined as the price at which an asset would change hands
between a willing buyer and a willing seller when the former is not under any
compulsion to buy and the latter is not under any compulsion to sell, both
parties are able, as well as willing, to trade, and both parties are well
informed about the asset and the market for that asset. The Fairness Analyst
performed an analysis of the material features and characteristics of the
Partnership, the Other Partnerships and PCM, as well as an analysis of the
financial statements and results of operations of each entity. The Fairness
Analyst assumed that PCM will continue its current business plan and structure
and made other reasonable assumptions and estimates regarding distressed loan
portfolio acquisition and pricing, operating expenses, and partnership
distribution policies.
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<PAGE>
Determinations. The Company, PCM and the General Partner determined the
total indicated values for PCM and for each of the PAM Funds, as set forth in
the following table:
NAME OF PARTNERSHIP OR CORPORATION TOTAL VALUE
- ---------------------------------- -----------
Performance Asset Management Fund, Ltd.,
A California Limited Partnership..................... $ 934,000
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership..................... $ 3,112,000
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership..................... $ 6,000,000
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership..................... $15,846,000
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership..................... $ 4,700,000
Performance Capital Management, Inc.,
a California corporation............................. $44,523,000
Basis for Methods of Arriving at Findings and Recommendations. The Fairness
Analyst valued the assets of each entity by determining the combined value of
such entity's assets, including the value of such entity's cash flows and the
terminal value of such entity's distressed loan portfolios. The Fairness Analyst
determined the asset liquidation value of each entity and calculated the
allocation of assets of each PAM Fund between the General Partner and the
limited partners of such PAM Fund based on such PAM Fund's Agreement of Limited
Partnership. Additional factors considered by the Fairness Analyst, in making
its valuation, include discount factors based on the age and composition of the
various distressed loan portfolios and the Fairness Analyst's determination of
the present value of the respective cash receipts of each entity, as well as the
historical and projected collection costs of distressed loan portfolios.
DETERMINATION OF EXCHANGE VALUE AND ALLOCATION OF MERGER STOCK
Exchange Value. The net equity values determined by PCM, the Company and
the General Partner and reviewed by the Fairness Analyst of all of the assets of
the PAM Funds, PCM and the Company, considered together and separately, together
with the book value of the other financial assets of such entities, have been
used to establish the Exchange Value. The Fairness Analyst is unaffiliated with
the Company, Vision, Income Network Company, the PCM Shareholders, PCM or the
General Partner. Kelly & Company, the independent auditors for PCM, the Company,
Income Network Company, the General Partner and the PAM Funds, were referred to
the Fairness Analyst by an accountant unaffiliated with the PCM Shareholders,
PCM, the Company, Income Network Company, the PAM Funds, or the General Partner
and with whom neither the PCM Shareholders, PCM, the Company, Income Network
Company, the PAM Funds, nor the General Partner has conducted any business. The
Fairness Analyst was selected by Kelly & Company entirely on the basis of its
qualifications.
The Company, the General Partner and PCM valued the assets of the
Partnership and PCM, respectively, as if sold in an orderly manner in a
reasonable period of time, plus or minus other balance sheet items, and less the
cost of sale. The valuation was conducted in accordance with the provisions of
Section 25014.7(b)(1) of the Thompson-Killea Act. The valuation was also
conducted in accordance with the provisions of Sections 1300 et seq. of the
California General Corporation Law pertaining to the Dissenting Shareholders.
The compensation to dissenting Limited Partners and Dissenting Shareholders
entitled to compensation for their Units or shares of common stock,
respectively, is based upon the
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<PAGE>
valuation described above. See the section in the Joint Consent
Statement/Prospectus entitled "RIGHTS OF DISSENTING SHAREHOLDERS AND DISSENTING
LIMITED PARTNERS."
The purpose of the Fairness Opinion is to confirm to the Company, the PCM
Shareholders and the General Partner the fairness from a financial point of view
of the Merger Proposal and related transactions to the PAM Funds. Neither the
Company, the PCM Shareholders, PCM, nor the General Partner gave the Fairness
Analyst any specific instructions other than the instruction from Kelly &
Company to prepare a fairness opinion (i) meeting the valuation requirements of
the Thompson-Killea Act; (ii) potentially useful in meeting the valuation
requirements of Sections 1300 et seq. of the California General Corporation Law
pertaining to Dissenting Shareholders; and (iii) sufficient to support an
opinion regarding the fairness of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Pursuant to
the Thompson-Killea Act, the Units were valued as if sold in an orderly manner
in a reasonable period of time, plus or minus other balance sheet items, and
less the costs of sale. Pursuant to the provisions of Section 1300 of the
California General Corporation Law, the fair market value of the shares of
common stock held by the Dissenting Shareholders shall be determined as of the
day before the first announcement of the terms of the Merger Proposal and
related transactions, excluding any appreciation or depreciation in consequence
of the Merger Proposal or related transactions, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
The Fairness Opinion will not be updated.
Fairness Opinion. The Exchange Value was determined by PCM, the Company and
the General Partner. The consideration to be paid to the Fairness Analyst was
negotiated by the Fairness Analyst, on the one hand, and Kelly & Company, on the
other hand. The Fairness Analyst has determined that the Exchange Value, as such
consideration, is fair from a financial point of view to each PAM Fund, as
specified in the Fairness Opinion. The compensation paid to the Fairness Analyst
was not contingent upon the findings of the fairness of the Exchange Value, such
consideration or the Merger or the consummation or approval of the Merger
Proposal or related transactions. The Fairness Opinion relates to the fairness
from a financial point of view of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Because the
Merger is contingent upon the approval of the Merger Proposal by all of the PAM
Funds, the PCM Shareholders, and the Company shareholders, the Fairness Opinion
did not consider possible combinations of less than all of the PAM Funds in the
Merger. A copy of the Fairness Opinion is included in the Joint Consent
Statement/Prospectus as Appendix G.
The Fairness Opinion takes into account all of the assets of each of the
PAM Funds, PCM, and the Company. The intangible assets of the PAM Funds and PCM
consist of distressed financial debt instruments and obligations. The Fairness
Analyst also considered tangible assets of the PAM Funds, PCM and the Company.
The tangible assets of the PAM Funds and the Company were determined to be
negligible. The tangible assets of PCM were determined to be more considerable
and include furniture, computers and business equipment. The aggregate value of
the assets of the PAM Funds has been determined to be $30,592,000. The aggregate
value of the assets of PCM has been determined to be $44,523,000.
Fairness Opinion Will Not Be Updated. The Fairness Opinion will not be
updated. A copy of the Fairness Opinion is included with the Joint Consent
Statement/Prospectus as Appendix G. Although the General Partner is not aware of
any factors that may materially affect the fairness of the Merger Proposal or
the determination of the Exchange Value referenced in the Fairness Opinion, it
is possible that changes in the financial markets between the date of the
Fairness Opinion and the date the Merger, if approved, is consummated, might
affect the conclusions of the Fairness Analyst as specified in the
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Fairness Opinion. If the Fairness Opinion were to be updated by the Fairness
Analyst at or near the date of the consummation of the Merger, there can be no
assurances that the Fairness Analyst's opinions and conclusions would not be
materially amended or revised.
Exchange of Assets for Shares. On the Closing Date, if the limited partners
of all five PAM Funds approve the Merger Proposal, the PAM Funds and PCM will
merge with and into the Company. Pursuant to the Merger Agreement, all of the
assets of the PAM Funds will be exchanged for shares of the Merger Stock in
accordance with the Exchange Value, determined to be fair to the PAM Funds by
the Fairness Analyst.
The following table summarizes the valuation of PCM and the PAM Funds based
on 7,511,500 allocable shares of Merger Stock:
<TABLE>
<CAPTION>
Percentage of
Aggregate Number of
Indicated Value Indicated Value Shares of Merger
(Rounded to the (Rounded to the Stock Allocated
Nearest $1,000) Nearest 1/10 of 1%) to Entity
--------------- ------------------- ---------
<S> <C> <C> <C>
PAM .............................................. $934,000 1.2% 93,398
The Partnership .................................. 3,112,000 4.1 311,202
PAM III .......................................... 6,000,000 8.0 600,003
PAM IV ........................................... 15,846,000 21.1 1,584,596
PAM V ............................................ 4,700,000 6.3 470,002
----------- ----- -----------
Sub-Total ................................... $30,592,000 40.7% 3,059,201
PCM .............................................. 44,523,000 59.3 4,452,299
----------- ----- -----------
Total ....................................... $75,115,000 100.0% 7,511,500
=========== ===== ===========
</TABLE>
RISKS AND POTENTIAL ADVERSE EFFECTS
THE MERGER AND ACQUISITION OF SHARES OF THE MERGER STOCK INVOLVES VARIOUS RISKS,
AND LIMITED PARTNERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER THE
SECTION ENTITLED "RISK FACTORS" IN THE JOINT CONSENT STATEMENT/PROSPECTUS,
INCLUDING THE FOLLOWING:
History of Losses. PCM and the PAM Funds have a history of losses, because
PCM and the PAM Funds' accounting is predicated on return of capital and not a
return on capital. For financial statement purposes, the cash received from
collections on distressed loan portfolios does not appear as revenue, but goes
to offset the particular entity's basis in the respective portfolios. This has
the effect of reducing the respective entity's assets as presented on the
financial statements.
No Operating History. Since its formation, the Company has had no
operations. The only historical financial information presented in the Joint
Consent Statement/Prospectus relates to the business operations of the PAM Funds
and PCM.
Significant Reduction in Distributions. The Partnership historically made
monthly cash distributions to the Limited Partners until those distributions
were suspended in preparation for the Merger Proposal. THE COMPANY CURRENTLY
ANTICIPATES THAT IT WILL NOT PAY
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CASH DIVIDENDS. See that portion of the Joint Consent Statement/Prospectus
entitled "Dividend Policy" and "SUMMARY -- Disadvantages of the Merger and
Related Transactions."
In contrast to the Partnership, the Company will be subject to federal and
state income taxes imposed on its income. Holders of Merger Stock will not be
subject to federal or state income taxes imposed on such income, except to the
extent dividends are paid by the Company. See that portion of the Joint Consent
Statement/Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES." Additionally,
the Company expects to pay no dividends in the foreseeable future. It is
important for each Limited Partner to realize that the actual amount of
dividends, if any, to be paid will be determined by the Board of Directors of
the Company, in its sole and absolute discretion, generally taking into account
a number of factors, including operating performance, liquidity, capital
requirements, and the Company's business plan and growth strategies. There can
be no assurance that the Company's anticipated policy in regard to dividend
payments will not be modified by the Board of Directors of the Company.
DIVIDEND DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE IN THE SOLE AND ABSOLUTE
DISCRETION OF THE COMPANY'S BOARD OF DIRECTORS AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE COMPANY'S CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S
FINANCIAL CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS
AS THE COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Change in Nature of Investment. The Partnership is a limited partnership
organized under California law. The Company is a Delaware corporation. The
Partnership has a finite term of existence and is structured to dissolve when
its assets are liquidated. In contrast, the Company has a perpetual term and
intends to continue its operations for an indefinite time period. To the extent
the Company sells or refinances its assets, the net proceeds therefrom generally
will be retained by the Company for working capital and new investments, rather
than being distributed to shareholders in the form of dividends.
Change in Voting Rights. Under the Partnership's Agreement of Limited
Partnership ("Partnership Agreement") and applicable California law, the Limited
Partners have voting rights only as to major transactions of the Partnership
(e.g., amendment of the Partnership Agreement, removal of the General Partner,
election of a new General Partner, sale of all the assets of the Partnership,
and dissolution of the Partnership). Otherwise, all decisions relating to the
operation and management of the Partnership are made by the General Partner.
Certain major transactions of the Company, including most amendments to the
Company's Certificate of Incorporation, may not be consummated without the
approval of shareholders holding at least a majority of the outstanding voting
stock entitled to vote. Notwithstanding the foregoing, certain transactions of
the Company, such as the sale of all of the assets of the Company to an
affiliate of the Company, must be approved by at least 90% of the issued and
outstanding voting stock of the Company entitled to vote. To the extent that the
Company will have issued and outstanding shares of its voting stock held of
record by 100 or more persons, adoption of additional anti-takeover provisions
may require a supermajority (i.e., two thirds) vote to adopt. Subject to the
provisions of the Company's Certificate of Incorporation, as amended, and Bylaws
regarding certain anti-takeover provisions specified in the portion of the Joint
Consent Statement/Prospectus captioned "Anti-Takeover Provisions," each share of
the Company's common stock will have one vote, and the Company's Certificate of
Incorporation, as amended, permits the Board of Directors of the Company to
classify and issue capital stock in one or more classes having voting power
which may differ from that of the Merger Stock. See that portion of the Joint
Consent Statement/Prospectus entitled "COMPARISON OF UNITS AND MERGER STOCK."
Change in Duties Owed by General Partner. Regarding the Partnership and the
Company, the
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General Partner and the Board of Directors of the Company, respectively, owe
fiduciary duties to their constituent parties. Some courts have interpreted the
fiduciary duties of members of a board of directors in the same manner as the
duties of a general partner in a limited partnership. Other courts, however,
have indicated that the fiduciary obligations of a general partner to limited
partners are greater than those owed by a director to stockholders. Therefore,
although it is unclear whether, or to what extent, there are differences in such
fiduciary duties, it is possible that the fiduciary duties of the directors of
the Company to its shareholders may be less than those of the General Partner to
the Limited Partners. See that portion of the Joint Consent Statement/Prospectus
entitled "COMPARISON OF UNITS AND MERGER STOCK."
Changes in Compensation Arrangements. Under the Partnership Agreement,
distributions payable to the General Partner are specified and cannot be changed
by the General Partner without the approval of the Limited Partners. If the
Merger is consummated, the compensation paid to officers and directors of the
Company will be determined by a Compensation Committee for the Company
established by the Company's Board of Directors, and the terms and conditions of
employment of those officers and directors, including changes in compensation
arrangements, will not be subject to the direct approval or control of the
shareholders of the Company. See the summary compensation tables under the
caption "Executive Compensation" in the portion of the Joint Consent
Statement/Prospectus captioned"MANAGEMENT OF THE GENERAL PARTNER, PCM AND THE
COMPANY".
Taxation of Corporation and Shareholders. The Partnership does not pay any
federal or state income taxes. After consummation of the Merger, the Company
will be subject to federal and state income taxes. Shareholders of the Company
will also be required to pay federal and state income taxes on any dividends
that they may receive from the Company and on any gain from the sale or exchange
of the Company's common stock, including the Merger Stock. Therefore, while in
partnership form the income of the Partnership will be subject to federal state
and state income tax only once (i.e., on the Limited Partners) in corporate form
the income of the Company will be subject to federal and state income taxes
twice (i.e., once on the Company and once on its shareholders to the extent they
receive dividends or recognize gain on the sale or exchange of securities). See
that portion of the Joint Consent Statement/Prospectus entitled "FEDERAL INCOME
TAX CONSEQUENCES" and "OTHER TAX CONSEQUENCES."
Uncertainty Regarding Trading and Market Price of Common Shares. There is a
probability that the Merger Stock may initially trade at prices substantially
below the value assigned to the Merger Stock in the Merger Proposal. Moreover,
the Merger Stock may not immediately be listed or approved for listing on any
regional or national securities exchange or otherwise designated or approved for
designation upon notice of issuance as a national market system security on an
interdealer quotation system maintained by the National Association of
Securities Dealers, Inc. To the extent that the Merger Stock may trade, trading
prices for the Merger Stock will be influenced by many factors, including the
market for the Merger Stock, the Company's dividend policy, the possibility of
future sales of Merger Stock by the Company or its shareholders of the Company's
common stock, investors' perception of the Company and its businesses, and
general economic and stock market conditions. No prediction can be made as to
the price at which the Merger Stock will trade. Moreover, no guaranty or
assurance can be given that the Merger Stock will trade at all. Limited Partners
and PCM Shareholders have not previously had access to an active trading market
for the Units and shares of PCM's common stock, respectively. Therefore, it is
possible that they may wish to sell their Merger Stock from time to time after
consummation of the Merger. There can be no assurance that the Company's efforts
to stabilize the price of the Merger Stock by limiting the sale of the Merger
Stock will be successful. The sale of the MergerStock after the Merger might
have an adverse effect on the market price of the Merger Stock. Moreover,
various state regulatory agencies may require further limitations on the
transfer of the Merger Stock.
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Limited Public Market. There has been no public trading market for the
Company's securities. Although the Company intends to apply for listing of the
Merger Stock on a regional or national securities exchange, there is no
assurance that the will be so listed. If the Merger Stock is so listed, such a
listing provides no assurance that an active, receptive trading market will
develop for the Merger Stock or, if developed, will be sustained.
Potential Price Volatility. If a public market develops for the Merger
Stock, there may be significant volatility in the market price of the Merger
Stock. Period-to-period fluctuations in the Company's revenues and financial
results may have a significant impact on the perceived value of the Company and,
therefore, on the market price of the Merger Stock. The price of the Merger
Stock may be significantly affected by such factors as the financial results and
operating performance of the Company. Additionally, in recent years, the stock
market has experienced significant price and volume volatility, and market
prices for many companies, particularly small and emerging growth companies,
have experienced significant price fluctuations not necessarily related to the
operating performance of those companies. The market price for the Merger Stock
may be affected by general stock market volatility.
Possible Dilution. The percentage interest of holders of Merger Stock in
the assets, liabilities, cash flow and results of operations of the Company, as
well as the percentage voting power of such holders, may be diluted (a) if the
Company has, prior to solicitation of consents to the Merger Proposal, issued
either preferred shares or common shares which are currently outstanding and
held by existing shareholders of the Company, or (b) by the issuance of shares
of the Company's common stock in any future offering. In addition, the Company
may issue additional equity securities in the future (for example, in a public
offering), which would dilute the percentage ownership of the then current
shareholders of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock, and which is convertible to common stock subject to
certain conditions precedent. See a further discussion of Mr. Galewick's
preferred stock under the caption "Control by Principal Shareholder;
Anti-takeover Measures" below. Under NASDAQ National Market rules, the Company
may not issue shares of its common stock equal to 20% or more of the then
outstanding shares of its common stock in connection with the acquisition of the
shares or assets of another entity without shareholder approval. Issuances by
the Company of additional shares of its common stock or preferred stock could
adversely affect existing shareholders' equity interests in the Company and the
market price of the Merger Stock.
Shares Eligible for Future Sale. Sales of shares of the Company's common
stock in the public market after consummation of the Merger could adversely
affect the market price of the Merger Stock and could impair the Company's
future ability to raise capital through the sale of equity securities. Upon
consummation of the Merger, the Company will have 7,512,500 shares of common
stock issued and outstanding. The transfer, assignment, sale, conveyance,
hypothecation, encumbrance, or other alienation of the shares of the Merger
Stock shall be limited. See the portion of the Joint Consent
Statement/Prospectus entitled "Merger Stock Will Be Restricted."
Control by Principal Shareholder; Anti-takeover Measures. If the Merger
Proposal is approved and the Merger is consummated, Vincent E. Galewick shall
beneficially own approximately 62% of the then issued and outstanding shares of
the Company's common stock. As a result, Vincent E. Galewick, in his capacity as
a shareholder of the Company, would be able to significantly influence or
control many matters acquiring approval by the shareholders of the Company,
including the election of directors. The Company's Certificate of Incorporation
provides for preferred stock, the terms of which may be fixed by the Board of
Directors of the Company. Vincent E. Galewick owns 100,000 shares of
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the Company's preferred stock, which is all of the issued and outstanding shares
of that preferred stock. Each share of that preferred stock is convertible into
20 shares of the Company's common stock, subject to certain conditions precedent
relating to the acquisition, by any single shareholder, of 10% or more of the
issued and outstanding shares of the Company's common stock. Moreover, if the
Company becomes a "listed corporation", as that term is defined in the portion
of the Joint Consent Statement/Prospectus entitled "Elimination of Cumulative
Voting", the directors of the Company will be divided into 2 classes, and the
holders of the Merger Stock will not be permitted to cumulate their votes for
directors. Those provisions could have the effect of delaying, deferring or
preventing a change in control of the Company.
Addition of Provisions That May Discourage Changes of Control. The
Company's organizational documents and Delaware law contain provisions that may
delay, defer or prevent a takeover attempt that a shareholder might consider to
be in such shareholder's best interest, including offers that might result in a
premium over the market price for Merger Stock.
Conflicts of Interest. The General Partner has a fiduciary duty to the
Partnership. However, the General Partner is also affiliated with Income Network
Company, which is the Soliciting Agent, Vision, PCM and the Company. The
Company, Vision, Income Network Company, PCM and the General Partner have a
common shareholder, Vincent E. Galewick, and common directors and officers.
Several of the directors of the Company are employed independently of the
Company and those persons may continue to engage in other activities. The
persons serving as officers and directors of the Company shall have conflicts of
interest in allocating time, services, and functions between the other business
ventures in which those persons may be or become involved and, also, the affairs
of the Company. As a result, conflicts of interest between the Company and the
other activities of those persons may occur from time to time.
The Company will attempt to resolve any such conflicts of interest in favor
of the Company. The officers and directors of the Company are accountable to the
Company and the shareholders of the Company as fiduciaries (subject to the
restrictions set forth in the paragraph headed "Limitation on Liability of
Officers and Directors of the Company" below), which requires that such officers
and directors exercise good faith and integrity in handling the Company's
affairs. Moreover, the officers and directors of the Company believe that the
Company will have sufficient staff, consultants, employees, agents, contractors,
and managers to adequately conduct the business of the Company.
The General Partner has not retained an unaffiliated representative to act
on behalf of the Limited Partners for purposes of negotiating the Merger
Proposal. The General Partner does not believe retaining such a representative
is necessary, because an unaffiliated third party, Willamette Management
Associates, Inc., as the Fairness Analyst, has been retained to provide the
Fairness Opinion as to the fairness of the Merger Proposal to the Company, the
PCM Shareholders and the PAM Funds. A copy of the Fairness Opinion is included
with the Joint Consent Statement/Prospectus as Appendix G. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
However, because there has been no separate unaffiliated representation of
the Limited Partners in the negotiation of the Merger Proposal, the Limited
Partners are presented with risks inherent in multiple representation.
Specifically, the persons negotiating the Merger Proposal may have attempted to
balance the interests of the Partnership and the Limited Partners with the
interests of the PCM Shareholders and the Company. Aggressive advocacy solely on
behalf of the Limited Partners in the negotiations relating to the Merger
Proposal might have resulted in more favorable treatment for the Limited
Partners compared to the more even-handed approach which was followed in
negotiating the Merger Proposal.
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The General Partner and the Limited Partners have conflicts of interest
relating to the Merger Proposal because, if the Merger Proposal is approved, the
General Partner will cease providing management services to the Partnership,
with a resulting loss of income. The Merger Stock which the General Partner
receives upon the winding up and dissolution of the Partnership may be less
valuable than the participation in the distributions of the Partnership which
the General Partner currently receives.
A more significant conflict of interest exists between Vincent E. Galewick,
the sole shareholder of the General Partner, on the one hand, and the Limited
Partners, on the other hand, because Mr. Galewick is also the majority
shareholder of PCM and the sole shareholder of the Company. The allocation of
Merger Stock pursuant to the Merger Proposal creates a conflict between all the
parties included in the Merger Proposal, including the Limited Partners, on the
one hand, and Mr. Galewick and the General Partner, on the other hand. If the
Merger Proposal is approved, Mr. Galewick will own approximately 62% of the then
issued and outstanding common stock of the Company. Because of this conflict of
interest, Mr. Galewick did not participate in the negotiations regarding the
Merger Proposal.
No Arm's Length Agreements. Certain agreements and arrangements, including
those relating to compensation and payments between the Company and its
affiliates, are not the result of arm's length negotiations. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS". Most significantly, PCM and the Partnership are parties
to joint venture agreements pursuant to which PCM provides collection and
servicing activities. The joint venture agreements between PCM and the
Partnership have been filed as exhibits to the Company's Registration Statement
on Form S-4, of which the Joint Consent Statement/Prospectus is a part. PCM also
identifies and acquires distressed loan portfolios and sells them to the
Partnership at negotiated prices, which typically include a mark-up of as much
as 37%. Vision, an affiliate of PCM, the General Partner, Income Network Company
and the Company, provides human resources (employees) to PCM and the General
Partner pursuant to an arrangement not the result of arm's-length negotiations.
In the event the Merger is consummated, Vision will no longer provide those
human resources to the Company.
Speculative Investment Due to Market Factors. The business objectives of
the Company must be considered speculative because the market for distressed
consumer indebtedness will have a significant influence on the operations of the
Company. As there can be no assurance that changing market factors will not
adversely affect the operations of the Company, no assurance can be given that
the PCM Shareholders and Limited Partners will realize a return on their
exchange of shares of common stock of PCM or Units, respectively, for Merger
Stock, or that the Company shareholders will not ultimately lose their
investments in the Company completely.
Dependence on Management. All decisions regarding management of the
Company's affairs will be made exclusively by the officers and directors of the
Company. Accordingly, no person should vote in favor of the Merger Proposal
unless that person has carefully evaluated the personal experience and business
performance of the officers and directors of the Company and is willing to
entrust all aspects of management to the officers and directors of the Company,
or their successors.
Dependence on Key Personnel. The Company is dependent upon the efforts and
abilities of its senior management, particularly those of Vincent E. Galewick.
The loss of Mr. Galewick could have a material adverse affect on the business
and prospects of the Company. The officers of the Company believe that all
commercially reasonable efforts have been made to minimize the risks attendant
with such dependence on Mr. Galewick and the loss or departure of Mr. Galewick.
The General Partner currently maintains a key person life insurance policy in
the amount of $2,000,000 on Mr. Galewick and, if the Merger is consummated, the
Company anticipates maintaining such a policy on Mr. Galewick. Moreover,
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as the prospective owner of a significant portion of the issued and outstanding
common stock of the Company, Mr. Galewick will have an incentive to remain with
the Company. However, there is no assurance that Mr. Galewick will remain with
the Company or that, if he should elect to leave the Company, his replacement
would cause the Company to operate profitably.
Limitation on Liability of Officers and Directors of the Company. Section
145 of the Delaware General Corporation Law specifies that the Certificate of
Incorporation of a Delaware corporation may include a provision eliminating or
limiting the personal liability of a director or officer to that corporation or
its shareholders for damages for breach of fiduciary duty as a director or
officer, but such a provision must not eliminate or limit the liability of a
director or officer for (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) unlawful distributions
to stockholders. The Certificate of Incorporation of the Company includes a
provision eliminating or limiting the personal liability of the officers and
directors of the Company to the Company and its shareholders for damages for
breach of fiduciary duty as a director or officer. Moreover, the Company's
Bylaws provide certain indemnification to a controlling person, director or
officer which affects such a person's liability while acting in a corporate
capacity. The Company entered into various indemnification agreements with its
officers and directors, copies of which are attached to the Registration
Statement on Form S-4 as exhibits thereto. Moreover, the Merger Agreement
provides indemnification for directors and officers of the Company. Accordingly,
the officers and directors of the Company may have no liability to the
shareholders of the Company for any mistakes or errors of judgment or for any
act or omission, unless such act or omission involves intentional misconduct,
fraud, or a knowing violation of law or results in unlawful distributions to the
shareholders of the Company.
DISCLOSURE OF POSITION OF SECURITIES AND EXCHANGE COMMISSION
REGARDING INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE, UNENFORCEABLE.
No Limitation on Indebtedness. The Certificate of Incorporation and Bylaws
of the Company do not contain any limitation on the amount or percentage of
indebtedness, funded or otherwise, the Company might incur. The Indenture
Agreement pursuant to which those Limited Partners who exercise their dissenters
rights ("Dissenting Limited Partners") will be paid for their Units ("Indenture
Agreement") provides that the assets of the Partnership will not be leveraged
more than 70% in relation to any unsecured subordinated debentures issued
pursuant to the Merger Agreement. Accordingly, the Company could become
leveraged to the extent permitted by the Indenture Agreement, resulting in an
increase in debt service that could adversely affect the Company's ability to
make distributions to its stockholders and result in an increased risk of
default on its obligations. The Company does not believe that the debt
limitations imposed by the Indenture Agreement will have a significant impact on
the operations of the Company. However, if the Merger is consummated, the Board
of Directors of the Company will determine policies with respect to financing or
refinancing of assets and policies with respect to borrowings by the Company.
Loss on Dissolution of the Company. In the event of a dissolution of the
Company, the proceeds realized from the liquidation of the Company's assets, if
any, will be distributed to holders of the Company's common stock only after
satisfaction of claims of the Company's creditors and, in some
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situations, holders of the Company's preferred stock. The ability of a holder of
shares of the Company's common stock, including Merger Stock, to recover any
monies whatsoever in that event will depend on the amount of funds realized and
the claims to be satisfied therefrom.
Remuneration of Directors, Officers and Employees. Compensation received by
officers, directors and employees of the Company will be determined from time to
time by the Board of Directors of the Company. Officers, directors, and
employees of the Company will be reimbursed for any out-of-pocket expenses
incurred on behalf of the Company.
Receipt of Compensation Regardless of Profitability. The officers,
directors and employees of the Company may receive significant compensation,
payments, and reimbursements regardless of whether the Company operates at a
profit or at a loss.
Year 2000 Computer Compliance. Over the next two years, most large
companies will face a potentially serious business problem because many computer
software applications and computer equipment developed in the past may not
properly recognize calendar dates beginning in the Year 2000. As the century
date change occurs, date-sensitive systems may recognize the Year 2000 as the
Year 1900, or not at all. This inability to recognize or treat properly the Year
2000 may cause computer systems to process financial and operational information
incorrectly, which could have a material adverse effect on the results of
operations of all of the parties to the Merger. There can be no assurance that
PCM (or, if the Merger Proposal is approved and the Merger is consummated, the
Company) will complete the necessary modifications and conversions to the
computer software and operating systems necessary to properly operate or manage
date-sensitive information beyond December 31, 1999. Even if PCM (or, if the
Merger Proposal is approved and the Merger is consummated, the Company)
completes all necessary modifications and conversions to its computer software
and operating systems, there can be no assurance that the necessary
modifications and conversions by those third party institutions and entities
with which PCM and the PAM Funds conduct business will be completed in a timely
manner, which could have a material adverse effect on the results of operations
of PCM and the PAM Funds (or, if the Merger Proposal is approved and the Merger
is consummated, on the results of operations of the Company).
RIGHTS OF DISSENTING LIMITED PARTNERS
Offer to Purchase Units of Dissenting Limited Partners. The Merger Proposal
is also being structured to provide Limited Partners who dissent to the Merger
("Dissenting Limited Partners") the dissenter's rights specified in the
Thompson-Killea Act. The Thompson-Killea Act requires that the Dissenting
Limited Partners receive the appraised value of their Units in the form of cash,
freely tradeable securities, or secured or unsecured debt instruments satisfying
certain statutory requirements or, in the alternative, receive or retain a
security with substantially the same terms and conditions as the security
originally held, provided that the receipt or retention of that security is not
a step in a series of subsequent transactions that directly or indirectly
involves future combinations or reorganizations of one or more roll-up
participants. Securities received or retained will be considered to have the
same terms and conditions as the security originally held if (a) there is no
material adverse change to Dissenting Limited Partners' rights, including, but
not limited to, rights with respect to voting, the business plan, or the
investment, distribution, management compensation and liquidation policies of
the Partnership or resulting entity; and (b) the Dissenting Limited Partners
receive the same preferences, privileges, and priorities as they had pursuant to
the security originally held.
The Company is satisfying this requirement by offering to purchase the
Units of any Dissenting Limited Partner with an unsecured subordinated debenture
("Debenture") issued under an Indenture
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Agreement ("Indenture Agreement"). The Merger Proposal and the related
transactions, including the dissolution and liquidation of the Partnerships
("Dissolutions" and "Liquidations") have also been structured to comply with the
other protections afforded by the Thompson-Killea Act. A copy of the Indenture
Agreement is included with the Joint Consent Statement/Prospectus as Appendix M.
A copy of the Debenture is included with the Joint Consent Statement/Prospectus
as Appendix N. See that portion of the Joint Consent Statement/Prospectus
entitled "RIGHTS OF DISSENTING SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
Unsecured Subordinated Debentures. A Dissenting Limited Partner who
exercises his or her dissenter's rights will receive an unsecured subordinated
debenture ("Debenture") under an Indenture Agreement ("Indenture Agreement").
The Indenture Agreement provides for a Trustee and specifies that (a) the title
of the Debenture shall be "Unsecured Subordinated Debenture Due January 31,
2005"; (b) the amount at which such Debenture will be issued shall be the value,
in United States currency, of such Dissenting Limited Partner's interest in the
Partnership, determined in accordance with the Exchange Value, as of the
Determination Date, if such Dissenting Limited Partner perfects his or her
dissenter's rights pursuant to the terms of the Merger; (c) the date on which
the principal of the Debenture is payable shall be January 31, 2005, which date
or dates may be fixed or extendible; (d) the rate or rates at which the
Debenture shall bear interest shall be a variable interest rate equal to the
federal rate as determined in accordance with Section 1274 of the Internal
Revenue Code of 1986, payable on January 1 and July 1 of each year and based on
a 365-day year; (e) the Debenture shall be issued within 30 days of the closing
date of the Merger; (f) the Debenture shall limit total leverage to 70 percent
of the appraised value of the assets previously owned by the Partnership; and
(g) the Debenture shall be prepaid with 80 percent of the net proceeds of any
sale or refinancing of the assets previously owned by the Partnership. The
Indenture Agreement does not provide for a sinking fund.
A Limited Partner who does not consent to the Merger Proposal may, but is
not required to, exercise his or her dissenter's rights by completing and
signing Part V of the Letter of Transmittal and Consent Statement ("Consent
Statement"). Such a non-consenting Limited Partner, therefore, will become a
"Dissenting Limited Partner". Dissenting Limited Partners will receive, pursuant
to those dissenter's rights, a Debenture issued under the Indenture Agreement in
an amount equal to the Exchange Value of such Dissenting Limited Partner's
Units. Each Dissenting Limited Partner will be provided with a Debenture within
30 days following the consummation of the Merger and related transactions for
his or her Units in the amount as specified above.
LIMITED PARTNERS WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS ARE CAUTIONED THAT
FAILURE TO COMPLETE PART V OF THE CONSENT STATEMENT WILL RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
See the portion of the Joint Consent Statement/Prospectus entitled "RIGHTS
OF DISSENTING LIMITED PARTNERS" for additional information regarding Limited
Partners' dissenters' rights.
Compliance with and Approval from Federal and State Authorities. The Merger
Proposal and related transactions will not be completed if any moratorium on
transactions of its type are imposed by federal, state or regulatory authorities
or if any state securities authority imposes any restriction upon, or prohibits
any aspect of, the transactions contemplated by the Merger Proposal and related
transactions, which in the judgment of the Company, renders the Merger Proposal
and related transactions undesirable or impractical.
Comparison of Units and Merger Stock. The portion of the Joint Consent
Statement/Prospectus entitled "SUMMARY COMPARISON OF UNITS AND MERGER STOCK"
highlights a number of the
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significant differences between the Partnership (and the Units) and the Company
(and the Merger Stock) relating to, among other things, form of organization,
investment objectives, policies and restrictions, asset diversification,
capitalization, management structure compensation and fees, and investor rights,
and compares certain legal rights associated with the ownership of the Units and
Merger Stock, respectively. These comparisons are intended to assist the Limited
Partners in understanding how their investments will be changed if, as a result
of the Merger and related transactions, their Units are exchanged for shares of
Merger Stock.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following information is intended to provide the Limited
Partners with a summary of all material federal income tax consequences of
general application to the Company and Limited Partners associated with the
Merger Proposal. This summary does not consider all tax matters that may affect
the Partnership, the Company, or the Limited Partners, including any state,
local, foreign or other matters, and does not consider various facts or
limitations applicable to any particular Limited Partner, or special tax rules
that may apply to certain Limited Partners that may modify or alter the results
described herein.
Except as otherwise indicated, statements of legal conclusions regarding
tax treatments, tax effects or tax consequences present the opinions of John H.
Brainerd, Attorney at Law and tax counsel for the Company, based on the Internal
Revenue Code of 1986 ("Code") and applicable Treasury Regulations thereunder,
each as amended and in effect on the date hereof, and on reported judicial
decisions and published positions of the Internal Revenue Service ("IRS"). No
rulings have been requested from the IRS concerning any of the matters presented
in the Joint Consent Statement/Prospectus and the IRS will generally not issue
rulings on transactions such as the Merger Proposal. In some cases, particularly
those as to which tax counsel's opinion is qualified, there is a risk that the
IRS will disagree with the conclusions of tax counsel. The laws, regulations,
administrative rulings and judicial decisions that form the basis for
conclusions with respect to the tax consequences of the Merger Proposal are very
complex and are subject to change at any time.
The tax opinion of John H. Brainerd is filed as Exhibit 8 to the
Registration Statement, of which the Joint Consent Statement/Prospectus
constitutes a part. Upon receipt of a written request of a Limited Partner (or
such Limited Partner's representative who has been so designated in writing)
addressed to the Information Agent at 4100 Newport Place, Suite 400, Newport
Beach, California 92660, a copy of the tax opinion will be transmitted promptly,
without charge, by the General Partner.
The Limited Partners, PCM shareholders and Company shareholders should be
aware that there is no direct authority of general applicability governing the
federal income tax treatment of transactions such as the Merger Proposal that
are structured as partnership mergers, because this structure is an approach
made available by recent developments in California partnership law. Therefore,
in rendering his opinions, John H. Brainerd has relied on authorities addressing
the consequences of analogous transactions that used similar structures.
Accordingly, although there appears to be no controlling authority contrary to
Mr. Brainerd's conclusions, it is possible that the IRS would take a different
position if it reviewed the tax consequences of the Merger Proposal.
Differences Between Partnership Units and Merger Stock. A limited
partnership is a pass-through entity for federal income tax purposes. This means
that a limited partnership is not liable for federal income tax on its taxable
income. Rather, a limited partnership passes its income (or loss) through to its
owners (i.e., general and limited partners) in proportion to their relative
interests in profits and losses. This is known as allocating a partnership's
income and loss. Many items of income,
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deduction, gain, loss, and credits are allocated separately to each partner in
proportion to such partner's interest in those items as specified in such
limited partnership's agreement of limited partnership. The character of each
item passed through to a partner remains the same with such partner as it was
with the limited partnership. Each partner includes these items on such
partner's income tax return and pays tax based on those items combined with such
partner's other items of income, deduction, gain, loss or credits. Thus, tax is
imposed on the partner regardless of whether the limited partnership actually
distributes any cash or property to that partner. Therefore, it is the
allocation, not the distribution, of income (or loss) to a partner that results
in tax effect for that partner.
A partner has a basis in the limited partnership interest he or she holds
which is generally equal to either the cost of that limited partnership
interest, if purchased, or, if not purchased, the amount of any cash or adjusted
basis of any other property that partner transferred to the limited partnership,
increased (or decreased) by that partner's share of the limited partnership's
income (or loss) and decreased by the amount of any cash (or the basis of any
property) distributed to that partner. Upon sale of his or her limited
partnership interest, a partner realizes gain equal to the amount received for
the limited partnership interest (including their share of partnership
liabilities) less that partner's adjusted basis in the limited partnership
interest. The partner's gain (or loss) upon sale is generally capital gain (or
loss), but may be characterized as ordinary gain (or loss) to the extent of that
partner's share of certain "hot" assets held by the limited partnership.
Because a limited partnership does not pay tax on income it earns (but
rather the general partner and limited partners pay tax on such income),
partners of a limited partnership are subject to federal income tax on income
earned in the business conducted by the limited partnership only once.
Accordingly, as owners of the Partnership, by their Units, Limited Partners
receive the federal income tax treatment just described. Regarding the
Partnership, the number of Units owned by a partner (either the General Partner
or any Limited Partner) will determine the amount of income or loss allocated to
such partner by the Partnership.
A corporation is a taxable entity and pays federal income tax at rates
ranging from 15% to 39% on its taxable income. A shareholder of a corporation is
generally not taxed on any income earned by that corporation until that
corporation distributes either cash or property to that shareholder or that
shareholder sells or exchanges his or her shares of stock issued by that
corporation at a gain. A corporation often makes distributions to its
shareholders in proportion to their interests in that corporation, but it need
not do so. When cash or property is distributed, each portion of the
distribution will be characterized in one of the following three ways: (i) as a
dividend, (ii) as a capital gain, or (iii) as a return of capital. The portion
of a distribution treated as a dividend is taxed at ordinary federal income tax
rates, which, for individuals, are as much as 39.6%. Upper tax bracket
individuals are subject to a phaseout of their personal exemptions, and a
restriction on itemized deductions, which, however, in combination under certain
circumstances, can bring the actual maximum effective federal rate to more than
47%. The portion treated as capital gain will reduce the adjusted basis in the
shareholder's stock and generally be taxed at a maximum 28% rate until the
adjusted basis reaches zero. The portion treated as return of capital will not
be taxed. The amount of any distribution treated in any of the three alternative
ways may differ for each shareholder, and will depend upon the value of the cash
and property received, the percentage interest in the corporation owned by the
shareholders receiving distributions and each shareholder's basis in his or her
shares. Because corporations are taxable on their own taxable income, and
because shareholders may be taxed again on that same income, if it is
distributed to shareholders in the form of cash or property, or if that income
is realized by the sale or exchange of shares at a gain, there are two levels of
potential tax upon income earned by a corporation. A shareholder's basis in his
or her shares is generally equal to the cost of the shares, if purchased, or, if
not purchased, the amount of any cash and basis of other property contributed to
the corporation, decreased by the amount of any distributions
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treated as a return of capital. Upon a sale of shares, a shareholder's gain (or
loss) will be equal to the amount received for those shares less his or her
basis in those shares. The character of such gain (or loss) will generally be
capital in nature. As holders of interests in a corporation (the Company), the
owners of Merger Stock will be subject to the tax treatment just described.
As a holder of a Unit, a Limited Partner holds an interest in an entity
that earns income subject to federal income tax only once, whereas the holder of
Merger Stock would hold an interest in an entity that earns income conceivably
subject to federal income tax twice (if dividends or similar distributions are
made by the Company to its shareholders).
There are, however, potential tax advantages (and corresponding financial
advantages) to conducting a business in a corporation. These include the ability
of shareholders to defer tax on income earned by the corporation until the
corporation distributes such income. Partners in a partnership, by contrast, are
taxed as the partnership earns income, even if cash is not distributed to those
partners. Partners pay such tax at their individual federal tax rate, which may
exceed the maximum federal corporate tax rate. Alternatively, because
shareholders pay no tax until they receive distributions from the corporation,
the Company, as a corporation, may accumulate income for business expansion
without financially interfering with its shareholders' abilities to pay their
taxes. Finally, because tax is paid by the corporation, it is better able to
manage its tax liability by tax planning.
The Partnership. The Partnership will be deemed to have transferred all of
its assets and liabilities to the Company and to have received the Merger Stock
in exchange, and then to have distributed such Merger Stock to the Limited
Partners and the General Partner in complete liquidation. The Partnership will
realize, but not be required to recognize, gain or loss as if the Partnership
had transferred of all of its assets to the Company for an amount equal to the
value of such Merger Stock, plus the liabilities of the Partnership assumed in
the Merger. The Partnership will avoid recognition of gain or loss if it
contributes property to the Company and immediately thereafter, together with
the other PAM Funds and the PCM Shareholders, is in control of 80% of the
Company. The Partnership will, however, be taxed on any boot received in the
Merger. Boot is defined as cash or property (including securities other than the
stock) received by the Partnership. Gain or loss is not recognized and deferred
by the Partnership by the transfer of the Partnership's adjusted basis in its
assets, reduced by any liabilities assumed by the Company, to the shares of
Merger Stock that it is deemed to receive in the Merger. The gain or loss
realized will be recognized when these shares of Merger Stock are sold or
exchanged in a taxable transaction.
The Partnership will have a split holding period for each share of Merger
Stock received. A share of Merger Stock received in exchange for Units will have
a holding period that begins on the day following the Closing Date to the extent
that the value of such share of Merger Stock on the Closing Date is attributable
to certain of the Partnership's assets (essentially, its ordinary income
assets), and, to the extent of any excess value, such share of Merger Stock will
have a holding period that includes the period the Units were held by the
Limited Partners.
The Company. The Partnership will be deemed to have transferred all of its
assets and liabilities to the Company and to have received Merger Stock in
exchange, and then to have distributed the Merger Stock to the Limited Partners
and the General Partner in complete liquidation.
The Company will not recognize gain or loss resulting from the Merger, but
the Company's tax basis in the assets acquired from the Partnership will be the
same as that basis was in the hands of the Partnership. The Company's holding
period in the assets will include the Partnership's holding periods received by
the Company. The Partnership, on the other hand, will not be required to
recognize gain
C-30
<PAGE>
or loss resulting from the Merger.
After consummation of the Merger, the Partnership will cease to exist for
both state law and federal income tax purposes. The Company will be taxed as a
corporation on its taxable income. The income and deductions attributable to the
assets and liabilities received in the Merger will be included in the Company's
taxable income. The adjusted tax basis of certain of the assets will be
depreciable or amortizable for federal tax purposes, thereby reducing the amount
of the Company's income subject to tax.
Gain or Loss to the Limited Partners. Each Limited Partner will realize
gain or loss on the receipt of Merger Stock or a Debenture in exchange for his
or her Units. As the Merger Stock will probably be considered to be marketable
securities, the Merger Stock will be treated as cash received and gain to the
Limited Partners will be measured by the difference between the fair market
value of the Merger Stock received by the Limited Partners and their adjusted
basis in their Units. This gain will be limited by the prorata share of the net
gain, if any, which would be recognized if all the marketable securities (Merger
Stock) held by the Partnership were sold. If all Dissenting Limited Partners
have had their interests redeemed before the distribution of the Merger Stock,
each Limited Partner's gains will be reduced to zero. This means that the
adjusted basis of the Merger Stock received would be the same as the adjusted
basis the Limited Partners had in their Units. If gain is recognized, the
adjusted basis in the Merger Stock would be increased by the amount of that
gain.
A Limited Partner that receives a Debenture (with respect to his or her
Units) because of such Limited Partner's exercise of dissenter's or similar
rights under California law (with respect to his or her Units) may recognize
gain depending upon such Limited Partner's aggregate basis in the Partnership
prior to the Closing Date. The aggregate basis of any Merger Stock received by a
Limited Partner in exchange for his or her Units will be equal to the aggregate
basis in such Units immediately before the Merger, decreased by the amount of
cash received by such Limited Partner for such Units in lieu of fractional
shares of Merger Stock. Such basis will be prorated among all shares of Merger
Stock received for such Units.
Limited Partners will have a split holding period for each share of Merger
Stock received. A share of Merger Stock will have a holding period that begins
on the day following the Closing Date to the extent that the value of such share
of Merger Stock on such date is attributable to certain of the Partnership's
assets (essentially, the Partnership's ordinary income assets), and, to the
extent of any excess value, such share of Merger Stock will have a holding
period that includes the period that Units were held by each recipient Limited
Partner.
Each Dissenting Limited Partner will receive a Debenture which will be
treated the same as cash, resulting in gain that will be realized and recognized
by such Limited Partner. It is not anticipated that such Debenture will be
readily transferable. Accordingly, this gain may be eligible to be deferred
until payment is received under such Debenture. Limited Partners should consult
their tax advisor as to how these rules might apply to them.
Each Limited Partner who receives Merger Stock will be required to file
with his or her federal income tax return for the year in which the Merger is
consummated a statement that provides details relating to his or her Units
(which will be considered to be property transferred), the Merger Stock, and his
or her share of any liabilities assumed by the Company, as the surviving
corporation in the Merger. The Company will provide its shareholders with
information to assist them in preparing those statements.
After the Merger is consummated, the income and deductions attributable to
the assets and
C-31
<PAGE>
liabilities of the Company will not be allocated to the shareholders of the
Company. A shareholder of the Company will be taxed only on dividends and other
distributions received from the Company, if any. Such distributions generally
will be taxable as dividends to the extent of any current or accumulated
earnings and profits of the Company. Any other distributions will be treated as
a nontaxable return of capital to the extent of such shareholder's basis in his
or her shares of the Company's common stock and as capital gain to the extent of
the remaining portion of such distribution.
THE FOREGOING INFORMATION RELATES ONLY TO THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER PROPOSAL APPLICABLE TO LIMITED PARTNERS GENERALLY. EACH LIMITED
PARTNER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE
CONSEQUENCES OF THE MERGER PROPOSAL ON SUCH PERSON'S PARTICULAR TAX SITUATION.
C-32
<PAGE>
APPENDIX D
Supplement For
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership
(S-K Reg. 229.902)
Notice to Limited Partners of Performance Asset Management Fund III, Ltd., A
California Limited Partnership:
Purpose of Partnership Supplement. This separate partnership supplement
highlights information presented in the Joint Consent Statement/Prospectus as
that information relates to Performance Asset Management Fund III, Ltd., A
California Limited Partnership ("Partnership") and its limited partners
("Limited Partners"), regarding a proposed merger ("Merger Proposal") of the
Partnership and other, similar California limited partnerships ("Other
Partnerships") and Performance Capital Management, Inc., a California
corporation ("PCM"), with and into Performance Asset Management Company, a
Delaware corporation ("Company") ("Merger"). Similar supplements have been
prepared for the Other Partnerships. The effects of the Merger may differ for
the limited partners in the Other Partnerships. If you want to obtain a
supplement for any of the Other Partnerships, please call the Information Agent,
Bud Webb at (888) 754-4145. You may also send a written request for copies of
any documents referenced in the Joint Consent Statement/Prospectus to
Performance Development, Inc., Attn: Information Agent, 4100 Newport Place,
Suite 400, Newport Beach, California 92660. As you know, Performance
Development, Inc. is a California corporation and the General Partner of the
Partnership and each of the Other Partnerships ("General Partner"). Supplements
for any of the Other Partnerships will be provided without charge to any Limited
Partner. The Partnership and the Other Partnerships are sometimes collectively
referred to as the "PAM Funds."
Potential Adverse Effects of the Merger. The most significant potential
adverse effects of the Merger to the Limited Partners are the significant
reduction in distributions (the Company does not intend to pay cash dividends);
the possibility that the shares of the Company's $.001 par value common stock
received by the Limited Partners upon the winding up and dissolution of the
Partnership ("Merger Stock") will trade at a price substantially below the value
assigned in the Merger Proposal; the limited public market for the Merger Stock;
the potential price volatility of the Merger Stock; possible dilution of the
Merger Stock; and the significant influence of Vincent E. Galewick, in his
capacity as the majority shareholder of the Company. There are also possible
adverse tax consequences to individual Limited Partners which could result from
their particular financial circumstances. Limited Partners should carefully
consider the matters set forth under the Caption "RISK FACTORS" beginning on
Page 22 of the Joint Consent Statement/Prospectus, and summarized herein
beginning at Page __ . Significant risk factors include:
o PCM and the Partnerships Have History of Losses
o Significant Reduction in Distributions
o Shares of the Merger Stock May Trade at a Price Substantially Below
the Value Assigned in the Merger Proposal
o Limited Public Market for Shares of the Merger Stock
o Potential Price Volatility of Shares of the Merger Stock
o Possible Dilution of the Merger Stock
o Uncertainty of Future Financial Results of the Company
o Dependence on Key Personnel of the Company
o Control by Principal Shareholder of the Company
o Possible Adverse Tax Consequences
o The Company may fail to comply with Year 2000 computer programming
issues
D-1
<PAGE>
Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("Partnership"), was formed on October 13, 1992, as a limited
partnership in California under the Revised Limited Partnership Act of the State
of California, as enacted and in effect on or after July 1, 1984. The
Partnership sold 1,980 limited partnership interests ("Units") at the price of
$5,000.00 per Unit. The terms "Unit" and "Units", when used in this Supplement,
shall also mean and refer to the limited partnership interests offered and sold
by the Other Partnerships. The total amount received by this Partnership from
purchasers of its Units is $9,990,000.00. As of June 30, 1997 ("Determination
Date"), this Partnership had 596 Limited Partners. The Partnership termination
date is December 31, 2005, unless sooner terminated.
PERFORMANCE ASSET MANAGEMENT FUND III, LTD.
PER UNIT DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Units outstanding at year end 1,998.00 1,998.00 2,000.00 2,000.00 437.00
Earnings (loss) per Unit $341.92 ($45.97) ($61.14) ($89.90) ($11.83)
Book value per Unit 3,063.10 2,858.14 3,096.22 3,768.59 4,965.99
Annual return of capital
distributions per Unit 148.11 200.05 668.10 415.70 0.00
Cumulative return of capital
distributions per Unit 1,433.04 1,284.93 1,083.80 415.70 0.00
Assigned value for Merger Stock $3,003.00/Unit
</TABLE>
Each Limited Partner should review thoroughly the selected financial
statements included in the portions of the Joint Consent Statement/Prospectus
captioned "RESULTS OF OPERATIONS," "SELECTED HISTORICAL AND PRO FORMA FINANCIAL
DATA AND COMPARATIVE PER SHARE DATA," "PRO FORMA CONDENSED FINANCIAL
INFORMATION," and the financial statements of the Company, PCM and the
Partnership and the Other Partnerships included in the Joint Consent
Statement/Prospectus.
The Partnership has continued to invest in distressed loan portfolios. As
set forth above, these portfolios consist primarily of charged-off credit card
accounts and consumer loan balances, such as auto loans and personal lines of
credit originated by independent third-party financial institutions located
throughout the United States. In addition, the Partnership acquired certain
portfolios of default consumer debts which were rewritten under terms different
from the original obligation. In 1994, 1995 and 1996, the Partnership's
investments in distressed loan portfolios consisted of the following (amounts
are carrying amounts):
Type of Portfolio 1994 1995 1996
----------------- ---------- ---------- ----------
Credit Card Accounts .............. $3,043,207 $1,168,650 $2,566,546
Performing Rewritten Accounts ..... $46,017 $1,952,735 $0
Consumer Loans .................... $1,310,633 $520,968 $0
Trade Receivables ................. $8,004 $0 $0
---------- ---------- ----------
Total ................... $4,407,861 $3,642,353 $2,566,546
========== ========== ==========
In 1994, the Partnership recorded net investment income of $15,660, net
interest income of $9,437, and other income of $900. Operating expenses for the
Partnership consists of the following: management
D-2
<PAGE>
fee expense of $121,205; collection expense of $12,076; professional fees of
$6,856; amortization expense of $1,157; and general and administrative expenses
of $6,990; for total operating expenses of $148,284. Therefore, the Partnership
recorded a net loss of $122,287 for 1994.
In 1995, the Partnership recorded net investment income of $205,518, net
interest income of $14,283, and other income of $1,735. Operating expenses for
the Partnership consists of the following: management fee expense of $92,447;
collection expense of $7,716; professional fees of $208,877; amortization
expense of $1,157; and general and administrative expenses of $3,183; for total
operating expenses of $313,380. Therefore, the Partnership recorded a net loss
of $91,844 for 1995.
In 1996, the Partnership recorded net investment income of $884,915 and net
interest income of $190,605. Operating expenses for the Partnership consists of
the following: management fee expense of $51,425; collection expense of $73,542;
professional fees of $254,453; amortization expense of $1,155; and general and
administrative expenses of $11,782; for total operating expenses of $392,357.
Therefore, the Partnership recorded net income of $683,163 for 1996.
Value of Assets Held by the Partnership. As of December 31 of each of the
years specified in the following table, the Partnership held the following
assets with the following values, which values were determined by the General
Partner and reviewed by Willamette Management Associates, Inc. ("Fairness
Analyst"), as part of the Fairness Analyst's review of the Merger Proposal to
determine if the terms of the Merger Proposal are fair to the Partnership and
the Other Partnerships:
Asset 1994 1995 1996
----- ---------- ---------- ----------
Cash and equivalents ................... $751,459 $210,140 $775,755
Cash held in trust ..................... 0 $762,639 $2,656,338
Investment in Distressed Loan Portfolios $4,408,633 $3,642,353 $2,566,546
Receivable from Unaffiliated Service
Provider(1) .......................... $927,540 $927,540 0
Due from Affiliates .................... 0 0 $56,039
Other Assets ........................... $101,579 $165,815 $64,477
Organization Costs, Net ................ $3,235 $2,078 $923
(1) West Capital Financial Services Corp., a California corporation.
The Partnership defines cash equivalents as all highly liquid investments
with a maturity of three months or less when purchased. The Partnership
maintains cash balances at one bank and aggregate accounts at that bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
D-3
<PAGE>
Compensation to the General Partner and Affiliates For the Last Three
Fiscal Years. The following table sets forth the compensation paid by the
Partnership to the General Partner and its Affiliates for the last three fiscal
years and the most recently completed interim period.
Entity 1994 1995 1996 1997*
------ -------- -------- -------- --------
General Partner
Management Fees .......... $121,205 $92,447 $51,425 $28,901
Distributions ............ $148,383 $41,828 $35,775 $66,600
PCM
Acquisition Fees ......... $0 $42,513 $686,459 $0
Collection Fees .......... $755 $29,091 $165,204 $353,060
-------- -------- -------- --------
Total .......................... $270,343 $205,879 $938,863 $448,561
======== ======== ======== ========
* Through June 30, 1997
The following table sets forth the compensation that would have been paid
by the Partnership to the General Partner and its Affiliates if the compensation
and distributions structure to be in effect after the Merger had been in effect
during the last three fiscal years.
Entity 1994 1995 1996
------ ---- ---- ----
General Partner ..................................... $0 $0 $0
PCM ................................................. $0 $0 $0
-- -- --
Total ......................................... $0 $0 $0
== == ==
As stated above, the Partnership enters into various joint ventures with
Performance Capital Management, Inc., a California corporation and an Affiliate
of the General Partner. Vincent E. Galewick owns all of the issued and
outstanding common stock of the following Affiliates:
Performance Development, Inc., a California corporation ("General Partner")
Income Network Company, Inc., a California corporation ("INC")
Vision Capital Services Corporation, a California corporation ("Vision")
Vincent E. Galewick owns 98.5% of the issued and outstanding common stock
of the following Affiliate: Performance Capital Management, Inc., a California
corporation ("PCM")
The Other Partnerships are:
Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM")
Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II")
Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("Partnership")
Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM IV")
Performance Asset Management Fund V, Ltd., A California Limited Partnership
("PAM V")
For convenience, as set forth above, the Partnership and the Other Partnerships
may be referred to in this Supplement as the "PAM Funds."
The General Partner was formed in June, 1990 to engage in various aspects
of the distressed loan industry. The General Partner serves as the general
partner for all the PAM Funds and certain other
D-4
<PAGE>
California limited partnerships. The General Partner's management fees incurred
and recorded by the Partnership totalled $121,205, $92,447 and $51,425 for the
years ended December 31, 1994, 1995, and 1996, respectively. The Partnership
also accrued distributions to the General Partner of $148,383 and $41,828 for
the years ended December 31, 1994 and 1995, respectively and $35,775 for the
year ended December 31, 1996. At December 31, 1994 and 1995, the Partnership had
amounts owed to the General Partner recorded as amounts due to Affiliates, of
$370,609 and $420,681, respectively, and $492,364 for the year ended December
31, 1996.
Income Network Company, a California corporation ("INC"), was formed on
February 1, 1988, as a registered Broker-Dealer and member of the National
Association of Security Dealers, Inc. and the Securities Investor Protection
Corporation. The sole shareholder of INC, Vincent E. Galewick, is also the sole
shareholder of the General Partner and Vision. Additionally, Mr. Galewick owns
98.5% of the issued and outstanding stock of PCM. INC, in accordance with the
Agreement of Limited Partnership for the Partnership and offering memorandum of
the Partnership, was paid commissions equal to 10% of gross proceeds received
from the offer and sale of interests in the Partnership ("Units"). INC is the
Soliciting Agent for the Merger Proposal.
Performance Capital Management, Inc., a California corporation ("PCM"), was
formed in February, 1993 to perform services related to locating, evaluating,
negotiating, acquiring and collecting distressed loan portfolio assets. PCM
acquires portfolio assets from third-party financial institutions and sells the
portfolios to the Partnership and the Other Partnerships at cost plus an
acquisition fee of approximately 30% to 37%, as provided in the related purchase
agreements. The Partnership also enters into servicing agreements with PCM to
collect and service the portfolios. Those agreements generally provide that all
proceeds generated from the collection of portfolio assets shall be shared by
the venturers (PCM and the Partnership) in proportion to their respective
percentage interests, generally, 55% to 60% for the Partnership and 40% to 45%
for PCM. The Partnership also reimburses PCM for certain costs associated with
the collection of portfolio proceeds.
Moreover, in addition to providing collection efforts on distressed loan
portfolios to the Partnership, PCM identifies and acquires distressed loan
portfolios and other discounted portfolios of financial debt instruments and
obligations and sells them to the Partnership and the Other Partnerships at
negotiated prices.
For the years ended December 31, 1995 and 1996, the Partnership purchased
one portfolio and three portfolios, respectively, from PCM and recorded
acquisition fees for these portfolios of $42,513 and $686,459, respectively.
These acquisition fees have been included in the carrying value of the related
investments. Also, for the years ended December 31, 1994, 1995 and 1996, the
Partnership incurred and reimbursed PCM for collection costs of $940, $4,578,
and $73,542, respectively.
The Partnership had amounts owed to PCM of $9,411 recorded as due to
affiliates at December 31, 1995, and amounts due from PCM of $56,039 recorded as
due from affiliates at December 31, 1996.
Distributions and Dividends. The Partnership has made quarterly cash
distributions to the Limited Partners, which distributions terminated effective
as of June 30, 1997. All of the distributions represented a return of capital.
The following table specifies the cash distributions made to the Limited
Partners during each of the last five fiscal years and most recently completed
interim period.
D-5
<PAGE>
General Limited
Total Partner Partner
Year Distributions Distributions Distributions
---- ------------- ------------- -------------
1992 ..................... $0 $0 $0
1993 ..................... $923,767 $92,377 $831,390
1994 ..................... $1,484,583 $148,383 $1,336,200
1995 ..................... $441,528 $41,828 $399,700
1996 ..................... $331,700 $35,775 $295,925
June 30, 1997 ............ $667,200 $66,600 $600,600
Selected Financial Information. The following table sets forth a historical
summary of gross collections and partner distributions for the PAM Funds from
the date of formation of each PAM Fund through June 30, 1997:
<TABLE>
<CAPTION>
Cost of
Portfolios Original Portfolio Portfolios Gross Partner
Partnership Acquired Face Value Acquired Collections* Distributions**
----------- -------- ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
PAM(1) ............... 16 $305,438,442 $4,932,616 $5,526,429 $3,678,632
PAM II(2) ............ 19 433,632,566 6,230,345 8,749,682 4,059,775
Partnership .......... 21 521,408,657 9,685,926 7,826,584 3,463,815
PAM IV(3) ............ 57 709,008,534 20,416,167 20,014,508 6,269,988
PAM V(4) ............. 12 209,901,705 4,997,992 2,889,555 639,600
--- -------------- ----------- ----------- ----------
Total ........... 125 $2,179,389,904 $46,263,046 $45,006,758 $18,111,810
=== ============== =========== =========== ===========
</TABLE>
* Gross collections include any sale of accounts and collection activity
through June 30, 1997
** Through June 30, 1997
(1) Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM").
(2) Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II").
(3) Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM IV").
(4) Performance Asset Management Fund V, Ltd., A California Limited Partnership
("PAM V").
REASONS FOR THE MERGER PROPOSAL
The primary purpose of the Merger is to provide the Limited Partners with
the opportunity to participate in the growth of Performance Capital Management,
Inc., a California corporation ("PCM"), while also increasing the liquidity of
their investments. Additional purposes include the possibility of greater access
to capital markets; greater flexibility regarding capital resources; the ability
to provide employees with incentive performance compensation by a stock option
plan; the opportunity to offer greater employee ownership; more simplified
record keeping, accounting and tax reporting; and to permit the shares of $.001
par value common stock issued by the Company to the Limited Partners in the
Merger ("Merger Stock") to be eligible for listing on a regional or national
market quotation system. No prediction can be made, however, as to the price at
which the Merger Stock will trade. Moreover, no assurance or guaranty can be
given that the Merger Stock will trade at all or that the application for such
listing will be approved.
D-6
<PAGE>
Liquidity and Market Valuation. The Units and currently issued and
outstanding shares of no par value common stock of PCM are not publicly traded
and have limited, if any, liquidity. The primary means of liquidity for holders
of the Units has been requesting the Partnership to redeem their Units. Although
the Partnership is not obligated to comply with any such request, such
redemptions have occurred from time to time, using available cash to redeem
Units at a percentage of book value. After consummation of the Merger, the
Merger Stock may be made eligible for trading on a regional or national stock
exchange and there may be a readily accessible market for selling the Merger
Stock and a readily determinable market price for the Merger Stock. With a
readily accessible market for Merger Stock, Unit holders would no longer be
required to rely solely on the Partnership as a source of liquidity, and the
Company would not be required to use its cash to provide such liquidity.
Instead, it is expected that holders of Merger Stock will be able to sell their
Merger Stock publicly from time to time, subject to certain restrictions, at a
fair market price. No prediction can be made, however, as to the price at which
the Merger Stock will trade. Moreover, no assurance or guaranty can be given
that the Merger Stock will trade at all or that the application for such listing
will be approved.
Access to Equity Markets. Although the Company currently has no plans for
any equity offerings, the existence of publicly traded equity securities is
expected to provide the Company with future access to the public equity markets.
Greater Flexibility Regarding Capital Resources. The Company should have
greater flexibility with respect to the use of capital resources, because it
will not have to use available cash to redeem shares of its common stock. As
discussed above, the Partnership has from time to time used its available cash
to redeem Units when requested to do so by certain of its Limited Partners.
There are also potential tax advantages (and corresponding financial advantages)
to conducting a business as a corporation that should allow the Company greater
flexibility with respect to the management of its capital resources.
Shareholders of the Company will defer the payment of taxes on income earned by
the Company until the Company distributes such income in the form of dividends.
Limited Partners, by contrast, are taxed at such time as the Partnership
recognizes taxable income. The Limited Partners are taxed on such income at
their individual federal, state and, sometimes, municipal tax rates, which may
exceed the maximum corporate tax rates. Therefore, the Company, as a
corporation, can accumulate income for business expansion without adversely
affecting a shareholder's tax liability.
Acquisition Consideration. After consummation of the Merger, the Company
may be able to use shares of its common stock as consideration in its
acquisition of assets or other businesses. The use of equity securities as an
acquisition currency is advantageous, because it may be more tax efficient to
the seller of a business than a cash transaction, and it allows the Company to
consummate acquisitions without depleting cash resources. It also allows a
seller to continue to hold an equity interest in the business acquired by the
Company, by equity ownership in the Company after such acquisition. The use of
common stock in acquisitions can also enable the Company to use the advantageous
pooling accounting method, if certain conditions are satisfied.
Incentive Compensation. The availability of shares of the Company's common
stock will permit the Company to provide its key employees with equity based
incentive compensation. The Company believes providing equity based incentive
compensation by the use of common stock will allow greater employee
participation in the Company's ownership, provide a more accurate measure of the
Company's performance (as a result of common stock having a readily
ascertainable value), and provide the Company with more flexibility in designing
equity based incentive compensation. The Company believes that this method of
compensation conserves the Company's cash and promotes management stability.
D-7
<PAGE>
Greater Employee Ownership. As a result of the complex tax reporting
requirements associated with being a Limited Partner and the administrative
burden placed on the Partnership, as a result of having a significant number of
additional limited partners, it has not been feasible for the Partnership to
offer ownership opportunities to a broad range of employees. By having the
shares of its common stock available, however, the Company will be able to offer
ownership opportunities to its employees. The Board of Directors of the Company
believes that employee ownership is in the best interests of the Company and its
shareholders.
Simplified Record Keeping, Accounting and Tax Reporting. The Limited
Partners will not continue to be burdened with the cumbersome and complex tax
reporting requirements imposed on them under federal and multiple state
partnership tax laws, or with the related record keeping and accounting
requirements.
Certain Disadvantages of the Merger Proposal and Related Transactions
Taxation. The Partnership does not pay any federal or state income taxes.
After consummation of the Merger, the Company will be subject to federal and
state income tax. Shareholders of the Company will also be required to pay
federal, state and, in some circumstances, municipal income taxes on any
dividends that they receive from the Company and on any gain from the sale or
exchange of their Merger Stock. Therefore, while in partnership form, income
taxes are imposed only once (i.e., on the Limited Partners), in corporate form
income taxes are imposed twice (i.e., once on the Company and once on its
shareholders, to the extent they receive dividends or recognize gain on the sale
or exchange of securities). See those portions of the Joint Consent
Statement/Prospectus captioned "FEDERAL INCOME TAX CONSEQUENCES" and "CERTAIN
STATE AND LOCAL INCOME TAX CONSEQUENCES."
Significant Reduction in Distributions. The dividends distributed by the
Company to its shareholders after consummation of the Merger may be
significantly less that the distributions historically made by the Partnership
to the Limited Partners. Moreover, the Company shall not pay any cash dividends
on its common stock or preferred stock during the foreseeable future. See those
portions of the Joint Consent Statement/Prospectus captioned "Distribution
Policy" and "DISTRIBUTION POLICY --HISTORICAL DISTRIBUTIONS OF THE
PARTNERSHIPS."
Uncertainty Regarding Trading and Market Price of Common Shares. The Merger
Stock may not be listed or approved for listing on any regional or national
securities exchange or otherwise designated or approved for designation upon
notice of issuance as a national market system security on an interdealer
quotation system maintained by the National Association of Securities Dealers,
Inc. To the extent that the Merger Stock may trade, trading prices for the
Merger Stock will be influenced by many factors, including the market for the
Merger Stock, the Company's dividend policy, the possibility of future sales by
the Company or its shareholders of shares of the Company's common stock,
investors' perception of the Company and its businesses, and general economic
and stock market conditions. No prediction can be made as to the price at which
the Merger Stock will trade, if it will trade at all. Moreover, there is a
probability that the Merger Stock may trade at a price below the value per share
assigned in the Merger Proposal. The Limited Partners and shareholders of PCM
("PCM Shareholders") have not previously had access to an active trading market
for the Units and shares of PCM's common stock, respectively. Therefore, it is
possible that they may wish to sell their Merger Stock from time to time after
the consummation of the Merger. The sale of Merger Stock after the consummation
of the Merger might have an adverse effect on the market price of the Merger
Stock; provided, however, to mitigate as much as possible any such adverse
effect, trading of the Merger Stock shall be limited during the first one year
period following the closing date of the Merger ("Closing Date").
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<PAGE>
EFFECTS OF THE MERGER
As a result of the Merger, all of the assets now held directly or
indirectly by PCM and the PAM Funds will be held by the Company, and PCM and the
PAM Funds will cease to exist by operation of law. The Company will possess all
of the assets, properties, rights and privileges, and will be subject to all the
liabilities and obligations, of PCM, the PAM Funds and the Company existing on
the Closing Date.
The following is a brief description of each material risk and effect of
the Merger Proposal, including, but not limited to, federal income tax
consequences, for the Limited Partners. Also included is a brief discussion of
the effect of the Merger Proposal on the Partnership's financial condition and
results of operations. Pro forma financial information based on the
participation of the Partnership in the Merger is set forth in the Joint Consent
Statement/Prospectus under the heading entitled "SELECTED HISTORICAL AND PRO
FORMA FINANCIAL DATA AND COMPARATIVE PER SHARE DATA."
The Merger. The proposed merger transaction contemplates that each of the
PAM Funds, including the Partnership, shall receive shares of $.001 par common
stock of the Company in exchange for the assets of the PAM Funds. Additionally,
by amending the provisions of the Agreements of Limited Partnership for the PAM
Funds, the PAM Funds shall be wound up and dissolved and the shares of $.001 par
value common stock of the Company received by the PAM Funds in exchange for
their assets shall be distributed to the General Partner and the limited
partners of the PAM Funds, all in accordance with an exchange value determined
by the Company, PCM and the General Partner and reviewed by Willamette
Management Associates, Inc. ("Fairness Analyst"). A copy of the Fairness Opinion
is attached to the Joint Consent Statement/Prospectus as Appendix G.
The Determination Date is a date set by the Board of Directors of the
Company. At this time, the Board of Directors of the Company expects that the
Determination Date will be June 30, 1997. To accommodate the Merger, the General
Partner suspended distributions by the Partnership to the Limited Partners,
effective as of the Determination Date. This is necessary to assure that the
Limited Partners' capital accounts do not change after the Determination Date.
The Board of Directors of the Company has the authority to postpone the
Determination Date and declare a new Determination Date, in its discretion. The
Board of Directors of the Company might postpone the Determination Date and
declare a new Determination Date, if the matters contemplated in the Merger
Proposal are postponed for any reason.
Effect of the Merger on Cash Distributions. Until June 30, 1997, the
Partnership made cash distributions to the Limited Partners. The Company
currently anticipates that the Company will not pay cash dividends. However,
this policy may change, as the actual amount of dividends, if any, to be paid
will be determined by the Board of Directors of the Company, in its sole
discretion, generally taking into account a number of factors, including
operating performance, liquidity and capital requirements. There can be no
assurances that any cash dividends will be paid, just as there can be no
assurances that the Partnership's distributions will continue at previous
levels.
DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
COMPANY'S ACTUAL CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S FINANCIAL
CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS AS THE
COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
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<PAGE>
Effects of the Merger May Be Different For Investors in the Various Limited
Partnerships. If the Merger Proposal is approved and the Merger is consummated,
the Limited Partners will receive $3,003.00 in Merger Stock per Unit of the
Partnership. Limited partners in PAM will receive $890.37 in Merger Stock per
Unit of PAM. Limited partners in PAM II will receive $2,010.34 in Merger Stock
per Unit of PAM II. Limited partners in PAM IV will receive $1,381.52 in Merger
Stock per Unit of PAM IV. Limited Partners in PAM V will receive $3,936.35 in
Merger Stock per Unit of PAM V.
The General Partner believes that the Limited Partners would receive
significantly less if the Partnership was liquidated, and the assets distributed
to the Limited Partners, because even an orderly liquidation would result in
prohibitive discounts on the value of the Partnership assets, which are
distressed debt portfolios. Continuing the Partnership in accordance with its
present business plan would result in each Limited Partner maintaining the
current book value per Unit of the Partnership. The book value at the
Determination Date of the Partnership was $2,340.34 per Unit; of PAM, $536.07
per Unit; of PAM II, $1,855.19 per Unit; of PAM IV, $1,249.22 per Unit; and of
PAM V, $3,158.55 per Unit. Therefore, under the Merger Proposal, the limited
partners of the PAM Funds will receive significantly more in Merger Stock per
Unit than the book value per Unit.
To estimate the value of PCM and the PAM Funds, the Fairness Analyst
considered an asset-based approach and an income-based approach to value.
Therefore, the amount of capital raised from the limited partners in each of the
PAM Funds, and the returns on investment experienced by each PAM Fund, were
factors in determining the Exchange Value of each PAM Fund. The extent to which
each PAM Fund achieved its investment objectives was another factor. PCM's value
was calculated based on the present value of debt-free net cash flow and the
present value of the terminal value of PCM's cash receipts.
In the asset-based approach, the Fairness Analyst considered the total
expected net proceeds (i.e., after consideration of interim operating and
liquidation costs) which would accrue to the limited partners of each PAM Fund
as a result of the orderly liquidation of the assets on hand. The Fairness
Analyst determined that the liquidation equity values of the PAM Funds are as
follows: the Partnership - $3,826,861; PAM - $28,256; PAM II - $2,404,533; PAM
IV - $11,865,592; and PAM V - $2,594,885. The present value of PCM's terminal
value of cash flows was determined to be $38,764,000.
In the income-based approach, the Fairness Analyst considered the expected
annual cash flows which would be generated by PCM and each PAM Fund over a
projected, finite operating period primarily as a result of collection efforts
and the sale of distressed loan portfolios. The expected cash flows, including
the terminal value, or projected cash flows resulting from the sale of assets or
business at the end of the projection period, were then discounted to a present
value by a rate of return deemed to be reflective of the risks inherent within a
projected stream of cash flows generated by assets such as distressed loan
portfolios.
The projected cash distributions from 1997 through the life each PAM Fund
were as follows: the Partnership - $8,625,225; PAM - $2,718,150; PAM II
- -$6,560,773; PAM IV - $25,117,113; and PAM V - $5,618,400. Present value of the
projected cash distributions was calculated using a discount rate based on a
weighted average yield to maturity of 14 high yield issues in fiscal 1996, as
specified in Exhibit A-12 to the Fairness Opinion. This figure was added to the
terminal value of the portfolios of the PAM Funds, to arrive at a total present
value of each PAM Fund. The General Partner determined (and the Fairness Analyst
agreed that such determination is fair to the PAM Funds from a financial point
of view) that the present value of the PAM Funds as of the date of the Fairness
Opinion was as follows: the Partnership - $3,357,876 ; PAM - $1,432,934; PAM II
- - $1,571,591; PAM IV - $9,737,878; and PAM V - $3,786,364. These valuations were
added to each PAM Fund's adjusted net asset value, for
D-10
<PAGE>
a combined portfolio and adjusted net asset value of $5,999,944 for the
Partnership; $933,609 for PAM; $3,111,728 for PAM II; $15,846,278 for PAM IV;
and $4,699,954 for PAM V.
The present value of PCM was determined to be the sum of its terminal value
of cash flows, $38,764,000, plus the present value of its debt free net cash
flow, $5,759,000, for a total present value of $44,523,211.
These values formed the basis for the Exchange Value for each PAM Fund and
PCM.
The only material difference in the operation of the PAM Funds is a
difference in the Agreement of Limited Partnership of PAM IV. Section 6.2 of the
Agreement of Limited Partnership of PAM IV provides that, until such time as the
limited partners of PAM IV have received a cash return equal to their capital
contributions, plus an amount equal to 6% of their capital contributions, the
limited partners of PAM IV will receive 90% of the cash available for
distribution, and the General Partner will receive the remaining 10% of the cash
available for distribution. After the limited partners of PAM IV have received
the specified cash return, the distribution ratio changes to 70% to those
limited partners and 30% to the General Partner. The General Partner considered
this provision in calculating the income-based value of PAM IV.
Allocation to Limited Partners and General Partner. Upon dissolution of the
PAM Funds, the General Partner will receive 10% of the Merger Stock allocated to
each PAM Fund pursuant to the ownership allocations in the Agreement of Limited
Partnership for each PAM Fund. The Partnership has been allocated 600,000 shares
of Merger Stock. If the Merger is consummated, the General Partner will receive
60,000 shares of Merger Stock received by the Partnership and the Limited
Partners will receive 540,000 shares of Merger Stock received by the
Partnership.
The Merger Agreement. The Merger will be consummated pursuant to the Merger
Agreement, if the Merger Proposal, as set forth in the Joint Consent
Statement/Prospectus, receives the requisite approval of the limited partners of
each PAM Fund, the approval of the PCM Shareholders, and the approval of the
shareholders of the Company, and if the other applicable conditions to the
Merger are satisfied or waived, including any approvals required from any state
or federal regulatory agency. The Merger Agreement is designated as Exhibit 2 to
the Registration Statement on Form S-4 filed by the Company with the Securities
and Exchange Commission in connection with the Merger and is included in the
Joint Consent Statement/Prospectus as Appendix A.
Until such time as the Merger Agreement has been approved and adopted by
all the parties thereto, it may be amended or terminated by the Board of
Directors of the General Partner, on behalf of any of the PAM Funds; the PCM
Shareholders, on their own behalf, or the Board of Directors of the Company, on
behalf of the Company; provided, however, that at any time after the Merger
Agreement has been adopted by the PCM Shareholders, the Company shareholders or
the limited partners of the PAM Funds, the Company's Board of Directors may not
amend, modify or supplement the Merger Agreement to change the amount or kind of
interests to be received by the limited partners of the PAM Funds, the PCM
Shareholders or the Company shareholders or to make any change if such change
would, alone or in the aggregate, materially adversely affect the limited
partners of the PAM Funds.
Approval by All of the Limited Partnerships Is Required. The Merger
Proposal may be consummated only if all of the PAM Funds approve the Merger
Proposal. The Merger Agreement provides that limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. A PAM Fund which rejects the Merger Proposal shall not be required to
pay any of the costs of the Merger, in accordance with the provisions of Section
25014.7(e)(3) of the
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<PAGE>
California Corporations Code. The General Partner, the PCM Shareholders and the
Company have considered the possibility of approval of the Merger Proposal and
related transactions by less than all of the PAM Funds, and do not believe that
the Merger can be fairly consummated unless all of the PAM Funds approve the
Merger Proposal, because, among other things, (i) it would be unduly burdensome
or impossible to evaluate and apportion the value of the various services
provided to the PAM Funds by PCM, considering the complexity and scope of the
various joint ventures between the PAM Funds and PCM; and (ii) if the Merger
Proposal is approved, PCM will cease to exist by operation of law, and would no
longer be available to provide the same services to dissenting PAM Funds.
Willamette Management Associates, Inc., as the Fairness Analyst, was retained by
Kelly & Company, the independent auditing firm for the PAM Funds, the General
Partner, PCM, and INC, to render the Fairness Opinion concerning the Merger
Proposal. See the section in the Joint Consent Statement/Prospectus entitled
"DETERMINATION OF THE EXCHANGE STOCK AND ALLOCATION OF THE MERGER."
Conditions of the Merger. The Merger will not be consummated unless the
Merger Proposal receives the requisite approval of the limited partners of each
PAM Fund and the approval of the requisite state and federal regulatory
agencies. Consummation of the Merger is also subject to the receipt of the
opinion described in the section in the Joint Consent Statement/Prospectus
entitled "FEDERAL INCOME TAX CONSEQUENCES." Receipt of this opinion may be
waived in whole or in part by the PAM Funds, the PCM Shareholders and the
Company in each respective party's sole discretion.
Prior to the consummation of the Merger, the obligations of the parties to
the Merger Agreement may be terminated at any time (including after approval of
the Merger by the limited partners of the PAM Funds and the respective
shareholders) if, among other things, (a) the General Partner or the Company
adopts a resolution terminating the Merger Agreement or (b) a final injunction,
order, or other action of a court or other governmental body prevents the
consummation of the Merger.
Completing the Merger. If the Merger Proposal is approved and the other
conditions of the Merger Agreement are waived or satisfied, the Closing Date
will be selected by agreement of the General Partner, the PCM Shareholders and
the Company. Upon consummation of the Merger and dissolution of the
Partnerships, the limited partners of the PAM Funds and PCM Shareholders will be
entitled to receive certificates for Merger Stock issued in exchange for the
assets of the Partnerships and shares of PCM's no par value common stock,
respectively.
Costs of the Merger. For purposes of the Thompson-Killea Act, which is that
portion of the California Corporations Code relating to "rollup" transactions
(the Merger Proposal is a "rollup" transaction), the costs of the Merger will be
divided into two categories, (i) transaction costs; and (ii) solicitation
expenses. Transaction costs are defined as the costs of printing and mailing the
Joint Consent Statement/Prospectus, or other documents; legal fees not related
to the solicitation of votes or tenders; financial advisory fees; investment
banking fees; valuation fees; accounting fees; independent committee expenses;
travel expenses; and all other fees related to the preparatory work of the
transaction, but not including costs that would have otherwise been incurred by
the Partnership in the ordinary course of business, or solicitation expenses.
Solicitation expenses include direct marketing expenses such as telephone calls,
broker-dealer fact sheets, legal and other fees related to the solicitation, as
well as direct solicitation compensation to brokers and dealers.
The Company estimates that the total costs and expenses of the Merger will
be approximately $1,400,000 if consummated and $1,200,000 if not consummated.
The Company estimates that the total solicitation expenses will be approximately
$600,000. This amount will be incurred whether or not the Merger is consummated.
The remainder of the costs and expenses estimated for consummation or
non-consummation will be attributable to transaction costs.
D-12
<PAGE>
The Merger Agreement provides that those limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. Should the Merger Proposal be rejected by all of the PAM Funds, the
transaction costs will be apportioned between the Company and each PAM Fund
according to the final vote on the Merger Proposal as follows: (a) the Company
shall bear all transaction costs in proportion to the number of votes of the
limited partners of that PAM Fund to reject the Merger Proposal; and (b) that
PAM Fund shall bear transaction costs in proportion to the number of votes of
limited partners of that PAM Fund to approve the Merger Proposal. Should the
Merger Proposal be approved by one or more PAM Funds and rejected by at least
one PAM Fund, each PAM Fund rejecting the Merger Proposal shall not be required
to pay any of the costs of the Merger, in accordance with the provisions of
Section 25014.7(e)(3) of the Thompson-Killea Act. Further, in the event that the
Merger Proposal is rejected by all of the PAM Funds, the Company shall pay all
of the solicitation expenses in accordance with the provisions of Section
25014.7(g) of the Thompson-Killea Act.
In 1996, the total approximate amounts distributed to the partners of each
PAM Fund are as set forth on the following table:
<TABLE>
<CAPTION>
Distributions to the Distributions to the
PAM Fund Limited Partners General Partner
-------- ---------------- ---------------
<S> <C> <C>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership.............. $ 154,650 $ 17,483
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership.............. $ 230,023 $ 25,810
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership.............. $ 295,925 $ 35,775
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership.............. $ 1,433,425 $ 159,334
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership.............. $ 179,100 $ 19,966
</TABLE>
The total amount distributed by all of the PAM Funds was $2,551,491. All of
the distributions to the limited partners were in the form of cash
distributions. Some of the distributions to the General Partner were accrued.
In contrast to the Partnership, the Company will itself be subject to
federal tax on its income. Holders of Merger Stock will not be subject to
federal tax on such income except to the extent dividends are paid by the
Company. See the section in the Joint Consent Statement/Prospectus entitled
"FEDERAL INCOME TAX CONSEQUENCES." The Company is expected to make significantly
smaller distributions, if any, than the Partnership has made.
There can be no assurance that the Merger will achieve any of the benefits
and objectives described above. In addition, certain possible disadvantages and
other risks and special considerations associated with the Merger exist, as
described in the section in the Joint Consent Statement/Prospectus entitled
"RISK FACTORS." Limited Partners should analyze the Merger Proposal and related
transactions, considering all the matters presented in the Joint Consent
Statement/Prospectus.
ALTERNATIVES TO THE MERGER
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal and related transactions. Some of
these alternatives do not contemplate a reorganization. In the mutual opinion of
the PCM Shareholders, the Company and the General Partner,
D-13
<PAGE>
the only viable alternatives not contemplating a reorganization involve some
form of public registration or offering of securities. The General Partner has
considered the possibility of a registration of Units. In the opinion of the
General Partner, this possibility would fail to provide the Limited Partners
with the liquidity that the Merger Proposal might provide, because of the
unsatisfactory market for publicly traded limited partnership interests. The PCM
Shareholders and the Company have also considered the possibility of merging PCM
and the Company without merging with any of the PAM Funds and thereafter making
a public offering of shares of common stock in the surviving corporation. In the
event the Merger is not consummated, the PCM Shareholders and the Company may
elect this alternative.
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal, each of which contemplates a
reorganization. The General Partner considered the possibility of selling all
Units of the PAM Funds to the Company, and the Company considered purchasing all
such Units, in exchange for shares of common stock of the Company. This
alternative would require the Company and the PAM Funds to comply with certain
tender offer requirements which would make the proposed reorganization more
complicated in terms of statutory compliance. The PCM Shareholders also
considered the possibility of selling all of PCM's assets to the Company, and
the Company considered purchasing all such assets, in exchange for shares of
common stock of the Company. Alternatively, the General Partner considered
winding up and dissolving the PAM Funds and distributing the proceeds of
liquidation to their limited partners. Although a dissolution would provide
those limited partners with immediate liquidity, the General Partner believes
that, because of the type of assets held by the PAM Funds, even an orderly
liquidation would result in a prohibitive discount on the value of the debt
portfolios. Such a dissolution would also result in additional legal,
accounting, appraisal, advertising and sales costs to the PAM Funds, further
diminishing the value of the PAM Funds' assets.
The General Partner believes that the value of the consideration to be
received by the PAM Funds in the Merger would far exceed any of the alternatives
constituting a reorganization listed above, specifically because the PAM Funds'
assets consist primarily of distressed loan portfolios, and such portfolios have
a liquidation value far below their value to either the PAM Funds or the
Company, which can generate substantial revenues from collection activities on
the portfolios.
The PCM Shareholders and the General Partner considered the results of
continuing PCM and the PAM Funds in accordance with their current business plans
and joint venture agreements. A continuation of the PAM Funds in accordance with
their existing business plans would benefit their limited partners to the extent
that those limited partners would receive cash distributions from the proceeds
of the PAM Funds' collection on debt portfolios. If the Merger is consummated,
limited partners of the PAM Funds would no longer receive such cash
distributions. Moreover, the Company currently does not anticipate paying its
shareholders cash dividends. Therefore, a continuation of the Partnership
provides the Limited Partners with cash flow which they will not have if the
Merger is consummated. Finally, if the Merger Proposal is approved, the Limited
Partners will be minority shareholders in the Company, and will lose the
ultimate control over Partnership affairs, which they currently hold.
Alternatively, the Partnership's servicing entity, PCM, currently has the
capacity to service portfolios in excess of those owned by the Partnership and
has the potential for significant growth. PCM has been offered access to
commercial lines of credit and its growth is not contingent upon a continuing
relationship with the Partnership. After consummation of the Merger, Limited
Partners who approve the Merger Proposal will participate in this growth.
Moreover, after consummation of the Merger, the Company will be able to compete
for available portfolios by taking advantage of economies of scale not available
to PCM and the Partnership acting individually. The General Partner believes
that the Limited
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<PAGE>
Partners should have the opportunity to consider and vote upon these
opportunities.
The General Partner believes that the value of the consideration to be
received by the Partnership in the Merger is equal to or greater than the
present value of the Partnership, which assumes that PCM and the Partnership
continue with their current business plans and joint venture agreements.
However, the Company, with access to commercial lines of credit, will be able to
compete more effectively with its competitors for debt portfolios. The General
Partner believes that there will be increased competition for debt portfolios,
as finance companies, collection agencies, and even Wall Street firms, which
offer asset-backed securities, enter the market. Therefore, the General Partner
believes that the Merger Proposal, if approved, would ultimately provide Limited
Partners with a greater return on their investments than they would obtain if
the Partnership continued in its present business arrangements, and would
increase the longevity, and the ultimate return, on the Limited Partners'
investments.
The PCM Shareholders and the General Partner also considered going forward
with the Merger Proposal with the approval of less than all of the PAM Funds,
but rejected this alternative because of economies of scale, the scope and
complexity of existing joint ventures between PCM and the PAM Funds, and the
economics of purchasing, holding, servicing, collecting and selling distressed
debt portfolios. Specifically, as discussed in detail in the section of the
Joint Consent Statement/Prospectus captioned "APPROVAL BY ALL OF THE
PARTNERSHIPS IS REQUIRED", the General Partner does not believe that the Merger
can be fairly consummated unless all of the PAM Funds approve the Merger
Proposal, because it would be unduly burdensome or impossible to evaluate and
apportion the value of the various services provided to the PAM Funds by PCM, on
the one hand, considering the complexity and scope of the various joint ventures
between the PAM Funds and PCM, on the other hand; and, if the Merger Proposal is
approved, PCM will cease to exist by operation of law, and would no longer be
available to provide the same services to a dissenting PAM Fund. The elimination
of PCM as a separate entity would result in the elimination of the acquisition
fees PCM currently charges the PAM Funds. Existing joint ventures, and the
management and servicing fees related to various separate joint ventures between
PCM and the PAM Funds, would similarly merge into a single large business
venture, eliminating those duplicative management and servicing fees. Because
PCM would no longer exist as an independent entity, PAM Funds which did not
participate in the Merger Proposal would lose their present source of portfolio
acquisitions. PCM, which currently has access to commercial lines of credit, has
the right to assign such commercial lines to a successor entity, allowing for
the Company, as such a successor entity, if the Merger is consummated, to enjoy
the benefits of increased credit lines for portfolio acquisitions which are not
currently available to the PAM Funds individually. Moreover, one of the primary
benefits of the Merger Proposal is the consolidation of record keeping and
simplification of the complex accounting requirements imposed on the PAM Funds
under federal and multiple state partnership tax laws.
The General Partner is not aware of any offers made during the preceding 18
months for a merger, consolidation, or combination of any of the PAM Funds; an
acquisition of any of the PAM Funds or a material amount of their assets; a
tender offer for or other acquisition of securities of any class issued by any
of the PAM Funds; or a change in control of the PAM Funds. Other than as set
forth herein, the General Partner is not aware of any factors which may affect
materially the value of the consideration to be received by the Limited Partners
in the Merger or the fairness of the Merger Proposal to the Limited Partners.
RECOMMENDATIONS
After considering the advantages and disadvantages of the Merger Proposal
described above, the General Partner believes that the Merger Proposal is fair
to, and in the best interests of, the Partnership
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<PAGE>
and the Limited Partners. The General Partner recommends that each Limited
Partner vote to approve the Merger Proposal.
EXCHANGE VALUE AND FAIRNESS OPINION
Bases for the General Partner's Belief as to Fairness. The Fairness Opinion
is specified at length in the section in the Joint Consent Statement/Prospectus
entitled "FAIRNESS OPINION." The General Partner believes that the Merger
Proposal is fair to the Limited Partners, because the General Partner believes
that the Merger will provide Limited Partners with liquidity in their
investments and more simplified tax reporting.
No Limitations Imposed on Scope of Investigation. Kelly & Company,
independent auditors for the General Partner, PCM, the PAM Funds, Income Network
Company and the Company, retained the Fairness Analyst to determine the fairness
from a financial point of view of the Exchange Value in connection with the
Merger Proposal. There were no limitations or restrictions placed on the scope
of the Fairness Analyst's analysis and investigation, and the Fairness Analyst
performed a complete due diligence examination by, among other things, visiting
PCM's facilities in Newport Beach, California; interviewing the President and
Vice-President of PCM; interviewing the President, Chief Financial Officer,
Director of Business Development, and Secretary of the General Partner;
interviewing various personnel employed by Kelly & Company; and interviewing
counsel to the various entities. The Fairness Analyst was allowed full access to
all financial records of PCM, the General Partner, the PAM Funds and all service
providers to those entities, including privileged documents such as tax returns
and audit workpapers.
No Instructions from General Partner, PCM or the Company. Neither the
General Partner, the PCM Shareholders, PCM nor the Company provided instructions
to the Fairness Analyst. Kelly & Company instructed the Fairness Analyst to
conduct an independent investigation, and thereafter render a written opinion to
Kelly & Company, as of the Determination Date, as to whether the Exchange Value
established by the General Partner, the PCM Shareholders and the Company is fair
from a financial point of view to the PAM Funds. Kelly & Company also instructed
the Fairness Analyst to prepare a Fairness Opinion (i) satisfying the valuation
requirements of the Thompson-Killea Act; (ii) potentially useful in meeting the
valuation requirements of Sections 1300 et seq. of the California General
Corporation Law pertaining to PCM Shareholders and Company shareholders who do
not consent to the Merger Proposal and, instead, exercise their rights as
dissenting shareholders ("Dissenting Shareholders"); and (iii) sufficient to
support an opinion regarding the fairness from a financial point of view of the
Merger Proposal and related transactions, addressing the fairness from a
financial point of view of the Merger and related transactions as a whole and to
each of the PAM Funds. Kelly & Company instructed the Fairness Analyst to
perform a due diligence investigation and to review all pertinent documents,
including, but not limited to, financial statements; tax returns; audit work
papers; banking records; balance sheets; income statements; Securities and
Exchange Commission reporting forms; corporate documents such as Certificates or
Articles of Incorporation, Bylaws and minutes; furniture and equipment
schedules; insurance policies and coverages; operating budgets through December
31, 2008 for PCM and the PAM Funds; office leases; management profiles;
portfolio stratification reports; and daily productivity reports. Kelly &
Company also instructed the Fairness Analyst to research industry sources and
databases and economic outlook sources regarding the financial services and
distressed debt industry.
Procedures Followed. As set forth above, the Fairness Analyst conducted a
complete independent investigation focusing on the valuation issues relating to
the "adequate consideration" rule. Adequate consideration is generally
understood to represent the fair market of an asset. Accordingly, in order to
arrive at its opinion regarding the fairness from a financial point of view of
the Exchange Value
D-16
<PAGE>
established for the Units, the Fairness Analyst performed its research and
analyses with the intent of establishing whether the Limited Partners would
receive at least fair market value in exchange for their Units. "Fair market
value" is defined as the price at which an asset would change hands between a
willing buyer and a willing seller when the former is not under any compulsion
to buy and the latter is not under any compulsion to sell, both parties are
able, as well as willing, to trade, and both parties are well informed about the
asset and the market for that asset. The Fairness Analyst performed an analysis
of the material features and characteristics of the Partnership, the Other
Partnerships and PCM, as well as an analysis of the financial statements and
results of operations of each entity. The Fairness Analyst assumed that PCM will
continue its current business plan and structure and made other reasonable
assumptions and estimates regarding distressed loan portfolio acquisition and
pricing, operating expenses, and partnership distribution policies.
Determinations. The Company, PCM and the General Partner determined the
total indicated values for PCM and for each of the PAM Funds, as set forth in
the following table:
NAME OF PARTNERSHIP OR CORPORATION TOTAL VALUE
- ---------------------------------- -----------
Performance Asset Management Fund, Ltd.,
A California Limited Partnership.................... $ 934,000
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership.................... $ 3,112,000
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership.................... $ 6,000,000
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership.................... $15,846,000
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership.................... $ 4,700,000
Performance Capital Management, Inc.,
a California corporation............................ $44,523,000
Basis for Methods of Arriving at Findings and Recommendations. The Fairness
Analyst valued the assets of each entity by determining the combined value of
such entity's assets, including the value of such entity's cash flows and the
terminal value of such entity's distressed loan portfolios. The Fairness Analyst
determined the asset liquidation value of each entity and calculated the
allocation of assets of each PAM Fund between the General Partner and the
limited partners of such PAM Fund based on such PAM Fund's Agreement of Limited
Partnership. Additional factors considered by the Fairness Analyst, in making
its valuation, include discount factors based on the age and composition of the
various distressed loan portfolios and the Fairness Analyst's determination of
the present value of the respective cash receipts of each entity, as well as the
historical and projected collection costs of distressed loan portfolios.
DETERMINATION OF EXCHANGE VALUE AND ALLOCATION OF MERGER STOCK
Exchange Value. The net equity values determined by PCM, the Company and
the General Partner and reviewed by the Fairness Analyst of all of the assets of
the PAM Funds, PCM and the Company, considered together and separately, together
with the book value of the other financial assets of such entities, have been
used to establish the Exchange Value. The Fairness Analyst is unaffiliated with
the Company, Vision, Income Network Company, the PCM Shareholders, PCM or the
General Partner. Kelly & Company, the independent auditors for PCM, the Company,
Income Network Company, the General Partner and the PAM Funds, were referred to
the Fairness Analyst by an accountant unaffiliated with the PCM Shareholders,
PCM, the Company, Income Network Company, the PAM Funds, or the General Partner
and with whom neither the PCM Shareholders, PCM, the Company, Income Network
Company, the
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PAM Funds, nor the General Partner has conducted any business. The Fairness
Analyst was selected by Kelly & Company entirely on the basis of its
qualifications.
The Company, the General Partner and PCM valued the assets of the
Partnership and PCM, respectively, as if sold in an orderly manner in a
reasonable period of time, plus or minus other balance sheet items, and less the
cost of sale. The valuation was conducted in accordance with the provisions of
Section 25014.7(b)(1) of the Thompson-Killea Act. The valuation was also
conducted in accordance with the provisions of Sections 1300 et seq. of the
California General Corporation Law pertaining to the Dissenting Shareholders.
The compensation to dissenting Limited Partners and Dissenting Shareholders
entitled to compensation for their Units or shares of common stock,
respectively, is based upon the valuation described above. See the section in
the Joint Consent Statement/Prospectus entitled "RIGHTS OF DISSENTING
SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
The purpose of the Fairness Opinion is to confirm to the Company, the PCM
Shareholders and the General Partner the fairness from a financial point of view
of the Merger Proposal and related transactions to the PAM Funds. Neither the
Company, the PCM Shareholders, PCM, nor the General Partner gave the Fairness
Analyst any specific instructions other than the instruction from Kelly &
Company to prepare a fairness opinion (i) meeting the valuation requirements of
the Thompson-Killea Act; (ii) potentially useful in meeting the valuation
requirements of Sections 1300 et seq. of the California General Corporation Law
pertaining to Dissenting Shareholders; and (iii) sufficient to support an
opinion regarding the fairness of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Pursuant to
the Thompson-Killea Act, the Units were valued as if sold in an orderly manner
in a reasonable period of time, plus or minus other balance sheet items, and
less the costs of sale. Pursuant to the provisions of Section 1300 of the
California General Corporation Law, the fair market value of the shares of
common stock held by the Dissenting Shareholders shall be determined as of the
day before the first announcement of the terms of the Merger Proposal and
related transactions, excluding any appreciation or depreciation in consequence
of the Merger Proposal or related transactions, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
The Fairness Opinion will not be updated.
Fairness Opinion. The Exchange Value was determined by PCM, the Company and
the General Partner. The consideration to be paid to the Fairness Analyst was
negotiated by the Fairness Analyst, on the one hand, and Kelly & Company, on the
other hand. The Fairness Analyst has determined that the Exchange Value, as such
consideration, is fair from a financial point of view to each PAM Fund, as
specified in the Fairness Opinion. The compensation paid to the Fairness Analyst
was not contingent upon the findings of the fairness of the Exchange Value, such
consideration or the Merger or the consummation or approval of the Merger
Proposal or related transactions. The Fairness Opinion relates to the fairness
from a financial point of view of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Because the
Merger is contingent upon the approval of the Merger Proposal by all of the PAM
Funds, the PCM Shareholders, and the Company shareholders, the Fairness Opinion
did not consider possible combinations of less than all of the PAM Funds in the
Merger. A copy of the Fairness Opinion is included in the Joint Consent
Statement/Prospectus as Appendix G.
The Fairness Opinion takes into account all of the assets of each of the
PAM Funds, PCM, and the Company. The intangible assets of the PAM Funds and PCM
consist of distressed financial debt instruments and obligations. The Fairness
Analyst also considered tangible assets of the PAM Funds, PCM and the Company.
The tangible assets of the PAM Funds and the Company were determined to be
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negligible. The tangible assets of PCM were determined to be more considerable
and include furniture, computers and business equipment. The aggregate value of
the assets of the PAM Funds has been determined to be $30,592,000. The aggregate
value of the assets of PCM has been determined to be $44,523,000.
Fairness Opinion Will Not Be Updated. The Fairness Opinion will not be
updated. A copy of the Fairness Opinion is included with the Joint Consent
Statement/Prospectus as Appendix G. Although the General Partner is not aware of
any factors that may materially affect the fairness of the Merger Proposal or
the determination of the Exchange Value referenced in the Fairness Opinion, it
is possible that changes in the financial markets between the date of the
Fairness Opinion and the date the Merger, if approved, is consummated, might
affect the conclusions of the Fairness Analyst as specified in the Fairness
Opinion. If the Fairness Opinion were to be updated by the Fairness Analyst at
or near the date of the consummation of the Merger, there can be no assurances
that the Fairness Analyst's opinions and conclusions would not be materially
amended or revised.
Exchange of Assets for Shares. On the Closing Date, if the limited partners
of all five PAM Funds approve the Merger Proposal, the PAM Funds and PCM will
merge with and into the Company. Pursuant to the Merger Agreement, all of the
assets of the PAM Funds will be exchanged for shares of the Merger Stock in
accordance with the Exchange Value, determined to be fair to the PAM Funds by
the Fairness Analyst.
The following table summarizes the valuation of PCM and the PAM Funds based
on 7,511,500 allocable shares of Merger Stock:
<TABLE>
<CAPTION>
Percentage of
Aggregate Number of
Indicated Value Indicated Value Shares of Merger
(Rounded to the (Rounded to the Stock Allocated
Nearest $1,000) Nearest 1/10 of 1%) to Entity
--------------- ------------------ ---------
<S> <C> <C> <C>
PAM ........................ $934,000 1.2% 93,398
PAM II ..................... 3,112,000 4.1 311,202
The Partnership ............ 6,000,000 8.0 600,003
PAM IV ..................... 15,846,000 21.1 1,584,596
PAM V ...................... 4,700,000 6.3 470,002
----------- ----- -----------
Sub-Total ............. $30,592,000 40.7% 3,059,201
PCM ........................ 44,523,000 59.3 4,452,299
----------- ----- -----------
Total ................. $75,115,000 100.0% 7,511,500
=========== ===== ===========
</TABLE>
RISKS AND POTENTIAL ADVERSE EFFECTS
THE MERGER AND ACQUISITION OF SHARES OF THE MERGER STOCK INVOLVES VARIOUS RISKS,
AND LIMITED PARTNERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER THE
SECTION ENTITLED "RISK FACTORS" IN THE JOINT CONSENT STATEMENT/PROSPECTUS,
INCLUDING THE FOLLOWING:
History of Losses. PCM and the PAM Funds have a history of losses, because
PCM and the PAM Funds' accounting is predicated on return of capital and not a
return on capital. For financial statement purposes, the cash received from
collections on distressed loan portfolios does not appear
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as revenue, but goes to offset the particular entity's basis in the respective
portfolios. This has the effect of reducing the respective entity's assets as
presented on the financial statements.
No Operating History. Since its formation, the Company has had no
operations. The only historical financial information presented in the Joint
Consent Statement/Prospectus relates to the business operations of the PAM Funds
and PCM.
Significant Reduction in Distributions. The Partnership historically made
monthly cash distributions to the Limited Partners until those distributions
were suspended in preparation for the Merger Proposal. THE COMPANY CURRENTLY
ANTICIPATES THAT IT WILL NOT PAY CASH DIVIDENDS. See that portion of the Joint
Consent Statement/Prospectus entitled "Dividend Policy" and "SUMMARY --
Disadvantages of the Merger and Related Transactions."
In contrast to the Partnership, the Company will be subject to federal and
state income taxes imposed on its income. Holders of Merger Stock will not be
subject to federal or state income taxes imposed on such income, except to the
extent dividends are paid by the Company. See that portion of the Joint Consent
Statement/Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES." Additionally,
the Company expects to pay no dividends in the foreseeable future. It is
important for each Limited Partner to realize that the actual amount of
dividends, if any, to be paid will be determined by the Board of Directors of
the Company, in its sole and absolute discretion, generally taking into account
a number of factors, including operating performance, liquidity, capital
requirements, and the Company's business plan and growth strategies. There can
be no assurance that the Company's anticipated policy in regard to dividend
payments will not be modified by the Board of Directors of the Company.
DIVIDEND DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE IN THE SOLE AND ABSOLUTE
DISCRETION OF THE COMPANY'S BOARD OF DIRECTORS AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE COMPANY'S CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S
FINANCIAL CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS
AS THE COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Change in Nature of Investment. The Partnership is a limited partnership
organized under California law. The Company is a Delaware corporation. The
Partnership has a finite term of existence and is structured to dissolve when
its assets are liquidated. In contrast, the Company has a perpetual term and
intends to continue its operations for an indefinite time period. To the extent
the Company sells or refinances its assets, the net proceeds therefrom generally
will be retained by the Company for working capital and new investments, rather
than being distributed to shareholders in the form of dividends.
Change in Voting Rights. Under the Partnership's Agreement of Limited
Partnership ("Partnership Agreement") and applicable California law, the Limited
Partners have voting rights only as to major transactions of the Partnership
(e.g., amendment of the Partnership Agreement, removal of the General Partner,
election of a new General Partner, sale of all the assets of the Partnership,
and dissolution of the Partnership). Otherwise, all decisions relating to the
operation and management of the Partnership are made by the General Partner.
Certain major transactions of the Company, including most amendments to the
Company's Certificate of Incorporation, may not be consummated without the
approval of shareholders holding at least a majority of the outstanding voting
stock entitled to vote. Notwithstanding the foregoing, certain transactions of
the Company, such as the sale of all of the assets of the Company to an
affiliate of the Company, must be approved by at least 90% of the issued and
outstanding voting stock of the Company entitled to vote. To the extent that the
Company will have issued and outstanding shares of its voting stock held of
record by 100 or more persons, adoption of additional
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<PAGE>
anti-takeover provisions may require a supermajority (i.e., two thirds) vote to
adopt. Subject to the provisions of the Company's Certificate of Incorporation,
as amended, and Bylaws regarding certain anti-takeover provisions specified in
the portion of the Joint Consent Statement/Prospectus captioned "Anti-Takeover
Provisions," each share of the Company's common stock will have one vote, and
the Company's Certificate of Incorporation, as amended, permits the Board of
Directors of the Company to classify and issue capital stock in one or more
classes having voting power which may differ from that of the Merger Stock. See
that portion of the Joint Consent Statement/Prospectus entitled "COMPARISON OF
UNITS AND MERGER STOCK."
Change in Duties Owed by General Partner. Regarding the Partnership and the
Company, the General Partner and the Board of Directors of the Company,
respectively, owe fiduciary duties to their constituent parties. Some courts
have interpreted the fiduciary duties of members of a board of directors in the
same manner as the duties of a general partner in a limited partnership. Other
courts, however, have indicated that the fiduciary obligations of a general
partner to limited partners are greater than those owed by a director to
stockholders. Therefore, although it is unclear whether, or to what extent,
there are differences in such fiduciary duties, it is possible that the
fiduciary duties of the directors of the Company to its shareholders may be less
than those of the General Partner to the Limited Partners. See that portion of
the Joint Consent Statement/Prospectus entitled "COMPARISON OF UNITS AND MERGER
STOCK."
Changes in Compensation Arrangements. Under the Partnership Agreement,
distributions payable to the General Partner are specified and cannot be changed
by the General Partner without the approval of the Limited Partners. If the
Merger is consummated, the compensation paid to officers and directors of the
Company will be determined by a Compensation Committee for the Company
established by the Company's Board of Directors, and the terms and conditions of
employment of those officers and directors, including changes in compensation
arrangements, will not be subject to the direct approval or control of the
shareholders of the Company. See the summary compensation tables under the
caption "Executive Compensation" in the portion of the Joint Consent
Statement/Prospectus captioned"MANAGEMENT OF THE GENERAL PARTNER, PCM AND THE
COMPANY".
Taxation of Corporation and Shareholders. The Partnership does not pay any
federal or state income taxes. After consummation of the Merger, the Company
will be subject to federal and state income taxes. Shareholders of the Company
will also be required to pay federal and state income taxes on any dividends
that they may receive from the Company and on any gain from the sale or exchange
of the Company's common stock, including the Merger Stock. Therefore, while in
partnership form the income of the Partnership will be subject to federal state
and state income tax only once (i.e., on the Limited Partners) in corporate form
the income of the Company will be subject to federal and state income taxes
twice (i.e., once on the Company and once on its shareholders to the extent they
receive dividends or recognize gain on the sale or exchange of securities). See
that portion of the Joint Consent Statement/Prospectus entitled "FEDERAL INCOME
TAX CONSEQUENCES" and "OTHER TAX CONSEQUENCES."
Uncertainty Regarding Trading and Market Price of Common Shares. There is a
probability that the Merger Stock may initially trade at prices substantially
below the value assigned to the Merger Stock in the Merger Proposal. Moreover,
the Merger Stock may not immediately be listed or approved for listing on any
regional or national securities exchange or otherwise designated or approved for
designation upon notice of issuance as a national market system security on an
interdealer quotation system maintained by the National Association of
Securities Dealers, Inc. To the extent that the Merger Stock may trade, trading
prices for the Merger Stock will be influenced by many factors, including the
market for the Merger Stock, the Company's dividend policy, the possibility of
future sales of Merger
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<PAGE>
Stock by the Company or its shareholders of the Company's common stock,
investors' perception of the Company and its businesses, and general economic
and stock market conditions. No prediction can be made as to the price at which
the Merger Stock will trade. Moreover, no guaranty or assurance can be given
that the Merger Stock will trade at all. Limited Partners and PCM Shareholders
have not previously had access to an active trading market for the Units and
shares of PCM's common stock, respectively. Therefore, it is possible that they
may wish to sell their Merger Stock from time to time after consummation of the
Merger. There can be no assurance that the Company's efforts to stabilize the
price of the Merger Stock by limiting the sale of the Merger Stock will be
successful. The sale of the Merger Stock after the Merger might have an adverse
effect on the market price of the Merger Stock. Moreover, various state
regulatory agencies may require further limitations on the transfer of the
Merger Stock.
Limited Public Market. There has been no public trading market for the
Company's securities. Although the Company intends to apply for listing of the
Merger Stock on a regional or national securities exchange, there is no
assurance that the will be so listed. If the Merger Stock is so listed, such a
listing provides no assurance that an active, receptive trading market will
develop for the Merger Stock or, if developed, will be sustained.
Potential Price Volatility. If a public market develops for the Merger
Stock, there may be significant volatility in the market price of the Merger
Stock. Period-to-period fluctuations in the Company's revenues and financial
results may have a significant impact on the perceived value of the Company and,
therefore, on the market price of the Merger Stock. The price of the Merger
Stock may be significantly affected by such factors as the financial results and
operating performance of the Company. Additionally, in recent years, the stock
market has experienced significant price and volume volatility, and market
prices for many companies, particularly small and emerging growth companies,
have experienced significant price fluctuations not necessarily related to the
operating performance of those companies. The market price for the Merger Stock
may be affected by general stock market volatility.
Possible Dilution. The percentage interest of holders of Merger Stock in
the assets, liabilities, cash flow and results of operations of the Company, as
well as the percentage voting power of such holders, may be diluted (a) if the
Company has, prior to solicitation of consents to the Merger Proposal, issued
either preferred shares or common shares which are currently outstanding and
held by existing shareholders of the Company, or (b) by the issuance of shares
of the Company's common stock in any future offering. In addition, the Company
may issue additional equity securities in the future (for example, in a public
offering), which would dilute the percentage ownership of the then current
shareholders of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock, and which is convertible to common stock subject to
certain conditions precedent. See a further discussion of Mr. Galewick's
preferred stock under the caption "Control by Principal Shareholder;
Anti-takeover Measures" below. Under NASDAQ National Market rules, the Company
may not issue shares of its common stock equal to 20% or more of the then
outstanding shares of its common stock in connection with the acquisition of the
shares or assets of another entity without shareholder approval. Issuances by
the Company of additional shares of its common stock or preferred stock could
adversely affect existing shareholders' equity interests in the Company and the
market price of the Merger Stock.
Shares Eligible for Future Sale. Sales of shares of the Company's common
stock in the public market after consummation of the Merger could adversely
affect the market price of the Merger Stock and could impair the Company's
future ability to raise capital through the sale of equity securities. Upon
consummation of the Merger, the Company will have 7,512,500 shares of common
stock issued and outstanding. The transfer, assignment, sale, conveyance,
hypothecation, encumbrance, or other alienation
D-22
<PAGE>
of the shares of the Merger Stock shall be limited. See the portion of the Joint
Consent Statement/Prospectus entitled "Merger Stock Will Be Restricted."
Control by Principal Shareholder; Anti-takeover Measures. If the Merger
Proposal is approved and the Merger is consummated, Vincent E. Galewick shall
beneficially own approximately 62% of the then issued and outstanding shares of
the Company's common stock. As a result, Vincent E. Galewick, in his capacity as
a shareholder of the Company, would be able to significantly influence or
control many matters acquiring approval by the shareholders of the Company,
including the election of directors. The Company's Certificate of Incorporation
provides for preferred stock, the terms of which may be fixed by the Board of
Directors of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock. Each share of that preferred stock is convertible into 20
shares of the Company's common stock, subject to certain conditions precedent
relating to the acquisition, by any single shareholder, of 10% or more of the
issued and outstanding shares of the Company's common stock. Moreover, if the
Company becomes a "listed corporation", as that term is defined in the portion
of the Joint Consent Statement/Prospectus entitled "Elimination of Cumulative
Voting", the directors of the Company will be divided into 2 classes, and the
holders of the Merger Stock will not be permitted to cumulate their votes for
directors. Those provisions could have the effect of delaying, deferring or
preventing a change in control of the Company.
Addition of Provisions That May Discourage Changes of Control. The
Company's organizational documents and Delaware law contain provisions that may
delay, defer or prevent a takeover attempt that a shareholder might consider to
be in such shareholder's best interest, including offers that might result in a
premium over the market price for Merger Stock.
Conflicts of Interest. The General Partner has a fiduciary duty to the
Partnership. However, the General Partner is also affiliated with Income Network
Company, which is the Soliciting Agent, Vision, PCM and the Company. The
Company, Vision, Income Network Company, PCM and the General Partner have a
common shareholder, Vincent E. Galewick, and common directors and officers.
Several of the directors of the Company are employed independently of the
Company and those persons may continue to engage in other activities. The
persons serving as officers and directors of the Company shall have conflicts of
interest in allocating time, services, and functions between the other business
ventures in which those persons may be or become involved and, also, the affairs
of the Company. As a result, conflicts of interest between the Company and the
other activities of those persons may occur from time to time.
The Company will attempt to resolve any such conflicts of interest in favor
of the Company. The officers and directors of the Company are accountable to the
Company and the shareholders of the Company as fiduciaries (subject to the
restrictions set forth in the paragraph headed "Limitation on Liability of
Officers and Directors of the Company" below), which requires that such officers
and directors exercise good faith and integrity in handling the Company's
affairs. Moreover, the officers and directors of the Company believe that the
Company will have sufficient staff, consultants, employees, agents, contractors,
and managers to adequately conduct the business of the Company.
The General Partner has not retained an unaffiliated representative to act
on behalf of the Limited Partners for purposes of negotiating the Merger
Proposal. The General Partner does not believe retaining such a representative
is necessary, because an unaffiliated third party, Willamette Management
Associates, Inc., as the Fairness Analyst, has been retained to provide the
Fairness Opinion as to the fairness of the Merger Proposal to the Company, the
PCM Shareholders and the PAM Funds. A copy of the Fairness Opinion is included
with the Joint Consent Statement/Prospectus as Appendix G. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
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<PAGE>
However, because there has been no separate unaffiliated representation of
the Limited Partners in the negotiation of the Merger Proposal, the Limited
Partners are presented with risks inherent in multiple representation.
Specifically, the persons negotiating the Merger Proposal may have attempted to
balance the interests of the Partnership and the Limited Partners with the
interests of the PCM Shareholders and the Company. Aggressive advocacy solely on
behalf of the Limited Partners in the negotiations relating to the Merger
Proposal might have resulted in more favorable treatment for the Limited
Partners compared to the more even-handed approach which was followed in
negotiating the Merger Proposal.
The General Partner and the Limited Partners have conflicts of interest
relating to the Merger Proposal because, if the Merger Proposal is approved, the
General Partner will cease providing management services to the Partnership,
with a resulting loss of income. The Merger Stock which the General Partner
receives upon the winding up and dissolution of the Partnership may be less
valuable than the participation in the distributions of the Partnership which
the General Partner currently receives.
A more significant conflict of interest exists between Vincent E. Galewick,
the sole shareholder of the General Partner, on the one hand, and the Limited
Partners, on the other hand, because Mr. Galewick is also the majority
shareholder of PCM and the sole shareholder of the Company. The allocation of
Merger Stock pursuant to the Merger Proposal creates a conflict between all the
parties included in the Merger Proposal, including the Limited Partners, on the
one hand, and Mr. Galewick and the General Partner, on the other hand. If the
Merger Proposal is approved, Mr. Galewick will own approximately 62% of the then
issued and outstanding common stock of the Company. Because of this conflict of
interest, Mr. Galewick did not participate in the negotiations regarding the
Merger Proposal.
No Arm's Length Agreements. Certain agreements and arrangements, including
those relating to compensation and payments between the Company and its
affiliates, are not the result of arm's length negotiations. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS". Most significantly, PCM and the Partnership are parties
to joint venture agreements pursuant to which PCM provides collection and
servicing activities. The joint venture agreements between PCM and the
Partnership have been filed as exhibits to the Company's Registration Statement
on Form S-4, of which the Joint Consent Statement/Prospectus is a part. PCM also
identifies and acquires distressed loan portfolios and sells them to the
Partnership at negotiated prices, which typically include a mark-up of as much
as 37%. Vision, an affiliate of PCM, the General Partner, Income Network Company
and the Company, provides human resources (employees) to PCM and the General
Partner pursuant to an arrangement not the result of arm's-length negotiations.
In the event the Merger is consummated, Vision will no longer provide those
human resources to the Company.
Speculative Investment Due to Market Factors. The business objectives of
the Company must be considered speculative because the market for distressed
consumer indebtedness will have a significant influence on the operations of the
Company. As there can be no assurance that changing market factors will not
adversely affect the operations of the Company, no assurance can be given that
the PCM Shareholders and Limited Partners will realize a return on their
exchange of shares of common stock of PCM or Units, respectively, for Merger
Stock, or that the Company shareholders will not ultimately lose their
investments in the Company completely.
Dependence on Management. All decisions regarding management of the
Company's affairs will be made exclusively by the officers and directors of the
Company. Accordingly, no person should vote in favor of the Merger Proposal
unless that person has carefully evaluated the personal experience and business
performance of the officers and directors of the Company and is willing to
entrust all aspects of management to the officers and directors of the Company,
or their successors.
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<PAGE>
Dependence on Key Personnel. The Company is dependent upon the efforts and
abilities of its senior management, particularly those of Vincent E. Galewick.
The loss of Mr. Galewick could have a material adverse affect on the business
and prospects of the Company. The officers of the Company believe that all
commercially reasonable efforts have been made to minimize the risks attendant
with such dependence on Mr. Galewick and the loss or departure of Mr. Galewick.
The General Partner currently maintains a key person life insurance policy in
the amount of $2,000,000 on Mr. Galewick and, if the Merger is consummated, the
Company anticipates maintaining such a policy on Mr. Galewick. Moreover, as the
prospective owner of a significant portion of the issued and outstanding common
stock of the Company, Mr. Galewick will have an incentive to remain with the
Company. However, there is no assurance that Mr. Galewick will remain with the
Company or that, if he should elect to leave the Company, his replacement would
cause the Company to operate profitably.
Limitation on Liability of Officers and Directors of the Company. Section
145 of the Delaware General Corporation Law specifies that the Certificate of
Incorporation of a Delaware corporation may include a provision eliminating or
limiting the personal liability of a director or officer to that corporation or
its shareholders for damages for breach of fiduciary duty as a director or
officer, but such a provision must not eliminate or limit the liability of a
director or officer for (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) unlawful distributions
to stockholders. The Certificate of Incorporation of the Company includes a
provision eliminating or limiting the personal liability of the officers and
directors of the Company to the Company and its shareholders for damages for
breach of fiduciary duty as a director or officer. Moreover, the Company's
Bylaws provide certain indemnification to a controlling person, director or
officer which affects such a person's liability while acting in a corporate
capacity. The Company entered into various indemnification agreements with its
officers and directors, copies of which are attached to the Registration
Statement on Form S-4 as exhibits thereto. Moreover, the Merger Agreement
provides indemnification for directors and officers of the Company. Accordingly,
the officers and directors of the Company may have no liability to the
shareholders of the Company for any mistakes or errors of judgment or for any
act or omission, unless such act or omission involves intentional misconduct,
fraud, or a knowing violation of law or results in unlawful distributions to the
shareholders of the Company.
DISCLOSURE OF POSITION OF SECURITIES AND EXCHANGE COMMISSION
REGARDING INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE, UNENFORCEABLE.
No Limitation on Indebtedness. The Certificate of Incorporation and Bylaws
of the Company do not contain any limitation on the amount or percentage of
indebtedness, funded or otherwise, the Company might incur. The Indenture
Agreement pursuant to which those Limited Partners who exercise their dissenters
rights ("Dissenting Limited Partners") will be paid for their Units ("Indenture
Agreement") provides that the assets of the Partnership will not be leveraged
more than 70% in relation to any unsecured subordinated debentures issued
pursuant to the Merger Agreement. Accordingly, the Company could become
leveraged to the extent permitted by the Indenture Agreement, resulting in an
increase in debt service that could adversely affect the Company's ability to
make distributions to its stockholders and result in an increased risk of
default on its obligations. The Company does not believe that the debt
limitations imposed by the Indenture Agreement will have a significant impact on
the
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<PAGE>
operations of the Company. However, if the Merger is consummated, the Board of
Directors of the Company will determine policies with respect to financing or
refinancing of assets and policies with respect to borrowings by the Company.
Loss on Dissolution of the Company. In the event of a dissolution of the
Company, the proceeds realized from the liquidation of the Company's assets, if
any, will be distributed to holders of the Company's common stock only after
satisfaction of claims of the Company's creditors and, in some situations,
holders of the Company's preferred stock. The ability of a holder of shares of
the Company's common stock, including Merger Stock, to recover any monies
whatsoever in that event will depend on the amount of funds realized and the
claims to be satisfied therefrom.
Remuneration of Directors, Officers and Employees. Compensation received by
officers, directors and employees of the Company will be determined from time to
time by the Board of Directors of the Company. Officers, directors, and
employees of the Company will be reimbursed for any out-of-pocket expenses
incurred on behalf of the Company.
Receipt of Compensation Regardless of Profitability. The officers,
directors and employees of the Company may receive significant compensation,
payments, and reimbursements regardless of whether the Company operates at a
profit or at a loss.
Year 2000 Computer Compliance. Over the next two years, most large
companies will face a potentially serious business problem because many computer
software applications and computer equipment developed in the past may not
properly recognize calendar dates beginning in the Year 2000. As the century
date change occurs, date-sensitive systems may recognize the Year 2000 as the
Year 1900, or not at all. This inability to recognize or treat properly the Year
2000 may cause computer systems to process financial and operational information
incorrectly, which could have a material adverse effect on the results of
operations of all of the parties to the Merger. There can be no assurance that
PCM (or, if the Merger Proposal is approved and the Merger is consummated, the
Company) will complete the necessary modifications and conversions to the
computer software and operating systems necessary to properly operate or manage
date-sensitive information beyond December 31, 1999. Even if PCM (or, if the
Merger Proposal is approved and the Merger is consummated, the Company)
completes all necessary modifications and conversions to its computer software
and operating systems, there can be no assurance that the necessary
modifications and conversions by those third party institutions and entities
with which PCM and the PAM Funds conduct business will be completed in a timely
manner, which could have a material adverse effect on the results of operations
of PCM and the PAM Funds (or, if the Merger Proposal is approved and the Merger
is consummated, on the results of operations of the Company).
RIGHTS OF DISSENTING LIMITED PARTNERS
Offer to Purchase Units of Dissenting Limited Partners. The Merger Proposal
is also being structured to provide Limited Partners who dissent to the Merger
("Dissenting Limited Partners") the dissenter's rights specified in the
Thompson-Killea Act. The Thompson-Killea Act requires that the Dissenting
Limited Partners receive the appraised value of their Units in the form of cash,
freely tradeable securities, or secured or unsecured debt instruments satisfying
certain statutory requirements or, in the alternative, receive or retain a
security with substantially the same terms and conditions as the security
originally held, provided that the receipt or retention of that security is not
a step in a series of subsequent transactions that directly or indirectly
involves future combinations or reorganizations of one or more roll-up
participants. Securities received or retained will be considered to have the
same terms and conditions as the security originally held if (a) there is no
material adverse change to Dissenting
D-26
<PAGE>
Limited Partners' rights, including, but not limited to, rights with respect to
voting, the business plan, or the investment, distribution, management
compensation and liquidation policies of the Partnership or resulting entity;
and (b) the Dissenting Limited Partners receive the same preferences,
privileges, and priorities as they had pursuant to the security originally held.
The Company is satisfying this requirement by offering to purchase the
Units of any Dissenting Limited Partner with an unsecured subordinated debenture
("Debenture") issued under an Indenture Agreement ("Indenture Agreement"). The
Merger Proposal and the related transactions, including the dissolution and
liquidation of the Partnerships ("Dissolutions" and "Liquidations") have also
been structured to comply with the other protections afforded by the
Thompson-Killea Act. A copy of the Indenture Agreement is included with the
Joint Consent Statement/Prospectus as Appendix M. A copy of the Debenture is
included with the Joint Consent Statement/Prospectus as Appendix N. See that
portion of the Joint Consent Statement/Prospectus entitled "RIGHTS OF DISSENTING
SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
Unsecured Subordinated Debentures. A Dissenting Limited Partner who
exercises his or her dissenter's rights will receive an unsecured subordinated
debenture ("Debenture") under an Indenture Agreement ("Indenture Agreement").
The Indenture Agreement provides for a Trustee and specifies that (a) the title
of the Debenture shall be "Unsecured Subordinated Debenture Due January 31,
2005"; (b) the amount at which such Debenture will be issued shall be the value,
in United States currency, of such Dissenting Limited Partner's interest in the
Partnership, determined in accordance with the Exchange Value, as of the
Determination Date, if such Dissenting Limited Partner perfects his or her
dissenter's rights pursuant to the terms of the Merger; (c) the date on which
the principal of the Debenture is payable shall be January 31, 2005, which date
or dates may be fixed or extendible; (d) the rate or rates at which the
Debenture shall bear interest shall be a variable interest rate equal to the
federal rate as determined in accordance with Section 1274 of the Internal
Revenue Code of 1986, payable on January 1 and July 1 of each year and based on
a 365-day year; (e) the Debenture shall be issued within 30 days of the closing
date of the Merger; (f) the Debenture shall limit total leverage to 70 percent
of the appraised value of the assets previously owned by the Partnership; and
(g) the Debenture shall be prepaid with 80 percent of the net proceeds of any
sale or refinancing of the assets previously owned by the Partnership. The
Indenture Agreement does not provide for a sinking fund.
A Limited Partner who does not consent to the Merger Proposal may, but is
not required to, exercise his or her dissenter's rights by completing and
signing Part V of the Letter of Transmittal and Consent Statement ("Consent
Statement"). Such a non-consenting Limited Partner, therefore, will become a
"Dissenting Limited Partner". Dissenting Limited Partners will receive, pursuant
to those dissenter's rights, a Debenture issued under the Indenture Agreement in
an amount equal to the Exchange Value of such Dissenting Limited Partner's
Units. Each Dissenting Limited Partner will be provided with a Debenture within
30 days following the consummation of the Merger and related transactions for
his or her Units in the amount as specified above.
LIMITED PARTNERS WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS ARE CAUTIONED THAT
FAILURE TO COMPLETE PART V OF THE CONSENT STATEMENT WILL RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
See the portion of the Joint Consent Statement/Prospectus entitled "RIGHTS
OF DISSENTING LIMITED PARTNERS" for additional information regarding Limited
Partners' dissenters' rights.
Compliance with and Approval from Federal and State Authorities. The Merger
Proposal and related transactions will not be completed if any moratorium on
transactions of its type are imposed by
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<PAGE>
federal, state or regulatory authorities or if any state securities authority
imposes any restriction upon, or prohibits any aspect of, the transactions
contemplated by the Merger Proposal and related transactions, which in the
judgment of the Company, renders the Merger Proposal and related transactions
undesirable or impractical.
Comparison of Units and Merger Stock. The portion of the Joint Consent
Statement/Prospectus entitled "SUMMARY COMPARISON OF UNITS AND MERGER STOCK"
highlights a number of the significant differences between the Partnership (and
the Units) and the Company (and the Merger Stock) relating to, among other
things, form of organization, investment objectives, policies and restrictions,
asset diversification, capitalization, management structure compensation and
fees, and investor rights, and compares certain legal rights associated with the
ownership of the Units and Merger Stock, respectively. These comparisons are
intended to assist the Limited Partners in understanding how their investments
will be changed if, as a result of the Merger and related transactions, their
Units are exchanged for shares of Merger Stock.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following information is intended to provide the Limited
Partners with a summary of all material federal income tax consequences of
general application to the Company and Limited Partners associated with the
Merger Proposal. This summary does not consider all tax matters that may affect
the Partnership, the Company, or the Limited Partners, including any state,
local, foreign or other matters, and does not consider various facts or
limitations applicable to any particular Limited Partner, or special tax rules
that may apply to certain Limited Partners that may modify or alter the results
described herein.
Except as otherwise indicated, statements of legal conclusions regarding
tax treatments, tax effects or tax consequences present the opinions of John H.
Brainerd, Attorney at Law and tax counsel for the Company, based on the Internal
Revenue Code of 1986 ("Code") and applicable Treasury Regulations thereunder,
each as amended and in effect on the date hereof, and on reported judicial
decisions and published positions of the Internal Revenue Service ("IRS"). No
rulings have been requested from the IRS concerning any of the matters presented
in the Joint Consent Statement/Prospectus and the IRS will generally not issue
rulings on transactions such as the Merger Proposal. In some cases, particularly
those as to which tax counsel's opinion is qualified, there is a risk that the
IRS will disagree with the conclusions of tax counsel. The laws, regulations,
administrative rulings and judicial decisions that form the basis for
conclusions with respect to the tax consequences of the Merger Proposal are very
complex and are subject to change at any time.
The tax opinion of John H. Brainerd is filed as Exhibit 8 to the
Registration Statement, of which the Joint Consent Statement/Prospectus
constitutes a part. Upon receipt of a written request of a Limited Partner (or
such Limited Partner's representative who has been so designated in writing)
addressed to the Information Agent at 4100 Newport Place, Suite 400, Newport
Beach, California 92660, a copy of the tax opinion will be transmitted promptly,
without charge, by the General Partner.
The Limited Partners, PCM shareholders and Company shareholders should be
aware that there is no direct authority of general applicability governing the
federal income tax treatment of transactions such as the Merger Proposal that
are structured as partnership mergers, because this structure is an approach
made available by recent developments in California partnership law. Therefore,
in rendering his opinions, John H. Brainerd has relied on authorities addressing
the consequences of analogous transactions that used similar structures.
Accordingly, although there appears to be no controlling authority contrary to
Mr. Brainerd's conclusions, it is possible that the IRS would take a different
position
D-28
<PAGE>
if it reviewed the tax consequences of the Merger Proposal.
Differences Between Partnership Units and Merger Stock. A limited
partnership is a pass-through entity for federal income tax purposes. This means
that a limited partnership is not liable for federal income tax on its taxable
income. Rather, a limited partnership passes its income (or loss) through to its
owners (i.e., general and limited partners) in proportion to their relative
interests in profits and losses. This is known as allocating a partnership's
income and loss. Many items of income, deduction, gain, loss, and credits are
allocated separately to each partner in proportion to such partner's interest in
those items as specified in such limited partnership's agreement of limited
partnership. The character of each item passed through to a partner remains the
same with such partner as it was with the limited partnership. Each partner
includes these items on such partner's income tax return and pays tax based on
those items combined with such partner's other items of income, deduction, gain,
loss or credits. Thus, tax is imposed on the partner regardless of whether the
limited partnership actually distributes any cash or property to that partner.
Therefore, it is the allocation, not the distribution, of income (or loss) to a
partner that results in tax effect for that partner.
A partner has a basis in the limited partnership interest he or she holds
which is generally equal to either the cost of that limited partnership
interest, if purchased, or, if not purchased, the amount of any cash or adjusted
basis of any other property that partner transferred to the limited partnership,
increased (or decreased) by that partner's share of the limited partnership's
income (or loss) and decreased by the amount of any cash (or the basis of any
property) distributed to that partner. Upon sale of his or her limited
partnership interest, a partner realizes gain equal to the amount received for
the limited partnership interest (including their share of partnership
liabilities) less that partner's adjusted basis in the limited partnership
interest. The partner's gain (or loss) upon sale is generally capital gain (or
loss), but may be characterized as ordinary gain (or loss) to the extent of that
partner's share of certain "hot" assets held by the limited partnership.
Because a limited partnership does not pay tax on income it earns (but
rather the general partner and limited partners pay tax on such income),
partners of a limited partnership are subject to federal income tax on income
earned in the business conducted by the limited partnership only once.
Accordingly, as owners of the Partnership, by their Units, Limited Partners
receive the federal income tax treatment just described. Regarding the
Partnership, the number of Units owned by a partner (either the General Partner
or any Limited Partner) will determine the amount of income or loss allocated to
such partner by the Partnership.
A corporation is a taxable entity and pays federal income tax at rates
ranging from 15% to 39% on its taxable income. A shareholder of a corporation is
generally not taxed on any income earned by that corporation until that
corporation distributes either cash or property to that shareholder or that
shareholder sells or exchanges his or her shares of stock issued by that
corporation at a gain. A corporation often makes distributions to its
shareholders in proportion to their interests in that corporation, but it need
not do so. When cash or property is distributed, each portion of the
distribution will be characterized in one of the following three ways: (i) as a
dividend, (ii) as a capital gain, or (iii) as a return of capital. The portion
of a distribution treated as a dividend is taxed at ordinary federal income tax
rates, which, for individuals, are as much as 39.6%. Upper tax bracket
individuals are subject to a phaseout of their personal exemptions, and a
restriction on itemized deductions, which, however, in combination under certain
circumstances, can bring the actual maximum effective federal rate to more than
47%. The portion treated as capital gain will reduce the adjusted basis in the
shareholder's stock and generally be taxed at a maximum 28% rate until the
adjusted basis reaches zero. The portion treated as return of capital will not
be taxed. The amount of any distribution treated in any of the three alternative
ways may differ for each shareholder, and will depend upon the value of the cash
and property received, the percentage
D-29
<PAGE>
interest in the corporation owned by the shareholders receiving distributions
and each shareholder's basis in his or her shares. Because corporations are
taxable on their own taxable income, and because shareholders may be taxed again
on that same income, if it is distributed to shareholders in the form of cash or
property, or if that income is realized by the sale or exchange of shares at a
gain, there are two levels of potential tax upon income earned by a corporation.
A shareholder's basis in his or her shares is generally equal to the cost of the
shares, if purchased, or, if not purchased, the amount of any cash and basis of
other property contributed to the corporation, decreased by the amount of any
distributions treated as a return of capital. Upon a sale of shares, a
shareholder's gain (or loss) will be equal to the amount received for those
shares less his or her basis in those shares. The character of such gain (or
loss) will generally be capital in nature. As holders of interests in a
corporation (the Company), the owners of Merger Stock will be subject to the tax
treatment just described.
As a holder of a Unit, a Limited Partner holds an interest in an entity
that earns income subject to federal income tax only once, whereas the holder of
Merger Stock would hold an interest in an entity that earns income conceivably
subject to federal income tax twice (if dividends or similar distributions are
made by the Company to its shareholders).
There are, however, potential tax advantages (and corresponding financial
advantages) to conducting a business in a corporation. These include the ability
of shareholders to defer tax on income earned by the corporation until the
corporation distributes such income. Partners in a partnership, by contrast, are
taxed as the partnership earns income, even if cash is not distributed to those
partners. Partners pay such tax at their individual federal tax rate, which may
exceed the maximum federal corporate tax rate. Alternatively, because
shareholders pay no tax until they receive distributions from the corporation,
the Company, as a corporation, may accumulate income for business expansion
without financially interfering with its shareholders' abilities to pay their
taxes. Finally, because tax is paid by the corporation, it is better able to
manage its tax liability by tax planning.
The Partnership. The Partnership will be deemed to have transferred all of
its assets and liabilities to the Company and to have received the Merger Stock
in exchange, and then to have distributed such Merger Stock to the Limited
Partners and the General Partner in complete liquidation. The Partnership will
realize, but not be required to recognize, gain or loss as if the Partnership
had transferred of all of its assets to the Company for an amount equal to the
value of such Merger Stock, plus the liabilities of the Partnership assumed in
the Merger. The Partnership will avoid recognition of gain or loss if it
contributes property to the Company and immediately thereafter, together with
the other PAM Funds and the PCM Shareholders, is in control of 80% of the
Company. The Partnership will, however, be taxed on any boot received in the
Merger. Boot is defined as cash or property (including securities other than the
stock) received by the Partnership. Gain or loss is not recognized and deferred
by the Partnership by the transfer of the Partnership's adjusted basis in its
assets, reduced by any liabilities assumed by the Company, to the shares of
Merger Stock that it is deemed to receive in the Merger. The gain or loss
realized will be recognized when these shares of Merger Stock are sold or
exchanged in a taxable transaction.
The Partnership will have a split holding period for each share of Merger
Stock received. A share of Merger Stock received in exchange for Units will have
a holding period that begins on the day following the Closing Date to the extent
that the value of such share of Merger Stock on the Closing Date is attributable
to certain of the Partnership's assets (essentially, its ordinary income
assets), and, to the extent of any excess value, such share of Merger Stock will
have a holding period that includes the period the Units were held by the
Limited Partners.
The Company. The Partnership will be deemed to have transferred all of its
assets and liabilities
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<PAGE>
to the Company and to have received Merger Stock in exchange, and then to have
distributed the Merger Stock to the Limited Partners and the General Partner in
complete liquidation.
The Company will not recognize gain or loss resulting from the Merger, but
the Company's tax basis in the assets acquired from the Partnership will be the
same as that basis was in the hands of the Partnership. The Company's holding
period in the assets will include the Partnership's holding periods received by
the Company. The Partnership, on the other hand, will not be required to
recognize gain or loss resulting from the Merger.
After consummation of the Merger, the Partnership will cease to exist for
both state law and federal income tax purposes. The Company will be taxed as a
corporation on its taxable income. The income and deductions attributable to the
assets and liabilities received in the Merger will be included in the Company's
taxable income. The adjusted tax basis of certain of the assets will be
depreciable or amortizable for federal tax purposes, thereby reducing the amount
of the Company's income subject to tax.
Gain or Loss to the Limited Partners. Each Limited Partner will realize
gain or loss on the receipt of Merger Stock or a Debenture in exchange for his
or her Units. As the Merger Stock will probably be considered to be marketable
securities, the Merger Stock will be treated as cash received and gain to the
Limited Partners will be measured by the difference between the fair market
value of the Merger Stock received by the Limited Partners and their adjusted
basis in their Units. This gain will be limited by the prorata share of the net
gain, if any, which would be recognized if all the marketable securities (Merger
Stock) held by the Partnership were sold. If all Dissenting Limited Partners
have had their interests redeemed before the distribution of the Merger Stock,
each Limited Partner's gains will be reduced to zero. This means that the
adjusted basis of the Merger Stock received would be the same as the adjusted
basis the Limited Partners had in their Units. If gain is recognized, the
adjusted basis in the Merger Stock would be increased by the amount of that
gain.
A Limited Partner that receives a Debenture (with respect to his or her
Units) because of such Limited Partner's exercise of dissenter's or similar
rights under California law (with respect to his or her Units) may recognize
gain depending upon such Limited Partner's aggregate basis in the Partnership
prior to the Closing Date. The aggregate basis of any Merger Stock received by a
Limited Partner in exchange for his or her Units will be equal to the aggregate
basis in such Units immediately before the Merger, decreased by the amount of
cash received by such Limited Partner for such Units in lieu of fractional
shares of Merger Stock. Such basis will be prorated among all shares of Merger
Stock received for such Units.
Limited Partners will have a split holding period for each share of Merger
Stock received. A share of Merger Stock will have a holding period that begins
on the day following the Closing Date to the extent that the value of such share
of Merger Stock on such date is attributable to certain of the Partnership's
assets (essentially, the Partnership's ordinary income assets), and, to the
extent of any excess value, such share of Merger Stock will have a holding
period that includes the period that Units were held by each recipient Limited
Partner.
Each Dissenting Limited Partner will receive a Debenture which will be
treated the same as cash, resulting in gain that will be realized and recognized
by such Limited Partner. It is not anticipated that such Debenture will be
readily transferable. Accordingly, this gain may be eligible to be deferred
until payment is received under such Debenture. Limited Partners should consult
their tax advisor as to how these rules might apply to them.
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<PAGE>
Each Limited Partner who receives Merger Stock will be required to file
with his or her federal income tax return for the year in which the Merger is
consummated a statement that provides details relating to his or her Units
(which will be considered to be property transferred), the Merger Stock, and his
or her share of any liabilities assumed by the Company, as the surviving
corporation in the Merger. The Company will provide its shareholders with
information to assist them in preparing those statements.
After the Merger is consummated, the income and deductions attributable to
the assets and liabilities of the Company will not be allocated to the
shareholders of the Company. A shareholder of the Company will be taxed only on
dividends and other distributions received from the Company, if any. Such
distributions generally will be taxable as dividends to the extent of any
current or accumulated earnings and profits of the Company. Any other
distributions will be treated as a nontaxable return of capital to the extent of
such shareholder's basis in his or her shares of the Company's common stock and
as capital gain to the extent of the remaining portion of such distribution.
THE FOREGOING INFORMATION RELATES ONLY TO THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER PROPOSAL APPLICABLE TO LIMITED PARTNERS GENERALLY. EACH LIMITED
PARTNER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE
CONSEQUENCES OF THE MERGER PROPOSAL ON SUCH PERSON'S PARTICULAR TAX SITUATION.
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<PAGE>
APPENDIX E
Supplement For
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership
(S-K Reg. 229.902)
Notice to Limited Partners of Performance Asset Management Fund IV, Ltd., A
California Limited Partnership:
Purpose of Partnership Supplement. This separate partnership supplement
highlights information presented in the Joint Consent Statement/Prospectus as
that information relates to Performance Asset Management Fund IV, Ltd., A
California Limited Partnership ("Partnership") and its limited partners
("Limited Partners"), regarding a proposed merger ("Merger Proposal") of the
Partnership and other, similar California limited partnerships ("Other
Partnerships") and Performance Capital Management, Inc., a California
corporation ("PCM"), with and into Performance Asset Management Company, a
Delaware corporation ("Company") ("Merger"). Similar supplements have been
prepared for the Other Partnerships. The effects of the Merger may differ for
the limited partners in the Other Partnerships. If you want to obtain a
supplement for any of the Other Partnerships, please call the Information Agent,
Bud Webb at (888) 754-4145. You may also send a written request for copies of
any documents referenced in the Joint Consent Statement/Prospectus to
Performance Development, Inc., Attn: Information Agent, 4100 Newport Place,
Suite 400, Newport Beach, California 92660. As you know, Performance
Development, Inc. is a California corporation and the General Partner of the
Partnership and each of the Other Partnerships ("General Partner"). Supplements
for any of the Other Partnerships will be provided without charge to any Limited
Partner. The Partnership and the Other Partnerships are sometimes collectively
referred to as the "PAM Funds."
Potential Adverse Effects of the Merger. The most significant potential
adverse effects of the Merger to the Limited Partners are the significant
reduction in distributions (the Company does not intend to pay cash dividends);
the possibility that the shares of the Company's $.001 par value common stock
received by the Limited Partners upon the winding up and dissolution of the
Partnership ("Merger Stock") will trade at a price substantially below the value
assigned in the Merger Proposal; the limited public market for the Merger Stock;
the potential price volatility of the Merger Stock; possible dilution of the
Merger Stock; and the significant influence of Vincent E. Galewick, in his
capacity as the majority shareholder of the Company. There are also possible
adverse tax consequences to individual Limited Partners which could result from
their particular financial circumstances. Limited Partners should carefully
consider the matters set forth under the Caption "RISK FACTORS" beginning on
Page 22 of the Joint Consent Statement/Prospectus, and summarized herein
beginning at Page __ . Significant risk factors include:
o PCM and the Partnerships Have History of Losses
o Significant Reduction in Distributions
o Shares of the Merger Stock May Trade at a Price Substantially Below
the Value Assigned in the Merger Proposal
o Limited Public Market for Shares of the Merger Stock
o Potential Price Volatility of Shares of the Merger Stock
o Possible Dilution of the Merger Stock
o Uncertainty of Future Financial Results of the Company
o Dependence on Key Personnel of the Company
o Control by Principal Shareholder of the Company
o Possible Adverse Tax Consequences
o The Company may fail to comply with Year 2000 computer programming
issues
E-1
<PAGE>
Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("Partnership"), was formed on October 21, 1992, as a limited
partnership in California under the Revised Limited Partnership Act of the State
of California. The Partnership sold 11,470 limited partnership interests
("Units") at the price of $2,500.00 per Unit. The terms "Unit" and "Units", when
used in this Supplement, shall also mean and refer to the limited partnership
interests offered and sold by the Other Partnerships. The total amount received
by the Partnership from purchasers of its Units was $28,675,000. As of June 30,
1997 ("Determination Date") the Partnership had 1,442 Limited Partners. The
Partnership termination date is December 31, 2005, unless sooner terminated.
PERFORMANCE ASSET MANAGEMENT FUND IV, LTD.
PER UNIT DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Units outstanding at year end 11,472.00 11,488.00 8,779.00 2,047.00
Earnings (loss) per Unit ($63.82) ($53.10) ($118.03) ($23.42)
Book value per Unit 1,507.27 1,684.62 1,892.58 2,274.69
Annual return of capital
distributions per Unit 124.95 134.66 174.77 17.77
Cumulative return of capital
distributions per Unit 396.72 271.39 178.91 17.77
Assigned value for Merger Stock $1,381.52/Unit
</TABLE>
Each Limited Partner should review thoroughly the selected financial
statements included in the portions of the Joint Consent Statement/Prospectus
captioned "RESULTS OF OPERATIONS," "SELECTED HISTORICAL AND PRO FORMA FINANCIAL
DATA AND COMPARATIVE PER SHARE DATA," "PRO FORMA CONDENSED FINANCIAL
INFORMATION," and the financial statements of the Company, PCM and the
Partnership and the Other Partnerships included in the Joint Consent
Statement/Prospectus.
The Partnership has continued to invest in distressed loan portfolios. As
set forth above, these portfolios consist primarily of charged-off credit card
accounts and consumer loan balances, such as auto loans and personal lines of
credit originated by independent third-party financial institutions located
throughout the United States. In addition, the Partnership acquired certain
portfolios of default consumer debts which were rewritten under terms different
from the original obligation. In 1994, 1995 and 1996, the Partnership's
investments in distressed loan portfolios consisted of the following (amounts
are carrying amounts):
Type of Portfolio 1994 1995 1996
----------------- ---------- ---------- ----------
Credit Card Accounts ................. $5,894,375 $5,857,955 $6,947,644
Performing Rewritten Accounts ........ $1,230,121 $414,056 $0
Consumer Loans ....................... $1,275,696 $2,984,756 $1,795,999
Trade Receivables .................... $869,140 $0 $0
Notes Secured by Deeds of Trust ...... $0 $445,000 $347,543
---------- ---------- ----------
Total ...................... $9,269,332 $9,701,767 $9,091,186
========== ========== ==========
In 1994, the Partnership received investment income of $11,558, additional
income in the form of net interest of $96,928, and miscellaneous income in the
amount of $900. Against this, the Partnership had operating expenses as follows:
management fee expenses of $144,633; collection expenses of
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$525,073; professional fees of $60,949; amortization expense of $3,605; general
and administrative expenses of $6,321; and provision for portfolio losses of
$405,000; for total operating expenses of $1,145,581. Therefore, the
Partnership's net loss for 1994 was $1,036,195.
In 1995, the Partnership received investment income of $367,527, additional
income in the form of net interest of $109,670, and miscellaneous income in the
amount of $1,800. Against this, the Partnership had operating expenses as
follows: management fee expenses of $214,677; collection expenses of $225,318;
professional fees of $514,773; amortization expense of $3,669; general and
administrative expenses of $21,532; and provision for portfolio losses of
$109,000; for total operating expenses of $1,088,969. Therefore, the
Partnership's net loss for 1995 was $609,972.
In 1996, the Partnership received investment income of $150,347, additional
income in the form of net interest of $535,431, and miscellaneous income in the
amount of $15,151. Against this, the Partnership had operating expenses as
follows: management fee expenses of $221,422; collection expenses of $227,874;
professional fees of $959,297; amortization expense of $3,670; and general and
administrative expenses of $20,832; for total operating expenses of $1,433,095.
Therefore, the Partnership's net loss for 1996 was $732,166.
Value of Assets Held by the Partnership. As of December 31 of each of the
years specified in the following table, the Partnership held the following
assets with the following values, which values were determined by the General
Partner and reviewed by Willamette Management Associates, Inc. ("Fairness
Analyst"), as part of the Fairness Analyst's review of the Merger Proposal to
determine if the terms of the Merger Proposal are fair to the Partnership and
the Other Partnerships:
Asset 1994 1995 1996
----- ---------- ---------- ----------
Cash and equivalents .................... $5,002,648 $559,223 $2,121,545
Cash held in trust ...................... 0 $6,247,207 $5,834,268
Investment in Distressed Loan Portfolios $9,269,331 $9,701,767 $9,091,186
Receivable from Unaffiliated Service
Provider(1) ........................... $1,937,718 $1,937,718 $0
Due from Affiliates ..................... $376,050 $680,731 $136,022
Other Assets ............................ $18,425 $219,153 $104,977
Organization Costs, Net ................. $10,793 $7,124 $3,454
(1) West Capital Financial Services Corp., a California corporation.
The Partnership defines cash equivalents as all highly liquid investments
with a maturity of three months or less when purchased. The Partnership
maintains cash balances at one bank and aggregate accounts at that bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
Compensation to the General Partner and Affiliates For the Last Three
Fiscal Years. The following table sets forth the compensation paid by the
Partnership to the General Partner and its Affiliates for the last three fiscal
years and the most recently completed interim period.
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Entity 1994 1995 1996 1997*
------ ---------- ---------- ---------- ----------
General Partner
Management Fees ...... $144,633 $214,677 $221,422 $108,724
Distributions ........ $174,521 $172,358 $159,339 $191,067
PCM
Acquisition Fees ..... $1,635,474 $960,352 $1,181,569 $24,794
Collection Fees ...... $725,066 $1,144,313 $1,991,083 $1,034,059
INC
Commissions .......... $1,719,000 $636,000 $0 $0
---------- ---------- ---------- ----------
Total ........ $4,398,694 $3,127,700 $3,553,413 $1,358,644
========== ========== ========== ==========
* Through June 30, 1997
The following table sets forth the compensation that would have been paid
by the Partnership to the General Partner and its Affiliates if the compensation
and distributions structure to be in effect after the Merger had been in effect
during the last three fiscal years.
Entity 1994 1995 1996
------ ---------- ---------- ----------
General Partner ......................... $0 $0 $0
PCM ..................................... $0 $0 $0
INC ..................................... $1,719,000 $636,000 $0
---------- ---------- ----------
Total ........................... 1,719,000 $636,000 $0
========== ========== ==========
As stated above, the Partnership enters into various joint ventures with
Performance Capital Management, Inc., a California corporation and an Affiliate
of the General Partner. Vincent E. Galewick owns all of the issued and
outstanding common stock of the following Affiliates:
Performance Development, Inc., a California corporation ("General Partner")
Income Network Company, Inc., a California corporation ("INC")
Vision Capital Services Corporation, a California corporation ("Vision")
Vincent E. Galewick owns 98.5% of the issued and outstanding common stock
of the following Affiliate: Performance Capital Management, Inc., a California
corporation ("PCM")
The Other Partnerships are:
Performance Asset Management Fund, Ltd., A California Limited
Partnership ("PAM")
Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II")
Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III")
Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("Partnership")
Performance Asset Management Fund V, Ltd., A California Limited
Partnership ("PAM V")
For convenience, as set forth above, the Partnership and the Other
Partnerships may be referred to in this Supplement as the "PAM Funds."
The General Partner was formed in June, 1990 to engage in various aspects
of the distressed loan industry. The General Partner serves as the general
partner for all the PAM Funds and certain other
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California limited partnerships. During the fiscal years ended 1994, 1995 and
1996, the General Partner's syndication fees incurred and recorded by the
Partnership totalled $506,100, $201,825 and $0 respectively, which have been
accounted for as a reduction against the gross proceeds of the offering. The
Partnership also reimbursed the General Partner for offering expenses totalling
$189,105 during the year ended December 31, 1994. The General Partner's
management fees incurred and recorded by the Partnership totalled $144,633 and
$214,677 for the years ended December 31, 1994 and 1995, respectively, and
$221,422 for the year ended December 31, 1996. The Partnership also accrued
distributions to the General Partner of $174,521 and $172,358 for the years
ended December 31, 1994 and 1995, respectively and $159,334 for the year ended
December 31, 1996. At year end December 31, 1996 the Partnership had amounts
owed to the General Partner recorded as amounts due to affiliates of $349,497.
The Partnership reimbursed the General Partner for certain syndication
costs in connection with the limited partnership offering during both 1994 and
1995. At December 31, 1994, the Partnership had amounts owed to the General
Partner recorded as amounts due to affiliates of $477,757. At December 31, 1995,
the Partnership had amounts owed from the General Partner recorded as amounts
due from affiliates of $366,510. At December 31, 1996 the Partnership had
amounts owed to the General Partner recorded as amounts due to affiliates of
$349,497.
Income Network Company, a California corporation ("INC"), was formed on
February 1, 1988, as a registered Broker-Dealer and member of the National
Association of Security Dealers, Inc. and the Securities Investor Protection
Corporation. The sole shareholder of INC, Vincent E. Galewick, is also the sole
shareholder of the General Partner and Vision. Additionally, Mr. Galewick owns
98.5% of the issued and outstanding stock of PCM. INC, in accordance with the
Agreement of Limited Partnership for the Partnership and offering memorandum of
the Partnership, was paid commissions equal to 10% of gross proceeds received
from the offer and sale of interests in the Partnership ("Units"). INC is the
Soliciting Agent for the Merger Proposal.
During the years ended December 31, 1994 and 1995, the Partnership incurred
and recorded commissions due to INC of $1,719,000 and $636,000, respectively,
which have been accounted for as reductions against the gross proceeds of the
offering. At December 31, 1994 and 1995, the Partnership had amounts owed to INC
of $32,000 and $8,250, respectively, for transactions described above.
Performance Capital Management, Inc., a California corporation ("PCM"), was
formed in February, 1993, to perform services related to locating, evaluating,
negotiating, acquiring and collecting distressed loan portfolio assets. PCM
acquires portfolio assets from third-party financial institutions and sells the
portfolios to the Partnership and the Other Partnerships at cost plus an
acquisition fee of approximately 30% to 37%, as provided in the related purchase
agreements. The Partnership also enters into servicing agreements with PCM to
collect and service the portfolios. Those agreements generally provide that all
proceeds generated from the collection of portfolio assets shall be shared by
the venturers (PCM and the Partnership) in proportion to their respective
percentage interests, generally, 55% to 60% for the Partnership and 40% to 45%
for PCM. The Partnership also reimburses PCM for certain costs associated with
the collection of portfolio proceeds.
Moreover, in addition to providing collection efforts on distressed loan
portfolios to the Partnership, PCM identifies and acquires distressed loan
portfolios and other discounted portfolios of financial debt instruments and
obligations and sells them to the Partnership and the Other Partnerships at
negotiated prices.
For the years ended December 31, 1994 and 1995, the Partnership purchased
twenty seven portfolios
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from PCM, and recorded acquisition fees for those portfolios of $1,635,474 and
$960,352 respectively. For the year ended December 31, 1996, the Partnership
purchased 12 portfolios from PCM, and recorded acquisition fees for those
portfolios of $1,181,569. Also, for the years ended December 31, 1994 and 1995,
the Partnership reimbursed PCM for collection costs of $427,180 and $225,318,
respectively, while for the year ended December 31, 1996, the Partnership
reimbursed PCM for collection costs of $227,874. At December 31, 1994 and 1995,
the Partnership had amounts owed from PCM recorded as Due from Affiliates of
$376,050 and $314,221, respectively, for the transactions described above. At
December 31, 1996, amounts owed from PCM recorded as Due from Affiliates for
acquisition fees and collection cost reimbursements totalled $136,022.
Distributions and Dividends. The Partnership has made quarterly cash
distributions to the Limited Partners, which distributions terminated effective
as of June 30, 1997. All of the distributions represented a return of capital.
The following table specifies the cash distributions made to the Limited
Partners during each of the last five fiscal years and most recently completed
interim period.
General Limited
Total Partner Partner
Year Distributions Distributions Distributions
---- ------------- ------------- -------------
1992 ..................... $ 0 $ 0 $ 0
1993 ..................... $ 40,425 $ 0 $ 40,425
1994 ..................... $1,704,784 $ 174,521 $1,530,263
1995 ..................... $1,719,383 $ 172,358 $1,547,025
1996 ..................... $1,592,759 $ 159,334 $1,433,425
June 30, 1997 ............ $1,624,168 $ 191,068 $1,433,100
Selected Financial Information. The following table sets forth a historical
summary of gross collections and partner distributions for the PAM Funds from
the date of formation of each PAM Fund through June 30, 1997:
<TABLE>
<CAPTION>
Cost of
Portfolios Original Portfolio Portfolios Gross Partner
Partnership Acquired Face Value Acquired Collections* Distributions**
----------- -------- ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
PAM(1) .... 16 $ 305,438,442 $ 4,932,616 $ 5,526,429 $ 3,678,632
PAM II(2) . 19 433,632,566 6,230,345 8,749,682 4,059,775
PAM III (3) 21 521,408,657 9,685,926 7,826,584 3,463,815
Partnership 57 709,008,534 20,416,167 20,014,508 6,269,988
PAM V(4) .. 12 209,901,705 4,997,992 2,889,555 639,600
--- -------------- -------------- -------------- --------------
Total 125 $2,179,389,904 $ 46,263,046 $ 45,006,758 $ 18,111,810
=== ============== ============== ============== ==============
</TABLE>
* Gross collections include any sale of accounts and collection activity
through June 30, 1997
** Through June 30, 1997
(1) Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM").
(2) Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II").
(3) Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III").
(4) Performance Asset Management Fund V, Ltd., A California Limited Partnership
("PAM V").
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<PAGE>
REASONS FOR THE MERGER PROPOSAL
The primary purpose of the Merger is to provide the Limited Partners with
the opportunity to participate in the growth of Performance Capital Management,
Inc., a California corporation ("PCM"), while also increasing the liquidity of
their investments. Additional purposes include the possibility of greater access
to capital markets; greater flexibility regarding capital resources; the ability
to provide employees with incentive performance compensation by a stock option
plan; the opportunity to offer greater employee ownership; more simplified
record keeping, accounting and tax reporting; and to permit the shares of $.001
par value common stock issued by the Company to the Limited Partners in the
Merger ("Merger Stock") to be eligible for listing on a regional or national
market quotation system. No prediction can be made, however, as to the price at
which the Merger Stock will trade. Moreover, no assurance or guaranty can be
given that the Merger Stock will trade at all or that the application for such
listing will be approved.
Liquidity and Market Valuation. The Units and currently issued and
outstanding shares of no par value common stock of PCM are not publicly traded
and have limited, if any, liquidity. The primary means of liquidity for holders
of the Units has been requesting the Partnership to redeem their Units. Although
the Partnership is not obligated to comply with any such request, such
redemptions have occurred from time to time, using available cash to redeem
Units at a percentage of book value. After consummation of the Merger, the
Merger Stock may be made eligible for trading on a regional or national stock
exchange and there may be a readily accessible market for selling the Merger
Stock and a readily determinable market price for the Merger Stock. With a
readily accessible market for Merger Stock, Unit holders would no longer be
required to rely solely on the Partnership as a source of liquidity, and the
Company would not be required to use its cash to provide such liquidity.
Instead, it is expected that holders of Merger Stock will be able to sell their
Merger Stock publicly from time to time, subject to certain restrictions, at a
fair market price. No prediction can be made, however, as to the price at which
the Merger Stock will trade. Moreover, no assurance or guaranty can be given
that the Merger Stock will trade at all or that the application for such listing
will be approved.
Access to Equity Markets. Although the Company currently has no plans for
any equity offerings, the existence of publicly traded equity securities is
expected to provide the Company with future access to the public equity markets.
Greater Flexibility Regarding Capital Resources. The Company should have
greater flexibility with respect to the use of capital resources, because it
will not have to use available cash to redeem shares of its common stock. As
discussed above, the Partnership has from time to time used its available cash
to redeem Units when requested to do so by certain of its Limited Partners.
There are also potential tax advantages (and corresponding financial advantages)
to conducting a business as a corporation that should allow the Company greater
flexibility with respect to the management of its capital resources.
Shareholders of the Company will defer the payment of taxes on income earned by
the Company until the Company distributes such income in the form of dividends.
Limited Partners, by contrast, are taxed at such time as the Partnership
recognizes taxable income. The Limited Partners are taxed on such income at
their individual federal, state and, sometimes, municipal tax rates, which may
exceed the maximum corporate tax rates. Therefore, the Company, as a
corporation, can accumulate income for business expansion without adversely
affecting a shareholder's tax liability.
Acquisition Consideration. After consummation of the Merger, the Company
may be able to use shares of its common stock as consideration in its
acquisition of assets or other businesses. The use of equity securities as an
acquisition currency is advantageous, because it may be more tax efficient to
the seller of a business than a cash transaction, and it allows the Company to
consummate acquisitions without depleting cash resources. It also allows a
seller to continue to hold an equity interest in the
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<PAGE>
business acquired by the Company, by equity ownership in the Company after such
acquisition. The use of common stock in acquisitions can also enable the Company
to use the advantageous pooling accounting method, if certain conditions are
satisfied.
Incentive Compensation. The availability of shares of the Company's common
stock will permit the Company to provide its key employees with equity based
incentive compensation. The Company believes providing equity based incentive
compensation by the use of common stock will allow greater employee
participation in the Company's ownership, provide a more accurate measure of the
Company's performance (as a result of common stock having a readily
ascertainable value), and provide the Company with more flexibility in designing
equity based incentive compensation. The Company believes that this method of
compensation conserves the Company's cash and promotes management stability.
Greater Employee Ownership. As a result of the complex tax reporting
requirements associated with being a Limited Partner and the administrative
burden placed on the Partnership, as a result of having a significant number of
additional limited partners, it has not been feasible for the Partnership to
offer ownership opportunities to a broad range of employees. By having the
shares of its common stock available, however, the Company will be able to offer
ownership opportunities to its employees. The Board of Directors of the Company
believes that employee ownership is in the best interests of the Company and its
shareholders.
Simplified Record Keeping, Accounting and Tax Reporting. The Limited
Partners will not continue to be burdened with the cumbersome and complex tax
reporting requirements imposed on them under federal and multiple state
partnership tax laws, or with the related record keeping and accounting
requirements.
Certain Disadvantages of the Merger Proposal and Related Transactions
Taxation. The Partnership does not pay any federal or state income taxes.
After consummation of the Merger, the Company will be subject to federal and
state income tax. Shareholders of the Company will also be required to pay
federal, state and, in some circumstances, municipal income taxes on any
dividends that they receive from the Company and on any gain from the sale or
exchange of their Merger Stock. Therefore, while in partnership form, income
taxes are imposed only once (i.e., on the Limited Partners), in corporate form
income taxes are imposed twice (i.e., once on the Company and once on its
shareholders, to the extent they receive dividends or recognize gain on the sale
or exchange of securities). See those portions of the Joint Consent
Statement/Prospectus captioned "FEDERAL INCOME TAX CONSEQUENCES" and "CERTAIN
STATE AND LOCAL INCOME TAX CONSEQUENCES."
Significant Reduction in Distributions. The dividends distributed by the
Company to its shareholders after consummation of the Merger may be
significantly less that the distributions historically made by the Partnership
to the Limited Partners. Moreover, the Company shall not pay any cash dividends
on its common stock or preferred stock during the foreseeable future. See those
portions of the Joint Consent Statement/Prospectus captioned "Distribution
Policy" and "DISTRIBUTION POLICY --HISTORICAL DISTRIBUTIONS OF THE
PARTNERSHIPS."
Uncertainty Regarding Trading and Market Price of Common Shares. The Merger
Stock may not be listed or approved for listing on any regional or national
securities exchange or otherwise designated or approved for designation upon
notice of issuance as a national market system security on an interdealer
quotation system maintained by the National Association of Securities Dealers,
Inc. To the extent that the Merger Stock may trade, trading prices for the
Merger Stock will be influenced by many factors, including the market for the
Merger Stock, the Company's dividend policy, the possibility of
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<PAGE>
future sales by the Company or its shareholders of shares of the Company's
common stock, investors' perception of the Company and its businesses, and
general economic and stock market conditions. No prediction can be made as to
the price at which the Merger Stock will trade, if it will trade at all.
Moreover, there is a probability that the Merger Stock may trade at a price
below the value per share assigned in the Merger Proposal. The Limited Partners
and shareholders of PCM ("PCM Shareholders") have not previously had access to
an active trading market for the Units and shares of PCM's common stock,
respectively. Therefore, it is possible that they may wish to sell their Merger
Stock from time to time after the consummation of the Merger. The sale of Merger
Stock after the consummation of the Merger might have an adverse effect on the
market price of the Merger Stock; provided, however, to mitigate as much as
possible any such adverse effect, trading of the Merger Stock shall be limited
during the first one year period following the closing date of the Merger
("Closing Date").
EFFECTS OF THE MERGER
As a result of the Merger, all of the assets now held directly or
indirectly by PCM and the PAM Funds will be held by the Company, and PCM and the
PAM Funds will cease to exist by operation of law. The Company will possess all
of the assets, properties, rights and privileges, and will be subject to all the
liabilities and obligations, of PCM, the PAM Funds and the Company existing on
the Closing Date.
The following is a brief description of each material risk and effect of
the Merger Proposal, including, but not limited to, federal income tax
consequences, for the Limited Partners. Also included is a brief discussion of
the effect of the Merger Proposal on the Partnership's financial condition and
results of operations. Pro forma financial information based on the
participation of the Partnership in the Merger is set forth in the Joint Consent
Statement/Prospectus under the heading entitled "SELECTED HISTORICAL AND PRO
FORMA FINANCIAL DATA AND COMPARATIVE PER SHARE DATA."
The Merger. The proposed merger transaction contemplates that each of the
PAM Funds, including the Partnership, shall receive shares of $.001 par common
stock of the Company in exchange for the assets of the PAM Funds. Additionally,
by amending the provisions of the Agreements of Limited Partnership for the PAM
Funds, the PAM Funds shall be wound up and dissolved and the shares of $.001 par
value common stock of the Company received by the PAM Funds in exchange for
their assets shall be distributed to the General Partner and the limited
partners of the PAM Funds, all in accordance with an exchange value determined
by the Company, PCM and the General Partner and reviewed by Willamette
Management Associates, Inc. ("Fairness Analyst"). A copy of the Fairness Opinion
is attached to the Joint Consent Statement/Prospectus as Appendix G.
The Determination Date is a date set by the Board of Directors of the
Company. At this time, the Board of Directors of the Company expects that the
Determination Date will be June 30, 1997. To accommodate the Merger, the General
Partner suspended distributions by the Partnership to the Limited Partners,
effective as of the Determination Date. This is necessary to assure that the
Limited Partners' capital accounts do not change after the Determination Date.
The Board of Directors of the Company has the authority to postpone the
Determination Date and declare a new Determination Date, in its discretion. The
Board of Directors of the Company might postpone the Determination Date and
declare a new Determination Date, if the matters contemplated in the Merger
Proposal are postponed for any reason.
Effect of the Merger on Cash Distributions. Until June 30, 1997, the
Partnership made cash distributions to the Limited Partners. The Company
currently anticipates that the Company will not pay cash dividends. However,
this policy may change, as the actual amount of dividends, if any, to be paid
will be determined by the Board of Directors of the Company, in its sole
discretion, generally taking into
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<PAGE>
account a number of factors, including operating performance, liquidity and
capital requirements. There can be no assurances that any cash dividends will be
paid, just as there can be no assurances that the Partnership's distributions
will continue at previous levels.
DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
COMPANY'S ACTUAL CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S FINANCIAL
CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS AS THE
COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Effects of the Merger May Be Different For Investors in the Various Limited
Partnerships. If the Merger Proposal is approved and the Merger is consummated,
the Limited Partners will receive $1,381.52 in Merger Stock per Unit of the
Partnership. Limited partners in PAM will receive $890.37 in Merger Stock per
Unit of PAM. Limited partners in PAM II will receive $2,010.34 in Merger Stock
per Unit of PAM II. Limited partners in PAM III will receive $3,003.00 in Merger
Stock per Unit of PAM IV. Limited Partners in PAM V will receive $3,936.35 in
Merger Stock per Unit of PAM V.
The General Partner believes that the Limited Partners would receive
significantly less if the Partnership was liquidated, and the assets distributed
to the Limited Partners, because even an orderly liquidation would result in
prohibitive discounts on the value of the Partnership assets, which are
distressed debt portfolios. Continuing the Partnership in accordance with its
present business plan would result in each Limited Partner maintaining the
current book value per Unit of the Partnership. The book value at the
Determination Date of the Partnership was $1,249.22 per Unit; of PAM, $536.07
per Unit; of PAM II, $1,855.19 per Unit; of PAM III, $2,340.34 per Unit; and of
PAM V, $3,158.55 per Unit. Therefore, under the Merger Proposal, the limited
partners of the PAM Funds will receive significantly more in Merger Stock per
Unit than the book value per Unit.
To estimate the value of PCM and the PAM Funds, the Fairness Analyst
considered an asset-based approach and an income-based approach to value.
Therefore, the amount of capital raised from the limited partners in each of the
PAM Funds, and the returns on investment experienced by each PAM Fund, were
factors in determining the Exchange Value of each PAM Fund. The extent to which
each PAM Fund achieved its investment objectives was another factor. PCM's value
was calculated based on the present value of debt-free net cash flow and the
present value of the terminal value of PCM's cash receipts.
In the asset-based approach, the Fairness Analyst considered the total
expected net proceeds (i.e., after consideration of interim operating and
liquidation costs) which would accrue to the limited partners of each PAM Fund
as a result of the orderly liquidation of the assets on hand. The Fairness
Analyst determined that the liquidation equity values of the PAM Funds are as
follows: the Partnership - $11,865,592; PAM - $28,256; PAM II - $2,404,533; PAM
III - $3,826,861; and PAM V - $2,594,885. The present value of PCM's terminal
value of cash flows was determined to be $38,764,000.
In the income-based approach, the Fairness Analyst considered the expected
annual cash flows which would be generated by PCM and each PAM Fund over a
projected, finite operating period primarily as a result of collection efforts
and the sale of distressed loan portfolios. The expected cash flows, including
the terminal value, or projected cash flows resulting from the sale of assets or
business at the end of the projection period, were then discounted to a present
value by a rate of return deemed to be reflective of the risks inherent within a
projected stream of cash flows generated by assets such as distressed loan
portfolios.
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<PAGE>
The projected cash distributions from 1997 through the life each PAM Fund
were as follows: the Partnership - $25,117,113; PAM - $2,718,150; PAM II
- -$6,560,773; PAM III - $8,625,225; and PAM V - $5,618,400. Present value of the
projected cash distributions was calculated using a discount rate based on a
weighted average yield to maturity of 14 high yield issues in fiscal 1996, as
specified in Exhibit A-12 to the Fairness Opinion. This figure was added to the
terminal value of the portfolios of the PAM Funds, to arrive at a total present
value of each PAM Fund. The General Partner determined (and the Fairness Analyst
agreed that such determination is fair to the PAM Funds from a financial point
of view) that the present value of the PAM Funds as of the date of the Fairness
Opinion was as follows: the Partnership - $9,737,878; PAM - $1,432,934; PAM II -
$1,571,591; PAM III -$3,357,876; and PAM V - $3,786,364. These valuations were
added to each PAM Fund's adjusted net asset value, for a combined portfolio and
adjusted net asset value of $15,846,278 for the Partnership; $933,609 for PAM;
$3,111,728 for PAM II; $5,999,944 for PAM III; and $4,699,954 for PAM V.
The present value of PCM was determined to be the sum of its terminal value
of cash flows, $38,764,000, plus the present value of its debt free net cash
flow, $5,759,000, for a total present value of $44,523,211.
These values formed the basis for the Exchange Value for each PAM Fund and
PCM.
The only material difference in the operation of the PAM Funds is a
difference in the Agreement of Limited Partnership of the Partnership. Section
6.2 of the Partnership's Agreement of Limited Partnership provides that, until
such time as the Limited Partners of the Partnership have received a cash return
equal to their capital contributions, plus an amount equal to 6% of their
capital contributions, the Limited Partners will receive 90% of the cash
available for distribution, and the General Partner will receive the remaining
10% of the cash available for distribution. After the Limited Partners have
received the specified cash return, the distribution ratio changes to 70% to
those Limited Partners and 30% to the General Partner. The General Partner
considered this provision in calculating the income-based value of the
Partnership.
Allocation to Limited Partners and General Partner. Upon dissolution of the
PAM Funds, the General Partner will receive 10% of the Merger Stock allocated to
each PAM Fund pursuant to the ownership allocations in the Agreement of Limited
Partnership for each PAM Fund. The Partnership has been allocated 1,584,600
shares of Merger Stock. If the Merger is consummated, the General Partner will
receive 158,460 shares of Merger Stock received by the Partnership and the
Limited Partners will receive 1,426,140 shares of Merger Stock received by the
Partnership.
The Merger Agreement. The Merger will be consummated pursuant to the Merger
Agreement, if the Merger Proposal, as set forth in the Joint Consent
Statement/Prospectus, receives the requisite approval of the limited partners of
each PAM Fund, the approval of the PCM Shareholders, and the approval of the
shareholders of the Company, and if the other applicable conditions to the
Merger are satisfied or waived, including any approvals required from any state
or federal regulatory agency. The Merger Agreement is designated as Exhibit 2 to
the Registration Statement on Form S-4 filed by the Company with the Securities
and Exchange Commission in connection with the Merger and is included in the
Joint Consent Statement/Prospectus as Appendix A.
Until such time as the Merger Agreement has been approved and adopted by
all the parties thereto, it may be amended or terminated by the Board of
Directors of the General Partner, on behalf of any of the PAM Funds; the PCM
Shareholders, on their own behalf, or the Board of Directors of the Company, on
behalf of the Company; provided, however, that at any time after the Merger
Agreement has been adopted by the PCM Shareholders, the Company shareholders or
the limited partners of the
E-11
<PAGE>
PAM Funds, the Company's Board of Directors may not amend, modify or supplement
the Merger Agreement to change the amount or kind of interests to be received by
the limited partners of the PAM Funds, the PCM Shareholders or the Company
shareholders or to make any change if such change would, alone or in the
aggregate, materially adversely affect the limited partners of the PAM Funds.
Approval by All of the Limited Partnerships Is Required. The Merger
Proposal may be consummated only if all of the PAM Funds approve the Merger
Proposal. The Merger Agreement provides that limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. A PAM Fund which rejects the Merger Proposal shall not be required to
pay any of the costs of the Merger, in accordance with the provisions of Section
25014.7(e)(3) of the California Corporations Code. The General Partner, the PCM
Shareholders and the Company have considered the possibility of approval of the
Merger Proposal and related transactions by less than all of the PAM Funds, and
do not believe that the Merger can be fairly consummated unless all of the PAM
Funds approve the Merger Proposal, because, among other things, (i) it would be
unduly burdensome or impossible to evaluate and apportion the value of the
various services provided to the PAM Funds by PCM, considering the complexity
and scope of the various joint ventures between the PAM Funds and PCM; and (ii)
if the Merger Proposal is approved, PCM will cease to exist by operation of law,
and would no longer be available to provide the same services to dissenting PAM
Funds. Willamette Management Associates, Inc., as the Fairness Analyst, was
retained by Kelly & Company, the independent auditing firm for the PAM Funds,
the General Partner, PCM, and INC, to render the Fairness Opinion concerning the
Merger Proposal. See the section in the Joint Consent Statement/Prospectus
entitled "DETERMINATION OF THE EXCHANGE STOCK AND ALLOCATION OF THE MERGER."
Conditions of the Merger. The Merger will not be consummated unless the
Merger Proposal receives the requisite approval of the limited partners of each
PAM Fund and the approval of the requisite state and federal regulatory
agencies. Consummation of the Merger is also subject to the receipt of the
opinion described in the section in the Joint Consent Statement/Prospectus
entitled "FEDERAL INCOME TAX CONSEQUENCES." Receipt of this opinion may be
waived in whole or in part by the PAM Funds, the PCM Shareholders and the
Company in each respective party's sole discretion.
Prior to the consummation of the Merger, the obligations of the parties to
the Merger Agreement may be terminated at any time (including after approval of
the Merger by the limited partners of the PAM Funds and the respective
shareholders) if, among other things, (a) the General Partner or the Company
adopts a resolution terminating the Merger Agreement or (b) a final injunction,
order, or other action of a court or other governmental body prevents the
consummation of the Merger.
Completing the Merger. If the Merger Proposal is approved and the other
conditions of the Merger Agreement are waived or satisfied, the Closing Date
will be selected by agreement of the General Partner, the PCM Shareholders and
the Company. Upon consummation of the Merger and dissolution of the
Partnerships, the limited partners of the PAM Funds and PCM Shareholders will be
entitled to receive certificates for Merger Stock issued in exchange for the
assets of the Partnerships and shares of PCM's no par value common stock,
respectively.
Costs of the Merger. For purposes of the Thompson-Killea Act, which is that
portion of the California Corporations Code relating to "rollup" transactions
(the Merger Proposal is a "rollup" transaction), the costs of the Merger will be
divided into two categories, (i) transaction costs; and (ii) solicitation
expenses. Transaction costs are defined as the costs of printing and mailing the
Joint Consent Statement/Prospectus, or other documents; legal fees not related
to the solicitation of votes or tenders; financial advisory fees; investment
banking fees; valuation fees; accounting fees; independent committee expenses;
travel expenses; and all other fees related to the preparatory work of the
transaction, but not
E-12
<PAGE>
including costs that would have otherwise been incurred by the Partnership in
the ordinary course of business, or solicitation expenses. Solicitation expenses
include direct marketing expenses such as telephone calls, broker-dealer fact
sheets, legal and other fees related to the solicitation, as well as direct
solicitation compensation to brokers and dealers.
The Company estimates that the total costs and expenses of the Merger will
be approximately $1,400,000 if consummated and $1,200,000 if not consummated.
The Company estimates that the total solicitation expenses will be approximately
$600,000. This amount will be incurred whether or not the Merger is consummated.
The remainder of the costs and expenses estimated for consummation or
non-consummation will be attributable to transaction costs.
The Merger Agreement provides that those limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. Should the Merger Proposal be rejected by all of the PAM Funds, the
transaction costs will be apportioned between the Company and each PAM Fund
according to the final vote on the Merger Proposal as follows: (a) the Company
shall bear all transaction costs in proportion to the number of votes of the
limited partners of that PAM Fund to reject the Merger Proposal; and (b) that
PAM Fund shall bear transaction costs in proportion to the number of votes of
limited partners of that PAM Fund to approve the Merger Proposal. Should the
Merger Proposal be approved by one or more PAM Funds and rejected by at least
one PAM Fund, each PAM Fund rejecting the Merger Proposal shall not be required
to pay any of the costs of the Merger, in accordance with the provisions of
Section 25014.7(e)(3) of the Thompson-Killea Act. Further, in the event that the
Merger Proposal is rejected by all of the PAM Funds, the Company shall pay all
of the solicitation expenses in accordance with the provisions of Section
25014.7(g) of the Thompson-Killea Act.
In 1996, the total approximate amounts distributed to the partners of each
PAM Fund are as set forth on the following table:
<TABLE>
<CAPTION>
Distributions to the Distributions to the
PAM Fund Limited Partners General Partner
-------- ---------------- ---------------
<S> <C> <C>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership.............. $ 154,650 $ 17,483
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership.............. $ 230,023 $ 25,810
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership.............. $ 295,925 $ 35,775
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership.............. $ 1,433,425 $ 159,334
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership.............. $ 179,100 $ 19,966
</TABLE>
The total amount distributed by all of the PAM Funds was $2,551,491. All of
the distributions to the limited partners were in the form of cash
distributions. Some of the distributions to the General Partner were accrued.
In contrast to the Partnership, the Company will itself be subject to
federal tax on its income. Holders of Merger Stock will not be subject to
federal tax on such income except to the extent dividends are paid by the
Company. See the section in the Joint Consent Statement/Prospectus entitled
"FEDERAL INCOME TAX CONSEQUENCES." The Company is expected to make significantly
smaller distributions, if any, than the Partnership has made.
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<PAGE>
There can be no assurance that the Merger will achieve any of the benefits
and objectives described above. In addition, certain possible disadvantages and
other risks and special considerations associated with the Merger exist, as
described in the section in the Joint Consent Statement/Prospectus entitled
"RISK FACTORS." Limited Partners should analyze the Merger Proposal and related
transactions, considering all the matters
ALTERNATIVES TO THE MERGER
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal and related transactions. Some of
these alternatives do not contemplate a reorganization. In the mutual opinion of
the PCM Shareholders, the Company and the General Partner, the only viable
alternatives not contemplating a reorganization involve some form of public
registration or offering of securities. The General Partner has considered the
possibility of a registration of Units. In the opinion of the General Partner,
this possibility would fail to provide the Limited Partners with the liquidity
that the Merger Proposal might provide, because of the unsatisfactory market for
publicly traded limited partnership interests. The PCM Shareholders and the
Company have also considered the possibility of merging PCM and the Company
without merging with any of the PAM Funds and thereafter making a public
offering of shares of common stock in the surviving corporation. In the event
the Merger is not consummated, the PCM Shareholders and the Company may elect
this alternative.
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal, each of which contemplates a
reorganization. The General Partner considered the possibility of selling all
Units of the PAM Funds to the Company, and the Company considered purchasing all
such Units, in exchange for shares of common stock of the Company. This
alternative would require the Company and the PAM Funds to comply with certain
tender offer requirements which would make the proposed reorganization more
complicated in terms of statutory compliance. The PCM Shareholders also
considered the possibility of selling all of PCM's assets to the Company, and
the Company considered purchasing all such assets, in exchange for shares of
common stock of the Company. Alternatively, the General Partner considered
winding up and dissolving the PAM Funds and distributing the proceeds of
liquidation to their limited partners. Although a dissolution would provide
those limited partners with immediate liquidity, the General Partner believes
that, because of the type of assets held by the PAM Funds, even an orderly
liquidation would result in a prohibitive discount on the value of the debt
portfolios. Such a dissolution would also result in additional legal,
accounting, appraisal, advertising and sales costs to the PAM Funds, further
diminishing the value of the PAM Funds' assets.
The General Partner believes that the value of the consideration to be
received by the PAM Funds in the Merger would far exceed any of the alternatives
constituting a reorganization listed above, specifically because the PAM Funds'
assets consist primarily of distressed loan portfolios, and such portfolios have
a liquidation value far below their value to either the PAM Funds or the
Company, which can generate substantial revenues from collection activities on
the portfolios.
The PCM Shareholders and the General Partner considered the results of
continuing PCM and the PAM Funds in accordance with their current business plans
and joint venture agreements. A continuation of the PAM Funds in accordance with
their existing business plans would benefit their limited partners to the extent
that those limited partners would receive cash distributions from the proceeds
of the PAM Funds' collection on debt portfolios. If the Merger is consummated,
limited partners of the PAM Funds would no longer receive such cash
distributions. Moreover, the Company currently does not anticipate paying its
shareholders cash dividends. Therefore, a continuation of the Partnership
provides the Limited Partners with cash flow which they will not have if the
Merger is
E-14
<PAGE>
consummated. Finally, if the Merger Proposal is approved, the Limited Partners
will be minority shareholders in the Company, and will lose the ultimate control
over Partnership affairs, which they currently hold.
Alternatively, the Partnership's servicing entity, PCM, currently has the
capacity to service portfolios in excess of those owned by the Partnership and
has the potential for significant growth. PCM has been offered access to
commercial lines of credit and its growth is not contingent upon a continuing
relationship with the Partnership. After consummation of the Merger, Limited
Partners who approve the Merger Proposal will participate in this growth.
Moreover, after consummation of the Merger, the Company will be able to compete
for available portfolios by taking advantage of economies of scale not available
to PCM and the Partnership acting individually. The General Partner believes
that the Limited Partners should have the opportunity to consider and vote upon
these opportunities.
The General Partner believes that the value of the consideration to be
received by the Partnership in the Merger is equal to or greater than the
present value of the Partnership, which assumes that PCM and the Partnership
continue with their current business plans and joint venture agreements.
However, the Company, with access to commercial lines of credit, will be able to
compete more effectively with its competitors for debt portfolios. The General
Partner believes that there will be increased competition for debt portfolios,
as finance companies, collection agencies, and even Wall Street firms, which
offer asset-backed securities, enter the market. Therefore, the General Partner
believes that the Merger Proposal, if approved, would ultimately provide Limited
Partners with a greater return on their investments than they would obtain if
the Partnership continued in its present business arrangements, and would
increase the longevity, and the ultimate return, on the Limited Partners'
investments.
The PCM Shareholders and the General Partner also considered going forward
with the Merger Proposal with the approval of less than all of the PAM Funds,
but rejected this alternative because of economies of scale, the scope and
complexity of existing joint ventures between PCM and the PAM Funds, and the
economics of purchasing, holding, servicing, collecting and selling distressed
debt portfolios. Specifically, as discussed in detail in the section of the
Joint Consent Statement/Prospectus captioned "APPROVAL BY ALL OF THE
PARTNERSHIPS IS REQUIRED", the General Partner does not believe that the Merger
can be fairly consummated unless all of the PAM Funds approve the Merger
Proposal, because it would be unduly burdensome or impossible to evaluate and
apportion the value of the various services provided to the PAM Funds by PCM, on
the one hand, considering the complexity and scope of the various joint ventures
between the PAM Funds and PCM, on the other hand; and, if the Merger Proposal is
approved, PCM will cease to exist by operation of law, and would no longer be
available to provide the same services to a dissenting PAM Fund. The elimination
of PCM as a separate entity would result in the elimination of the acquisition
fees PCM currently charges the PAM Funds. Existing joint ventures, and the
management and servicing fees related to various separate joint ventures between
PCM and the PAM Funds, would similarly merge into a single large business
venture, eliminating those duplicative management and servicing fees. Because
PCM would no longer exist as an independent entity, PAM Funds which did not
participate in the Merger Proposal would lose their present source of portfolio
acquisitions. PCM, which currently has access to commercial lines of credit, has
the right to assign such commercial lines to a successor entity, allowing for
the Company, as such a successor entity, if the Merger is consummated, to enjoy
the benefits of increased credit lines for portfolio acquisitions which are not
currently available to the PAM Funds individually. Moreover, one of the primary
benefits of the Merger Proposal is the consolidation of record keeping and
simplification of the complex accounting requirements imposed on the PAM Funds
under federal and multiple state partnership tax laws.
The General Partner is not aware of any offers made during the preceding 18
months for a
E-15
<PAGE>
merger, consolidation, or combination of any of the PAM Funds; an acquisition of
any of the PAM Funds or a material amount of their assets; a tender offer for or
other acquisition of securities of any class issued by any of the PAM Funds; or
a change in control of the PAM Funds. Other than as set forth herein, the
General Partner is not aware of any factors which may affect materially the
value of the consideration to be received by the Limited Partners in the Merger
or the fairness of the Merger Proposal to the Limited Partners.
RECOMMENDATIONS
After considering the advantages and disadvantages of the Merger Proposal
described above, the General Partner believes that the Merger Proposal is fair
to, and in the best interests of, the Partnership and the Limited Partners. The
General Partner recommends that each Limited Partner vote to approve the Merger
Proposal.
EXCHANGE VALUE AND FAIRNESS OPINION
Bases for the General Partner's Belief as to Fairness. The Fairness Opinion
is specified at length in the section in the Joint Consent Statement/Prospectus
entitled "FAIRNESS OPINION." The General Partner believes that the Merger
Proposal is fair to the Limited Partners, because the General Partner believes
that the Merger will provide Limited Partners with liquidity in their
investments and more simplified tax reporting.
No Limitations Imposed on Scope of Investigation. Kelly & Company,
independent auditors for the General Partner, PCM, the PAM Funds, Income Network
Company and the Company, retained the Fairness Analyst to determine the fairness
from a financial point of view of the Exchange Value in connection with the
Merger Proposal. There were no limitations or restrictions placed on the scope
of the Fairness Analyst's analysis and investigation, and the Fairness Analyst
performed a complete due diligence examination by, among other things, visiting
PCM's facilities in Newport Beach, California; interviewing the President and
Vice-President of PCM; interviewing the President, Chief Financial Officer,
Director of Business Development, and Secretary of the General Partner;
interviewing various personnel employed by Kelly & Company; and interviewing
counsel to the various entities. The Fairness Analyst was allowed full access to
all financial records of PCM, the General Partner, the PAM Funds and all service
providers to those entities, including privileged documents such as tax returns
and audit workpapers.
No Instructions from General Partner, PCM or the Company. Neither the
General Partner, the PCM Shareholders, PCM nor the Company provided instructions
to the Fairness Analyst. Kelly & Company instructed the Fairness Analyst to
conduct an independent investigation, and thereafter render a written opinion to
Kelly & Company, as of the Determination Date, as to whether the Exchange Value
established by the General Partner, the PCM Shareholders and the Company is fair
from a financial point of view to the PAM Funds. Kelly & Company also instructed
the Fairness Analyst to prepare a Fairness Opinion (i) satisfying the valuation
requirements of the Thompson-Killea Act; (ii) potentially useful in meeting the
valuation requirements of Sections 1300 et seq. of the California General
Corporation Law pertaining to PCM Shareholders and Company shareholders who do
not consent to the Merger Proposal and, instead, exercise their rights as
dissenting shareholders ("Dissenting Shareholders"); and (iii) sufficient to
support an opinion regarding the fairness from a financial point of view of the
Merger Proposal and related transactions, addressing the fairness from a
financial point of view of the Merger and related transactions as a whole and to
each of the PAM Funds. Kelly & Company instructed the Fairness Analyst to
perform a due diligence investigation and to review all pertinent documents,
including, but not limited to, financial statements; tax returns; audit work
papers; banking records;
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<PAGE>
balance sheets; income statements; Securities and Exchange Commission reporting
forms; corporate documents such as Certificates or Articles of Incorporation,
Bylaws and minutes; furniture and equipment schedules; insurance policies and
coverages; operating budgets through December 31, 2008 for PCM and the PAM
Funds; office leases; management profiles; portfolio stratification reports; and
daily productivity reports. Kelly & Company also instructed the Fairness Analyst
to research industry sources and databases and economic outlook sources
regarding the financial services and distressed debt industry.
Procedures Followed. As set forth above, the Fairness Analyst conducted a
complete independent investigation focusing on the valuation issues relating to
the "adequate consideration" rule. Adequate consideration is generally
understood to represent the fair market of an asset. Accordingly, in order to
arrive at its opinion regarding the fairness from a financial point of view of
the Exchange Value established for the Units, the Fairness Analyst performed its
research and analyses with the intent of establishing whether the Limited
Partners would receive at least fair market value in exchange for their Units.
"Fair market value" is defined as the price at which an asset would change hands
between a willing buyer and a willing seller when the former is not under any
compulsion to buy and the latter is not under any compulsion to sell, both
parties are able, as well as willing, to trade, and both parties are well
informed about the asset and the market for that asset. The Fairness Analyst
performed an analysis of the material features and characteristics of the
Partnership, the Other Partnerships and PCM, as well as an analysis of the
financial statements and results of operations of each entity. The Fairness
Analyst assumed that PCM will continue its current business plan and structure
and made other reasonable assumptions and estimates regarding distressed loan
portfolio acquisition and pricing, operating expenses, and partnership
distribution policies.
Determinations. The Company, PCM and the General Partner determined the
total indicated values for PCM and for each of the PAM Funds, as set forth in
the following table:
NAME OF PARTNERSHIP OR CORPORATION TOTAL VALUE
- ---------------------------------- -----------
Performance Asset Management Fund, Ltd.,
A California Limited Partnership....................... $ 934,000
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership....................... $ 3,112,000
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership....................... $ 6,000,000
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership....................... $15,846,000
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership....................... $ 4,700,000
Performance Capital Management, Inc.,
a California corporation............................... $44,523,000
Basis for Methods of Arriving at Findings and Recommendations. The Fairness
Analyst valued the assets of each entity by determining the combined value of
such entity's assets, including the value of such entity's cash flows and the
terminal value of such entity's distressed loan portfolios. The Fairness Analyst
determined the asset liquidation value of each entity and calculated the
allocation of assets of each PAM Fund between the General Partner and the
limited partners of such PAM Fund based on such PAM Fund's Agreement of Limited
Partnership. Additional factors considered by the Fairness Analyst, in making
its valuation, include discount factors based on the age and composition of the
various distressed loan portfolios and the Fairness Analyst's determination of
the present value of the respective cash receipts of each entity, as well as the
historical and projected collection costs of distressed loan portfolios.
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<PAGE>
DETERMINATION OF EXCHANGE VALUE AND ALLOCATION OF MERGER STOCK
Exchange Value. The net equity values determined by PCM, the Company and
the General Partner and reviewed by the Fairness Analyst of all of the assets of
the PAM Funds, PCM and the Company, considered together and separately, together
with the book value of the other financial assets of such entities, have been
used to establish the Exchange Value. The Fairness Analyst is unaffiliated with
the Company, Vision, Income Network Company, the PCM Shareholders, PCM or the
General Partner. Kelly & Company, the independent auditors for PCM, the Company,
Income Network Company, the General Partner and the PAM Funds, were referred to
the Fairness Analyst by an accountant unaffiliated with the PCM Shareholders,
PCM, the Company, Income Network Company, the PAM Funds, or the General Partner
and with whom neither the PCM Shareholders, PCM, the Company, Income Network
Company, the PAM Funds, nor the General Partner has conducted any business. The
Fairness Analyst was selected by Kelly & Company entirely on the basis of its
qualifications.
The Company, the General Partner and PCM valued the assets of the
Partnership and PCM, respectively, as if sold in an orderly manner in a
reasonable period of time, plus or minus other balance sheet items, and less the
cost of sale. The valuation was conducted in accordance with the provisions of
Section 25014.7(b)(1) of the Thompson-Killea Act. The valuation was also
conducted in accordance with the provisions of Sections 1300 et seq. of the
California General Corporation Law pertaining to the Dissenting Shareholders.
The compensation to dissenting Limited Partners and Dissenting Shareholders
entitled to compensation for their Units or shares of common stock,
respectively, is based upon the valuation described above. See the section in
the Joint Consent Statement/Prospectus entitled "RIGHTS OF DISSENTING
SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
The purpose of the Fairness Opinion is to confirm to the Company, the PCM
Shareholders and the General Partner the fairness from a financial point of view
of the Merger Proposal and related transactions to the PAM Funds. Neither the
Company, the PCM Shareholders, PCM, nor the General Partner gave the Fairness
Analyst any specific instructions other than the instruction from Kelly &
Company to prepare a fairness opinion (i) meeting the valuation requirements of
the Thompson-Killea Act; (ii) potentially useful in meeting the valuation
requirements of Sections 1300 et seq. of the California General Corporation Law
pertaining to Dissenting Shareholders; and (iii) sufficient to support an
opinion regarding the fairness of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Pursuant to
the Thompson-Killea Act, the Units were valued as if sold in an orderly manner
in a reasonable period of time, plus or minus other balance sheet items, and
less the costs of sale. Pursuant to the provisions of Section 1300 of the
California General Corporation Law, the fair market value of the shares of
common stock held by the Dissenting Shareholders shall be determined as of the
day before the first announcement of the terms of the Merger Proposal and
related transactions, excluding any appreciation or depreciation in consequence
of the Merger Proposal or related transactions, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
The Fairness Opinion will not be updated.
Fairness Opinion. The Exchange Value was determined by PCM, the Company and
the General Partner. The consideration to be paid to the Fairness Analyst was
negotiated by the Fairness Analyst, on the one hand, and Kelly & Company, on the
other hand. The Fairness Analyst has determined that the Exchange Value, as such
consideration, is fair from a financial point of view to each PAM Fund, as
specified in the Fairness Opinion. The compensation paid to the Fairness Analyst
was not contingent upon the findings of the fairness of the Exchange Value, such
consideration or the Merger or the consummation or approval of the Merger
Proposal or related transactions. The Fairness Opinion relates to the fairness
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<PAGE>
from a financial point of view of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Because the
Merger is contingent upon the approval of the Merger Proposal by all of the PAM
Funds, the PCM Shareholders, and the Company shareholders, the Fairness Opinion
did not consider possible combinations of less than all of the PAM Funds in the
Merger. A copy of the Fairness Opinion is included in the Joint Consent
Statement/Prospectus as Appendix G.
The Fairness Opinion takes into account all of the assets of each of the
PAM Funds, PCM, and the Company. The intangible assets of the PAM Funds and PCM
consist of distressed financial debt instruments and obligations. The Fairness
Analyst also considered tangible assets of the PAM Funds, PCM and the Company.
The tangible assets of the PAM Funds and the Company were determined to be
negligible. The tangible assets of PCM were determined to be more considerable
and include furniture, computers and business equipment. The aggregate value of
the assets of the PAM Funds has been determined to be $30,592,000. The aggregate
value of the assets of PCM has been determined to be $44,523,000.
Fairness Opinion Will Not Be Updated. The Fairness Opinion will not be
updated. A copy of the Fairness Opinion is included with the Joint Consent
Statement/Prospectus as Appendix G. Although the General Partner is not aware of
any factors that may materially affect the fairness of the Merger Proposal or
the determination of the Exchange Value referenced in the Fairness Opinion, it
is possible that changes in the financial markets between the date of the
Fairness Opinion and the date the Merger, if approved, is consummated, might
affect the conclusions of the Fairness Analyst as specified in the Fairness
Opinion. If the Fairness Opinion were to be updated by the Fairness Analyst at
or near the date of the consummation of the Merger, there can be no assurances
that the Fairness Analyst's opinions and conclusions would not be materially
amended or revised.
Exchange of Assets for Shares. On the Closing Date, if the limited partners
of all five PAM Funds approve the Merger Proposal, the PAM Funds and PCM will
merge with and into the Company. Pursuant to the Merger Agreement, all of the
assets of the PAM Funds will be exchanged for shares of the Merger Stock in
accordance with the Exchange Value, determined to be fair to the PAM Funds by
the Fairness Analyst.
The following table summarizes the valuation of PCM and the PAM
Funds based on 7,511,500 allocable shares of Merger Stock:
<TABLE>
<CAPTION>
Percentage of
Aggregate Number of
Indicated Value Indicated Value Shares of Merger
(Rounded to the (Rounded to the Stock Allocated
Nearest $1,000) Nearest 1/10 of 1%) to Entity
--------------- ------------------ ---------
<S> <C> <C> <C>
PAM ........................ $ 934,000 1.2% 93,398
PAM II ..................... 3,112,000 4.1 311,202
PAM III .................... 6,000,000 8.0 600,003
The Partnership ............ 15,846,000 21.1 1,584,596
PAM V ...................... 4,700,000 6.3 470,002
----------- ----- -----------
Sub-Total ............. $30,592,000 40.7% 3,059,201
PCM ........................ 44,523,000 59.3 4,452,299
----------- ----- -----------
Total ................. $75,115,000 100.0% 7,511,500
=========== ===== ===========
</TABLE>
RISKS AND POTENTIAL ADVERSE EFFECTS
THE MERGER AND ACQUISITION OF SHARES OF THE MERGER STOCK INVOLVES
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VARIOUS RISKS, AND LIMITED PARTNERS SHOULD CAREFULLY CONSIDER THE MATTERS
DISCUSSED UNDER THE SECTION ENTITLED "RISK FACTORS" IN THE JOINT CONSENT
STATEMENT/PROSPECTUS, INCLUDING THE FOLLOWING:
History of Losses. PCM and the PAM Funds have a history of losses, because
PCM and the PAM Funds' accounting is predicated on return of capital and not a
return on capital. For financial statement purposes, the cash received from
collections on distressed loan portfolios does not appear as revenue, but goes
to offset the particular entity's basis in the respective portfolios. This has
the effect of reducing the respective entity's assets as presented on the
financial statements.
No Operating History. Since its formation, the Company has had no
operations. The only historical financial information presented in the Joint
Consent Statement/Prospectus relates to the business operations of the PAM Funds
and PCM.
Significant Reduction in Distributions. The Partnership historically made
monthly cash distributions to the Limited Partners until those distributions
were suspended in preparation for the Merger Proposal. THE COMPANY CURRENTLY
ANTICIPATES THAT IT WILL NOT PAY CASH DIVIDENDS. See that portion of the Joint
Consent Statement/Prospectus entitled "Dividend Policy" and "SUMMARY --
Disadvantages of the Merger and Related Transactions."
In contrast to the Partnership, the Company will be subject to federal and
state income taxes imposed on its income. Holders of Merger Stock will not be
subject to federal or state income taxes imposed on such income, except to the
extent dividends are paid by the Company. See that portion of the Joint Consent
Statement/Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES." Additionally,
the Company expects to pay no dividends in the foreseeable future. It is
important for each Limited Partner to realize that the actual amount of
dividends, if any, to be paid will be determined by the Board of Directors of
the Company, in its sole and absolute discretion, generally taking into account
a number of factors, including operating performance, liquidity, capital
requirements, and the Company's business plan and growth strategies. There can
be no assurance that the Company's anticipated policy in regard to dividend
payments will not be modified by the Board of Directors of the Company.
DIVIDEND DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE IN THE SOLE AND ABSOLUTE
DISCRETION OF THE COMPANY'S BOARD OF DIRECTORS AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE COMPANY'S CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S
FINANCIAL CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS
AS THE COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Change in Nature of Investment. The Partnership is a limited partnership
organized under California law. The Company is a Delaware corporation. The
Partnership has a finite term of existence and is structured to dissolve when
its assets are liquidated. In contrast, the Company has a perpetual term and
intends to continue its operations for an indefinite time period. To the extent
the Company sells or refinances its assets, the net proceeds therefrom generally
will be retained by the Company for working capital and new investments, rather
than being distributed to shareholders in the form of dividends.
Change in Voting Rights. Under the Partnership's Agreement of Limited
Partnership ("Partnership Agreement") and applicable California law, the Limited
Partners have voting rights only as to major transactions of the Partnership
(e.g., amendment of the Partnership Agreement, removal of the General Partner,
election of a new General Partner, sale of all the assets of the Partnership,
and dissolution of the Partnership). Otherwise, all decisions relating to the
operation and management of the
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Partnership are made by the General Partner. Certain major transactions of the
Company, including most amendments to the Company's Certificate of
Incorporation, may not be consummated without the approval of shareholders
holding at least a majority of the outstanding voting stock entitled to vote.
Notwithstanding the foregoing, certain transactions of the Company, such as the
sale of all of the assets of the Company to an affiliate of the Company, must be
approved by at least 90% of the issued and outstanding voting stock of the
Company entitled to vote. To the extent that the Company will have issued and
outstanding shares of its voting stock held of record by 100 or more persons,
adoption of additional anti-takeover provisions may require a supermajority
(i.e., two thirds) vote to adopt. Subject to the provisions of the Company's
Certificate of Incorporation, as amended, and Bylaws regarding certain
anti-takeover provisions specified in the portion of the Joint Consent
Statement/Prospectus captioned "Anti-Takeover Provisions," each share of the
Company's common stock will have one vote, and the Company's Certificate of
Incorporation, as amended, permits the Board of Directors of the Company to
classify and issue capital stock in one or more classes having voting power
which may differ from that of the Merger Stock. See that portion of the Joint
Consent Statement/Prospectus entitled "COMPARISON OF UNITS AND MERGER STOCK."
Change in Duties Owed by General Partner. Regarding the Partnership and the
Company, the General Partner and the Board of Directors of the Company,
respectively, owe fiduciary duties to their constituent parties. Some courts
have interpreted the fiduciary duties of members of a board of directors in the
same manner as the duties of a general partner in a limited partnership. Other
courts, however, have indicated that the fiduciary obligations of a general
partner to limited partners are greater than those owed by a director to
stockholders. Therefore, although it is unclear whether, or to what extent,
there are differences in such fiduciary duties, it is possible that the
fiduciary duties of the directors of the Company to its shareholders may be less
than those of the General Partner to the Limited Partners. See that portion of
the Joint Consent Statement/Prospectus entitled "COMPARISON OF UNITS AND MERGER
STOCK."
Changes in Compensation Arrangements. Under the Partnership Agreement,
distributions payable to the General Partner are specified and cannot be changed
by the General Partner without the approval of the Limited Partners. If the
Merger is consummated, the compensation paid to officers and directors of the
Company will be determined by a Compensation Committee for the Company
established by the Company's Board of Directors, and the terms and conditions of
employment of those officers and directors, including changes in compensation
arrangements, will not be subject to the direct approval or control of the
shareholders of the Company. See the summary compensation tables under the
caption "Executive Compensation" in the portion of the Joint Consent
Statement/Prospectus captioned"MANAGEMENT OF THE GENERAL PARTNER, PCM AND THE
COMPANY".
Taxation of Corporation and Shareholders. The Partnership does not pay any
federal or state income taxes. After consummation of the Merger, the Company
will be subject to federal and state income taxes. Shareholders of the Company
will also be required to pay federal and state income taxes on any dividends
that they may receive from the Company and on any gain from the sale or exchange
of the Company's common stock, including the Merger Stock. Therefore, while in
partnership form the income of the Partnership will be subject to federal state
and state income tax only once (i.e., on the Limited Partners) in corporate form
the income of the Company will be subject to federal and state income taxes
twice (i.e., once on the Company and once on its shareholders to the extent they
receive dividends or recognize gain on the sale or exchange of securities). See
that portion of the Joint Consent Statement/Prospectus entitled "FEDERAL INCOME
TAX CONSEQUENCES" and "OTHER TAX CONSEQUENCES."
Uncertainty Regarding Trading and Market Price of Common Shares. There is a
probability
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that the Merger Stock may initially trade at prices substantially below the
value assigned to the Merger Stock in the Merger Proposal. Moreover, the Merger
Stock may not immediately be listed or approved for listing on any regional or
national securities exchange or otherwise designated or approved for designation
upon notice of issuance as a national market system security on an interdealer
quotation system maintained by the National Association of Securities Dealers,
Inc. To the extent that the Merger Stock may trade, trading prices for the
Merger Stock will be influenced by many factors, including the market for the
Merger Stock, the Company's dividend policy, the possibility of future sales of
Merger Stock by the Company or its shareholders of the Company's common stock,
investors' perception of the Company and its businesses, and general economic
and stock market conditions. No prediction can be made as to the price at which
the Merger Stock will trade. Moreover, no guaranty or assurance can be given
that the Merger Stock will trade at all. Limited Partners and PCM Shareholders
have not previously had access to an active trading market for the Units and
shares of PCM's common stock, respectively. Therefore, it is possible that they
may wish to sell their Merger Stock from time to time after consummation of the
Merger. There can be no assurance that the Company's efforts to stabilize the
price of the Merger Stock by limiting the sale of the Merger Stock will be
successful. The sale of the Merger Stock after the Merger might have an adverse
effect on the market price of the Merger Stock. Moreover, various state
regulatory agencies may require further limitations on the transfer of the
Merger Stock.
Limited Public Market. There has been no public trading market for the
Company's securities. Although the Company intends to apply for listing of the
Merger Stock on a regional or national securities exchange, there is no
assurance that the will be so listed. If the Merger Stock is so listed, such a
listing provides no assurance that an active, receptive trading market will
develop for the Merger Stock or, if developed, will be sustained.
Potential Price Volatility. If a public market develops for the Merger
Stock, there may be significant volatility in the market price of the Merger
Stock. Period-to-period fluctuations in the Company's revenues and financial
results may have a significant impact on the perceived value of the Company and,
therefore, on the market price of the Merger Stock. The price of the Merger
Stock may be significantly affected by such factors as the financial results and
operating performance of the Company. Additionally, in recent years, the stock
market has experienced significant price and volume volatility, and market
prices for many companies, particularly small and emerging growth companies,
have experienced significant price fluctuations not necessarily related to the
operating performance of those companies. The market price for the Merger Stock
may be affected by general stock market volatility.
Possible Dilution. The percentage interest of holders of Merger Stock in
the assets, liabilities, cash flow and results of operations of the Company, as
well as the percentage voting power of such holders, may be diluted (a) if the
Company has, prior to solicitation of consents to the Merger Proposal, issued
either preferred shares or common shares which are currently outstanding and
held by existing shareholders of the Company, or (b) by the issuance of shares
of the Company's common stock in any future offering. In addition, the Company
may issue additional equity securities in the future (for example, in a public
offering), which would dilute the percentage ownership of the then current
shareholders of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock, and which is convertible to common stock subject to
certain conditions precedent. See a further discussion of Mr. Galewick's
preferred stock under the caption "Control by Principal Shareholder;
Anti-takeover Measures" below. Under NASDAQ National Market rules, the Company
may not issue shares of its common stock equal to 20% or more of the then
outstanding shares of its common stock in connection with the acquisition of the
shares or assets of another entity without shareholder approval. Issuances by
the Company of additional shares of its common stock or preferred stock could
adversely affect existing shareholders' equity interests in the Company and the
market price of the Merger Stock.
Shares Eligible for Future Sale. Sales of shares of the Company's common
stock in the public market after consummation of the Merger could adversely
affect the market price of the Merger Stock
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and could impair the Company's future ability to raise capital through the sale
of equity securities. Upon consummation of the Merger, the Company will have
7,512,500 shares of common stock issued and outstanding. The transfer,
assignment, sale, conveyance, hypothecation, encumbrance, or other alienation of
the shares of the Merger Stock shall be limited. See the portion of the Joint
Consent Statement/Prospectus entitled "Merger Stock Will Be Restricted."
Control by Principal Shareholder; Anti-takeover Measures. If the Merger
Proposal is approved and the Merger is consummated, Vincent E. Galewick shall
beneficially own approximately 62% of the then issued and outstanding shares of
the Company's common stock. As a result, Vincent E. Galewick, in his capacity as
a shareholder of the Company, would be able to significantly influence or
control many matters acquiring approval by the shareholders of the Company,
including the election of directors. The Company's Certificate of Incorporation
provides for preferred stock, the terms of which may be fixed by the Board of
Directors of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock. Each share of that preferred stock is convertible into 20
shares of the Company's common stock, subject to certain conditions precedent
relating to the acquisition, by any single shareholder, of 10% or more of the
issued and outstanding shares of the Company's common stock. Moreover, if the
Company becomes a "listed corporation", as that term is defined in the portion
of the Joint Consent Statement/Prospectus entitled "Elimination of Cumulative
Voting", the directors of the Company will be divided into 2 classes, and the
holders of the Merger Stock will not be permitted to cumulate their votes for
directors. Those provisions could have the effect of delaying, deferring or
preventing a change in control of the Company.
Addition of Provisions That May Discourage Changes of Control. The
Company's organizational documents and Delaware law contain provisions that may
delay, defer or prevent a takeover attempt that a shareholder might consider to
be in such shareholder's best interest, including offers that might result in a
premium over the market price for Merger Stock.
Conflicts of Interest. The General Partner has a fiduciary duty to the
Partnership. However, the General Partner is also affiliated with Income Network
Company, which is the Soliciting Agent, Vision, PCM and the Company. The
Company, Vision, Income Network Company, PCM and the General Partner have a
common shareholder, Vincent E. Galewick, and common directors and officers.
Several of the directors of the Company are employed independently of the
Company and those persons may continue to engage in other activities. The
persons serving as officers and directors of the Company shall have conflicts of
interest in allocating time, services, and functions between the other business
ventures in which those persons may be or become involved and, also, the affairs
of the Company. As a result, conflicts of interest between the Company and the
other activities of those persons may occur from time to time.
The Company will attempt to resolve any such conflicts of interest in favor
of the Company. The officers and directors of the Company are accountable to the
Company and the shareholders of the Company as fiduciaries (subject to the
restrictions set forth in the paragraph headed "Limitation on Liability of
Officers and Directors of the Company" below), which requires that such officers
and directors exercise good faith and integrity in handling the Company's
affairs. Moreover, the officers and directors of the Company believe that the
Company will have sufficient staff, consultants, employees, agents, contractors,
and managers to adequately conduct the business of the Company.
The General Partner has not retained an unaffiliated representative to act
on behalf of the Limited Partners for purposes of negotiating the Merger
Proposal. The General Partner does not believe retaining such a representative
is necessary, because an unaffiliated third party, Willamette Management
Associates, Inc., as the Fairness Analyst, has been retained to provide the
Fairness Opinion as to the fairness of the Merger Proposal to the Company, the
PCM Shareholders and the PAM Funds. A copy of the Fairness Opinion is included
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with the Joint Consent Statement/Prospectus as Appendix G. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
However, because there has been no separate unaffiliated representation of
the Limited Partners in the negotiation of the Merger Proposal, the Limited
Partners are presented with risks inherent in multiple representation.
Specifically, the persons negotiating the Merger Proposal may have attempted to
balance the interests of the Partnership and the Limited Partners with the
interests of the PCM Shareholders and the Company. Aggressive advocacy solely on
behalf of the Limited Partners in the negotiations relating to the Merger
Proposal might have resulted in more favorable treatment for the Limited
Partners compared to the more even-handed approach which was followed in
negotiating the Merger Proposal.
The General Partner and the Limited Partners have conflicts of interest
relating to the Merger Proposal because, if the Merger Proposal is approved, the
General Partner will cease providing management services to the Partnership,
with a resulting loss of income. The Merger Stock which the General Partner
receives upon the winding up and dissolution of the Partnership may be less
valuable than the participation in the distributions of the Partnership which
the General Partner currently receives.
A more significant conflict of interest exists between Vincent E. Galewick,
the sole shareholder of the General Partner, on the one hand, and the Limited
Partners, on the other hand, because Mr. Galewick is also the majority
shareholder of PCM and the sole shareholder of the Company. The allocation of
Merger Stock pursuant to the Merger Proposal creates a conflict between all the
parties included in the Merger Proposal, including the Limited Partners, on the
one hand, and Mr. Galewick and the General Partner, on the other hand. If the
Merger Proposal is approved, Mr. Galewick will own approximately 62% of the then
issued and outstanding common stock of the Company. Because of this conflict of
interest, Mr. Galewick did not participate in the negotiations regarding the
Merger Proposal.
No Arm's Length Agreements. Certain agreements and arrangements, including
those relating to compensation and payments between the Company and its
affiliates, are not the result of arm's length negotiations. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS". Most significantly, PCM and the Partnership are parties
to joint venture agreements pursuant to which PCM provides collection and
servicing activities. The joint venture agreements between PCM and the
Partnership have been filed as exhibits to the Company's Registration Statement
on Form S-4, of which the Joint Consent Statement/Prospectus is a part. PCM also
identifies and acquires distressed loan portfolios and sells them to the
Partnership at negotiated prices, which typically include a mark-up of as much
as 37%. Vision, an affiliate of PCM, the General Partner, Income Network Company
and the Company, provides human resources (employees) to PCM and the General
Partner pursuant to an arrangement not the result of arm's-length negotiations.
In the event the Merger is consummated, Vision will no longer provide those
human resources to the Company.
Speculative Investment Due to Market Factors. The business objectives of
the Company must be considered speculative because the market for distressed
consumer indebtedness will have a significant influence on the operations of the
Company. As there can be no assurance that changing market factors will not
adversely affect the operations of the Company, no assurance can be given that
the PCM Shareholders and Limited Partners will realize a return on their
exchange of shares of common stock of PCM or Units, respectively, for Merger
Stock, or that the Company shareholders will not ultimately lose their
investments in the Company completely.
Dependence on Management. All decisions regarding management of the
Company's affairs will be made exclusively by the officers and directors of the
Company. Accordingly, no person should
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vote in favor of the Merger Proposal unless that person has carefully evaluated
the personal experience and business performance of the officers and directors
of the Company and is willing to entrust all aspects of management to the
officers and directors of the Company, or their successors.
Dependence on Key Personnel. The Company is dependent upon the efforts and
abilities of its senior management, particularly those of Vincent E. Galewick.
The loss of Mr. Galewick could have a material adverse affect on the business
and prospects of the Company. The officers of the Company believe that all
commercially reasonable efforts have been made to minimize the risks attendant
with such dependence on Mr. Galewick and the loss or departure of Mr. Galewick.
The General Partner currently maintains a key person life insurance policy in
the amount of $2,000,000 on Mr. Galewick and, if the Merger is consummated, the
Company anticipates maintaining such a policy on Mr. Galewick. Moreover, as the
prospective owner of a significant portion of the issued and outstanding common
stock of the Company, Mr. Galewick will have an incentive to remain with the
Company. However, there is no assurance that Mr. Galewick will remain with the
Company or that, if he should elect to leave the Company, his replacement would
cause the Company to operate profitably.
Limitation on Liability of Officers and Directors of the Company. Section
145 of the Delaware General Corporation Law specifies that the Certificate of
Incorporation of a Delaware corporation may include a provision eliminating or
limiting the personal liability of a director or officer to that corporation or
its shareholders for damages for breach of fiduciary duty as a director or
officer, but such a provision must not eliminate or limit the liability of a
director or officer for (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) unlawful distributions
to stockholders. The Certificate of Incorporation of the Company includes a
provision eliminating or limiting the personal liability of the officers and
directors of the Company to the Company and its shareholders for damages for
breach of fiduciary duty as a director or officer. Moreover, the Company's
Bylaws provide certain indemnification to a controlling person, director or
officer which affects such a person's liability while acting in a corporate
capacity. The Company entered into various indemnification agreements with its
officers and directors, copies of which are attached to the Registration
Statement on Form S-4 as exhibits thereto. Moreover, the Merger Agreement
provides indemnification for directors and officers of the Company. Accordingly,
the officers and directors of the Company may have no liability to the
shareholders of the Company for any mistakes or errors of judgment or for any
act or omission, unless such act or omission involves intentional misconduct,
fraud, or a knowing violation of law or results in unlawful distributions to the
shareholders of the Company.
DISCLOSURE OF POSITION OF SECURITIES AND EXCHANGE COMMISSION
REGARDING INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE, UNENFORCEABLE.
No Limitation on Indebtedness. The Certificate of Incorporation and Bylaws
of the Company do not contain any limitation on the amount or percentage of
indebtedness, funded or otherwise, the Company might incur. The Indenture
Agreement pursuant to which those Limited Partners who exercise their dissenters
rights ("Dissenting Limited Partners") will be paid for their Units ("Indenture
Agreement") provides that the assets of the Partnership will not be leveraged
more than 70% in relation to any unsecured subordinated debentures issued
pursuant to the Merger Agreement. Accordingly, the
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Company could become leveraged to the extent permitted by the Indenture
Agreement, resulting in an increase in debt service that could adversely affect
the Company's ability to make distributions to its stockholders and result in an
increased risk of default on its obligations. The Company does not believe that
the debt limitations imposed by the Indenture Agreement will have a significant
impact on the operations of the Company. However, if the Merger is consummated,
the Board of Directors of the Company will determine policies with respect to
financing or refinancing of assets and policies with respect to borrowings by
the Company.
Loss on Dissolution of the Company. In the event of a dissolution of the
Company, the proceeds realized from the liquidation of the Company's assets, if
any, will be distributed to holders of the Company's common stock only after
satisfaction of claims of the Company's creditors and, in some situations,
holders of the Company's preferred stock. The ability of a holder of shares of
the Company's common stock, including Merger Stock, to recover any monies
whatsoever in that event will depend on the amount of funds realized and the
claims to be satisfied therefrom.
Remuneration of Directors, Officers and Employees. Compensation received by
officers, directors and employees of the Company will be determined from time to
time by the Board of Directors of the Company. Officers, directors, and
employees of the Company will be reimbursed for any out-of-pocket expenses
incurred on behalf of the Company.
Receipt of Compensation Regardless of Profitability. The officers,
directors and employees of the Company may receive significant compensation,
payments, and reimbursements regardless of whether the Company operates at a
profit or at a loss.
Year 2000 Computer Compliance. Over the next two years, most large
companies will face a potentially serious business problem because many computer
software applications and computer equipment developed in the past may not
properly recognize calendar dates beginning in the Year 2000. As the century
date change occurs, date-sensitive systems may recognize the Year 2000 as the
Year 1900, or not at all. This inability to recognize or treat properly the Year
2000 may cause computer systems to process financial and operational information
incorrectly, which could have a material adverse effect on the results of
operations of all of the parties to the Merger. There can be no assurance that
PCM (or, if the Merger Proposal is approved and the Merger is consummated, the
Company) will complete the necessary modifications and conversions to the
computer software and operating systems necessary to properly operate or manage
date-sensitive information beyond December 31, 1999. Even if PCM (or, if the
Merger Proposal is approved and the Merger is consummated, the Company)
completes all necessary modifications and conversions to its computer software
and operating systems, there can be no assurance that the necessary
modifications and conversions by those third party institutions and entities
with which PCM and the PAM Funds conduct business will be completed in a timely
manner, which could have a material adverse effect on the results of operations
of PCM and the PAM Funds (or, if the Merger Proposal is approved and the Merger
is consummated, on the results of operations of the Company).
RIGHTS OF DISSENTING LIMITED PARTNERS
Offer to Purchase Units of Dissenting Limited Partners. The Merger Proposal
is also being structured to provide Limited Partners who dissent to the Merger
("Dissenting Limited Partners") the dissenter's rights specified in the
Thompson-Killea Act. The Thompson-Killea Act requires that the Dissenting
Limited Partners receive the appraised value of their Units in the form of cash,
freely tradeable securities, or secured or unsecured debt instruments satisfying
certain statutory requirements or, in the alternative, receive or retain a
security with substantially the same terms and conditions as the
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security originally held, provided that the receipt or retention of that
security is not a step in a series of subsequent transactions that directly or
indirectly involves future combinations or reorganizations of one or more
roll-up participants. Securities received or retained will be considered to have
the same terms and conditions as the security originally held if (a) there is no
material adverse change to Dissenting Limited Partners' rights, including, but
not limited to, rights with respect to voting, the business plan, or the
investment, distribution, management compensation and liquidation policies of
the Partnership or resulting entity; and (b) the Dissenting Limited Partners
receive the same preferences, privileges, and priorities as they had pursuant to
the security originally held.
The Company is satisfying this requirement by offering to purchase the
Units of any Dissenting Limited Partner with an unsecured subordinated debenture
("Debenture") issued under an Indenture Agreement ("Indenture Agreement"). The
Merger Proposal and the related transactions, including the dissolution and
liquidation of the Partnerships ("Dissolutions" and "Liquidations") have also
been structured to comply with the other protections afforded by the
Thompson-Killea Act. A copy of the Indenture Agreement is included with the
Joint Consent Statement/Prospectus as Appendix M. A copy of the Debenture is
included with the Joint Consent Statement/Prospectus as Appendix N. See that
portion of the Joint Consent Statement/Prospectus entitled "RIGHTS OF DISSENTING
SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
Unsecured Subordinated Debentures. A Dissenting Limited Partner who
exercises his or her dissenter's rights will receive an unsecured subordinated
debenture ("Debenture") under an Indenture Agreement ("Indenture Agreement").
The Indenture Agreement provides for a Trustee and specifies that (a) the title
of the Debenture shall be "Unsecured Subordinated Debenture Due January 31,
2005"; (b) the amount at which such Debenture will be issued shall be the value,
in United States currency, of such Dissenting Limited Partner's interest in the
Partnership, determined in accordance with the Exchange Value, as of the
Determination Date, if such Dissenting Limited Partner perfects his or her
dissenter's rights pursuant to the terms of the Merger; (c) the date on which
the principal of the Debenture is payable shall be January 31, 2005, which date
or dates may be fixed or extendible; (d) the rate or rates at which the
Debenture shall bear interest shall be a variable interest rate equal to the
federal rate as determined in accordance with Section 1274 of the Internal
Revenue Code of 1986, payable on January 1 and July 1 of each year and based on
a 365-day year; (e) the Debenture shall be issued within 30 days of the closing
date of the Merger; (f) the Debenture shall limit total leverage to 70 percent
of the appraised value of the assets previously owned by the Partnership; and
(g) the Debenture shall be prepaid with 80 percent of the net proceeds of any
sale or refinancing of the assets previously owned by the Partnership. The
Indenture Agreement does not provide for a sinking fund.
A Limited Partner who does not consent to the Merger Proposal may, but is
not required to, exercise his or her dissenter's rights by completing and
signing Part V of the Letter of Transmittal and Consent Statement ("Consent
Statement"). Such a non-consenting Limited Partner, therefore, will become a
"Dissenting Limited Partner". Dissenting Limited Partners will receive, pursuant
to those dissenter's rights, a Debenture issued under the Indenture Agreement in
an amount equal to the Exchange Value of such Dissenting Limited Partner's
Units. Each Dissenting Limited Partner will be provided with a Debenture within
30 days following the consummation of the Merger and related transactions for
his or her Units in the amount as specified above.
LIMITED PARTNERS WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS ARE CAUTIONED THAT
FAILURE TO COMPLETE PART V OF THE CONSENT STATEMENT WILL RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
See the portion of the Joint Consent Statement/Prospectus entitled "RIGHTS
OF DISSENTING
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LIMITED PARTNERS" for additional information regarding Limited Partners'
dissenters' rights.
Compliance with and Approval from Federal and State Authorities. The Merger
Proposal and related transactions will not be completed if any moratorium on
transactions of its type are imposed by federal, state or regulatory authorities
or if any state securities authority imposes any restriction upon, or prohibits
any aspect of, the transactions contemplated by the Merger Proposal and related
transactions, which in the judgment of the Company, renders the Merger Proposal
and related transactions undesirable or impractical.
Comparison of Units and Merger Stock. The portion of the Joint Consent
Statement/Prospectus entitled "SUMMARY COMPARISON OF UNITS AND MERGER STOCK"
highlights a number of the significant differences between the Partnership (and
the Units) and the Company (and the Merger Stock) relating to, among other
things, form of organization, investment objectives, policies and restrictions,
asset diversification, capitalization, management structure compensation and
fees, and investor rights, and compares certain legal rights associated with the
ownership of the Units and Merger Stock, respectively. These comparisons are
intended to assist the Limited Partners in understanding how their investments
will be changed if, as a result of the Merger and related transactions, their
Units are exchanged for shares of Merger Stock.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following information is intended to provide the Limited
Partners with a summary of all material federal income tax consequences of
general application to the Company and Limited Partners associated with the
Merger Proposal. This summary does not consider all tax matters that may affect
the Partnership, the Company, or the Limited Partners, including any state,
local, foreign or other matters, and does not consider various facts or
limitations applicable to any particular Limited Partner, or special tax rules
that may apply to certain Limited Partners that may modify or alter the results
described herein.
Except as otherwise indicated, statements of legal conclusions regarding
tax treatments, tax effects or tax consequences present the opinions of John H.
Brainerd, Attorney at Law and tax counsel for the Company, based on the Internal
Revenue Code of 1986 ("Code") and applicable Treasury Regulations thereunder,
each as amended and in effect on the date hereof, and on reported judicial
decisions and published positions of the Internal Revenue Service ("IRS"). No
rulings have been requested from the IRS concerning any of the matters presented
in the Joint Consent Statement/Prospectus and the IRS will generally not issue
rulings on transactions such as the Merger Proposal. In some cases, particularly
those as to which tax counsel's opinion is qualified, there is a risk that the
IRS will disagree with the conclusions of tax counsel. The laws, regulations,
administrative rulings and judicial decisions that form the basis for
conclusions with respect to the tax consequences of the Merger Proposal are very
complex and are subject to change at any time.
The tax opinion of John H. Brainerd is filed as Exhibit 8 to the
Registration Statement, of which the Joint Consent Statement/Prospectus
constitutes a part. Upon receipt of a written request of a Limited Partner (or
such Limited Partner's representative who has been so designated in writing)
addressed to the Information Agent at 4100 Newport Place, Suite 400, Newport
Beach, California 92660, a copy of the tax opinion will be transmitted promptly,
without charge, by the General Partner.
The Limited Partners, PCM shareholders and Company shareholders should be
aware that there is no direct authority of general applicability governing the
federal income tax treatment of transactions such as the Merger Proposal that
are structured as partnership mergers, because this structure is an approach
made available by recent developments in California partnership law. Therefore,
in rendering
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his opinions, John H. Brainerd has relied on authorities addressing the
consequences of analogous transactions that used similar structures.
Accordingly, although there appears to be no controlling authority contrary to
Mr. Brainerd's conclusions, it is possible that the IRS would take a different
position if it reviewed the tax consequences of the Merger Proposal.
Differences Between Partnership Units and Merger Stock. A limited
partnership is a pass-through entity for federal income tax purposes. This means
that a limited partnership is not liable for federal income tax on its taxable
income. Rather, a limited partnership passes its income (or loss) through to its
owners (i.e., general and limited partners) in proportion to their relative
interests in profits and losses. This is known as allocating a partnership's
income and loss. Many items of income, deduction, gain, loss, and credits are
allocated separately to each partner in proportion to such partner's interest in
those items as specified in such limited partnership's agreement of limited
partnership. The character of each item passed through to a partner remains the
same with such partner as it was with the limited partnership. Each partner
includes these items on such partner's income tax return and pays tax based on
those items combined with such partner's other items of income, deduction, gain,
loss or credits. Thus, tax is imposed on the partner regardless of whether the
limited partnership actually distributes any cash or property to that partner.
Therefore, it is the allocation, not the distribution, of income (or loss) to a
partner that results in tax effect for that partner.
A partner has a basis in the limited partnership interest he or she holds
which is generally equal to either the cost of that limited partnership
interest, if purchased, or, if not purchased, the amount of any cash or adjusted
basis of any other property that partner transferred to the limited partnership,
increased (or decreased) by that partner's share of the limited partnership's
income (or loss) and decreased by the amount of any cash (or the basis of any
property) distributed to that partner. Upon sale of his or her limited
partnership interest, a partner realizes gain equal to the amount received for
the limited partnership interest (including their share of partnership
liabilities) less that partner's adjusted basis in the limited partnership
interest. The partner's gain (or loss) upon sale is generally capital gain (or
loss), but may be characterized as ordinary gain (or loss) to the extent of that
partner's share of certain "hot" assets held by the limited partnership.
Because a limited partnership does not pay tax on income it earns (but
rather the general partner and limited partners pay tax on such income),
partners of a limited partnership are subject to federal income tax on income
earned in the business conducted by the limited partnership only once.
Accordingly, as owners of the Partnership, by their Units, Limited Partners
receive the federal income tax treatment just described. Regarding the
Partnership, the number of Units owned by a partner (either the General Partner
or any Limited Partner) will determine the amount of income or loss allocated to
such partner by the Partnership.
A corporation is a taxable entity and pays federal income tax at rates
ranging from 15% to 39% on its taxable income. A shareholder of a corporation is
generally not taxed on any income earned by that corporation until that
corporation distributes either cash or property to that shareholder or that
shareholder sells or exchanges his or her shares of stock issued by that
corporation at a gain. A corporation often makes distributions to its
shareholders in proportion to their interests in that corporation, but it need
not do so. When cash or property is distributed, each portion of the
distribution will be characterized in one of the following three ways: (i) as a
dividend, (ii) as a capital gain, or (iii) as a return of capital. The portion
of a distribution treated as a dividend is taxed at ordinary federal income tax
rates, which, for individuals, are as much as 39.6%. Upper tax bracket
individuals are subject to a phaseout of their personal exemptions, and a
restriction on itemized deductions, which, however, in combination under certain
circumstances, can bring the actual maximum effective federal rate to more than
47%. The portion treated as capital gain will reduce the adjusted basis in the
shareholder's stock and generally be taxed at
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a maximum 28% rate until the adjusted basis reaches zero. The portion treated as
return of capital will not be taxed. The amount of any distribution treated in
any of the three alternative ways may differ for each shareholder, and will
depend upon the value of the cash and property received, the percentage interest
in the corporation owned by the shareholders receiving distributions and each
shareholder's basis in his or her shares. Because corporations are taxable on
their own taxable income, and because shareholders may be taxed again on that
same income, if it is distributed to shareholders in the form of cash or
property, or if that income is realized by the sale or exchange of shares at a
gain, there are two levels of potential tax upon income earned by a corporation.
A shareholder's basis in his or her shares is generally equal to the cost of the
shares, if purchased, or, if not purchased, the amount of any cash and basis of
other property contributed to the corporation, decreased by the amount of any
distributions treated as a return of capital. Upon a sale of shares, a
shareholder's gain (or loss) will be equal to the amount received for those
shares less his or her basis in those shares. The character of such gain (or
loss) will generally be capital in nature. As holders of interests in a
corporation (the Company), the owners of Merger Stock will be subject to the tax
treatment just described.
As a holder of a Unit, a Limited Partner holds an interest in an entity
that earns income subject to federal income tax only once, whereas the holder of
Merger Stock would hold an interest in an entity that earns income conceivably
subject to federal income tax twice (if dividends or similar distributions are
made by the Company to its shareholders).
There are, however, potential tax advantages (and corresponding financial
advantages) to conducting a business in a corporation. These include the ability
of shareholders to defer tax on income earned by the corporation until the
corporation distributes such income. Partners in a partnership, by contrast, are
taxed as the partnership earns income, even if cash is not distributed to those
partners. Partners pay such tax at their individual federal tax rate, which may
exceed the maximum federal corporate tax rate. Alternatively, because
shareholders pay no tax until they receive distributions from the corporation,
the Company, as a corporation, may accumulate income for business expansion
without financially interfering with its shareholders' abilities to pay their
taxes. Finally, because tax is paid by the corporation, it is better able to
manage its tax liability by tax planning.
The Partnership. The Partnership will be deemed to have transferred all of
its assets and liabilities to the Company and to have received the Merger Stock
in exchange, and then to have distributed such Merger Stock to the Limited
Partners and the General Partner in complete liquidation. The Partnership will
realize, but not be required to recognize, gain or loss as if the Partnership
had transferred of all of its assets to the Company for an amount equal to the
value of such Merger Stock, plus the liabilities of the Partnership assumed in
the Merger. The Partnership will avoid recognition of gain or loss if it
contributes property to the Company and immediately thereafter, together with
the other PAM Funds and the PCM Shareholders, is in control of 80% of the
Company. The Partnership will, however, be taxed on any boot received in the
Merger. Boot is defined as cash or property (including securities other than the
stock) received by the Partnership. Gain or loss is not recognized and deferred
by the Partnership by the transfer of the Partnership's adjusted basis in its
assets, reduced by any liabilities assumed by the Company, to the shares of
Merger Stock that it is deemed to receive in the Merger. The gain or loss
realized will be recognized when these shares of Merger Stock are sold or
exchanged in a taxable transaction.
The Partnership will have a split holding period for each share of Merger
Stock received. A share of Merger Stock received in exchange for Units will have
a holding period that begins on the day following the Closing Date to the extent
that the value of such share of Merger Stock on the Closing Date is attributable
to certain of the Partnership's assets (essentially, its ordinary income
assets), and, to the extent of any excess value, such share of Merger Stock will
have a holding period that includes the period
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the Units were held by the Limited Partners.
The Company. The Partnership will be deemed to have transferred all of its
assets and liabilities to the Company and to have received Merger Stock in
exchange, and then to have distributed the Merger Stock to the Limited Partners
and the General Partner in complete liquidation.
The Company will not recognize gain or loss resulting from the Merger, but
the Company's tax basis in the assets acquired from the Partnership will be the
same as that basis was in the hands of the Partnership. The Company's holding
period in the assets will include the Partnership's holding periods received by
the Company. The Partnership, on the other hand, will not be required to
recognize gain or loss resulting from the Merger.
After consummation of the Merger, the Partnership will cease to exist for
both state law and federal income tax purposes. The Company will be taxed as a
corporation on its taxable income. The income and deductions attributable to the
assets and liabilities received in the Merger will be included in the Company's
taxable income. The adjusted tax basis of certain of the assets will be
depreciable or amortizable for federal tax purposes, thereby reducing the amount
of the Company's income subject to tax.
Gain or Loss to the Limited Partners. Each Limited Partner will realize
gain or loss on the receipt of Merger Stock or a Debenture in exchange for his
or her Units. As the Merger Stock will probably be considered to be marketable
securities, the Merger Stock will be treated as cash received and gain to the
Limited Partners will be measured by the difference between the fair market
value of the Merger Stock received by the Limited Partners and their adjusted
basis in their Units. This gain will be limited by the prorata share of the net
gain, if any, which would be recognized if all the marketable securities (Merger
Stock) held by the Partnership were sold. If all Dissenting Limited Partners
have had their interests redeemed before the distribution of the Merger Stock,
each Limited Partner's gains will be reduced to zero. This means that the
adjusted basis of the Merger Stock received would be the same as the adjusted
basis the Limited Partners had in their Units. If gain is recognized, the
adjusted basis in the Merger Stock would be increased by the amount of that
gain.
A Limited Partner that receives a Debenture (with respect to his or her
Units) because of such Limited Partner's exercise of dissenter's or similar
rights under California law (with respect to his or her Units) may recognize
gain depending upon such Limited Partner's aggregate basis in the Partnership
prior to the Closing Date. The aggregate basis of any Merger Stock received by a
Limited Partner in exchange for his or her Units will be equal to the aggregate
basis in such Units immediately before the Merger, decreased by the amount of
cash received by such Limited Partner for such Units in lieu of fractional
shares of Merger Stock. Such basis will be prorated among all shares of Merger
Stock received for such Units.
Limited Partners will have a split holding period for each share of Merger
Stock received. A share of Merger Stock will have a holding period that begins
on the day following the Closing Date to the extent that the value of such share
of Merger Stock on such date is attributable to certain of the Partnership's
assets (essentially, the Partnership's ordinary income assets), and, to the
extent of any excess value, such share of Merger Stock will have a holding
period that includes the period that Units were held by each recipient Limited
Partner.
Each Dissenting Limited Partner will receive a Debenture which will be
treated the same as cash, resulting in gain that will be realized and recognized
by such Limited Partner. It is not anticipated that such Debenture will be
readily transferable. Accordingly, this gain may be eligible to be deferred
until
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<PAGE>
payment is received under such Debenture. Limited Partners should consult their
tax advisor as to how these rules might apply to them.
Each Limited Partner who receives Merger Stock will be required to file
with his or her federal income tax return for the year in which the Merger is
consummated a statement that provides details relating to his or her Units
(which will be considered to be property transferred), the Merger Stock, and his
or her share of any liabilities assumed by the Company, as the surviving
corporation in the Merger. The Company will provide its shareholders with
information to assist them in preparing those statements.
After the Merger is consummated, the income and deductions attributable to
the assets and liabilities of the Company will not be allocated to the
shareholders of the Company. A shareholder of the Company will be taxed only on
dividends and other distributions received from the Company, if any. Such
distributions generally will be taxable as dividends to the extent of any
current or accumulated earnings and profits of the Company. Any other
distributions will be treated as a nontaxable return of capital to the extent of
such shareholder's basis in his or her shares of the Company's common stock and
as capital gain to the extent of the remaining portion of such distribution.
THE FOREGOING INFORMATION RELATES ONLY TO THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER PROPOSAL APPLICABLE TO LIMITED PARTNERS GENERALLY. EACH LIMITED
PARTNER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE
CONSEQUENCES OF THE MERGER PROPOSAL ON SUCH PERSON'S PARTICULAR TAX SITUATION.
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APPENDIX F
Supplement For
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership
(S-K Reg. 229.902)
Notice to Limited Partners of Performance Asset Management Fund V, Ltd., A
California Limited Partnership:
Purpose of Partnership Supplement. This separate partnership supplement
highlights information presented in the Joint Consent Statement/Prospectus as
that information relates to Performance Asset Management Fund V, Ltd., A
California Limited Partnership ("Partnership") and its limited partners
("Limited Partners"), regarding a proposed merger ("Merger Proposal") of the
Partnership and other, similar California limited partnerships ("Other
Partnerships") and Performance Capital Management, Inc., a California
corporation ("PCM"), with and into Performance Asset Management Company, a
Delaware corporation ("Company") ("Merger"). Similar supplements have been
prepared for the Other Partnerships. The effects of the Merger may differ for
the limited partners in the Other Partnerships. If you want to obtain a
supplement for any of the Other Partnerships, please call the Information Agent,
Bud Webb at (888) 754-4145. You may also send a written request for copies of
any documents referenced in the Joint Consent Statement/Prospectus to
Performance Development, Inc., Attn: Information Agent, 4100 Newport Place,
Suite 400, Newport Beach, California 92660. As you know, Performance
Development, Inc. is a California corporation and the General Partner of the
Partnership and each of the Other Partnerships ("General Partner"). Supplements
for any of the Other Partnerships will be provided without charge to any Limited
Partner. The Partnership and the Other Partnerships are sometimes collectively
referred to as the "PAM Funds."
Potential Adverse Effects of the Merger. The most significant potential
adverse effects of the Merger to the Limited Partners are the significant
reduction in distributions (the Company does not intend to pay cash dividends);
the possibility that the shares of the Company's $.001 par value common stock
received by the Limited Partners upon the winding up and dissolution of the
Partnership ("Merger Stock") will trade at a price substantially below the value
assigned in the Merger Proposal; the limited public market for the Merger Stock;
the potential price volatility of the Merger Stock; possible dilution of the
Merger Stock; and the significant influence of Vincent E. Galewick, in his
capacity as the majority shareholder of the Company. There are also possible
adverse tax consequences to individual Limited Partners which could result from
their particular financial circumstances. Limited Partners should carefully
consider the matters set forth under the Caption "RISK FACTORS" beginning on
Page 22 of the Joint Consent Statement/Prospectus, and summarized herein
beginning at Page __ . Significant risk factors include:
o PCM and the Partnerships Have History of Losses
o Significant Reduction in Distributions
o Shares of the Merger Stock May Trade at a Price Substantially Below
the Value Assigned in the Merger Proposal o Limited Public Market for
Shares of the Merger Stock
o Potential Price Volatility of Shares of the Merger Stock
o Possible Dilution of the Merger Stock
o Uncertainty of Future Financial Results of the Company
o Dependence on Key Personnel of the Company
o Control by Principal Shareholder of the Company
o Possible Adverse Tax Consequences
o The Company may fail to comply with Year 2000 computer programming
issues
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Performance Asset Management Fund V, Ltd., A California Limited Partnership
("Partnership"), was formed on May 1, 1994, as a limited partnership in
California pursuant to the Revised Limited Partnership Act of the State of
California. The Partnership sold 1,149 limited partnership interests ("Units")
at the price of $5,000.00 per Unit. The terms "Unit" and "Units", when used in
this Supplement, shall also mean and refer to the limited partnership interests
offered and sold by the Other Partnerships. The total amount received by the
Partnership from purchasers of its Units is $5,970,000. As of June 30, 1997
("Determination Date") the Partnership had 305 Limited Partners. The Partnership
termination date is December 31, 2007, unless sooner terminated.
PERFORMANCE ASSET MANAGEMENT FUND V, LTD.
PER UNIT DATA
1996 1995 1994
---- ---- ----
Units outstanding at year end 1,194.00 1,200.00 595.00
Earnings (loss) per Unit ( $71.47) ($ 169.56) ($ 201.71)
Book value per Unit $3,701.21 $3,900.79 $4,708.47
Annual return of capital
distributions per Unit $ 150.00 $ 73.38 $ 23.95
Cumulative return of capital
distributions per Unit $ 235.68 $ 85.25 $ 23.95
Assigned value for Merger Stock $3,936.35/Unit
Each Limited Partner should review thoroughly the selected financial statements
included in the portions of the Joint Consent Statement/Prospectus captioned
"RESULTS OF OPERATIONS," "SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA AND
COMPARATIVE PER SHARE DATA," "PRO FORMA CONDENSED FINANCIAL INFORMATION," and
the financial statements of the Company, PCM and the Partnership and the Other
Partnerships included in the Joint Consent Statement/Prospectus.
The Partnership has continued to invest in distressed loan portfolios. As
set forth above, these portfolios consist primarily of charged-off credit card
accounts and consumer loan balances, such as auto loans and personal lines of
credit originated by independent third-party financial institutions located
throughout the United States. In addition, the Partnership acquired certain
portfolios of default consumer debts which were rewritten under terms different
from the original obligation. In 1994, 1995 and 1996, the Partnership's
investments in distressed loan portfolios consisted of the following (amounts
are carrying amounts):
Type of Portfolio 1994 1995 1996
----------------- ---- ---- ----
Credit Card Accounts ............. $ 283,658 $1,032,857 $1,875,933
Performing Rewritten Accounts .... $ 0 $ 105,089 $ 0
Consumer Loans ................... $ 154,075 $ 633,622 $ 424,729
---------- ---------- ----------
Total .................. $ 437,733 $1,771,568 $2,300,662
========== ========== ==========
In 1994, the Partnership recorded net interest income of $9,542. Operating
expenses for the Partnership consists of the following: management fee expense
of $5,128; collection expense of $59,052; professional fees of $8,691; provision
for portfolio losses of $54,000; amortization expense of $617; and general and
administrative expenses of $2,072; for total operating expenses of $129,560.
Therefore, the Partnership recorded a net loss of $120,018 for 1994.
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<PAGE>
In 1995, the Partnership recorded net interest income of $32,864, and other
income of $46. Operating expenses for the Partnership consists of the following:
management fee expense of $39,146; collection expense of $64,375; professional
fees of $103,202; a provision for portfolio losses of $103,202; amortization
expense of $1,031; and general and administrative expenses of $2,629; for total
operating expenses of $236,383. Therefore, the Partnership recorded a net loss
of $203,473 for 1995.
In 1996, the Partnership recorded net investment income of $86,052 and net
interest income of $101,123. Operating expenses for the Partnership consists of
the following: management fee expense of $57,217; collection expense of $72,423;
professional fees of $133,690; amortization expense of $1,034; and general and
administrative expenses of $8,147; for total operating expenses of $272,511.
Therefore, the Partnership recorded a net loss of $85,336 for 1996.
Value of Assets Held by the Partnership. As of December 31 of each of the
years specified in the following table, the Partnership held the following
assets with the following values, which values were determined by the General
Partner and reviewed by Willamette Management Associates, Inc. ("Fairness
Analyst"), as part of the Fairness Analyst's review of the Merger Proposal to
determine if the terms of the Merger Proposal are fair to the Partnership and
the Other Partnerships:
Asset 1994 1995 1996
----- ---- ---- ----
Cash and equivalents .................... $1,220,917 $ 215,798 $1,731,112
Cash held in trust ...................... 0 $1,014,201 $ 8,388
Investment in Distressed Loan Portfolios $ 437,971 $1,771,568 $2,300,662
Receivable from Unaffiliated Service
Provider(1) ........................... $1,014,882 $1,014,882 $ 0
Due from Affiliates ..................... $ 100,032 $ 624,247 $ 351,718
Other Assets ............................ $ 23,234 $ 36,733 $ 24,873
Organization Costs, Net ................. $ 4,502 $ 3,520 $ 2,486
(1) West Capital Financial Services Corp., a California corporation.
The Partnership defines cash equivalents as all highly liquid investments
with a maturity of three months or less when purchased. The Partnership
maintains cash balances at one bank and aggregate accounts at that bank are
insured by the Federal Deposit Insurance Corporation up to $100,000.
Compensation to the General Partner and Affiliates For the Last Three
Fiscal Years. The following table sets forth the compensation paid by the
Partnership to the General Partner and its Affiliates for the last three fiscal
years and the most recently completed interim period.
Entity 1994 1995 1996 1997*
------ ---- ---- ---- -----
General Partner
Management Fees ...... $ 5,128 $ 39,146 $ 57,217 $ 35,961
Distributions ........ $ 1,583 $ 9,786 $ 19,966 $ 39,933
Syndication .......... $ 89,250 $ 90,750 $ 0 $ 0
PCM
Acquisition Fees ..... $ 136,953 $ 470,971 $ 435,465 $ 195,955
Collection Fees ...... $ 25,412 $ 186,513 $ 442,422 $ 298,214
INC
Commissions .......... $ 297,500 $ 302,500 $ 0 $ 0
---------- ---------- ---------- ----------
Total ........ $ 555,826 $1,099,666 $ 955,070 $ 570,063
========== ========== ========== ==========
* Through June 30, 1997
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The following table sets forth the compensation that would have been paid
by the Partnership to the General Partner and its Affiliates if the compensation
and distributions structure to be in effect after the Merger had been in effect
during the last three fiscal years.
Entity 1994 1995 1996
------ ---- ---- ----
General Partner ....................... $ 0 $ 0 $ 0
PCM ................................... $ 0 $ 0 $ 0
INC ................................... $297,500 $302,500 $ 0
-------- -------- --------
Total ............................. $297,500 $302,500 $ 0
======== ======== ========
As stated above, the Partnership enters into various joint ventures with
Performance Capital Management, Inc., a California corporation and an Affiliate
of the General Partner. Vincent E. Galewick owns all of the issued and
outstanding common stock of the following Affiliates:
Performance Development, Inc., a California corporation ("General Partner")
Income Network Company, Inc., a California corporation ("INC")
Vision Capital Services Corporation, a California corporation ("Vision")
Vincent E. Galewick owns 98.5% of the issued and outstanding common stock
of the following Affiliate: Performance Capital Management, Inc., a California
corporation ("PCM")
The Other Partnerships are:
Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM")
Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II")
Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III")
Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM IV")
Performance Asset Management Fund V, Ltd., A California Limited Partnership
("Partnership")
For convenience, as set forth above, the Partnership and the Other
Partnerships may be referred to in this Supplement as the "PAM Funds."
The General Partner was formed in June, 1990 to engage in various aspects
of the distressed loan industry. The General Partner is the general partner for
the PAM Funds and certain other California limited partnerships. During the
fiscal years ended December 31, 1994 and 1995, the General Partner's syndication
fees incurred and recorded by the Partnership totalled $89,250 and $90,750,
respectively, which have been accounted for as a reduction against the gross
proceeds of the offering. The Partnership also reimbursed the General Partner
for offering expenses totalling $45,689 and $60,450 during the year and period
ended December 31, 1994 and 1995, respectively. The General Partner's management
fees incurred and recorded by the Partnership totalled $5,128, $39,146 and
$57,217 for the years ended December 31, 1994, 1995, and 1996, respectively. The
Partnership also accrued distributions to the General Partner of $1,583 and
$9,786 for the years ended December 31, 1994 and 1995, respectively and $19,966
for the year ended December 31, 1996. At December 31, 1994 and 1996 the
Partnership had amounts owed to the General Partner recorded as amounts due to
affiliates of $234,028 and $56,124, respectively.
Income Network Company, a California corporation ("INC"), was formed on
February 1, 1988, as a registered Broker-Dealer and member of the National
Association of Security Dealers, Inc. and the Securities Investor Protection
Corporation. The sole shareholder of INC, Vincent E. Galewick, is also
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<PAGE>
the sole shareholder of the General Partner and Vision. Additionally, Mr.
Galewick owns 98.5% of the issued and outstanding stock of PCM. INC, in
accordance with the Agreement of Limited Partnership for the Partnership and
offering memorandum of the Partnership, was paid commissions equal to 10% of
gross proceeds received from the offer and sale of interests in the Partnership
("Units"). INC is the Soliciting Agent for the Merger Proposal.
During the year and period ended December 31, 1994 and 1995, the
Partnership recorded commissions payable to INC of $297,500 and $302,500,
respectively, which have been accounted for as reductions against the gross
proceeds of the offering. As of December 31, 1995, the Partnership had amounts
owed to INC of $1,650 for payments made on behalf of the Partnership.
Performance Capital Management, Inc., a California corporation ("PCM"), was
formed in February, 1993, to perform services related to locating, evaluating,
negotiating, acquiring and collecting distressed loan portfolio assets. PCM
acquires portfolio assets from third-party financial institutions and sells the
portfolios to the Partnership and the Other Partnerships at cost plus an
acquisition fee of approximately 30% to 37%, as provided in the related purchase
agreements. The Partnership also enters into servicing agreements with PCM to
collect and service the portfolios. Those agreements generally provide that all
proceeds generated from the collection of portfolio assets shall be shared by
the venturers (PCM and the Partnership) in proportion to their respective
percentage interests, generally, 55% to 60% for the Partnership and 40% to 45%
for PCM. The Partnership also reimburses PCM for certain costs associated with
the collection of portfolio proceeds.
Moreover, in addition to providing collection efforts on distressed loan
portfolios to the Partnership, PCM identifies and acquires distressed loan
portfolios and other discounted portfolios of financial debt instruments and
obligations and sells them to the Partnership and the Other Partnerships at
negotiated prices.
For the years ended December 31, 1994 and 1995, the Partnership purchased
four portfolios and five portfolios, respectively, from PCM and recorded
acquisition fees for these portfolios of $136,953 and $470,971, respectively.
For the year ended December 31, 1996, the Partnership purchased two portfolios
from PCM and recorded acquisition fees for these portfolios of $435,465. These
acquisition fees have been included in the carrying value of the related
investments. Also, for the years ended December 31, 1994, 1995 and 1996, the
Partnership incurred and reimbursed PCM for collection costs of $59,052,
$64,375, and $72,423, respectively.
The Partnership had amounts owed from PCM from collections of portfolio
proceeds and advances for portfolio purchases of $100,032 and $624,247 recorded
as due from affiliates at December 31, 1994 and 1995, respectively. For the year
ended December 31, 1996 the Partnership had amounts owed from PCM of $351,718
recorded as due from affiliates.
Distributions and Dividends. The Partnership has made quarterly cash
distributions to the Limited Partners, which distributions terminated effective
as of June 30, 1997. All of the distributions represented a return of capital.
The following table specifies the cash distributions made to the Limited
Partners during each of the last five fiscal years and most recently completed
interim period.
F-5
<PAGE>
General Limited
Total Partner Partner
Year Distributions Distributions Distributions
---- ------------- ------------- -------------
1992 ..................... $ 0 $ 0 $ 0
1993 ..................... $ 40,425 $ 0 $ 40,425
1994 ..................... $1,704,784 $ 174,521 $1,530,263
1995 ..................... $1,719,383 $ 172,358 $1,547,025
1996 ..................... $1,592,759 $ 159,334 $1,433,425
June 30, 1997 ............ $1,624,168 $ 191,068 $1,433,100
Selected Financial Information. The following table sets forth a historical
summary of gross collections and partner distributions for the PAM Funds from
the date of formation of each PAM Fund through June 30, 1997:
<TABLE>
<CAPTION>
Cost of
Portfolios Original Portfolio Portfolios Gross Partner
Partnership Acquired Face Value Acquired Collections* Distributions**
----------- -------- ---------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
PAM(1) ........ 16 $ 305,438,442 $ 4,932,616 $ 5,526,429 $ 3,678,632
PAM II(2) ..... 19 433,632,566 6,230,345 8,749,682 4,059,775
PAM III (3) ... 21 521,408,657 9,685,926 7,826,584 3,463,815
PAM IV(4) ..... 57 709,008,534 20,416,167 20,014,508 6,269,988
The Partnership 12 209,901,705 4,997,992 2,889,555 639,600
--------- -------------- -------------- -------------- --------------
Total .... 125 $2,179,389,904 $ 46,263,046 $ 45,006,758 $ 18,111,810
========= ============== ============== ============== ==============
</TABLE>
* Gross collections include any sale of accounts and collection activity
through June 30, 1997
** Through June 30, 1997
(1) Performance Asset Management Fund, Ltd., A California Limited Partnership
("PAM").
(2) Performance Asset Management Fund II, Ltd., A California Limited
Partnership ("PAM II").
(3) Performance Asset Management Fund III, Ltd., A California Limited
Partnership ("PAM III").
(4) Performance Asset Management Fund IV, Ltd., A California Limited
Partnership ("PAM V").
REASONS FOR THE MERGER PROPOSAL
The primary purpose of the Merger is to provide the Limited Partners with
the opportunity to participate in the growth of Performance Capital Management,
Inc., a California corporation ("PCM"), while also increasing the liquidity of
their investments. Additional purposes include the possibility of greater access
to capital markets; greater flexibility regarding capital resources; the ability
to provide employees with incentive performance compensation by a stock option
plan; the opportunity to offer greater employee ownership; more simplified
record keeping, accounting and tax reporting; and to permit the shares of $.001
par value common stock issued by the Company to the Limited Partners in the
Merger ("Merger Stock") to be eligible for listing on a regional or national
market quotation system. No prediction can be made, however, as to the price at
which the Merger Stock will trade. Moreover, no assurance or guaranty can be
given that the Merger Stock will trade at all or that the application for such
listing will be approved.
F-6
<PAGE>
Liquidity and Market Valuation. The Units and currently issued and
outstanding shares of no par value common stock of PCM are not publicly traded
and have limited, if any, liquidity. The primary means of liquidity for holders
of the Units has been requesting the Partnership to redeem their Units. Although
the Partnership is not obligated to comply with any such request, such
redemptions have occurred from time to time, using available cash to redeem
Units at a percentage of book value. After consummation of the Merger, the
Merger Stock may be made eligible for trading on a regional or national stock
exchange and there may be a readily accessible market for selling the Merger
Stock and a readily determinable market price for the Merger Stock. With a
readily accessible market for Merger Stock, Unit holders would no longer be
required to rely solely on the Partnership as a source of liquidity, and the
Company would not be required to use its cash to provide such liquidity.
Instead, it is expected that holders of Merger Stock will be able to sell their
Merger Stock publicly from time to time, subject to certain restrictions, at a
fair market price. No prediction can be made, however, as to the price at which
the Merger Stock will trade. Moreover, no assurance or guaranty can be given
that the Merger Stock will trade at all or that the application for such listing
will be approved.
Access to Equity Markets. Although the Company currently has no plans for
any equity offerings, the existence of publicly traded equity securities is
expected to provide the Company with future access to the public equity markets.
Greater Flexibility Regarding Capital Resources. The Company should have
greater flexibility with respect to the use of capital resources, because it
will not have to use available cash to redeem shares of its common stock. As
discussed above, the Partnership has from time to time used its available cash
to redeem Units when requested to do so by certain of its Limited Partners.
There are also potential tax advantages (and corresponding financial advantages)
to conducting a business as a corporation that should allow the Company greater
flexibility with respect to the management of its capital resources.
Shareholders of the Company will defer the payment of taxes on income earned by
the Company until the Company distributes such income in the form of dividends.
Limited Partners, by contrast, are taxed at such time as the Partnership
recognizes taxable income. The Limited Partners are taxed on such income at
their individual federal, state and, sometimes, municipal tax rates, which may
exceed the maximum corporate tax rates. Therefore, the Company, as a
corporation, can accumulate income for business expansion without adversely
affecting a shareholder's tax liability.
Acquisition Consideration. After consummation of the Merger, the Company
may be able to use shares of its common stock as consideration in its
acquisition of assets or other businesses. The use of equity securities as an
acquisition currency is advantageous, because it may be more tax efficient to
the seller of a business than a cash transaction, and it allows the Company to
consummate acquisitions without depleting cash resources. It also allows a
seller to continue to hold an equity interest in the business acquired by the
Company, by equity ownership in the Company after such acquisition. The use of
common stock in acquisitions can also enable the Company to use the advantageous
pooling accounting method, if certain conditions are satisfied.
Incentive Compensation. The availability of shares of the Company's common
stock will permit the Company to provide its key employees with equity based
incentive compensation. The Company believes providing equity based incentive
compensation by the use of common stock will allow greater employee
participation in the Company's ownership, provide a more accurate measure of the
Company's performance (as a result of common stock having a readily
ascertainable value), and provide the Company with more flexibility in designing
equity based incentive compensation. The Company believes that this method of
compensation conserves the Company's cash and promotes management stability.
Greater Employee Ownership. As a result of the complex tax reporting
requirements associated
F-7
<PAGE>
with being a Limited Partner and the administrative burden placed on the
Partnership, as a result of having a significant number of additional limited
partners, it has not been feasible for the Partnership to offer ownership
opportunities to a broad range of employees. By having the shares of its common
stock available, however, the Company will be able to offer ownership
opportunities to its employees. The Board of Directors of the Company believes
that employee ownership is in the best interests of the Company and its
shareholders.
Simplified Record Keeping, Accounting and Tax Reporting. The Limited
Partners will not continue to be burdened with the cumbersome and complex tax
reporting requirements imposed on them under federal and multiple state
partnership tax laws, or with the related record keeping and accounting
requirements.
Certain Disadvantages of the Merger Proposal and Related Transactions
Taxation. The Partnership does not pay any federal or state income taxes.
After consummation of the Merger, the Company will be subject to federal and
state income tax. Shareholders of the Company will also be required to pay
federal, state and, in some circumstances, municipal income taxes on any
dividends that they receive from the Company and on any gain from the sale or
exchange of their Merger Stock. Therefore, while in partnership form, income
taxes are imposed only once (i.e., on the Limited Partners), in corporate form
income taxes are imposed twice (i.e., once on the Company and once on its
shareholders, to the extent they receive dividends or recognize gain on the sale
or exchange of securities). See those portions of the Joint Consent
Statement/Prospectus captioned "FEDERAL INCOME TAX CONSEQUENCES" and "CERTAIN
STATE AND LOCAL INCOME TAX CONSEQUENCES."
Significant Reduction in Distributions. The dividends distributed by the
Company to its shareholders after consummation of the Merger may be
significantly less that the distributions historically made by the Partnership
to the Limited Partners. Moreover, the Company shall not pay any cash dividends
on its common stock or preferred stock during the foreseeable future. See those
portions of the Joint Consent Statement/Prospectus captioned "Distribution
Policy" and "DISTRIBUTION POLICY -- HISTORICAL DISTRIBUTIONS OF THE
PARTNERSHIPS."
Uncertainty Regarding Trading and Market Price of Common Shares. The Merger
Stock may not be listed or approved for listing on any regional or national
securities exchange or otherwise designated or approved for designation upon
notice of issuance as a national market system security on an interdealer
quotation system maintained by the National Association of Securities Dealers,
Inc. To the extent that the Merger Stock may trade, trading prices for the
Merger Stock will be influenced by many factors, including the market for the
Merger Stock, the Company's dividend policy, the possibility of future sales by
the Company or its shareholders of shares of the Company's common stock,
investors' perception of the Company and its businesses, and general economic
and stock market conditions. No prediction can be made as to the price at which
the Merger Stock will trade, if it will trade at all. Moreover, there is a
probability that the Merger Stock may trade at a price below the value per share
assigned in the Merger Proposal. The Limited Partners and shareholders of PCM
("PCM Shareholders") have not previously had access to an active trading market
for the Units and shares of PCM's common stock, respectively. Therefore, it is
possible that they may wish to sell their Merger Stock from time to time after
the consummation of the Merger. The sale of Merger Stock after the consummation
of the Merger might have an adverse effect on the market price of the Merger
Stock; provided, however, to mitigate as much as possible any such adverse
effect, trading of the Merger Stock shall be limited during the first one year
period following the closing date of the Merger ("Closing Date").
F-8
<PAGE>
EFFECTS OF THE MERGER
As a result of the Merger, all of the assets now held directly or
indirectly by PCM and the PAM Funds will be held by the Company, and PCM and the
PAM Funds will cease to exist by operation of law. The Company will possess all
of the assets, properties, rights and privileges, and will be subject to all the
liabilities and obligations, of PCM, the PAM Funds and the Company existing on
the Closing Date.
The following is a brief description of each material risk and effect of
the Merger Proposal, including, but not limited to, federal income tax
consequences, for the Limited Partners. Also included is a brief discussion of
the effect of the Merger Proposal on the Partnership's financial condition and
results of operations. Pro forma financial information based on the
participation of the Partnership in the Merger is set forth in the Joint Consent
Statement/Prospectus under the heading entitled "SELECTED HISTORICAL AND PRO
FORMA FINANCIAL DATA AND COMPARATIVE PER SHARE DATA."
The Merger. The proposed merger transaction contemplates that each of the
PAM Funds, including the Partnership, shall receive shares of $.001 par common
stock of the Company in exchange for the assets of the PAM Funds. Additionally,
by amending the provisions of the Agreements of Limited Partnership for the PAM
Funds, the PAM Funds shall be wound up and dissolved and the shares of $.001 par
value common stock of the Company received by the PAM Funds in exchange for
their assets shall be distributed to the General Partner and the limited
partners of the PAM Funds, all in accordance with an exchange value determined
by the Company, PCM and the General Partner and reviewed by Willamette
Management Associates, Inc. ("Fairness Analyst"). A copy of the Fairness Opinion
is attached to the Joint Consent Statement/Prospectus as Appendix G.
The Determination Date is a date set by the Board of Directors of the
Company. At this time, the Board of Directors of the Company expects that the
Determination Date will be June 30, 1997. To accommodate the Merger, the General
Partner suspended distributions by the Partnership to the Limited Partners,
effective as of the Determination Date. This is necessary to assure that the
Limited Partners' capital accounts do not change after the Determination Date.
The Board of Directors of the Company has the authority to postpone the
Determination Date and declare a new Determination Date, in its discretion. The
Board of Directors of the Company might postpone the Determination Date and
declare a new Determination Date, if the matters contemplated in the Merger
Proposal are postponed for any reason.
Effect of the Merger on Cash Distributions. Until June 30, 1997, the
Partnership made cash distributions to the Limited Partners. The Company
currently anticipates that the Company will not pay cash dividends. However,
this policy may change, as the actual amount of dividends, if any, to be paid
will be determined by the Board of Directors of the Company, in its sole
discretion, generally taking into account a number of factors, including
operating performance, liquidity and capital requirements. There can be no
assurances that any cash dividends will be paid, just as there can be no
assurances that the Partnership's distributions will continue at previous
levels.
DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
COMPANY'S ACTUAL CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S FINANCIAL
CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS AS THE
COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
F-9
<PAGE>
Effects of the Merger May Be Different For Investors in the Various Limited
Partnerships. If the Merger Proposal is approved and the Merger is consummated,
the Limited Partners will receive $3,936.35 in Merger Stock per Unit of the
Partnership. Limited partners in PAM will receive $890.37 in Merger Stock per
Unit of PAM. Limited partners in PAM II will receive $2,010.34 in Merger Stock
per Unit of PAM II. Limited partners in PAM III will receive $3,003.00 in Merger
Stock per Unit of PAM III. Limited Partners in PAM IV will receive $1,381.52 in
Merger Stock per Unit of PAM IV.
The General Partner believes that the Limited Partners would receive
significantly less if the Partnership was liquidated, and the assets distributed
to the Limited Partners, because even an orderly liquidation would result in
prohibitive discounts on the value of the Partnership assets, which are
distressed debt portfolios. Continuing the Partnership in accordance with its
present business plan would result in each Limited Partner maintaining the
current book value per Unit of the Partnership. The book value at the
Determination Date of the Partnership was $3,158.55 per Unit; of PAM, $536.07
per Unit; of PAM II, $1,855.19 per Unit; of PAM III, $2,340.34 per Unit; and of
PAM IV, $1,249.22 per Unit. Therefore, under the Merger Proposal, the limited
partners of the PAM Funds will receive significantly more in Merger Stock per
Unit than the book value per Unit.
To estimate the value of PCM and the PAM Funds, the Fairness Analyst
considered an asset-based approach and an income-based approach to value.
Therefore, the amount of capital raised from the limited partners in each of the
PAM Funds, and the returns on investment experienced by each PAM Fund, were
factors in determining the Exchange Value of each PAM Fund. The extent to which
each PAM Fund achieved its investment objectives was another factor. PCM's value
was calculated based on the present value of debt-free net cash flow and the
present value of the terminal value of PCM's cash receipts.
In the asset-based approach, the Fairness Analyst considered the total
expected net proceeds (i.e., after consideration of interim operating and
liquidation costs) which would accrue to the limited partners of each PAM Fund
as a result of the orderly liquidation of the assets on hand. The Fairness
Analyst determined that the liquidation equity values of the PAM Funds are as
follows: the Partnership - $2,594,885; PAM - $28,256; PAM II - $2,404,533; PAM
III - $3,826,861; and PAM IV - $11,865,592. The present value of PCM's terminal
value of cash flows was determined to be $38,764,000.
In the income-based approach, the Fairness Analyst considered the expected
annual cash flows which would be generated by PCM and each PAM Fund over a
projected, finite operating period primarily as a result of collection efforts
and the sale of distressed loan portfolios. The expected cash flows, including
the terminal value, or projected cash flows resulting from the sale of assets or
business at the end of the projection period, were then discounted to a present
value by a rate of return deemed to be reflective of the risks inherent within a
projected stream of cash flows generated by assets such as distressed loan
portfolios.
The projected cash distributions from 1997 through the life each PAM Fund
were as follows: the Partnership - $5,618,400; PAM - $2,718,150; PAM II
- - $6,560,773; PAM III - $8,625,225; and PAM IV - $25,117,113. Present value of
the projected cash distributions was calculated using a discount rate based on a
weighted average yield to maturity of 14 high yield issues in fiscal 1996, as
specified in Exhibit A-12 to the Fairness Opinion. This figure was added to the
terminal value of the portfolios of the PAM Funds, to arrive at a total present
value of each PAM Fund. The General Partner determined (and the Fairness Analyst
agreed that such determination is fair to the PAM Funds from a financial point
of view) that the present value of the PAM Funds as of the date of the Fairness
Opinion was as follows: the Partnership - $3,786,364; PAM - $1,432,934; PAM II -
$1,571,591; PAM III -$3,357,876; and
F-10
<PAGE>
PAM IV - $9,737,878. These valuations were added to each PAM Fund's adjusted net
asset value, for a combined portfolio and adjusted net asset value of $4,699,954
for the Partnership; $933,609 for PAM; $3,111,728 for PAM II; $5,999,944 for PAM
III; and $15,846,278 for PAM IV.
The present value of PCM was determined to be the sum of its terminal value
of cash flows, $38,764,000, plus the present value of its debt free net cash
flow, $5,759,000, for a total present value of $44,523,211.
These values formed the basis for the Exchange Value for each PAM Fund and
PCM.
The only material difference in the operation of the PAM Funds is a
difference in the Agreement of Limited Partnership of PAM IV. Section 6.2 of the
Agreement of Limited Partnership of PAM IV provides that, until such time as the
limited partners of PAM IV have received a cash return equal to their capital
contributions, plus an amount equal to 6% of their capital contributions, the
limited partners of PAM IV will receive 90% of the cash available for
distribution, and the General Partner will receive the remaining 10% of the cash
available for distribution. After the limited partners of PAM IV have received
the specified cash return, the distribution ratio changes to 70% to the limited
partners of PAM IV and 30% to the General Partner. The General Partner
considered this provision in calculating the income-based value of the
Partnership.
Allocation to Limited Partners and General Partner. Upon dissolution of the
PAM Funds, the General Partner will receive 10% of the Merger Stock allocated to
each PAM Fund pursuant to the ownership allocations in the Agreement of Limited
Partnership for each PAM Fund. The Partnership has been allocated 470,000 shares
of Merger Stock. If the Merger is consummated, the General Partner will receive
47,000 shares of Merger Stock received by the Partnership and the Limited
Partners will receive 423,000 shares of Merger Stock received by the
Partnership.
The Merger Agreement. The Merger will be consummated pursuant to the Merger
Agreement, if the Merger Proposal, as set forth in the Joint Consent
Statement/Prospectus, receives the requisite approval of the limited partners of
each PAM Fund, the approval of the PCM Shareholders, and the approval of the
shareholders of the Company, and if the other applicable conditions to the
Merger are satisfied or waived, including any approvals required from any state
or federal regulatory agency. The Merger Agreement is designated as Exhibit 2 to
the Registration Statement on Form S-4 filed by the Company with the Securities
and Exchange Commission in connection with the Merger and is included in the
Joint Consent Statement/Prospectus as Appendix A.
Until such time as the Merger Agreement has been approved and adopted by
all the parties thereto, it may be amended or terminated by the Board of
Directors of the General Partner, on behalf of any of the PAM Funds; the PCM
Shareholders, on their own behalf, or the Board of Directors of the Company, on
behalf of the Company; provided, however, that at any time after the Merger
Agreement has been adopted by the PCM Shareholders, the Company shareholders or
the limited partners of the PAM Funds, the Company's Board of Directors may not
amend, modify or supplement the Merger Agreement to change the amount or kind of
interests to be received by the limited partners of the PAM Funds, the PCM
Shareholders or the Company shareholders or to make any change if such change
would, alone or in the aggregate, materially adversely affect the limited
partners of the PAM Funds.
Approval by All of the Limited Partnerships Is Required. The Merger
Proposal may be consummated only if all of the PAM Funds approve the Merger
Proposal. The Merger Agreementprovides that limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. A PAM Fund which rejects the Merger Proposal shall not be required
F-11
<PAGE>
to pay any of the costs of the Merger, in accordance with the provisions of
Section 25014.7(e)(3) of the California Corporations Code. The General Partner,
the PCM Shareholders and the Company have considered the possibility of approval
of the Merger Proposal and related transactions by less than all of the PAM
Funds, and do not believe that the Merger can be fairly consummated unless all
of the PAM Funds approve the Merger Proposal, because, among other things, (i)
it would be unduly burdensome or impossible to evaluate and apportion the value
of the various services provided to the PAM Funds by PCM, considering the
complexity and scope of the various joint ventures between the PAM Funds and
PCM; and (ii) if the Merger Proposal is approved, PCM will cease to exist by
operation of law, and would no longer be available to provide the same services
to dissenting PAM Funds. Willamette Management Associates, Inc., as the Fairness
Analyst, was retained by Kelly & Company, the independent auditing firm for the
PAM Funds, the General Partner, PCM, and INC, to render the Fairness Opinion
concerning the Merger Proposal. See the section in the Joint Consent
Statement/Prospectus entitled "DETERMINATION OF THE EXCHANGE STOCK AND
ALLOCATION OF THE MERGER."
Conditions of the Merger. The Merger will not be consummated unless the
Merger Proposal receives the requisite approval of the limited partners of each
PAM Fund and the approval of the requisite state and federal regulatory
agencies. Consummation of the Merger is also subject to the receipt of the
opinion described in the section in the Joint Consent Statement/Prospectus
entitled "FEDERAL INCOME TAX CONSEQUENCES." Receipt of this opinion may be
waived in whole or in part by the PAM Funds, the PCM Shareholders and the
Company in each respective party's sole discretion.
Prior to the consummation of the Merger, the obligations of the parties to
the Merger Agreement may be terminated at any time (including after approval of
the Merger by the limited partners of the PAM Funds and the respective
shareholders) if, among other things, (a) the General Partner or the Company
adopts a resolution terminating the Merger Agreement or (b) a final injunction,
order, or other action of a court or other governmental body prevents the
consummation of the Merger.
Completing the Merger. If the Merger Proposal is approved and the other
conditions of the Merger Agreement are waived or satisfied, the Closing Date
will be selected by agreement of the General Partner, the PCM Shareholders and
the Company. Upon consummation of the Merger and dissolution of the
Partnerships, the limited partners of the PAM Funds and PCM Shareholders will be
entitled to receive certificates for Merger Stock issued in exchange for the
assets of the Partnerships and shares of PCM's no par value common stock,
respectively.
Costs of the Merger. For purposes of the Thompson-Killea Act, which is that
portion of the California Corporations Code relating to "rollup" transactions
(the Merger Proposal is a "rollup" transaction), the costs of the Merger will be
divided into two categories, (i) transaction costs; and (ii) solicitation
expenses. Transaction costs are defined as the costs of printing and mailing the
Joint Consent Statement/Prospectus, or other documents; legal fees not related
to the solicitation of votes or tenders; financial advisory fees; investment
banking fees; valuation fees; accounting fees; independent committee expenses;
travel expenses; and all other fees related to the preparatory work of the
transaction, but not including costs that would have otherwise been incurred by
the Partnership in the ordinary course of business, or solicitation expenses.
Solicitation expenses include direct marketing expenses such as telephone calls,
broker-dealer fact sheets, legal and other fees related to the solicitation, as
well as direct solicitation compensation to brokers and dealers.
The Company estimates that the total costs and expenses of the Merger will
be approximately $1,400,000 if consummated and $1,200,000 if not consummated.
The Company estimates that the total solicitation expenses will be approximately
$600,000. This amount will be incurred whether or not the
F-12
<PAGE>
Merger is consummated. The remainder of the costs and expenses estimated for
consummation or non-consummation will be attributable to transaction costs.
The Merger Agreement provides that those limited partners that reject the
Merger Proposal shall not bear an unfair portion of the transaction costs of the
Merger. Should the Merger Proposal be rejected by all of the PAM Funds, the
transaction costs will be apportioned between the Company and each PAM Fund
according to the final vote on the Merger Proposal as follows: (a) the Company
shall bear all transaction costs in proportion to the number of votes of the
limited partners of that PAM Fund to reject the Merger Proposal; and (b) that
PAM Fund shall bear transaction costs in proportion to the number of votes of
limited partners of that PAM Fund to approve the Merger Proposal. Should the
Merger Proposal be approved by one or more PAM Funds and rejected by at least
one PAM Fund, each PAM Fund rejecting the Merger Proposal shall not be required
to pay any of the costs of the Merger, in accordance with the provisions of
Section 25014.7(e)(3) of the Thompson-Killea Act. Further, in the event that the
Merger Proposal is rejected by all of the PAM Funds, the Company shall pay all
of the solicitation expenses in accordance with the provisions of Section
25014.7(g) of the Thompson-Killea Act.
In 1996, the total approximate amounts distributed to the partners of each
PAM Fund are as set forth on the following table:
<TABLE>
<CAPTION>
Distributions to the Distributions to the
PAM Fund Limited Partners General Partner
-------- -------------------- --------------------
<S> <C> <C>
Performance Asset Management Fund, Ltd.,
A California Limited Partnership ............... $ 154,650 $ 17,483
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership ............... $ 230,023 $ 25,810
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership ............... $ 295,925 $ 35,775
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership ............... $1,433,425 $ 159,334
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership ............... $ 179,100 $ 19,966
</TABLE>
The total amount distributed by all of the PAM Funds was $2,551,491. All of
the distributions to the limited partners were in the form of cash
distributions. Some of the distributions to the General Partner were accrued.
In contrast to the Partnership, the Company will itself be subject to
federal tax on its income. Holders of Merger Stock will not be subject to
federal tax on such income except to the extent dividends are paid by the
Company. See the section in the Joint Consent Statement/Prospectus entitled
"FEDERAL INCOME TAX CONSEQUENCES." The Company is expected to make significantly
smaller distributions, if any, than the Partnership has made.
There can be no assurance that the Merger will achieve any of the benefits
and objectives described above. In addition, certain possible disadvantages and
other risks and special considerations associated with the Merger exist, as
described in the section in the Joint Consent Statement/Prospectus entitled
"RISK FACTORS." Limited Partners should analyze the Merger Proposal and related
transactions, considering all the matters presented in the Joint Consent
Statement/Prospectus.
F-13
<PAGE>
ALTERNATIVES TO THE MERGER
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal and related transactions. Some of
these alternatives do not contemplate a reorganization. In the mutual opinion of
the PCM Shareholders, the Company and the General Partner, the only viable
alternatives not contemplating a reorganization involve some form of public
registration or offering of securities. The General Partner has considered the
possibility of a registration of Units. In the opinion of the General Partner,
this possibility would fail to provide the Limited Partners with the liquidity
that the Merger Proposal might provide, because of the unsatisfactory market for
publicly traded limited partnership interests. The PCM Shareholders and the
Company have also considered the possibility of merging PCM and the Company
without merging with any of the PAM Funds and thereafter making a public
offering of shares of common stock in the surviving corporation. In the event
the Merger is not consummated, the PCM Shareholders and the Company may elect
this alternative.
The PCM Shareholders, the Company and the General Partner have considered
several alternatives to the Merger Proposal, each of which contemplates a
reorganization. The General Partner considered the possibility of selling all
Units of the PAM Funds to the Company, and the Company considered purchasing all
such Units, in exchange for shares of common stock of the Company. This
alternative would require the Company and the PAM Funds to comply with certain
tender offer requirements which would make the proposed reorganization more
complicated in terms of statutory compliance. The PCM Shareholders also
considered the possibility of selling all of PCM's assets to the Company, and
the Company considered purchasing all such assets, in exchange for shares of
common stock of the Company. Alternatively, the General Partner considered
winding up and dissolving the PAM Funds and distributing the proceeds of
liquidation to their limited partners. Although a dissolution would provide
those limited partners with immediate liquidity, the General Partner believes
that, because of the type of assets held by the PAM Funds, even an orderly
liquidation would result in a prohibitive discount on the value of the debt
portfolios. Such a dissolution would also result in additional legal,
accounting, appraisal, advertising and sales costs to the PAM Funds, further
diminishing the value of the PAM Funds' assets.
The General Partner believes that the value of the consideration to be
received by the PAM Funds in the Merger would far exceed any of the alternatives
constituting a reorganization listed above, specifically because the PAM Funds'
assets consist primarily of distressed loan portfolios, and such portfolios have
a liquidation value far below their value to either the PAM Funds or the
Company, which can generate substantial revenues from collection activities on
the portfolios.
The PCM Shareholders and the General Partner considered the results of
continuing PCM and the PAM Funds in accordance with their current business plans
and joint venture agreements. A continuation of the PAM Funds in accordance with
their existing business plans would benefit their limited partners to the extent
that those limited partners would receive cash distributions from the proceeds
of the PAM Funds' collection on debt portfolios. If the Merger is consummated,
limited partners of the PAM Funds would no longer receive such cash
distributions. Moreover, the Company currently does not anticipate paying its
shareholders cash dividends. Therefore, a continuation of the Partnership
provides the Limited Partners with cash flow which they will not have if the
Merger is consummated. Finally, if the Merger Proposal is approved, the Limited
Partners will be minority shareholders in the Company, and will lose the
ultimate control over Partnership affairs, which they currently hold.
Alternatively, the Partnership's servicing entity, PCM, currently has the
capacity to service portfolios in excess of those owned by the Partnership and
has the potential for significant growth. PCM
F-14
<PAGE>
has been offered access to commercial lines of credit and its growth is not
contingent upon a continuing relationship with the Partnership. After
consummation of the Merger, Limited Partners who approve the Merger Proposal
will participate in this growth. Moreover, after consummation of the Merger, the
Company will be able to compete for available portfolios by taking advantage of
economies of scale not available to PCM and the Partnership acting individually.
The General Partner believes that the Limited Partners should have the
opportunity to consider and vote upon these opportunities.
The General Partner believes that the value of the consideration to be
received by the Partnership in the Merger is equal to or greater than the
present value of the Partnership, which assumes that PCM and the Partnership
continue with their current business plans and joint venture agreements.
However, the Company, with access to commercial lines of credit, will be able to
compete more effectively with its competitors for debt portfolios. The General
Partner believes that there will be increased competition for debt portfolios,
as finance companies, collection agencies, and even Wall Street firms, which
offer asset-backed securities, enter the market. Therefore, the General Partner
believes that the Merger Proposal, if approved, would ultimately provide Limited
Partners with a greater return on their investments than they would obtain if
the Partnership continued in its present business arrangements, and would
increase the longevity, and the ultimate return, on the Limited Partners'
investments.
The PCM Shareholders and the General Partner also considered going forward
with the Merger Proposal with the approval of less than all of the PAM Funds,
but rejected this alternative because of economies of scale, the scope and
complexity of existing joint ventures between PCM and the PAM Funds, and the
economics of purchasing, holding, servicing, collecting and selling distressed
debt portfolios. Specifically, as discussed in detail in the section of the
Joint Consent Statement/Prospectus captioned "APPROVAL BY ALL OF THE
PARTNERSHIPS IS REQUIRED", the General Partner does not believe that the Merger
can be fairly consummated unless all of the PAM Funds approve the Merger
Proposal, because it would be unduly burdensome or impossible to evaluate and
apportion the value of the various services provided to the PAM Funds by PCM, on
the one hand, considering the complexity and scope of the various joint ventures
between the PAM Funds and PCM, on the other hand; and, if the Merger Proposal is
approved, PCM will cease to exist by operation of law, and would no longer be
available to provide the same services to a dissenting PAM Fund. The elimination
of PCM as a separate entity would result in the elimination of the acquisition
fees PCM currently charges the PAM Funds. Existing joint ventures, and the
management and servicing fees related to various separate joint ventures between
PCM and the PAM Funds, would similarly merge into a single large business
venture, eliminating those duplicative management and servicing fees. Because
PCM would no longer exist as an independent entity, PAM Funds which did not
participate in the Merger Proposal would lose their present source of portfolio
acquisitions. PCM, which currently has access to commercial lines of credit, has
the right to assign such commercial lines to a successor entity, allowing for
the Company, as such a successor entity, if the Merger is consummated, to enjoy
the benefits of increased credit lines for portfolio acquisitions which are not
currently available to the PAM Funds individually. Moreover, one of the primary
benefits of the Merger Proposal is the consolidation of record keeping and
simplification of the complex accounting requirements imposed on the PAM Funds
under federal and multiple state partnership tax laws.
The General Partner is not aware of any offers made during the preceding 18
months for a merger, consolidation, or combination of any of the PAM Funds; an
acquisition of any of the PAM Funds or a material amount of their assets; a
tender offer for or other acquisition of securities of any class issued by any
of the PAM Funds; or a change in control of the PAM Funds. Other than as set
forth herein, the General Partner is not aware of any factors which may affect
materially the value of the consideration to be received by the Limited Partners
in the Merger or the fairness of the Merger Proposal to the Limited Partners.
F-15
<PAGE>
RECOMMENDATIONS
After considering the advantages and disadvantages of the Merger Proposal
described above, the General Partner believes that the Merger Proposal is fair
to, and in the best interests of, the Partnership and the Limited Partners. The
General Partner recommends that each Limited Partner vote to approve the Merger
Proposal.
EXCHANGE VALUE AND FAIRNESS OPINION
Bases for the General Partner's Belief as to Fairness. The Fairness Opinion
is specified at length in the section in the Joint Consent Statement/Prospectus
entitled "FAIRNESS OPINION." The General Partner believes that the Merger
Proposal is fair to the Limited Partners, because the General Partner believes
that the Merger will provide Limited Partners with liquidity in their
investments and more simplified tax reporting.
No Limitations Imposed on Scope of Investigation. Kelly & Company,
independent auditors for the General Partner, PCM, the PAM Funds, Income Network
Company and the Company, retained the Fairness Analyst to determine the fairness
from a financial point of view of the Exchange Value in connection with the
Merger Proposal. There were no limitations or restrictions placed on the scope
of the Fairness Analyst's analysis and investigation, and the Fairness Analyst
performed a complete due diligence examination by, among other things, visiting
PCM's facilities in Newport Beach, California; interviewing the President and
Vice-President of PCM; interviewing the President, Chief Financial Officer,
Director of Business Development, and Secretary of the General Partner;
interviewing various personnel employed by Kelly & Company; and interviewing
counsel to the various entities. The Fairness Analyst was allowed full access to
all financial records of PCM, the General Partner, the PAM Funds and all service
providers to those entities, including privileged documents such as tax returns
and audit workpapers.
No Instructions from General Partner, PCM or the Company. Neither the
General Partner, the PCM Shareholders, PCM nor the Company provided instructions
to the Fairness Analyst. Kelly & Company instructed the Fairness Analyst to
conduct an independent investigation, and thereafter render a written opinion to
Kelly & Company, as of the Determination Date, as to whether the Exchange Value
established by the General Partner, the PCM Shareholders and the Company is fair
from a financial point of view to the PAM Funds. Kelly & Company also instructed
the Fairness Analyst to prepare a Fairness Opinion (i) satisfying the valuation
requirements of the Thompson-Killea Act; (ii) potentially useful in meeting the
valuation requirements of Sections 1300 et seq. of the California General
Corporation Law pertaining to PCM Shareholders and Company shareholders who do
not consent to the Merger Proposal and, instead, exercise their rights as
dissenting shareholders ("Dissenting Shareholders"); and (iii) sufficient to
support an opinion regarding the fairness from a financial point of view of the
Merger Proposal and related transactions, addressing the fairness from a
financial point of view of the Merger and related transactions as a whole and to
each of the PAM Funds. Kelly & Company instructed the Fairness Analyst to
perform a due diligence investigation and to review all pertinent documents,
including, but not limited to, financial statements; tax returns; audit work
papers; banking records; balance sheets; income statements; Securities and
Exchange Commission reporting forms; corporate documents such as Certificates or
Articles of Incorporation, Bylaws and minutes; furniture and equipment
schedules; insurance policies and coverages; operating budgets through December
31, 2008 for PCM and the PAM Funds; office leases; management profiles;
portfolio stratification reports; and daily productivity reports. Kelly &
Company also instructed the Fairness Analyst to research industry sources and
databases and economic outlook sources regarding the financial services and
distressed debt industry.
F-16
<PAGE>
Procedures Followed. As set forth above, the Fairness Analyst conducted a
complete independent investigation focusing on the valuation issues relating to
the "adequate consideration" rule. Adequate consideration is generally
understood to represent the fair market of an asset. Accordingly, in order to
arrive at its opinion regarding the fairness from a financial point of view of
the Exchange Value established for the Units, the Fairness Analyst performed its
research and analyses with the intent of establishing whether the Limited
Partners would receive at least fair market value in exchange for their Units.
"Fair market value" is defined as the price at which an asset would change hands
between a willing buyer and a willing seller when the former is not under any
compulsion to buy and the latter is not under any compulsion to sell, both
parties are able, as well as willing, to trade, and both parties are well
informed about the asset and the market for that asset. The Fairness Analyst
performed an analysis of the material features and characteristics of the
Partnership, the Other Partnerships and PCM, as well as an analysis of the
financial statements and results of operations of each entity. The Fairness
Analyst assumed that PCM will continue its current business plan and structure
and made other reasonable assumptions and estimates regarding distressed loan
portfolio acquisition and pricing, operating expenses, and partnership
distribution policies.
Determinations. The Company, PCM and the General Partner determined the
total indicated values for PCM and for each of the PAM Funds, as set forth in
the following table:
NAME OF PARTNERSHIP OR CORPORATION TOTAL VALUE
- ---------------------------------- -----------
Performance Asset Management Fund, Ltd.,
A California Limited Partnership ....................... $ 934,000
Performance Asset Management Fund II, Ltd.,
A California Limited Partnership ....................... $ 3,112,000
Performance Asset Management Fund III, Ltd.,
A California Limited Partnership ....................... $ 6,000,000
Performance Asset Management Fund IV, Ltd.,
A California Limited Partnership ....................... $15,846,000
Performance Asset Management Fund V, Ltd.,
A California Limited Partnership ....................... $ 4,700,000
Performance Capital Management, Inc.,
a California corporation ............................... $44,523,000
Basis for Methods of Arriving at Findings and Recommendations. The Fairness
Analyst valued the assets of each entity by determining the combined value of
such entity's assets, including the value of such entity's cash flows and the
terminal value of such entity's distressed loan portfolios. The Fairness Analyst
determined the asset liquidation value of each entity and calculated the
allocation of assets of each PAM Fund between the General Partner and the
limited partners of such PAM Fund based on such PAM Fund's Agreement of Limited
Partnership. Additional factors considered by the Fairness Analyst, in making
its valuation, include discount factors based on the age and composition of the
various distressed loan portfolios and the Fairness Analyst's determination of
the present value of the respective cash receipts of each entity, as well as the
historical and projected collection costs of distressed loan portfolios.
DETERMINATION OF EXCHANGE VALUE AND ALLOCATION OF MERGER STOCK
Exchange Value. The net equity values determined by PCM, the Company and
the General Partner and reviewed by the Fairness Analyst of all of the assets of
the PAM Funds, PCM and the Company, considered together and separately, together
with the book value of the other financial assets of such entities, have been
used to establish the Exchange Value. The Fairness Analyst is unaffiliated with
F-17
<PAGE>
the Company, Vision, Income Network Company, the PCM Shareholders, PCM or the
General Partner. Kelly & Company, the independent auditors for PCM, the Company,
Income Network Company, the General Partner and the PAM Funds, were referred to
the Fairness Analyst by an accountant unaffiliated with the PCM Shareholders,
PCM, the Company, Income Network Company, the PAM Funds, or the General Partner
and with whom neither the PCM Shareholders, PCM, the Company, Income Network
Company, the PAM Funds, nor the General Partner has conducted any business. The
Fairness Analyst was selected by Kelly & Company entirely on the basis of its
qualifications.
The Company, the General Partner and PCM valued the assets of the
Partnership and PCM, respectively, as if sold in an orderly manner in a
reasonable period of time, plus or minus other balance sheet items, and less the
cost of sale. The valuation was conducted in accordance with the provisions of
Section 25014.7(b)(1) of the Thompson-Killea Act. The valuation was also
conducted in accordance with the provisions of Sections 1300 et seq. of the
California General Corporation Law pertaining to the Dissenting Shareholders.
The compensation to dissenting Limited Partners and Dissenting Shareholders
entitled to compensation for their Units or shares of common stock,
respectively, is based upon the valuation described above. See the section in
the Joint Consent Statement/Prospectus entitled "RIGHTS OF DISSENTING
SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
The purpose of the Fairness Opinion is to confirm to the Company, the PCM
Shareholders and the General Partner the fairness from a financial point of view
of the Merger Proposal and related transactions to the PAM Funds. Neither the
Company, the PCM Shareholders, PCM, nor the General Partner gave the Fairness
Analyst any specific instructions other than the instruction from Kelly &
Company to prepare a fairness opinion (i) meeting the valuation requirements of
the Thompson-Killea Act; (ii) potentially useful in meeting the valuation
requirements of Sections 1300 et seq. of the California General Corporation Law
pertaining to Dissenting Shareholders; and (iii) sufficient to support an
opinion regarding the fairness of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Pursuant to
the Thompson-Killea Act, the Units were valued as if sold in an orderly manner
in a reasonable period of time, plus or minus other balance sheet items, and
less the costs of sale. Pursuant to the provisions of Section 1300 of the
California General Corporation Law, the fair market value of the shares of
common stock held by the Dissenting Shareholders shall be determined as of the
day before the first announcement of the terms of the Merger Proposal and
related transactions, excluding any appreciation or depreciation in consequence
of the Merger Proposal or related transactions, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
The Fairness Opinion will not be updated.
Fairness Opinion. The Exchange Value was determined by PCM, the Company and
the General Partner. The consideration to be paid to the Fairness Analyst was
negotiated by the Fairness Analyst, on the one hand, and Kelly & Company, on the
other hand. The Fairness Analyst has determined that the Exchange Value, as such
consideration, is fair from a financial point of view to each PAM Fund, as
specified in the Fairness Opinion. The compensation paid to the Fairness Analyst
was not contingent upon the findings of the fairness of the Exchange Value, such
consideration or the Merger or the consummation or approval of the Merger
Proposal or related transactions. The Fairness Opinion relates to the fairness
from a financial point of view of the Merger Proposal and related transactions,
addressing the fairness from a financial point of view of the Merger Proposal
and related transactions as a whole and to each of the PAM Funds. Because the
Merger is contingent upon the approval of the Merger Proposal by all of the PAM
Funds, the PCM Shareholders, and the Company shareholders, the Fairness Opinion
did not consider possible combinations of less than all of the PAM Funds in the
Merger. A copy of the Fairness Opinion is included in the Joint Consent
Statement/Prospectus as Appendix G.
F-18
<PAGE>
The Fairness Opinion takes into account all of the assets of each of the
PAM Funds, PCM, and the Company. The intangible assets of the PAM Funds and PCM
consist of distressed financial debt instruments and obligations. The Fairness
Analyst also considered tangible assets of the PAM Funds, PCM and the Company.
The tangible assets of the PAM Funds and the Company were determined to be
negligible. The tangible assets of PCM were determined to be more considerable
and include furniture, computers and business equipment. The aggregate value of
the assets of the PAM Funds has been determined to be $30,592,000. The aggregate
value of the assets of PCM has been determined to be $44,523,000.
Fairness Opinion Will Not Be Updated. The Fairness Opinion will not be
updated. A copy of the Fairness Opinion is included with the Joint Consent
Statement/Prospectus as Appendix G. Although the General Partner is not aware of
any factors that may materially affect the fairness of the Merger Proposal or
the determination of the Exchange Value referenced in the Fairness Opinion, it
is possible that changes in the financial markets between the date of the
Fairness Opinion and the date the Merger, if approved, is consummated, might
affect the conclusions of the Fairness Analyst as specified in the Fairness
Opinion. If the Fairness Opinion were to be updated by the Fairness Analyst at
or near the date of the consummation of the Merger, there can be no assurances
that the Fairness Analyst's opinions and conclusions would not be materially
amended or revised.
Exchange of Assets for Shares. On the Closing Date, if the limited partners
of all five PAM Funds approve the Merger Proposal, the PAM Funds and PCM will
merge with and into the Company. Pursuant to the Merger Agreement, all of the
assets of the PAM Funds will be exchanged for shares of the Merger Stock in
accordance with the Exchange Value, determined to be fair to the PAM Funds by
the Fairness Analyst.
The following table summarizes the valuation of PCM and the PAM
Funds based on 7,511,500 allocable shares of Merger Stock:
<TABLE>
<CAPTION>
Percentage of
Aggregate Number of
Indicated Value Indicated Value Shares of Merger
(Rounded to the (Rounded to the Stock Allocated
Nearest $1,000) Nearest 1/10 of 1%) to Entity
--------------- ------------------- ----------------
<S> <C> <C> <C>
PAM ........................ $ 934,000 1.2% 93,398
PAM II ..................... 3,112,000 4.1 311,202
PAM III .................... 6,000,000 8.0 600,003
PAM IV ..................... 15,846,000 21.1 1,584,596
The Partnership ............ 4,700,000 6.3 470,002
----------- ----- -----------
Sub-Total ............. $30,592,000 40.7% 3,059,201
PCM ........................ 44,523,000 59.3 4,452,299
----------- ----- -----------
Total ................. $75,115,000 100.0% 7,511,500
=========== ===== ===========
</TABLE>
RISKS AND POTENTIAL ADVERSE EFFECTS
THE MERGER AND ACQUISITION OF SHARES OF THE MERGER STOCK INVOLVES VARIOUS RISKS,
AND LIMITED PARTNERS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER THE
SECTION ENTITLED "RISK FACTORS" IN THE JOINT CONSENT STATEMENT/PROSPECTUS,
INCLUDING THE FOLLOWING:
F-19
<PAGE>
History of Losses. PCM and the PAM Funds have a history of losses, because
PCM and the PAM Funds' accounting is predicated on return of capital and not a
return on capital. For financial statement purposes, the cash received from
collections on distressed loan portfolios does not appear as revenue, but goes
to offset the particular entity's basis in the respective portfolios. This has
the effect of reducing the respective entity's assets as presented on the
financial statements.
No Operating History. Since its formation, the Company has had no
operations. The only historical financial information presented in the Joint
Consent Statement/Prospectus relates to the business operations of the PAM Funds
and PCM.
Significant Reduction in Distributions. The Partnership historically made
monthly cash distributions to the Limited Partners until those distributions
were suspended in preparation for the Merger Proposal. THE COMPANY CURRENTLY
ANTICIPATES THAT IT WILL NOT PAY CASH DIVIDENDS. See that portion of the Joint
Consent Statement/Prospectus entitled "Dividend Policy" and "SUMMARY --
Disadvantages of the Merger and Related Transactions."
In contrast to the Partnership, the Company will be subject to federal and
state income taxes imposed on its income. Holders of Merger Stock will not be
subject to federal or state income taxes imposed on such income, except to the
extent dividends are paid by the Company. See that portion of the Joint Consent
Statement/Prospectus entitled "FEDERAL INCOME TAX CONSEQUENCES." Additionally,
the Company expects to pay no dividends in the foreseeable future. It is
important for each Limited Partner to realize that the actual amount of
dividends, if any, to be paid will be determined by the Board of Directors of
the Company, in its sole and absolute discretion, generally taking into account
a number of factors, including operating performance, liquidity, capital
requirements, and the Company's business plan and growth strategies. There can
be no assurance that the Company's anticipated policy in regard to dividend
payments will not be modified by the Board of Directors of the Company.
DIVIDEND DISTRIBUTIONS BY THE COMPANY, IF ANY, WILL BE IN THE SOLE AND ABSOLUTE
DISCRETION OF THE COMPANY'S BOARD OF DIRECTORS AND WILL DEPEND ON A NUMBER OF
FACTORS, INCLUDING THE COMPANY'S CASH AVAILABLE FOR DISTRIBUTION, THE COMPANY'S
FINANCIAL CONDITION, THE COMPANY'S CAPITAL REQUIREMENTS, AND SUCH OTHER FACTORS
AS THE COMPANY'S BOARD OF DIRECTORS DEEMS RELEVANT.
Change in Nature of Investment. The Partnership is a limited partnership
organized under California law. The Company is a Delaware corporation. The
Partnership has a finite term of existence and is structured to dissolve when
its assets are liquidated. In contrast, the Company has a perpetual term and
intends to continue its operations for an indefinite time period. To the extent
the Company sells or refinances its assets, the net proceeds therefrom generally
will be retained by the Company for working capital and new investments, rather
than being distributed to shareholders in the form of dividends.
Change in Voting Rights. Under the Partnership's Agreement of Limited
Partnership ("Partnership Agreement") and applicable California law, the Limited
Partners have voting rights only as to major transactions of the Partnership
(e.g., amendment of the Partnership Agreement, removal of the General Partner,
election of a new General Partner, sale of all the assets of the Partnership,
and dissolution of the Partnership). Otherwise, all decisions relating to the
operation and management of the Partnership are made by the General Partner.
Certain major transactions of the Company, including most amendments to the
Company's Certificate of Incorporation, may not be consummated without the
approval of shareholders holding at least a majority of the outstanding voting
stock entitled to vote. Notwithstanding the foregoing, certain transactions of
the Company, such as the sale of all of the assets
F-20
<PAGE>
of the Company to an affiliate of the Company, must be approved by at least 90%
of the issued and outstanding voting stock of the Company entitled to vote. To
the extent that the Company will have issued and outstanding shares of its
voting stock held of record by 100 or more persons, adoption of additional
anti-takeover provisions may require a supermajority (i.e., two thirds) vote to
adopt. Subject to the provisions of the Company's Certificate of Incorporation,
as amended, and Bylaws regarding certain anti-takeover provisions specified in
the portion of the Joint Consent Statement/Prospectus captioned "Anti-Takeover
Provisions," each share of the Company's common stock will have one vote, and
the Company's Certificate of Incorporation, as amended, permits the Board of
Directors of the Company to classify and issue capital stock in one or more
classes having voting power which may differ from that of the Merger Stock. See
that portion of the Joint Consent Statement/Prospectus entitled "COMPARISON OF
UNITS AND MERGER STOCK."
Change in Duties Owed by General Partner. Regarding the Partnership and the
Company, the General Partner and the Board of Directors of the Company,
respectively, owe fiduciary duties to their constituent parties. Some courts
have interpreted the fiduciary duties of members of a board of directors in the
same manner as the duties of a general partner in a limited partnership. Other
courts, however, have indicated that the fiduciary obligations of a general
partner to limited partners are greater than those owed by a director to
stockholders. Therefore, although it is unclear whether, or to what extent,
there are differences in such fiduciary duties, it is possible that the
fiduciary duties of the directors of the Company to its shareholders may be less
than those of the General Partner to the Limited Partners. See that portion of
the Joint Consent Statement/Prospectus entitled "COMPARISON OF UNITS AND MERGER
STOCK."
Changes in Compensation Arrangements. Under the Partnership Agreement,
distributions payable to the General Partner are specified and cannot be changed
by the General Partner without the approval of the Limited Partners. If the
Merger is consummated, the compensation paid to officers and directors of the
Company will be determined by a Compensation Committee for the Company
established by the Company's Board of Directors, and the terms and conditions of
employment of those officers and directors, including changes in compensation
arrangements, will not be subject to the direct approval or control of the
shareholders of the Company. See the summary compensation tables under the
caption "Executive Compensation" in the portion of the Joint Consent
Statement/Prospectus captioned"MANAGEMENT OF THE GENERAL PARTNER, PCM AND THE
COMPANY".
Taxation of Corporation and Shareholders. The Partnership does not pay any
federal or state income taxes. After consummation of the Merger, the Company
will be subject to federal and state income taxes. Shareholders of the Company
will also be required to pay federal and state income taxes on any dividends
that they may receive from the Company and on any gain from the sale or exchange
of the Company's common stock, including the Merger Stock. Therefore, while in
partnership form the income of the Partnership will be subject to federal state
and state income tax only once (i.e., on the Limited Partners) in corporate form
the income of the Company will be subject to federal and state income taxes
twice (i.e., once on the Company and once on its shareholders to the extent they
receive dividends or recognize gain on the sale or exchange of securities). See
that portion of the Joint Consent Statement/Prospectus entitled "FEDERAL INCOME
TAX CONSEQUENCES" and "OTHER TAX CONSEQUENCES."
Uncertainty Regarding Trading and Market Price of Common Shares. There is a
probability that the Merger Stock may initially trade at prices substantially
below the value assigned to the Merger Stock in the Merger Proposal. Moreover,
the Merger Stock may not be listed or approved for listing on any regional or
national securities exchange or otherwise designated or approved for designation
upon notice of issuance as a national market system security on an interdealer
quotation
F-21
<PAGE>
system maintained by the National Association of Securities Dealers, Inc. To the
extent that the Merger Stock may trade, trading prices for the Merger Stock will
be influenced by many factors, including the market for the Merger Stock, the
Company's dividend policy, the possibility of future sales of Merger Stock by
the Company or its shareholders of the Company's common stock, investors'
perception of the Company and its businesses, and general economic and stock
market conditions. No prediction can be made as to the price at which the Merger
Stock will trade. Moreover, no guaranty or assurance can be given that the
Merger Stock will trade at all. Limited Partners and PCM Shareholders have not
previously had access to an active trading market for the Units and shares of
PCM's common stock, respectively. Therefore, it is possible that they may wish
to sell their Merger Stock from time to time after consummation of the Merger.
There can be no assurance that the Company's efforts to stabilize the price of
the Merger Stock by limiting the sale of the Merger Stock will be successful.
The sale of the Merger Stock after the Merger might have an adverse effect on
the market price of the Merger Stock. Moreover, various state regulatory
agencies may require further limitations on the transfer of the Merger Stock.
Limited Public Market. There has been no public trading market for the
Company's securities. Although the Company intends to apply for listing of the
Merger Stock on a regional or national securities exchange, there is no
assurance that the will be so listed. If the Merger Stock is so listed, such a
listing provides no assurance that an active, receptive trading market will
develop for the Merger Stock or, if developed, will be sustained.
Potential Price Volatility. If a public market develops for the Merger
Stock, there may be significant volatility in the market price of the Merger
Stock. Period-to-period fluctuations in the Company's revenues and financial
results may have a significant impact on the perceived value of the Company and,
therefore, on the market price of the Merger Stock. The price of the Merger
Stock may be significantly affected by such factors as the financial results and
operating performance of the Company. Additionally, in recent years, the stock
market has experienced significant price and volume volatility, and market
prices for many companies, particularly small and emerging growth companies,
have experienced significant price fluctuations not necessarily related to the
operating performance of those companies. The market price for the Merger Stock
may be affected by general stock market volatility.
Possible Dilution. The percentage interest of holders of Merger Stock in
the assets, liabilities, cash flow and results of operations of the Company, as
well as the percentage voting power of such holders, may be diluted (a) if the
Company has, prior to solicitation of consents to the Merger Proposal, issued
either preferred shares or common shares which are currently outstanding and
held by existing shareholders of the Company, or (b) by the issuance of shares
of the Company's common stock in any future offering. In addition, the Company
may issue additional equity securities in the future (for example, in a public
offering), which would dilute the percentage ownership of the then current
shareholders of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock, and which is convertible to common stock subject to
certain conditions precedent. See a further discussion of Mr. Galewick's
preferred stock under the caption "Control by Principal Shareholder;
Anti-takeover Measures" below. Under NASDAQ National Market rules, the Company
may not issue shares of its common stock equal to 20% or more of the then
outstanding shares of its common stock in connection with the acquisition of the
shares or assets of another entity without shareholder approval. Issuances by
the Company of additional shares of its common stock or preferred stock could
adversely affect existing shareholders' equity interests in the Company and the
market price of the Merger Stock.
Shares Eligible for Future Sale. Sales of shares of the Company's common
stock in the public market after consummation of the Merger could adversely
affect the market price of the Merger Stock and could impair the Company's
future ability to raise capital through the sale of equity securities. Upon
consummation of the Merger, the Company will have 7,512,500 shares of common
stock issued and outstanding. The transfer, assignment, sale, conveyance,
hypothecation, encumbrance, or other alienation of the shares of the Merger
Stock shall be limited. See the portion of the Joint Consent
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Statement/Prospectus entitled "Merger Stock Will Be Restricted."
Control by Principal Shareholder; Anti-takeover Measures. If the Merger
Proposal is approved and the Merger is consummated, Vincent E. Galewick shall
beneficially own approximately 62% of the then issued and outstanding shares of
the Company's common stock. As a result, Vincent E. Galewick, in his capacity as
a shareholder of the Company, would be able to significantly influence or
control many matters acquiring approval by the shareholders of the Company,
including the election of directors. The Company's Certificate of Incorporation
provides for preferred stock, the terms of which may be fixed by the Board of
Directors of the Company. Vincent E. Galewick owns 100,000 shares of the
Company's preferred stock, which is all of the issued and outstanding shares of
that preferred stock. Each share of that preferred stock is convertible into 20
shares of the Company's common stock, subject to certain conditions precedent
relating to the acquisition, by any single shareholder, of 10% or more of the
issued and outstanding shares of the Company's common stock. Moreover, if the
Company becomes a "listed corporation", as that term is defined in the portion
of the Joint Consent Statement/Prospectus entitled "Elimination of Cumulative
Voting", the directors of the Company will be divided into 2 classes, and the
holders of the Merger Stock will not be permitted to cumulate their votes for
directors. Those provisions could have the effect of delaying, deferring or
preventing a change in control of the Company.
Addition of Provisions That May Discourage Changes of Control. The
Company's organizational documents and Delaware law contain provisions that may
delay, defer or prevent a takeover attempt that a shareholder might consider to
be in such shareholder's best interest, including offers that might result in a
premium over the market price for Merger Stock.
Conflicts of Interest. The General Partner has a fiduciary duty to the
Partnership. However, the General Partner is also affiliated with Income Network
Company, which is the Soliciting Agent, Vision, PCM and the Company. The
Company, Vision, Income Network Company, PCM and the General Partner have a
common shareholder, Vincent E. Galewick, and common directors and officers.
Several of the directors of the Company are employed independently of the
Company and those persons may continue to engage in other activities. The
persons serving as officers and directors of the Company shall have conflicts of
interest in allocating time, services, and functions between the other business
ventures in which those persons may be or become involved and, also, the affairs
of the Company. As a result, conflicts of interest between the Company and the
other activities of those persons may occur from time to time.
The Company will attempt to resolve any such conflicts of interest in favor
of the Company. The officers and directors of the Company are accountable to the
Company and the shareholders of the Company as fiduciaries (subject to the
restrictions set forth in the paragraph headed "Limitation on Liability of
Officers and Directors of the Company" below), which requires that such officers
and directors exercise good faith and integrity in handling the Company's
affairs. Moreover, the officers and directors of the Company believe that the
Company will have sufficient staff, consultants, employees, agents, contractors,
and managers to adequately conduct the business of the Company.
The General Partner has not retained an unaffiliated representative to act
on behalf of the Limited Partners for purposes of negotiating the Merger
Proposal. The General Partner does not believe retaining such a representative
is necessary, because an unaffiliated third party, Willamette Management
Associates, Inc., as the Fairness Analyst, has been retained to provide the
Fairness Opinion as to the fairness of the Merger Proposal to the Company, the
PCM Shareholders and the PAM Funds. A copy of the Fairness Opinion is included
with the Joint Consent Statement/Prospectus as Appendix G. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
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However, because there has been no separate unaffiliated representation of
the Limited Partners in the negotiation of the Merger Proposal, the Limited
Partners are presented with risks inherent in multiple representation.
Specifically, the persons negotiating the Merger Proposal may have attempted to
balance the interests of the Partnership and the Limited Partners with the
interests of the PCM Shareholders and the Company. Aggressive advocacy solely on
behalf of the Limited Partners in the negotiations relating to the Merger
Proposal might have resulted in more favorable treatment for the Limited
Partners compared to the more even-handed approach which was followed in
negotiating the Merger Proposal.
The General Partner and the Limited Partners have conflicts of interest
relating to the Merger Proposal because, if the Merger Proposal is approved, the
General Partner will cease providing management services to the Partnership,
with a resulting loss of income. The Merger Stock which the General Partner
receives upon the winding up and dissolution of the Partnership may be less
valuable than the participation in the distributions of the Partnership which
the General Partner currently receives.
A more significant conflict of interest exists between Vincent E. Galewick,
the sole shareholder of the General Partner, on the one hand, and the Limited
Partners, on the other hand, because Mr. Galewick is also the majority
shareholder of PCM and the sole shareholder of the Company. The allocation of
Merger Stock pursuant to the Merger Proposal creates a conflict between all the
parties included in the Merger Proposal, including the Limited Partners, on the
one hand, and Mr. Galewick and the General Partner, on the other hand. If the
Merger Proposal is approved, Mr. Galewick will own approximately 62% of the then
issued and outstanding common stock of the Company. Because of this conflict of
interest, Mr. Galewick did not participate in the negotiations regarding the
Merger Proposal.
No Arm's Length Agreements. Certain agreements and arrangements, including
those relating to compensation and payments between the Company and its
affiliates, are not the result of arm's length negotiations. See that portion of
the Joint Consent Statement/Prospectus entitled "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS". Most significantly, PCM and the Partnership are parties
to joint venture agreements pursuant to which PCM provides collection and
servicing activities. The joint venture agreements between PCM and the
Partnership have been filed as exhibits to the Company's Registration Statement
on Form S-4, of which the Joint Consent Statement/Prospectus is a part. PCM also
identifies and acquires distressed loan portfolios and sells them to the
Partnership at negotiated prices, which typically include a mark-up of as much
as 37%. Vision, an affiliate of PCM, the General Partner, Income Network Company
and the Company, provides human resources (employees) to PCM and the General
Partner pursuant to an arrangement not the result of arm's-length negotiations.
In the event the Merger is consummated, Vision will no longer provide those
human resources to the Company.
Speculative Investment Due to Market Factors. The business objectives of
the Company must be considered speculative because the market for distressed
consumer indebtedness will have a significant influence on the operations of the
Company. As there can be no assurance that changing market factors will not
adversely affect the operations of the Company, no assurance can be given that
the PCM Shareholders and Limited Partners will realize a return on their
exchange of shares of common stock of PCM or Units, respectively, for Merger
Stock, or that the Company shareholders will not ultimately lose their
investments in the Company completely.
Dependence on Management. All decisions regarding management of the
Company's affairs will be made exclusively by the officers and directors of the
Company. Accordingly, no person should vote in favor of the Merger Proposal
unless that person has carefully evaluated the personal experience and business
performance of the officers and directors of the Company and is willing to
entrust all aspects of management to the officers and directors of the Company,
or their successors.
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Dependence on Key Personnel. The Company is dependent upon the efforts and
abilities of its senior management, particularly those of Vincent E. Galewick.
The loss of Mr. Galewick could have a material adverse affect on the business
and prospects of the Company. The officers of the Company believe that all
commercially reasonable efforts have been made to minimize the risks attendant
with such dependence on Mr. Galewick and the loss or departure of Mr. Galewick.
The General Partner currently maintains a key person life insurance policy in
the amount of $2,000,000 on Mr. Galewick and, if the Merger is consummated, the
Company anticipates maintaining such a policy on Mr. Galewick. Moreover, as the
prospective owner of a significant portion of the issued and outstanding common
stock of the Company, Mr. Galewick will have an incentive to remain with the
Company. However, there is no assurance that Mr. Galewick will remain with the
Company or that, if he should elect to leave the Company, his replacement would
cause the Company to operate profitably.
Limitation on Liability of Officers and Directors of the Company. Section
145 of the Delaware General Corporation Law specifies that the Certificate of
Incorporation of a Delaware corporation may include a provision eliminating or
limiting the personal liability of a director or officer to that corporation or
its shareholders for damages for breach of fiduciary duty as a director or
officer, but such a provision must not eliminate or limit the liability of a
director or officer for (a) acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law; or (b) unlawful distributions
to stockholders. The Certificate of Incorporation of the Company includes a
provision eliminating or limiting the personal liability of the officers and
directors of the Company to the Company and its shareholders for damages for
breach of fiduciary duty as a director or officer. Moreover, the Company's
Bylaws provide certain indemnification to a controlling person, director or
officer which affects such a person's liability while acting in a corporate
capacity. The Company entered into various indemnification agreements with its
officers and directors, copies of which are attached to the Registration
Statement on Form S-4 as exhibits thereto. Moreover, the Merger Agreement
provides indemnification for directors and officers of the Company. Accordingly,
the officers and directors of the Company may have no liability to the
shareholders of the Company for any mistakes or errors of judgment or for any
act or omission, unless such act or omission involves intentional misconduct,
fraud, or a knowing violation of law or results in unlawful distributions to the
shareholders of the Company.
DISCLOSURE OF POSITION OF SECURITIES AND EXCHANGE COMMISSION
REGARDING INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE, UNENFORCEABLE.
No Limitation on Indebtedness. The Certificate of Incorporation and Bylaws
of the Company do not contain any limitation on the amount or percentage of
indebtedness, funded or otherwise, the Company might incur. The Indenture
Agreement pursuant to which those Limited Partners who exercise their dissenters
rights ("Dissenting Limited Partners") will be paid for their Units ("Indenture
Agreement") provides that the assets of the Partnership will not be leveraged
more than 70% in relation to any unsecured subordinated debentures issued
pursuant to the Merger Agreement. Accordingly, the Company could become
leveraged to the extent permitted by the Indenture Agreement, resulting in an
increase in debt service that could adversely affect the Company's ability to
make distributions to its stockholders and result in an increased risk of
default on its obligations. The Company does not believe
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that the debt limitations imposed by the Indenture Agreement will have a
significant impact on the operations of the Company. However, if the Merger is
consummated, the Board of Directors of the Company will determine policies with
respect to financing or refinancing of assets and policies with respect to
borrowings by the Company.
Loss on Dissolution of the Company. In the event of a dissolution of the
Company, the proceeds realized from the liquidation of the Company's assets, if
any, will be distributed to holders of the Company's common stock only after
satisfaction of claims of the Company's creditors and, in some situations,
holders of the Company's preferred stock. The ability of a holder of shares of
the Company's common stock, including Merger Stock, to recover any monies
whatsoever in that event will depend on the amount of funds realized and the
claims to be satisfied therefrom.
Remuneration of Directors, Officers and Employees. Compensation received by
officers, directors and employees of the Company will be determined from time to
time by the Board of Directors of the Company. Officers, directors, and
employees of the Company will be reimbursed for any out-of-pocket expenses
incurred on behalf of the Company.
Receipt of Compensation Regardless of Profitability. The officers,
directors and employees of the Company may receive significant compensation,
payments, and reimbursements regardless of whether the Company operates at a
profit or at a loss.
Year 2000 Computer Compliance. Over the next two years, most large
companies will face a potentially serious business problem because many computer
software applications and computer equipment developed in the past may not
properly recognize calendar dates beginning in the Year 2000. As the century
date change occurs, date-sensitive systems may recognize the Year 2000 as the
Year 1900, or not at all. This inability to recognize or treat properly the Year
2000 may cause computer systems to process financial and operational information
incorrectly, which could have a material adverse effect on the results of
operations of all of the parties to the Merger. There can be no assurance that
PCM (or, if the Merger Proposal is approved and the Merger is consummated, the
Company) will complete the necessary modifications and conversions to the
computer software and operating systems necessary to properly operate or manage
date-sensitive information beyond December 31, 1999. Even if PCM (or, if the
Merger Proposal is approved and the Merger is consummated, the Company)
completes all necessary modifications and conversions to its computer software
and operating systems, there can be no assurance that the necessary
modifications and conversions by those third party institutions and entities
with which PCM and the PAM Funds conduct business will be completed in a timely
manner, which could have a material adverse effect on the results of operations
of PCM and the PAM Funds (or, if the Merger Proposal is approved and the Merger
is consummated, on the results of operations of the Company).
RIGHTS OF DISSENTING LIMITED PARTNERS
Offer to Purchase Units of Dissenting Limited Partners. The Merger Proposal
is also being structured to provide Limited Partners who dissent to the Merger
("Dissenting Limited Partners") the dissenter's rights specified in the
Thompson-Killea Act. The Thompson-Killea Act requires that the Dissenting
Limited Partners receive the appraised value of their Units in the form of cash,
freely tradeable securities, or secured or unsecured debt instruments satisfying
certain statutory requirements or, in the alternative, receive or retain a
security with substantially the same terms and conditions as the security
originally held, provided that the receipt or retention of that security is not
a step in a series of subsequent transactions that directly or indirectly
involves future combinations or reorganizations of one or more roll-up
participants. Securities received or retained will be considered to have the
same terms
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<PAGE>
and conditions as the security originally held if (a) there is no material
adverse change to Dissenting Limited Partners' rights, including, but not
limited to, rights with respect to voting, the business plan, or the investment,
distribution, management compensation and liquidation policies of the
Partnership or resulting entity; and (b) the Dissenting Limited Partners receive
the same preferences, privileges, and priorities as they had pursuant to the
security originally held.
The Company is satisfying this requirement by offering to purchase the
Units of any Dissenting Limited Partner with an unsecured subordinated debenture
("Debenture") issued under an Indenture Agreement ("Indenture Agreement"). The
Merger Proposal and the related transactions, including the dissolution and
liquidation of the Partnerships ("Dissolutions" and "Liquidations") have also
been structured to comply with the other protections afforded by the
Thompson-Killea Act. A copy of the Indenture Agreement is included with the
Joint Consent Statement/Prospectus as Appendix M. A copy of the Debenture is
included with the Joint Consent Statement/Prospectus as Appendix N. See that
portion of the Joint Consent Statement/Prospectus entitled "RIGHTS OF DISSENTING
SHAREHOLDERS AND DISSENTING LIMITED PARTNERS."
Unsecured Subordinated Debentures. A Dissenting Limited Partner who
exercises his or her dissenter's rights will receive an unsecured subordinated
debenture ("Debenture") under an Indenture Agreement ("Indenture Agreement").
The Indenture Agreement provides for a Trustee and specifies that (a) the title
of the Debenture shall be "Unsecured Subordinated Debenture Due January 31,
2005"; (b) the amount at which such Debenture will be issued shall be the value,
in United States currency, of such Dissenting Limited Partner's interest in the
Partnership, determined in accordance with the Exchange Value, as of the
Determination Date, if such Dissenting Limited Partner perfects his or her
dissenter's rights pursuant to the terms of the Merger; (c) the date on which
the principal of the Debenture is payable shall be January 31, 2005, which date
or dates may be fixed or extendible; (d) the rate or rates at which the
Debenture shall bear interest shall be a variable interest rate equal to the
federal rate as determined in accordance with Section 1274 of the Internal
Revenue Code of 1986, payable on January 1 and July 1 of each year and based on
a 365-day year; (e) the Debenture shall be issued within 30 days of the closing
date of the Merger; (f) the Debenture shall limit total leverage to 70 percent
of the appraised value of the assets previously owned by the Partnership; and
(g) the Debenture shall be prepaid with 80 percent of the net proceeds of any
sale or refinancing of the assets previously owned by the Partnership. The
Indenture Agreement does not provide for a sinking fund.
A Limited Partner who does not consent to the Merger Proposal may, but is
not required to, exercise his or her dissenter's rights by completing and
signing Part V of the Letter of Transmittal and Consent Statement ("Consent
Statement"). Such a non-consenting Limited Partner, therefore, will become a
"Dissenting Limited Partner". Dissenting Limited Partners will receive, pursuant
to those dissenter's rights, a Debenture issued under the Indenture Agreement in
an amount equal to the Exchange Value of such Dissenting Limited Partner's
Units. Each Dissenting Limited Partner will be provided with a Debenture within
30 days following the consummation of the Merger and related transactions for
his or her Units in the amount as specified above.
LIMITED PARTNERS WISHING TO EXERCISE THEIR DISSENTERS' RIGHTS ARE CAUTIONED THAT
FAILURE TO COMPLETE PART V OF THE CONSENT STATEMENT WILL RESULT IN THE LOSS OF
DISSENTERS' RIGHTS.
See the portion of the Joint Consent Statement/Prospectus entitled "RIGHTS
OF DISSENTING LIMITED PARTNERS" for additional information regarding Limited
Partners' dissenters' rights.
Compliance with and Approval from Federal and State Authorities. The Merger
Proposal and
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related transactions will not be completed if any moratorium on transactions of
its type are imposed by federal, state or regulatory authorities or if any state
securities authority imposes any restriction upon, or prohibits any aspect of,
the transactions contemplated by the Merger Proposal and related transactions,
which in the judgment of the Company, renders the Merger Proposal and related
transactions undesirable or impractical.
Comparison of Units and Merger Stock. The portion of the Joint Consent
Statement/Prospectus entitled "SUMMARY COMPARISON OF UNITS AND MERGER STOCK"
highlights a number of the significant differences between the Partnership (and
the Units) and the Company (and the Merger Stock) relating to, among other
things, form of organization, investment objectives, policies and restrictions,
asset diversification, capitalization, management structure compensation and
fees, and investor rights, and compares certain legal rights associated with the
ownership of the Units and Merger Stock, respectively. These comparisons are
intended to assist the Limited Partners in understanding how their investments
will be changed if, as a result of the Merger and related transactions, their
Units are exchanged for shares of Merger Stock.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following information is intended to provide the Limited
Partners with a summary of all material federal income tax consequences of
general application to the Company and Limited Partners associated with the
Merger Proposal. This summary does not consider all tax matters that may affect
the Partnership, the Company, or the Limited Partners, including any state,
local, foreign or other matters, and does not consider various facts or
limitations applicable to any particular Limited Partner, or special tax rules
that may apply to certain Limited Partners that may modify or alter the results
described herein.
Except as otherwise indicated, statements of legal conclusions regarding
tax treatments, tax effects or tax consequences present the opinions of John H.
Brainerd, Attorney at Law and tax counsel for the Company, based on the Internal
Revenue Code of 1986 ("Code") and applicable Treasury Regulations thereunder,
each as amended and in effect on the date hereof, and on reported judicial
decisions and published positions of the Internal Revenue Service ("IRS"). No
rulings have been requested from the IRS concerning any of the matters presented
in the Joint Consent Statement/Prospectus and the IRS will generally not issue
rulings on transactions such as the Merger Proposal. In some cases, particularly
those as to which tax counsel's opinion is qualified, there is a risk that the
IRS will disagree with the conclusions of tax counsel. The laws, regulations,
administrative rulings and judicial decisions that form the basis for
conclusions with respect to the tax consequences of the Merger Proposal are very
complex and are subject to change at any time.
The tax opinion of John H. Brainerd is filed as Exhibit 8 to the
Registration Statement, of which the Joint Consent Statement/Prospectus
constitutes a part. Upon receipt of a written request of a Limited Partner (or
such Limited Partner's representative who has been so designated in writing)
addressed to the Information Agent at 4100 Newport Place, Suite 400, Newport
Beach, California 92660, a copy of the tax opinion will be transmitted promptly,
without charge, by the General Partner.
The Limited Partners, PCM shareholders and Company shareholders should be
aware that there is no direct authority of general applicability governing the
federal income tax treatment of transactions such as the Merger Proposal that
are structured as partnership mergers, because this structure is an approach
made available by recent developments in California partnership law. Therefore,
in rendering his opinions, John H. Brainerd has relied on authorities addressing
the consequences of analogous transactions that used similar structures.
Accordingly, although there appears to be no controlling
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authority contrary to Mr. Brainerd's conclusions, it is possible that the IRS
would take a different position if it reviewed the tax consequences of the
Merger Proposal.
Differences Between Partnership Units and Merger Stock. A limited
partnership is a pass-through entity for federal income tax purposes. This means
that a limited partnership is not liable for federal income tax on its taxable
income. Rather, a limited partnership passes its income (or loss) through to its
owners (i.e., general and limited partners) in proportion to their relative
interests in profits and losses. This is known as allocating a partnership's
income and loss. Many items of income, deduction, gain, loss, and credits are
allocated separately to each partner in proportion to such partner's interest in
those items as specified in such limited partnership's agreement of limited
partnership. The character of each item passed through to a partner remains the
same with such partner as it was with the limited partnership. Each partner
includes these items on such partner's income tax return and pays tax based on
those items combined with such partner's other items of income, deduction, gain,
loss or credits. Thus, tax is imposed on the partner regardless of whether the
limited partnership actually distributes any cash or property to that partner.
Therefore, it is the allocation, not the distribution, of income (or loss) to a
partner that results in tax effect for that partner.
A partner has a basis in the limited partnership interest he or she holds
which is generally equal to either the cost of that limited partnership
interest, if purchased, or, if not purchased, the amount of any cash or adjusted
basis of any other property that partner transferred to the limited partnership,
increased (or decreased) by that partner's share of the limited partnership's
income (or loss) and decreased by the amount of any cash (or the basis of any
property) distributed to that partner. Upon sale of his or her limited
partnership interest, a partner realizes gain equal to the amount received for
the limited partnership interest (including their share of partnership
liabilities) less that partner's adjusted basis in the limited partnership
interest. The partner's gain (or loss) upon sale is generally capital gain (or
loss), but may be characterized as ordinary gain (or loss) to the extent of that
partner's share of certain "hot" assets held by the limited partnership.
Because a limited partnership does not pay tax on income it earns (but
rather the general partner and limited partners pay tax on such income),
partners of a limited partnership are subject to federal income tax on income
earned in the business conducted by the limited partnership only once.
Accordingly, as owners of the Partnership, by their Units, Limited Partners
receive the federal income tax treatment just described. Regarding the
Partnership, the number of Units owned by a partner (either the General Partner
or any Limited Partner) will determine the amount of income or loss allocated to
such partner by the Partnership.
A corporation is a taxable entity and pays federal income tax at rates
ranging from 15% to 39% on its taxable income. A shareholder of a corporation is
generally not taxed on any income earned by that corporation until that
corporation distributes either cash or property to that shareholder or that
shareholder sells or exchanges his or her shares of stock issued by that
corporation at a gain. A corporation often makes distributions to its
shareholders in proportion to their interests in that corporation, but it need
not do so. When cash or property is distributed, each portion of the
distribution will be characterized in one of the following three ways: (i) as a
dividend, (ii) as a capital gain, or (iii) as a return of capital. The portion
of a distribution treated as a dividend is taxed at ordinary federal income tax
rates, which, for individuals, are as much as 39.6%. Upper tax bracket
individuals are subject to a phaseout of their personal exemptions, and a
restriction on itemized deductions, which, however, in combination under certain
circumstances, can bring the actual maximum effective federal rate to more than
47%. The portion treated as capital gain will reduce the adjusted basis in the
shareholder's stock and generally be taxed at a maximum 28% rate until the
adjusted basis reaches zero. The portion treated as return of capital will not
be taxed. The amount of any distribution treated in any of the three alternative
ways may differ for
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each shareholder, and will depend upon the value of the cash and property
received, the percentage interest in the corporation owned by the shareholders
receiving distributions and each shareholder's basis in his or her shares.
Because corporations are taxable on their own taxable income, and because
shareholders may be taxed again on that same income, if it is distributed to
shareholders in the form of cash or property, or if that income is realized by
the sale or exchange of shares at a gain, there are two levels of potential tax
upon income earned by a corporation. A shareholder's basis in his or her shares
is generally equal to the cost of the shares, if purchased, or, if not
purchased, the amount of any cash and basis of other property contributed to the
corporation, decreased by the amount of any distributions treated as a return of
capital. Upon a sale of shares, a shareholder's gain (or loss) will be equal to
the amount received for those shares less his or her basis in those shares. The
character of such gain (or loss) will generally be capital in nature. As holders
of interests in a corporation (the Company), the owners of Merger Stock will be
subject to the tax treatment just described.
As a holder of a Unit, a Limited Partner holds an interest in an entity
that earns income subject to federal income tax only once, whereas the holder of
Merger Stock would hold an interest in an entity that earns income conceivably
subject to federal income tax twice (if dividends or similar distributions are
made by the Company to its shareholders).
There are, however, potential tax advantages (and corresponding financial
advantages) to conducting a business in a corporation. These include the ability
of shareholders to defer tax on income earned by the corporation until the
corporation distributes such income. Partners in a partnership, by contrast, are
taxed as the partnership earns income, even if cash is not distributed to those
partners. Partners pay such tax at their individual federal tax rate, which may
exceed the maximum federal corporate tax rate. Alternatively, because
shareholders pay no tax until they receive distributions from the corporation,
the Company, as a corporation, may accumulate income for business expansion
without financially interfering with its shareholders' abilities to pay their
taxes. Finally, because tax is paid by the corporation, it is better able to
manage its tax liability by tax planning.
The Partnership. The Partnership will be deemed to have transferred all of
its assets and liabilities to the Company and to have received the Merger Stock
in exchange, and then to have distributed such Merger Stock to the Limited
Partners and the General Partner in complete liquidation. The Partnership will
realize, but not be required to recognize, gain or loss as if the Partnership
had transferred of all of its assets to the Company for an amount equal to the
value of such Merger Stock, plus the liabilities of the Partnership assumed in
the Merger. The Partnership will avoid recognition of gain or loss if it
contributes property to the Company and immediately thereafter, together with
the other PAM Funds and the PCM Shareholders, is in control of 80% of the
Company. The Partnership will, however, be taxed on any boot received in the
Merger. Boot is defined as cash or property (including securities other than the
stock) received by the Partnership. Gain or loss is not recognized and deferred
by the Partnership by the transfer of the Partnership's adjusted basis in its
assets, reduced by any liabilities assumed by the Company, to the shares of
Merger Stock that it is deemed to receive in the Merger. The gain or loss
realized will be recognized when these shares of Merger Stock are sold or
exchanged in a taxable transaction.
The Partnership will have a split holding period for each share of Merger
Stock received. A share of Merger Stock received in exchange for Units will have
a holding period that begins on the day following the Closing Date to the extent
that the value of such share of Merger Stock on the Closing Date is attributable
to certain of the Partnership's assets (essentially, its ordinary income
assets), and, to the extent of any excess value, such share of Merger Stock will
have a holding period that includes the period the Units were held by the
Limited Partners.
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The Company. The Partnership will be deemed to have transferred all of its
assets and liabilities to the Company and to have received Merger Stock in
exchange, and then to have distributed the Merger Stock to the Limited Partners
and the General Partner in complete liquidation.
The Company will not recognize gain or loss resulting from the Merger, but
the Company's tax basis in the assets acquired from the Partnership will be the
same as that basis was in the hands of the Partnership. The Company's holding
period in the assets will include the Partnership's holding periods received by
the Company. The Partnership, on the other hand, will not be required to
recognize gain or loss resulting from the Merger.
After consummation of the Merger, the Partnership will cease to exist for
both state law and federal income tax purposes. The Company will be taxed as a
corporation on its taxable income. The income and deductions attributable to the
assets and liabilities received in the Merger will be included in the Company's
taxable income. The adjusted tax basis of certain of the assets will be
depreciable or amortizable for federal tax purposes, thereby reducing the amount
of the Company's income subject to tax.
Gain or Loss to the Limited Partners. Each Limited Partner will realize
gain or loss on the receipt of Merger Stock or a Debenture in exchange for his
or her Units. As the Merger Stock will probably be considered to be marketable
securities, the Merger Stock will be treated as cash received and gain to the
Limited Partners will be measured by the difference between the fair market
value of the Merger Stock received by the Limited Partners and their adjusted
basis in their Units. This gain will be limited by the prorata share of the net
gain, if any, which would be recognized if all the marketable securities (Merger
Stock) held by the Partnership were sold. If all Dissenting Limited Partners
have had their interests redeemed before the distribution of the Merger Stock,
each Limited Partner's gains will be reduced to zero. This means that the
adjusted basis of the Merger Stock received would be the same as the adjusted
basis the Limited Partners had in their Units. If gain is recognized, the
adjusted basis in the Merger Stock would be increased by the amount of that
gain.
A Limited Partner that receives a Debenture (with respect to his or her
Units) because of such Limited Partner's exercise of dissenter's or similar
rights under California law (with respect to his or her Units) may recognize
gain depending upon such Limited Partner's aggregate basis in the Partnership
prior to the Closing Date. The aggregate basis of any Merger Stock received by a
Limited Partner in exchange for his or her Units will be equal to the aggregate
basis in such Units immediately before the Merger, decreased by the amount of
cash received by such Limited Partner for such Units in lieu of fractional
shares of Merger Stock. Such basis will be prorated among all shares of Merger
Stock received for such Units.
Limited Partners will have a split holding period for each share of Merger
Stock received. A share of Merger Stock will have a holding period that begins
on the day following the Closing Date to the extent that the value of such share
of Merger Stock on such date is attributable to certain of the Partnership's
assets (essentially, the Partnership's ordinary income assets), and, to the
extent of any excess value, such share of Merger Stock will have a holding
period that includes the period that Units were held by each recipient Limited
Partner.
Each Dissenting Limited Partner will receive a Debenture which will be
treated the same as cash, resulting in gain that will be realized and recognized
by such Limited Partner. It is not anticipated that such Debenture will be
readily transferable. Accordingly, this gain may be eligible to be deferred
until payment is received under such Debenture. Limited Partners should consult
their tax advisor as to how these rules might apply to them.
F-31
<PAGE>
Each Limited Partner who receives Merger Stock will be required to file
with his or her federal income tax return for the year in which the Merger is
consummated a statement that provides details relating to his or her Units
(which will be considered to be property transferred), the Merger Stock, and his
or her share of any liabilities assumed by the Company, as the surviving
corporation in the Merger. The Company will provide its shareholders with
information to assist them in preparing those statements.
After the Merger is consummated, the income and deductions attributable to
the assets and liabilities of the Company will not be allocated to the
shareholders of the Company. A shareholder of the Company will be taxed only on
dividends and other distributions received from the Company, if any. Such
distributions generally will be taxable as dividends to the extent of any
current or accumulated earnings and profits of the Company. Any other
distributions will be treated as a nontaxable return of capital to the extent of
such shareholder's basis in his or her shares of the Company's common stock and
as capital gain to the extent of the remaining portion of such distribution.
THE FOREGOING INFORMATION RELATES ONLY TO THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER PROPOSAL APPLICABLE TO LIMITED PARTNERS GENERALLY. EACH LIMITED
PARTNER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE
CONSEQUENCES OF THE MERGER PROPOSAL ON SUCH PERSON'S PARTICULAR TAX SITUATION.
F-32
<PAGE>
APPENDIX H
THIS CONSENT IS BEING SOLICITED BY PERFORMANCE DEVELOPMENT, INC., IN ITS
CAPACITY AS GENERAL PARTNER, AS A MATTER OF CONVENIENCE FOR THE BOARD OF
DIRECTORS OF PERFORMANCE ASSET MANAGEMENT COMPANY, A DELAWARE CORPORATION
("Company").
PERFORMANCE DEVELOPMENT, INC.
LETTER OF TRANSMITTAL AND CONSENT STATEMENT
FOR LIMITED PARTNERS OF
PERFORMANCE ASSET MANAGEMENT FUND, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP ("Partnership")
THE DATE OF THIS CONSENT STATEMENT IS ________________, 1998
Capitalized terms used but not defined herein have the meanings given to them in
the Prospectus dated May ____, 1998, and which is part of the Registration
Statement on Form S-4 filed on November 4, 1997, by the Company with the
Securities and Exchange Commission, as supplemented or amended ("Prospectus").
General instructions are included in this Letter of Transmittal and Consent
Statement.
This Letter of Transmittal and Consent Statement provides the limited partners
of the Partnership ("Limited Partners") the opportunity to vote "for" or
"against" the proposed merger as specified in the Prospectus, in accordance with
the terms and conditions specified in the Merger Agreement and Plan of
Reorganization dated ___________, 1998, by and between and among the Company,
the PCM Shareholders and the Partnerships ("Merger Proposal") and the proposed
amendment to the Agreement of Limited Partnership for the Partnership
("Partnership Agreement").
This Letter of Transmittal and Consent Statement must be received by U.S. Stock
Transfer Company, 1245 Gardena Avenue, Suite 200, Glendale, California
("Exchange Agent") on or before 5:00 p.m. Pacific Time, on ___________, 1998,
unless the Merger Proposal is extended. In the event the General Partner of the
Partnership ("General Partner") determines that it is in the best interests of
the Limited Partners that the Merger Proposal be extended, because of, for
example, the occurrence of an event beyond the control of the General Partner,
e.g., an event of force majeure (fire, flood, civil disturbance, etc.), all
Limited Partners will be notified in writing of the reasons for the extension
and the subsequent deadline for receipt of votes. To vote "for" the Merger
Proposal or vote "against" the Merger Proposal, please complete this Letter of
Transmittal and Consent Statement in accordance with the instructions in PARTS
IV, V and VI hereof, and send or deliver the completed Letter of Transmittal and
Consent Statement to the Exchange Agent.
The Merger Proposal, in summary, contemplates (i) that the assets of the
Partnership; (ii) the assets of other affiliated California limited partnerships
("Affiliated Partnerships"); and (iii) the assets of Performance Capital
Management, Inc., a California corporation ("PCM") will be acquired, by merger,
by the Company, in consideration for the issuance to the Partnership, the
Affiliated Partnerships, and the PCM Shareholders of certain shares of the
Company's $.001 par value common stock. Additionally, the Merger Proposal
contemplates that the Agreements of Limited Partnership for the Partnership and
the Affiliated Partnerships shall be amended so that the Partnership and the
Affiliated Partnerships, after they receive those shares of the Company's $.001
par value common stock, shall be wound up and dissolved and those shares of that
common stock shall be distributed to the General Partner and the Limited
Partners.
Approval of the Merger Proposal requires consent by Limited Partners holding 75%
of the units in the Partnership ("Units"). If the Merger Proposal is approved,
the Partnership will be wound up and dissolved. Limited Partners will receive
shares of the Company's common stock , unless they exercise dissenters' rights
to receive an unsecured subordinated debenture issued pursuant to an indenture.
See PART V below.
H-1
<PAGE>
THE EXCHANGE AGENT IS U.S. STOCK TRANSFER CORPORATION
Please send this Consent Statement by mail or by hand to:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Attn: PAMCO Roll-up
Delivery of this Letter of Transmittal and Consent Statement to the Exchange
Agent is at the risk of the Limited Partners. If sent by U.S. Mail, it is
recommended that Limited Partners use certified mail, return receipt requested.
Limited Partners may not vote by facsimile machine.
PART I
NAME AND ADDRESS OF LIMITED PARTNER
------------------------------------
------------------------------------
------------------------------------
PART II
DESCRIPTION OF UNITS
Specified below with respect to your Units are (i) the number of Units held of
record, (ii) the determined exchange value attributable to your Units and (iii)
the number of shares of the Company's common stock which will be distributed by
the Partnership to you in exchange for your Units.
Units Exchange Value Common Shares
----- -------------- -------------
PART III
REPRESENTATIONS, WARRANTIES, COVENANTS AND POWER OF ATTORNEY
A Limited Partner checking the "for" box and signing PART IV below ("Consenting
Limited Partner") hereby accepts the Merger Proposal on the terms and subject to
the conditions set forth in the Prospectus, receipt of a copy of which is hereby
acknowledged, thereby consenting to the Merger Proposal.
A Limited Partner checking the "against" box and signing PART IV below
("Non-Consenting Limited Partner") and which does not desire to exercise his or
her dissenters' rights pursuant to PART V below hereby (i) acknowledges receipt
of the Prospectus and, (ii) assuming adoption of the Merger Proposal, will
accept from the Partnership his or her allocable portion of the Company's shares
of $.001 par value common stock distributed by the Partnership on its winding up
and dissolution.
H-2
<PAGE>
The undersigned Limited Partner represents and warrants to the Company that, as
of the closing date of the Merger ("Closing Date"), (i) he or she has not
disposed of or agreed to dispose of his or her Units, other than pursuant to the
Merger Proposal; (ii) he or she has full legal right, power and authority to
convey his or her Units pursuant to the Merger Proposal; (iii) he or she has
received and reviewed a copy of the Prospectus; and (iv) he or she is qualified
to make decisions with respect to investments presenting an investment decision
similar to that involved in the Merger Proposal. All representations, warranties
and covenants contained herein shall survive the Closing Date and all other
transactions contemplated by this Letter of Transmittal and the Prospectus.
In connection with the solicitation of written consents of Limited Partners,
each Consenting Limited Partner below hereby (i) represents and warrants to the
General Partner that he or she has full legal right, power and authority to
execute a written consent with respect to the Merger Proposal; (ii) consents to
the adoption of the Merger Proposal, as described in the Prospectus; and (iii)
consents to the amendment of the Partnership Agreement to facilitate the closing
and consummation of the Merger.
The undersigned Limited Partner hereby irrevocably appoints the General Partner
or any designee of the General Partner, with full power of substitution, as his
or her true and lawful attorney-in-fact, in his or her name, place and stead, to
execute on his or her behalf any additional documents necessary or appropriate
to close and consummate the Merger and the withdrawal and transfer to the
Company of the assets underlying his or her Units. This power of attorney shall
become effective upon the closing and consummation of the Merger, shall be
deemed coupled with an interest, shall be irrevocable, is granted in
consideration of the shares of the Company's $.001 par value common stock which
he or she shall receive on the winding up and dissolution of the Partnership,
shall survive his or her death, incapacity, dissolution or termination of the
existence and shall obligate his or her heirs, legal representatives, successors
or assigns.
The following information must be completed in order to entitle Income Network
Company, as the Soliciting Agent, to receive compensation in connection with the
Merger Proposal.
- ----------------------------
Name of Account Executive
(Please Print)
PART IV
ALL LIMITED PARTNERS, INCLUDING LIMITED PARTNERS WHO DESIRE TO VOTE AGAINST THE
MERGER PROPOSAL, SHOULD COMPLETE THIS PART IV.
THOSE LIMITED PARTNERS WHO WISH TO VOTE AGAINST THE MERGER AND EXERCISE
DISSENTERS' RIGHTS TO RECEIVE AN UNSECURED SUBORDINATED DEBENTURE IN LIEU OF
SHARES OF THE COMPANY'S $.001 PAR VALUE COMMON STOCK, IN THE EVENT THE MERGER
PROPOSAL IS APPROVED, SHOULD ALSO COMPLETE PART V.
If you vote to approve the Merger Proposal, you are voting to (i) transfer the
assets of the Partnership to Performance Asset Management Company, a Delaware
corporation ("Company"), on terms and conditions specified in the Merger
Agreement and Plan of Reorganization, in exchange for the issuance by the
Company to the Partnership of shares of the Company's $.001 par value common
stock; (ii) the termination, winding up and dissolution of the Partnership by
operation of law and, as liquidating distributions, the distribution by the
Partnership to its partners of the Company's $.001 par value common stock
received by the Partnership in exchange for the assets of the Partnership and
(iii) merge the business operations of the Partnership and PCM with and into the
Company, as a result of which the Company would be the surviving corporation.
H-3
<PAGE>
Consent to the Merger Proposal being submitted by the General Partner.
[ ] For [ ] Against
If you vote to approve the amendment to the Partnership Agreement, you are
voting to (i) eliminate restrictions on the transfer and conveyance of all the
assets and liabilities of the Partnership to the Company in exchange for certain
of the Company's shares of $.001 par value common stock ("Partnership Merger
Stock"); (ii) to exchange the Partnership's assets and liabilities for the
Partnership Merger Stock; (iii) to wind up and dissolve the Partnership; and
(iv) to authorize the General Partner to execute, acknowledge, verify, deliver,
file and record any and all documents necessary or appropriate to effect the
Merger Proposal.
Consent to approve and adopt the amendment to the Partnership Agreement.
[ ] For [ ] Against
SIGNATURES
Please sign your name exactly as printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )____________________
Home Telephone: ( )____________________
Dated: _______________________, 1998
IF THE LIMITED PARTNER FAILS TO INDICATE WHETHER CONSENT TO THE MERGER PROPOSAL
IS GIVEN OR WITHHELD, PURSUANT TO SUBPARAGRAPH 9.3.4.1 OF THE PARTNERSHIP
AGREEMENT, CONSENT WILL BE CONCLUSIVELY PRESUMED TO BE GIVEN.
H-4
<PAGE>
PART V
DISSENTING LIMITED PARTNERS
COMPLETE THIS PART V ONLY IF YOU (1) ARE A NON-CONSENTING LIMITED PARTNER AND
(2) YOU WISH TO EXERCISE YOUR DISSENTERS' RIGHTS.
A Non-Consenting Limited Partner may, but is not required to, exercise his or
her dissenter's rights. The NonConsenting Limited Partner signing in this PART V
withholds his or her consent to the Merger Proposal and to adoption of the
amendment to the Partnership Agreement and, additionally, elects to exercise his
or her dissenter's rights. Such a Non-Consenting Limited Partner, therefore,
will become a "Dissenting Limited Partner". By signing this PART V, a Dissenting
Limited Partner hereby exercises his or her dissenter's rights and will be
deemed to have made the representations, warranties and covenants (other than
the consent to the adoption of the Merger Proposal) set forth in PART III above,
and he or she will receive, pursuant to those dissenter's rights, an unsecured
subordinated debenture issued pursuant to an indenture in an amount equal to the
determined exchange value of such Dissenting Limited Partner's Units.
Non-Consenting Limited Partners who do not sign this PART V will not become
Dissenting Limited Partners. Those Non-Consenting Limited Partners will, if the
Merger Proposal is approved, receive the same number of shares of the Company's
$.001 par value common stock that they would have received had they consented to
the Merger Proposal.
SIGNATURES
(ONLY FOR DISSENTING LIMITED PARTNERS)
Please sign exactly as your name is printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )______________________
Home Telephone: ( )______________________
Dated: __________________________, 1998
H-5
<PAGE>
PART VI
INSTRUCTIONS
1. Previously Transferred Interests. If a Limited Partner has transferred,
whether by sale, gift, death or otherwise, the beneficial ownership of any Units
of which he or she has been named a holder of record in this Letter of
Transmittal and Consent Statement without previously notifying the General
Partner or complying with the procedures set forth in the Partnership Agreement
for transferring his or her Units, he or she should notify the General Partner
of that fact and identify the Units transferred, the date of transfer and the
name, address and tax identification number of the assignee. The General Partner
will then send such Limited Partner and the assignee revised Letters of
Transmittal and Consent Statement and request from such Limited Partner or
assignee such other documents as the General Partner may require in order to
facilitate the closing and consummation of the Merger.
2. Participation in Exchange. To be entitled to receive shares of the Company's
$.001 par value common stock on the winding up and dissolution of the
Partnership, even if consent to the Merger Proposal is withheld, a Limited
Partner must deliver to the Exchange Agent one copy of this Letter of
Transmittal and Consent Statement, completed, dated and signed in PART IV.
Delivery of this Letter of Transmittal and Consent Statement is at the risk of
the Limited Partner. A consent will be effective only when this Letter of
Transmittal and Consent Statement is actually received by the Exchange Agent.
The Letter of Transmittal and Consent Statement must be received by the Exchange
Agent on or before 5:00 p.m. Pacific Time, on ____________, unless the Merger
Proposal is extended, in which event the Letter of Transmittal and Consent
Statement must be received by the latest time and date on which the Merger
Proposal, as so extended, will expire.
3. Signatures. This Letter of Transmittal and Consent Statement must be signed
by the Limited Partner whose name appears in PART I of this Letter of
Transmittal and Consent Statement. If Units are held in the names of two or more
persons, all such persons must sign this Letter of Transmittal and Consent
Statement. With respect to Units held by entities such as trusts, joint
ventures, limited partnerships or general partnerships, the Exchange Agent may
require that this Letter of Transmittal and Consent Statement be accompanied by
evidence acceptable to the Exchange Agent that the entity has satisfied all
requirements of its governing instruments, such as applicable partnership or
joint venture agreements, and that the person signing this Letter of Transmittal
and Consent Statement is authorized to sign for the Limited Partner under the
laws of the jurisdiction in which the entity was organized.
TO PARTICIPATE IN THE MERGER, A LIMITED PARTNER MUST SIGN IN THE SIGNATURE BLOCK
IN PART IV OF THIS LETTER OF TRANSMITTAL AND CONSENT STATEMENT. IF HE OR SHE
OBJECTS TO THE MERGER PROPOSAL BUT DOES NOT EXERCISE HIS OR HER DISSENTERS'
RIGHTS BY COMPLETING PART V, SUCH LIMITED PARTNER WILL NOT RECEIVE SHARES OF THE
COMPANY'S $.001 PAR VALUE COMMON STOCK UNTIL AN APPROPRIATELY SIGNED LETTER OF
TRANSMITTAL AND CONSENT STATEMENT IS RECEIVED BY THE EXCHANGE AGENT.
4. Conditional Tenders. No alternative, conditional or contingent consents will
be accepted.
5. Withdrawal or Revocation of Consents. This Letter of Transmittal and Consent
Statement may be withdrawn or revoked by a writing delivered to the Exchange
Agent prior to the date that the votes of the Limited Partners are counted
specifying that such Consent Statement is revoked.
6. Validity of Consents. All questions on the validity, form, eligibility
(including time of receipt) and acceptance of Units will be determined by the
Exchange Agent, in its sole and absolute discretion, and its determination will
be final and conclusive. The Exchange Agent reserves the right to waive any
irregularities or conditions on the manner of consent. Any irregularities in
connection with consents must be cured within such time as the Exchange Agent,
in its sole and absolute discretion, shall determine unless waived by it.
Consents will be deemed not to have been made until any irregularities have been
cured or waived. Any Letter of Transmittal and Consent Statement
H-6
<PAGE>
which is not properly completed and executed, and as to which irregularities are
not cured or waived, will be returned by the Exchange Agent to the Limited
Partner as soon as practicable. The Exchange Agent is under no duty to give
notification of defects in consents and will not incur any liability for failure
to give notification. The Exchange Agent will not accept consents of less than
all of a Limited Partner's Units.
7. Consents to Proposal. Only persons who are holders of record of Units on the
date determined as the record date for such purpose may vote on (i) the Merger
Proposal and (ii) to approve and adopt the proposed amendment to the Partnership
Agreement.
8. Dissenters' Rights. Non-Consenting Limited Partners have limited dissenters'
rights in accordance with the requirements for rollup transactions. By signing
PART V of this Consent Statement, Dissenting Limited Partners will be deemed to
exercise their dissenters' rights and will receive an unsecured subordinated
debenture issued pursuant to an indenture. Each Dissenting Limited Partner will
also be deemed to have sold his or her Units to the Company at the determined
exchange value, payment of which will be made pursuant to the provisions of the
indenture.
Specified below is the proposed amendment to the Partnership Agreement
("Amendment"). The Amendment shall be effective upon the acceptance of written
consents from Limited Partners holding not less than 75% of the Units approving
and adopting the Merger Proposal and the Amendment. If the Amendment becomes
effective, it will become a separate article of the Partnership Agreement and
shall be placed immediately after the last article specified in the Partnership
Agreement.
PROPOSED AMENDMENT
Notwithstanding any provisions of this Agreement to the contrary, it is hereby
agreed as follows:
1. Definitions. Except as defined in this Agreement or this article, each
capitalized term used herein shall, for the purposes of this article, have the
meaning ascribed to it in the Prospectus of Performance Asset Management
Company, a Delaware corporation ("Company"), dated October 31, 1997, which is
part of a Registration Statement on Form S-4 filed by the Company with the
Securities and Exchange Commission on November 4, 1997, ("Prospectus").
2. Elimination of Restrictions. No provision of this Agreement shall prohibit,
limit or prevent the (i) transfer and conveyance of all the assets and
liabilities of the Partnership to the Company in exchange for certain of the
Company's shares of $.001 par value common stock ("Partnership Merger Stock") in
accordance with the terms of the Prospectus or otherwise, or (ii) distribution
of the Partnership Merger Stock to the General Partner and the Limited Partners,
in exchange for their interests in the Partnership, upon the winding up and
dissolution of the Partnership. In addition, no consent of the Partnership or
any Partner, opinion of counsel or other procedure shall be required in order to
enable any Partner, the Partnership or the Company to effect any such transfer
and distribution.
3. Exchange of Partnership Assets and Liabilities for Subject Shares. On the
Closing Date of the Merger, the Partnership shall transfer and convey all of the
Partnership's assets and liabilities to the Company in exchange for the
Partnership Merger Stock, pursuant to and in accordance with the terms of the
Prospectus.
4. Election to Dissolve. Immediately after consummation of the issuance by the
Company to the Partnership of the Partnership Merger Stock, the Partnership
shall be wound up and dissolved. Upon the dissolution of the Partnership, the
business and affairs of the Partnership shall be terminated and wound up and, as
soon as practicable thereafter, any and all Partnership Merger Stock held by the
Partnership shall be distributed in kind to the Partners (or their assignees)
with each Partner (or his or her assignee) to receive a whole number of shares
of Partnership
H-7
<PAGE>
Merger Stock equal to the value of his or her interest in the Partnership
determined by the Exchange Value. Each Partner shall be paid cash for any
fractional shares of Partnership Merger Stock.
5. Authority of General Partner. The General Partner shall execute, acknowledge,
verify, deliver, file and record, for and in the name of the Partnership, any
and all documents and shall do and perform all acts required by applicable law
or that it deems necessary or desirable in order to give effect to this article
and the transactions contemplated herein, including, but not limited to, the
dissolution, termination, winding-up and distribution contemplated by Section 4
of this article.
6. This Article Controlling. The provisions of this article shall prevail and
control over all other provisions of this Agreement.
Except as herein expressly amended, all other terms and provisions of the
Certificate and this Agreement shall remain in full force and effect.
H-8
<PAGE>
APPENDIX I
THIS CONSENT IS BEING SOLICITED BY PERFORMANCE DEVELOPMENT, INC., IN ITS
CAPACITY AS GENERAL PARTNER, AS A MATTER OF CONVENIENCE FOR THE BOARD OF
DIRECTORS OF PERFORMANCE ASSET MANAGEMENT COMPANY, A DELAWARE CORPORATION
("Company").
PERFORMANCE DEVELOPMENT, INC.
LETTER OF TRANSMITTAL AND CONSENT STATEMENT
FOR LIMITED PARTNERS OF
PERFORMANCE ASSET MANAGEMENT FUND II, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP ("Partnership")
THE DATE OF THIS CONSENT STATEMENT IS ________________, 1998
Capitalized terms used but not defined herein have the meanings given to them in
the Prospectus dated May ____, 1998, and which is part of the Registration
Statement on Form S-4 filed on November 4, 1997, by the Company with the
Securities and Exchange Commission, as supplemented or amended ("Prospectus").
General instructions are included in this Letter of Transmittal and Consent
Statement.
This Letter of Transmittal and Consent Statement provides the limited partners
of the Partnership ("Limited Partners") the opportunity to vote "for" or
"against" the proposed merger as specified in the Prospectus, in accordance with
the terms and conditions specified in the Merger Agreement and Plan of
Reorganization dated ___________, 1998, by and between and among the Company,
the PCM Shareholders and the Partnerships ("Merger Proposal") and the proposed
amendment to the Agreement of Limited Partnership for the Partnership
("Partnership Agreement").
This Letter of Transmittal and Consent Statement must be received by U.S. Stock
Transfer Company, 1245 Gardena Avenue, Suite 200, Glendale, California
("Exchange Agent") on or before 5:00 p.m. Pacific Time, on ___________, 1998,
unless the Merger Proposal is extended. In the event the General Partner of the
Partnership ("General Partner") determines that it is in the best interests of
the Limited Partners that the Merger Proposal be extended, because of, for
example, the occurrence of an event beyond the control of the General Partner,
e.g., an event of force majeure (fire, flood, civil disturbance, etc.), all
Limited Partners will be notified in writing of the reasons for the extension
and the subsequent deadline for receipt of votes. To vote "for" the Merger
Proposal or vote "against" the Merger Proposal, please complete this Letter of
Transmittal and Consent Statement in accordance with the instructions in PARTS
IV, V and VI hereof, and send or deliver the completed Letter of Transmittal and
Consent Statement to the Exchange Agent.
The Merger Proposal, in summary, contemplates (i) that the assets of the
Partnership; (ii) the assets of other affiliated California limited partnerships
("Affiliated Partnerships"); and (iii) the assets of Performance Capital
Management, Inc., a California corporation ("PCM") will be acquired, by merger,
by the Company, in consideration for the issuance to the Partnership, the
Affiliated Partnerships, and the PCM Shareholders of certain shares of the
Company's $.001 par value common stock. Additionally, the Merger Proposal
contemplates that the Agreements of Limited Partnership for the Partnership and
the Affiliated Partnerships shall be amended so that the Partnership and the
Affiliated Partnerships, after they receive those shares of the Company's $.001
par value common stock, shall be wound up and dissolved and those shares of that
common stock shall be distributed to the General Partner and the Limited
Partners.
Approval of the Merger Proposal requires consent by Limited Partners holding 75%
of the units in the Partnership ("Units"). If the Merger Proposal is approved,
the Partnership will be wound up and dissolved. Limited Partners will receive
shares of the Company's common stock , unless they exercise dissenters' rights
to receive an unsecured subordinated debenture issued pursuant to an indenture.
See PART V below.
I-1
<PAGE>
THE EXCHANGE AGENT IS U.S. STOCK TRANSFER CORPORATION
Please send this Consent Statement by mail or by hand to:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Attn: PAMCO Roll-up
Delivery of this Letter of Transmittal and Consent Statement to the Exchange
Agent is at the risk of the Limited Partners. If sent by U.S. Mail, it is
recommended that Limited Partners use certified mail, return receipt requested.
Limited Partners may not vote by facsimile machine.
PART I
NAME AND ADDRESS OF LIMITED PARTNER
------------------------------------
------------------------------------
------------------------------------
PART II
DESCRIPTION OF UNITS
Specified below with respect to your Units are (i) the number of Units held of
record, (ii) the determined exchange value attributable to your Units and (iii)
the number of shares of the Company's common stock which will be distributed by
the Partnership to you in exchange for your Units.
Units Exchange Value Common Shares
----- -------------- -------------
PART III
REPRESENTATIONS, WARRANTIES, COVENANTS AND POWER OF ATTORNEY
A Limited Partner checking the "for" box and signing PART IV below ("Consenting
Limited Partner") hereby accepts the Merger Proposal on the terms and subject to
the conditions set forth in the Prospectus, receipt of a copy of which is hereby
acknowledged, thereby consenting to the Merger Proposal.
A Limited Partner checking the "against" box and signing PART IV below
("Non-Consenting Limited Partner") and which does not desire to exercise his or
her dissenters' rights pursuant to PART V below hereby (i) acknowledges receipt
of the Prospectus and, (ii) assuming adoption of the Merger Proposal, will
accept from the Partnership his or her allocable portion of the Company's shares
of $.001 par value common stock distributed by the Partnership on its winding up
and dissolution.
The undersigned Limited Partner represents and warrants to the Company that, as
of the closing date of the Merger ("Closing Date"), (i) he or she has not
disposed of or agreed to dispose of his or her Units, other than pursuant to the
Merger Proposal; (ii) he or she has full legal right, power and authority to
convey his or her Units pursuant to
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the Merger Proposal; (iii) he or she has received and reviewed a copy of the
Prospectus; and (iv) he or she is qualified to make decisions with respect to
investments presenting an investment decision similar to that involved in the
Merger Proposal. All representations, warranties and covenants contained herein
shall survive the Closing Date and all other transactions contemplated by this
Letter of Transmittal and the Prospectus.
In connection with the solicitation of written consents of Limited Partners,
each Consenting Limited Partner below hereby (i) represents and warrants to the
General Partner that he or she has full legal right, power and authority to
execute a written consent with respect to the Merger Proposal; (ii) consents to
the adoption of the Merger Proposal, as described in the Prospectus; and (iii)
consents to the amendment of the Partnership Agreement to facilitate the closing
and consummation of the Merger.
The undersigned Limited Partner hereby irrevocably appoints the General Partner
or any designee of the General Partner, with full power of substitution, as his
or her true and lawful attorney-in-fact, in his or her name, place and stead, to
execute on his or her behalf any additional documents necessary or appropriate
to close and consummate the Merger and the withdrawal and transfer to the
Company of the assets underlying his or her Units. This power of attorney shall
become effective upon the closing and consummation of the Merger, shall be
deemed coupled with an interest, shall be irrevocable, is granted in
consideration of the shares of the Company's $.001 par value common stock which
he or she shall receive on the winding up and dissolution of the Partnership,
shall survive his or her death, incapacity, dissolution or termination of the
existence and shall obligate his or her heirs, legal representatives, successors
or assigns.
The following information must be completed in order to entitle Income Network
Company, as the Soliciting Agent, to receive compensation in connection with the
Merger Proposal.
- ----------------------------
Name of Account Executive
(Please Print)
PART IV
ALL LIMITED PARTNERS, INCLUDING LIMITED PARTNERS WHO DESIRE TO VOTE AGAINST THE
MERGER PROPOSAL, SHOULD COMPLETE THIS PART IV.
THOSE LIMITED PARTNERS WHO WISH TO VOTE AGAINST THE MERGER AND EXERCISE
DISSENTERS' RIGHTS TO RECEIVE AN UNSECURED SUBORDINATED DEBENTURE IN LIEU OF
SHARES OF THE COMPANY'S $.001 PAR VALUE COMMON STOCK, IN THE EVENT THE MERGER
PROPOSAL IS APPROVED, SHOULD ALSO COMPLETE PART V.
If you vote to approve the Merger Proposal, you are voting to (i) transfer the
assets of the Partnership to Performance Asset Management Company, a Delaware
corporation ("Company"), on terms and conditions specified in the Merger
Agreement and Plan of Reorganization, in exchange for the issuance by the
Company to the Partnership of shares of the Company's $.001 par value common
stock; (ii) the termination, winding up and dissolution of the Partnership by
operation of law and, as liquidating distributions, the distribution by the
Partnership to its partners of the Company's $.001 par value common stock
received by the Partnership in exchange for the assets of the Partnership and
(iii) merge the business operations of the Partnership and PCM with and into the
Company, as a result of which the Company would be the surviving corporation.
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Consent to the Merger Proposal being submitted by the General Partner.
[ ] For [ ] Against
If you vote to approve the amendment to the Partnership Agreement, you are
voting to (i) eliminate restrictions on the transfer and conveyance of all the
assets and liabilities of the Partnership to the Company in exchange for certain
of the Company's shares of $.001 par value common stock ("Partnership Merger
Stock"); (ii) to exchange the Partnership's assets and liabilities for the
Partnership Merger Stock; (iii) to wind up and dissolve the Partnership; and
(iv) to authorize the General Partner to execute, acknowledge, verify, deliver,
file and record any and all documents necessary or appropriate to effect the
Merger Proposal.
Consent to approve and adopt the amendment to the Partnership Agreement.
[ ] For [ ] Against
SIGNATURES
Please sign your name exactly as printed in PART I above, unless printed
incorrectly. When signing as a general part
ner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )____________________
Home Telephone: ( )____________________
Dated: _______________________, 1998
IF THE LIMITED PARTNER FAILS TO INDICATE WHETHER CONSENT TO THE MERGER PROPOSAL
IS GIVEN OR WITHHELD, PURSUANT TO SUBPARAGRAPH 9.3.4.1 OF THE PARTNERSHIP
AGREEMENT, CONSENT WILL BE CONCLUSIVELY PRESUMED TO BE GIVEN.
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PART V
DISSENTING LIMITED PARTNERS
COMPLETE THIS PART V ONLY IF YOU (1) ARE A NON-CONSENTING LIMITED PARTNER AND
(2) YOU WISH TO EXERCISE YOUR DISSENTERS' RIGHTS.
A Non-Consenting Limited Partner may, but is not required to, exercise his or
her dissenter's rights. The NonConsenting Limited Partner signing in this PART V
withholds his or her consent to the Merger Proposal and to adoption of the
amendment to the Partnership Agreement and, additionally, elects to exercise his
or her dissenter's rights. Such a Non-Consenting Limited Partner, therefore,
will become a "Dissenting Limited Partner". By signing this PART V, a Dissenting
Limited Partner hereby exercises his or her dissenter's rights and will be
deemed to have made the representations, warranties and covenants (other than
the consent to the adoption of the Merger Proposal) set forth in PART III above,
and he or she will receive, pursuant to those dissenter's rights, an unsecured
subordinated debenture issued pursuant to an indenture in an amount equal to the
determined exchange value of such Dissenting Limited Partner's Units.
Non-Consenting Limited Partners who do not sign this PART V will not become
Dissenting Limited Partners. Those Non-Consenting Limited Partners will, if the
Merger Proposal is approved, receive the same number of shares of the Company's
$.001 par value common stock that they would have received had they consented to
the Merger Proposal.
SIGNATURES
(ONLY FOR DISSENTING LIMITED PARTNERS)
Please sign exactly as your name is printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )______________________
Home Telephone: ( )______________________
Dated: __________________________, 1998
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PART VI
INSTRUCTIONS
1. Previously Transferred Interests. If a Limited Partner has transferred,
whether by sale, gift, death or otherwise, the beneficial ownership of any Units
of which he or she has been named a holder of record in this Letter of
Transmittal and Consent Statement without previously notifying the General
Partner or complying with the procedures set forth in the Partnership Agreement
for transferring his or her Units, he or she should notify the General Partner
of that fact and identify the Units transferred, the date of transfer and the
name, address and tax identification number of the assignee. The General Partner
will then send such Limited Partner and the assignee revised Letters of
Transmittal and Consent Statement and request from such Limited Partner or
assignee such other documents as the General Partner may require in order to
facilitate the closing and consummation of the Merger.
2. Participation in Exchange. To be entitled to receive shares of the Company's
$.001 par value common stock on the winding up and dissolution of the
Partnership, even if consent to the Merger Proposal is withheld, a Limited
Partner must deliver to the Exchange Agent one copy of this Letter of
Transmittal and Consent Statement, completed, dated and signed in PART IV.
Delivery of this Letter of Transmittal and Consent Statement is at the risk of
the Limited Partner. A consent will be effective only when this Letter of
Transmittal and Consent Statement is actually received by the Exchange Agent.
The Letter of Transmittal and Consent Statement must be received by the Exchange
Agent on or before 5:00 p.m. Pacific Time, on ____________, unless the Merger
Proposal is extended, in which event the Letter of Transmittal and Consent
Statement must be received by the latest time and date on which the Merger
Proposal, as so extended, will expire.
3. Signatures. This Letter of Transmittal and Consent Statement must be signed
by the Limited Partner whose name appears in PART I of this Letter of
Transmittal and Consent Statement. If Units are held in the names of two or more
persons, all such persons must sign this Letter of Transmittal and Consent
Statement. With respect to Units held by entities such as trusts, joint
ventures, limited partnerships or general partnerships, the Exchange Agent may
require that this Letter of Transmittal and Consent Statement be accompanied by
evidence acceptable to the Exchange Agent that the entity has satisfied all
requirements of its governing instruments, such as applicable partnership or
joint venture agreements, and that the person signing this Letter of Transmittal
and Consent Statement is authorized to sign for the Limited Partner under the
laws of the jurisdiction in which the entity was organized.
TO PARTICIPATE IN THE MERGER, A LIMITED PARTNER MUST SIGN IN THE SIGNATURE BLOCK
IN PART IV OF THIS LETTER OF TRANSMITTAL AND CONSENT STATEMENT. IF HE OR SHE
OBJECTS TO THE MERGER PROPOSAL BUT DOES NOT EXERCISE HIS OR HER DISSENTERS'
RIGHTS BY COMPLETING PART V, SUCH LIMITED PARTNER WILL NOT RECEIVE SHARES OF THE
COMPANY'S $.001 PAR VALUE COMMON STOCK UNTIL AN APPROPRIATELY SIGNED LETTER OF
TRANSMITTAL AND CONSENT STATEMENT IS RECEIVED BY THE EXCHANGE AGENT.
4. Conditional Tenders. No alternative, conditional or contingent consents will
be accepted.
5. Withdrawal or Revocation of Consents. This Letter of Transmittal and Consent
Statement may be withdrawn or revoked by a writing delivered to the Exchange
Agent prior to the date that the votes of the Limited Partners are counted
specifying that such Consent Statement is revoked.
6. Validity of Consents. All questions on the validity, form, eligibility
(including time of receipt) and acceptance of Units will be determined by the
Exchange Agent, in its sole and absolute discretion, and its determination will
be final and conclusive. The Exchange Agent reserves the right to waive any
irregularities or conditions on the manner of consent. Any irregularities in
connection with consents must be cured within such time as the Exchange Agent,
in its sole and absolute discretion, shall determine unless waived by it.
Consents will be deemed not to have been made until any irregularities have been
cured or waived. Any Letter of Transmittal and Consent Statement
I-6
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which is not properly completed and executed, and as to which irregularities are
not cured or waived, will be returned by the Exchange Agent to the Limited
Partner as soon as practicable. The Exchange Agent is under no duty to give
notification of defects in consents and will not incur any liability for failure
to give notification. The Exchange Agent will not accept consents of less than
all of a Limited Partner's Units.
7. Consents to Proposal. Only persons who are holders of record of Units on the
date determined as the record date for such purpose may vote on (i) the Merger
Proposal and (ii) to approve and adopt the proposed amendment to the Partnership
Agreement.
8. Dissenters' Rights. Non-Consenting Limited Partners have limited dissenters'
rights in accordance with the requirements for rollup transactions. By signing
PART V of this Consent Statement, Dissenting Limited Partners will be deemed to
exercise their dissenters' rights and will receive an unsecured subordinated
debenture issued pursuant to an indenture. Each Dissenting Limited Partner will
also be deemed to have sold his or her Units to the Company at the determined
exchange value, payment of which will be made pursuant to the provisions of the
indenture.
Specified below is the proposed amendment to the Partnership Agreement
("Amendment"). The Amendment shall be effective upon the acceptance of written
consents from Limited Partners holding not less than 75% of the Units approving
and adopting the Merger Proposal and the Amendment. If the Amendment becomes
effective, it will become a separate article of the Partnership Agreement and
shall be placed immediately after the last article specified in the Partnership
Agreement.
PROPOSED AMENDMENT
Notwithstanding any provisions of this Agreement to the contrary, it is hereby
agreed as follows:
1. Definitions. Except as defined in this Agreement or this article, each
capitalized term used herein shall, for the purposes of this article, have the
meaning ascribed to it in the Prospectus of Performance Asset Management
Company, a Delaware corporation ("Company"), dated October 31, 1997, which is
part of a Registration Statement on Form S-4 filed by the Company with the
Securities and Exchange Commission on November 4, 1997, ("Prospectus").
2. Elimination of Restrictions. No provision of this Agreement shall prohibit,
limit or prevent the (i) transfer and conveyance of all the assets and
liabilities of the Partnership to the Company in exchange for certain of the
Company's shares of $.001 par value common stock ("Partnership Merger Stock") in
accordance with the terms of the Prospectus or otherwise, or (ii) distribution
of the Partnership Merger Stock to the General Partner and the Limited Partners,
in exchange for their interests in the Partnership, upon the winding up and
dissolution of the Partnership. In addition, no consent of the Partnership or
any Partner, opinion of counsel or other procedure shall be required in order to
enable any Partner, the Partnership or the Company to effect any such transfer
and distribution.
3. Exchange of Partnership Assets and Liabilities for Subject Shares. On the
Closing Date of the Merger, the Partnership shall transfer and convey all of the
Partnership's assets and liabilities to the Company in exchange for the
Partnership Merger Stock, pursuant to and in accordance with the terms of the
Prospectus.
4. Election to Dissolve. Immediately after consummation of the issuance by the
Company to the Partnership of the Partnership Merger Stock, the Partnership
shall be wound up and dissolved. Upon the dissolution of the Partnership, the
business and affairs of the Partnership shall be terminated and wound up and, as
soon as practicable thereafter, any and all Partnership Merger Stock held by the
Partnership shall be distributed in kind to the Partners (or their assignees)
with each Partner (or his or her assignee) to receive a whole number of shares
of Partnership
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Merger Stock equal to the value of his or her interest in the Partnership
determined by the Exchange Value. Each Partner shall be paid cash for any
fractional shares of Partnership Merger Stock.
5. Authority of General Partner. The General Partner shall execute, acknowledge,
verify, deliver, file and record, for and in the name of the Partnership, any
and all documents and shall do and perform all acts required by applicable law
or that it deems necessary or desirable in order to give effect to this article
and the transactions contemplated herein, including, but not limited to, the
dissolution, termination, winding-up and distribution contemplated by Section 4
of this article.
6. This Article Controlling. The provisions of this article shall prevail and
control over all other provisions of this Agreement.
Except as herein expressly amended, all other terms and provisions of the
Certificate and this Agreement shall remain in full force and effect.
I-8
<PAGE>
APPENDIX J
THIS CONSENT IS BEING SOLICITED BY PERFORMANCE DEVELOPMENT, INC., IN ITS
CAPACITY AS GENERAL PARTNER, AS A MATTER OF CONVENIENCE FOR THE BOARD OF
DIRECTORS OF PERFORMANCE ASSET MANAGEMENT COMPANY, A DELAWARE CORPORATION
("Company").
PERFORMANCE DEVELOPMENT, INC.
LETTER OF TRANSMITTAL AND CONSENT STATEMENT
FOR LIMITED PARTNERS OF
PERFORMANCE ASSET MANAGEMENT FUND III, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP ("Partnership")
THE DATE OF THIS CONSENT STATEMENT IS ________________, 1998
Capitalized terms used but not defined herein have the meanings given to them in
the Prospectus dated May ____, 1998, and which is part of the Registration
Statement on Form S-4 filed on November 4, 1997, by the Company with the
Securities and Exchange Commission, as supplemented or amended ("Prospectus").
General instructions are included in this Letter of Transmittal and Consent
Statement.
This Letter of Transmittal and Consent Statement provides the limited partners
of the Partnership ("Limited Partners") the opportunity to vote "for" or
"against" the proposed merger as specified in the Prospectus, in accordance with
the terms and conditions specified in the Merger Agreement and Plan of
Reorganization dated ___________, 1998, by and between and among the Company,
the PCM Shareholders and the Partnerships ("Merger Proposal") and the proposed
amendment to the Agreement of Limited Partnership for the Partnership
("Partnership Agreement").
This Letter of Transmittal and Consent Statement must be received by U.S. Stock
Transfer Company, 1245 Gardena Avenue, Suite 200, Glendale, California
("Exchange Agent") on or before 5:00 p.m. Pacific Time, on ___________, 1998,
unless the Merger Proposal is extended. In the event the General Partner of the
Partnership ("General Partner") determines that it is in the best interests of
the Limited Partners that the Merger Proposal be extended, because of, for
example, the occurrence of an event beyond the control of the General Partner,
e.g., an event of force majeure (fire, flood, civil disturbance, etc.), all
Limited Partners will be notified in writing of the reasons for the extension
and the subsequent deadline for receipt of votes. To vote "for" the Merger
Proposal or vote "against" the Merger Proposal, please complete this Letter of
Transmittal and Consent Statement in accordance with the instructions in PARTS
IV, V and VI hereof, and send or deliver the completed Letter of Transmittal and
Consent Statement to the Exchange Agent.
The Merger Proposal, in summary, contemplates (i) that the assets of the
Partnership; (ii) the assets of other affiliated California limited partnerships
("Affiliated Partnerships"); and (iii) the assets of Performance Capital
Management, Inc., a California corporation ("PCM") will be acquired, by merger,
by the Company, in consideration for the issuance to the Partnership, the
Affiliated Partnerships, and the PCM Shareholders of certain shares of the
Company's $.001 par value common stock. Additionally, the Merger Proposal
contemplates that the Agreements of Limited Partnership for the Partnership and
the Affiliated Partnerships shall be amended so that the Partnership and the
Affiliated Partnerships, after they receive those shares of the Company's $.001
par value common stock, shall be wound up and dissolved and those shares of that
common stock shall be distributed to the General Partner and the Limited
Partners.
Approval of the Merger Proposal requires consent by Limited Partners holding 75%
of the units in the Partnership ("Units"). If the Merger Proposal is approved,
the Partnership will be wound up and dissolved. Limited Partners will receive
shares of the Company's common stock , unless they exercise dissenters' rights
to receive an unsecured subordinated debenture issued pursuant to an indenture.
See PART V below.
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THE EXCHANGE AGENT IS U.S. STOCK TRANSFER CORPORATION
Please send this Consent Statement by mail or by hand to:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Attn: PAMCO Roll-up
Delivery of this Letter of Transmittal and Consent Statement to the Exchange
Agent is at the risk of the Limited Partners. If sent by U.S. Mail, it is
recommended that Limited Partners use certified mail, return receipt requested.
Limited Partners may not vote by facsimile machine.
PART I
NAME AND ADDRESS OF LIMITED PARTNER
------------------------------------
------------------------------------
------------------------------------
PART II
DESCRIPTION OF UNITS
Specified below with respect to your Units are (i) the number of Units held of
record, (ii) the determined exchange value attributable to your Units and (iii)
the number of shares of the Company's common stock which will be distributed by
the Partnership to you in exchange for your Units.
Units Exchange Value Common Shares
----- -------------- -------------
PART III
REPRESENTATIONS, WARRANTIES, COVENANTS AND POWER OF ATTORNEY
A Limited Partner checking the "for" box and signing PART IV below ("Consenting
Limited Partner") hereby accepts the Merger Proposal on the terms and subject to
the conditions set forth in the Prospectus, receipt of a copy of which is hereby
acknowledged, thereby consenting to the Merger Proposal.
A Limited Partner checking the "against" box and signing PART IV below
("Non-Consenting Limited Partner") and which does not desire to exercise his or
her dissenters' rights pursuant to PART V below hereby (i) acknowledges receipt
of the Prospectus and, (ii) assuming adoption of the Merger Proposal, will
accept from the Partnership his or her allocable portion of the Company's shares
of $.001 par value common stock distributed by the Partnership on its winding up
and dissolution.
The undersigned Limited Partner represents and warrants to the Company that, as
of the closing date of the Merger ("Closing Date"), (i) he or she has not
disposed of or agreed to dispose of his or her Units, other than pursuant to
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the Merger Proposal; (ii) he or she has full legal right, power and authority to
convey his or her Units pursuant to the Merger Proposal; (iii) he or she has
received and reviewed a copy of the Prospectus; and (iv) he or she is qualified
to make decisions with respect to investments presenting an investment decision
similar to that involved in the Merger Proposal. All representations, warranties
and covenants contained herein shall survive the Closing Date and all other
transactions contemplated by this Letter of Transmittal and the Prospectus.
In connection with the solicitation of written consents of Limited Partners,
each Consenting Limited Partner below hereby (i) represents and warrants to the
General Partner that he or she has full legal right, power and authority to
execute a written consent with respect to the Merger Proposal; (ii) consents to
the adoption of the Merger Proposal, as described in the Prospectus; and (iii)
consents to the amendment of the Partnership Agreement to facilitate the closing
and consummation of the Merger.
The undersigned Limited Partner hereby irrevocably appoints the General Partner
or any designee of the General Partner, with full power of substitution, as his
or her true and lawful attorney-in-fact, in his or her name, place and stead, to
execute on his or her behalf any additional documents necessary or appropriate
to close and consummate the Merger and the withdrawal and transfer to the
Company of the assets underlying his or her Units. This power of attorney shall
become effective upon the closing and consummation of the Merger, shall be
deemed coupled with an interest, shall be irrevocable, is granted in
consideration of the shares of the Company's $.001 par value common stock which
he or she shall receive on the winding up and dissolution of the Partnership,
shall survive his or her death, incapacity, dissolution or termination of the
existence and shall obligate his or her heirs, legal representatives, successors
or assigns.
The following information must be completed in order to entitle Income Network
Company, as the Soliciting Agent, to receive compensation in connection with the
Merger Proposal.
- ----------------------------
Name of Account Executive
(Please Print)
PART IV
ALL LIMITED PARTNERS, INCLUDING LIMITED PARTNERS WHO DESIRE TO VOTE AGAINST THE
MERGER PROPOSAL, SHOULD COMPLETE THIS PART IV.
THOSE LIMITED PARTNERS WHO WISH TO VOTE AGAINST THE MERGER AND EXERCISE
DISSENTERS' RIGHTS TO RECEIVE AN UNSECURED SUBORDINATED DEBENTURE IN LIEU OF
SHARES OF THE COMPANY'S $.001 PAR VALUE COMMON STOCK, IN THE EVENT THE MERGER
PROPOSAL IS APPROVED, SHOULD ALSO COMPLETE PART V.
If you vote to approve the Merger Proposal, you are voting to (i) transfer the
assets of the Partnership to Performance Asset Management Company, a Delaware
corporation ("Company"), on terms and conditions specified in the Merger
Agreement and Plan of Reorganization, in exchange for the issuance by the
Company to the Partnership of shares of the Company's $.001 par value common
stock; (ii) the termination, winding up and dissolution of the Partnership by
operation of law and, as liquidating distributions, the distribution by the
Partnership to its partners of the Company's $.001 par value common stock
received by the Partnership in exchange for the assets of the Partnership and
(iii) merge the business operations of the Partnership and PCM with and into the
Company, as a result of which the Company would be the surviving corporation.
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Consent to the Merger Proposal being submitted by the General Partner.
[ ] For [ ] Against
If you vote to approve the amendment to the Partnership Agreement, you are
voting to (i) eliminate restrictions on the transfer and conveyance of all the
assets and liabilities of the Partnership to the Company in exchange for certain
of the Company's shares of $.001 par value common stock ("Partnership Merger
Stock"); (ii) to exchange the Partnership's assets and liabilities for the
Partnership Merger Stock; (iii) to wind up and dissolve the Partnership; and
(iv) to authorize the General Partner to execute, acknowledge, verify, deliver,
file and record any and all documents necessary or appropriate to effect the
Merger Proposal.
Consent to approve and adopt the amendment to the Partnership Agreement.
[ ] For [ ] Against
SIGNATURES
Please sign your name exactly as printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )____________________
Home Telephone: ( )____________________
Dated: _______________________, 1998
IF THE LIMITED PARTNER FAILS TO INDICATE WHETHER CONSENT TO THE MERGER PROPOSAL
IS GIVEN OR WITHHELD, PURSUANT TO SUBPARAGRAPH 9.3.4.1 OF THE PARTNERSHIP
AGREEMENT, CONSENT WILL BE CONCLUSIVELY PRESUMED TO BE GIVEN.
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PART V
DISSENTING LIMITED PARTNERS
COMPLETE THIS PART V ONLY IF YOU (1) ARE A NON-CONSENTING LIMITED PARTNER AND
(2) YOU WISH TO EXERCISE YOUR DISSENTERS' RIGHTS.
A Non-Consenting Limited Partner may, but is not required to, exercise his or
her dissenter's rights. The NonConsenting Limited Partner signing in this PART V
withholds his or her consent to the Merger Proposal and to adoption of the
amendment to the Partnership Agreement and, additionally, elects to exercise his
or her dissenter's rights. Such a Non-Consenting Limited Partner, therefore,
will become a "Dissenting Limited Partner". By signing this PART V, a Dissenting
Limited Partner hereby exercises his or her dissenter's rights and will be
deemed to have made the representations, warranties and covenants (other than
the consent to the adoption of the Merger Proposal) set forth in PART III above,
and he or she will receive, pursuant to those dissenter's rights, an unsecured
subordinated debenture issued pursuant to an indenture in an amount equal to the
determined exchange value of such Dissenting Limited Partner's Units.
Non-Consenting Limited Partners who do not sign this PART V will not become
Dissenting Limited Partners. Those Non-Consenting Limited Partners will, if the
Merger Proposal is approved, receive the same number of shares of the Company's
$.001 par value common stock that they would have received had they consented to
the Merger Proposal.
SIGNATURES
(ONLY FOR DISSENTING LIMITED PARTNERS)
Please sign exactly as your name is printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )______________________
Home Telephone: ( )______________________
Dated: __________________________, 1998
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PART VI
INSTRUCTIONS
1. Previously Transferred Interests. If a Limited Partner has transferred,
whether by sale, gift, death or otherwise, the beneficial ownership of any Units
of which he or she has been named a holder of record in this Letter of
Transmittal and Consent Statement without previously notifying the General
Partner or complying with the procedures set forth in the Partnership Agreement
for transferring his or her Units, he or she should notify the General Partner
of that fact and identify the Units transferred, the date of transfer and the
name, address and tax identification number of the assignee. The General Partner
will then send such Limited Partner and the assignee revised Letters of
Transmittal and Consent Statement and request from such Limited Partner or
assignee such other documents as the General Partner may require in order to
facilitate the closing and consummation of the Merger.
2. Participation in Exchange. To be entitled to receive shares of the Company's
$.001 par value common stock on the winding up and dissolution of the
Partnership, even if consent to the Merger Proposal is withheld, a Limited
Partner must deliver to the Exchange Agent one copy of this Letter of
Transmittal and Consent Statement, completed, dated and signed in PART IV.
Delivery of this Letter of Transmittal and Consent Statement is at the risk of
the Limited Partner. A consent will be effective only when this Letter of
Transmittal and Consent Statement is actually received by the Exchange Agent.
The Letter of Transmittal and Consent Statement must be received by the Exchange
Agent on or before 5:00 p.m. Pacific Time, on ____________, unless the Merger
Proposal is extended, in which event the Letter of Transmittal and Consent
Statement must be received by the latest time and date on which the Merger
Proposal, as so extended, will expire.
3. Signatures. This Letter of Transmittal and Consent Statement must be signed
by the Limited Partner whose name appears in PART I of this Letter of
Transmittal and Consent Statement. If Units are held in the names of two or more
persons, all such persons must sign this Letter of Transmittal and Consent
Statement. With respect to Units held by entities such as trusts, joint
ventures, limited partnerships or general partnerships, the Exchange Agent may
require that this Letter of Transmittal and Consent Statement be accompanied by
evidence acceptable to the Exchange Agent that the entity has satisfied all
requirements of its governing instruments, such as applicable partnership or
joint venture agreements, and that the person signing this Letter of Transmittal
and Consent Statement is authorized to sign for the Limited Partner under the
laws of the jurisdiction in which the entity was organized.
TO PARTICIPATE IN THE MERGER, A LIMITED PARTNER MUST SIGN IN THE SIGNATURE BLOCK
IN PART IV OF THIS LETTER OF TRANSMITTAL AND CONSENT STATEMENT. IF HE OR SHE
OBJECTS TO THE MERGER PROPOSAL BUT DOES NOT EXERCISE HIS OR HER DISSENTERS'
RIGHTS BY COMPLETING PART V, SUCH LIMITED PARTNER WILL NOT RECEIVE SHARES OF THE
COMPANY'S $.001 PAR VALUE COMMON STOCK UNTIL AN APPROPRIATELY SIGNED LETTER OF
TRANSMITTAL AND CONSENT STATEMENT IS RECEIVED BY THE EXCHANGE AGENT.
4. Conditional Tenders. No alternative, conditional or contingent consents will
be accepted.
5. Withdrawal or Revocation of Consents. This Letter of Transmittal and Consent
Statement may be withdrawn or revoked by a writing delivered to the Exchange
Agent prior to the date that the votes of the Limited Partners are counted
specifying that such Consent Statement is revoked.
6. Validity of Consents. All questions on the validity, form, eligibility
(including time of receipt) and acceptance of Units will be determined by the
Exchange Agent, in its sole and absolute discretion, and its determination will
be final and conclusive. The Exchange Agent reserves the right to waive any
irregularities or conditions on the manner of consent. Any irregularities in
connection with consents must be cured within such time as the Exchange Agent,
in its sole and absolute discretion, shall determine unless waived by it.
Consents will be deemed not to have been made until any irregularities have been
cured or waived. Any Letter of Transmittal and Consent Statement
J-6
<PAGE>
which is not properly completed and executed, and as to which irregularities are
not cured or waived, will be returned by the Exchange Agent to the Limited
Partner as soon as practicable. The Exchange Agent is under no duty to give
notification of defects in consents and will not incur any liability for failure
to give notification. The Exchange Agent will not accept consents of less than
all of a Limited Partner's Units.
7. Consents to Proposal. Only persons who are holders of record of Units on the
date determined as the record date for such purpose may vote on (i) the Merger
Proposal and (ii) to approve and adopt the proposed amendment to the Partnership
Agreement.
8. Dissenters' Rights. Non-Consenting Limited Partners have limited dissenters'
rights in accordance with the requirements for rollup transactions. By signing
PART V of this Consent Statement, Dissenting Limited Partners will be deemed to
exercise their dissenters' rights and will receive an unsecured subordinated
debenture issued pursuant to an indenture. Each Dissenting Limited Partner will
also be deemed to have sold his or her Units to the Company at the determined
exchange value, payment of which will be made pursuant to the provisions of the
indenture.
Specified below is the proposed amendment to the Partnership Agreement
("Amendment"). The Amendment shall be effective upon the acceptance of written
consents from Limited Partners holding not less than 75% of the Units approving
and adopting the Merger Proposal and the Amendment. If the Amendment becomes
effective, it will become a separate article of the Partnership Agreement and
shall be placed immediately after the last article specified in the Partnership
Agreement.
PROPOSED AMENDMENT
Notwithstanding any provisions of this Agreement to the contrary, it is hereby
agreed as follows:
1. Definitions. Except as defined in this Agreement or this article, each
capitalized term used herein shall, for the purposes of this article, have the
meaning ascribed to it in the Prospectus of Performance Asset Management
Company, a Delaware corporation ("Company"), dated October 31, 1997, which is
part of a Registration Statement on Form S-4 filed by the Company with the
Securities and Exchange Commission on November 4, 1997, ("Prospectus").
2. Elimination of Restrictions. No provision of this Agreement shall prohibit,
limit or prevent the (i) transfer and conveyance of all the assets and
liabilities of the Partnership to the Company in exchange for certain of the
Company's shares of $.001 par value common stock ("Partnership Merger Stock") in
accordance with the terms of the Prospectus or otherwise, or (ii) distribution
of the Partnership Merger Stock to the General Partner and the Limited Partners,
in exchange for their interests in the Partnership, upon the winding up and
dissolution of the Partnership. In addition, no consent of the Partnership or
any Partner, opinion of counsel or other procedure shall be required in order to
enable any Partner, the Partnership or the Company to effect any such transfer
and distribution.
3. Exchange of Partnership Assets and Liabilities for Subject Shares. On the
Closing Date of the Merger, the Partnership shall transfer and convey all of the
Partnership's assets and liabilities to the Company in exchange for the
Partnership Merger Stock, pursuant to and in accordance with the terms of the
Prospectus.
4. Election to Dissolve. Immediately after consummation of the issuance by the
Company to the Partnership of the Partnership Merger Stock, the Partnership
shall be wound up and dissolved. Upon the dissolution of the Partnership, the
business and affairs of the Partnership shall be terminated and wound up and, as
soon as practicable thereafter, any and all Partnership Merger Stock held by the
Partnership shall be distributed in kind to the Partners (or their assignees)
with each Partner (or his or her assignee) to receive a whole number of shares
of Partnership
J-7
<PAGE>
Merger Stock equal to the value of his or her interest in the Partnership
determined by the Exchange Value. Each Partner shall be paid cash for any
fractional shares of Partnership Merger Stock.
5. Authority of General Partner. The General Partner shall execute, acknowledge,
verify, deliver, file and record, for and in the name of the Partnership, any
and all documents and shall do and perform all acts required by applicable law
or that it deems necessary or desirable in order to give effect to this article
and the transactions contemplated herein, including, but not limited to, the
dissolution, termination, winding-up and distribution contemplated by Section 4
of this article.
6. This Article Controlling. The provisions of this article shall prevail and
control over all other provisions of this Agreement.
Except as herein expressly amended, all other terms and provisions of the
Certificate and this Agreement shall remain in full force and effect.
J-8
<PAGE>
APPENDIX K
THIS CONSENT IS BEING SOLICITED BY PERFORMANCE DEVELOPMENT, INC., IN ITS
CAPACITY AS GENERAL PARTNER, AS A MATTER OF CONVENIENCE FOR THE BOARD OF
DIRECTORS OF PERFORMANCE ASSET MANAGEMENT COMPANY, A DELAWARE CORPORATION
("Company").
PERFORMANCE DEVELOPMENT, INC.
LETTER OF TRANSMITTAL AND CONSENT STATEMENT
FOR LIMITED PARTNERS OF
PERFORMANCE ASSET MANAGEMENT FUND IV, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP ("Partnership")
THE DATE OF THIS CONSENT STATEMENT IS ________________, 1998
Capitalized terms used but not defined herein have the meanings given to them in
the Prospectus dated May ____, 1998, and which is part of the Registration
Statement on Form S-4 filed on November 4, 1997, by the Company with the
Securities and Exchange Commission, as supplemented or amended ("Prospectus").
General instructions are included in this Letter of Transmittal and Consent
Statement.
This Letter of Transmittal and Consent Statement provides the limited partners
of the Partnership ("Limited Partners") the opportunity to vote "for" or
"against" the proposed merger as specified in the Prospectus, in accordance with
the terms and conditions specified in the Merger Agreement and Plan of
Reorganization dated ___________, 1998, by and between and among the Company,
the PCM Shareholders and the Partnerships ("Merger Proposal") and the proposed
amendment to the Agreement of Limited Partnership for the Partnership
("Partnership Agreement").
This Letter of Transmittal and Consent Statement must be received by U.S. Stock
Transfer Company, 1245 Gardena Avenue, Suite 200, Glendale, California
("Exchange Agent") on or before 5:00 p.m. Pacific Time, on ___________, 1998,
unless the Merger Proposal is extended. In the event the General Partner of the
Partnership ("General Partner") determines that it is in the best interests of
the Limited Partners that the Merger Proposal be extended, because of, for
example, the occurrence of an event beyond the control of the General Partner,
e.g., an event of force majeure (fire, flood, civil disturbance, etc.), all
Limited Partners will be notified in writing of the reasons for the extension
and the subsequent deadline for receipt of votes. To vote "for" the Merger
Proposal or vote "against" the Merger Proposal, please complete this Letter of
Transmittal and Consent Statement in accordance with the instructions in PARTS
IV, V and VI hereof, and send or deliver the completed Letter of Transmittal and
Consent Statement to the Exchange Agent.
The Merger Proposal, in summary, contemplates (i) that the assets of the
Partnership; (ii) the assets of other affiliated California limited partnerships
("Affiliated Partnerships"); and (iii) the assets of Performance Capital
Management, Inc., a California corporation ("PCM") will be acquired, by merger,
by the Company, in consideration for the issuance to the Partnership, the
Affiliated Partnerships, and the PCM Shareholders of certain shares of the
Company's $.001 par value common stock. Additionally, the Merger Proposal
contemplates that the Agreements of Limited Partnership for the Partnership and
the Affiliated Partnerships shall be amended so that the Partnership and the
Affiliated Partnerships, after they receive those shares of the Company's $.001
par value common stock, shall be wound up and dissolved and those shares of that
common stock shall be distributed to the General Partner and the Limited
Partners.
Approval of the Merger Proposal requires consent by Limited Partners holding 75%
of the units in the Partnership ("Units"). If the Merger Proposal is approved,
the Partnership will be wound up and dissolved. Limited Partners will receive
shares of the Company's common stock , unless they exercise dissenters' rights
to receive an unsecured subordinated debenture issued pursuant to an indenture.
See PART V below.
K-1
<PAGE>
THE EXCHANGE AGENT IS U.S. STOCK TRANSFER CORPORATION
Please send this Consent Statement by mail or by hand to:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Attn: PAMCO Roll-up
Delivery of this Letter of Transmittal and Consent Statement to the Exchange
Agent is at the risk of the Limited Partners. If sent by U.S. Mail, it is
recommended that Limited Partners use certified mail, return receipt requested.
Limited Partners may not vote by facsimile machine.
PART I
NAME AND ADDRESS OF LIMITED PARTNER
------------------------------------
------------------------------------
------------------------------------
PART II
DESCRIPTION OF UNITS
Specified below with respect to your Units are (i) the number of Units held of
record, (ii) the determined exchange value attributable to your Units and (iii)
the number of shares of the Company's common stock which will be distributed by
the Partnership to you in exchange for your Units.
Units Exchange Value Common Shares
----- -------------- -------------
PART III
REPRESENTATIONS, WARRANTIES, COVENANTS AND POWER OF ATTORNEY
A Limited Partner checking the "for" box and signing PART IV below ("Consenting
Limited Partner") hereby accepts the Merger Proposal on the terms and subject to
the conditions set forth in the Prospectus, receipt of a copy of which is hereby
acknowledged, thereby consenting to the Merger Proposal.
A Limited Partner checking the "against" box and signing PART IV below
("Non-Consenting Limited Partner") and which does not desire to exercise his or
her dissenters' rights pursuant to PART V below hereby (i) acknowledges receipt
of the Prospectus and, (ii) assuming adoption of the Merger Proposal, will
accept from the Partnership his or her allocable portion of the Company's shares
of $.001 par value common stock distributed by the Partnership on its winding up
and dissolution.
The undersigned Limited Partner represents and warrants to the Company that, as
of the closing date of the Merger ("Closing Date"), (i) he or she has not
disposed of or agreed to dispose of his or her Units, other than pursuant to
K-2
<PAGE>
the Merger Proposal; (ii) he or she has full legal right, power and authority to
convey his or her Units pursuant to the Merger Proposal; (iii) he or she has
received and reviewed a copy of the Prospectus; and (iv) he or she is qualified
to make decisions with respect to investments presenting an investment decision
similar to that involved in the Merger Proposal. All representations, warranties
and covenants contained herein shall survive the Closing Date and all other
transactions contemplated by this Letter of Transmittal and the Prospectus.
In connection with the solicitation of written consents of Limited Partners,
each Consenting Limited Partner below hereby (i) represents and warrants to the
General Partner that he or she has full legal right, power and authority to
execute a written consent with respect to the Merger Proposal; (ii) consents to
the adoption of the Merger Proposal, as described in the Prospectus; and (iii)
consents to the amendment of the Partnership Agreement to facilitate the closing
and consummation of the Merger.
The undersigned Limited Partner hereby irrevocably appoints the General Partner
or any designee of the General Partner, with full power of substitution, as his
or her true and lawful attorney-in-fact, in his or her name, place and stead, to
execute on his or her behalf any additional documents necessary or appropriate
to close and consummate the Merger and the withdrawal and transfer to the
Company of the assets underlying his or her Units. This power of attorney shall
become effective upon the closing and consummation of the Merger, shall be
deemed coupled with an interest, shall be irrevocable, is granted in
consideration of the shares of the Company's $.001 par value common stock which
he or she shall receive on the winding up and dissolution of the Partnership,
shall survive his or her death, incapacity, dissolution or termination of the
existence and shall obligate his or her heirs, legal representatives, successors
or assigns.
The following information must be completed in order to entitle Income Network
Company, as the Soliciting Agent, to receive compensation in connection with the
Merger Proposal.
- ----------------------------
Name of Account Executive
(Please Print)
PART IV
ALL LIMITED PARTNERS, INCLUDING LIMITED PARTNERS WHO DESIRE TO VOTE AGAINST THE
MERGER PROPOSAL, SHOULD COMPLETE THIS PART IV.
THOSE LIMITED PARTNERS WHO WISH TO VOTE AGAINST THE MERGER AND EXERCISE
DISSENTERS' RIGHTS TO RECEIVE AN UNSECURED SUBORDINATED DEBENTURE IN LIEU OF
SHARES OF THE COMPANY'S $.001 PAR VALUE COMMON STOCK, IN THE EVENT THE MERGER
PROPOSAL IS APPROVED, SHOULD ALSO COMPLETE PART V.
If you vote to approve the Merger Proposal, you are voting to (i) transfer the
assets of the Partnership to Performance Asset Management Company, a Delaware
corporation ("Company"), on terms and conditions specified in the Merger
Agreement and Plan of Reorganization, in exchange for the issuance by the
Company to the Partnership of shares of the Company's $.001 par value common
stock; (ii) the termination, winding up and dissolution of the Partnership by
operation of law and, as liquidating distributions, the distribution by the
Partnership to its partners of the Company's $.001 par value common stock
received by the Partnership in exchange for the assets of the Partnership and
(iii) merge the business operations of the Partnership and PCM with and into the
Company, as a result of which the Company would be the surviving corporation.
K-3
<PAGE>
Consent to the Merger Proposal being submitted by the General Partner.
[ ] For [ ] Against
If you vote to approve the amendment to the Partnership Agreement, you are
voting to (i) eliminate restrictions on the transfer and conveyance of all the
assets and liabilities of the Partnership to the Company in exchange for certain
of the Company's shares of $.001 par value common stock ("Partnership Merger
Stock"); (ii) to exchange the Partnership's assets and liabilities for the
Partnership Merger Stock; (iii) to wind up and dissolve the Partnership; and
(iv) to authorize the General Partner to execute, acknowledge, verify, deliver,
file and record any and all documents necessary or appropriate to effect the
Merger Proposal.
Consent to approve and adopt the amendment to the Partnership Agreement.
[ ] For [ ] Against
SIGNATURES
Please sign your name exactly as printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )____________________
Home Telephone: ( )____________________
Dated: _______________________, 1998
IF THE LIMITED PARTNER FAILS TO INDICATE WHETHER CONSENT TO THE MERGER PROPOSAL
IS GIVEN OR WITHHELD, PURSUANT TO SUBPARAGRAPH 9.3.4.1 OF THE PARTNERSHIP
AGREEMENT, CONSENT WILL BE CONCLUSIVELY PRESUMED TO BE GIVEN.
K-4
<PAGE>
PART V
DISSENTING LIMITED PARTNERS
COMPLETE THIS PART V ONLY IF YOU (1) ARE A NON-CONSENTING LIMITED PARTNER AND
(2) YOU WISH TO EXERCISE YOUR DISSENTERS' RIGHTS.
A Non-Consenting Limited Partner may, but is not required to, exercise his or
her dissenter's rights. The NonConsenting Limited Partner signing in this PART V
withholds his or her consent to the Merger Proposal and to adoption of the
amendment to the Partnership Agreement and, additionally, elects to exercise his
or her dissenter's rights. Such a Non-Consenting Limited Partner, therefore,
will become a "Dissenting Limited Partner". By signing this PART V, a Dissenting
Limited Partner hereby exercises his or her dissenter's rights and will be
deemed to have made the representations, warranties and covenants (other than
the consent to the adoption of the Merger Proposal) set forth in PART III above,
and he or she will receive, pursuant to those dissenter's rights, an unsecured
subordinated debenture issued pursuant to an indenture in an amount equal to the
determined exchange value of such Dissenting Limited Partner's Units.
Non-Consenting Limited Partners who do not sign this PART V will not become
Dissenting Limited Partners. Those Non-Consenting Limited Partners will, if the
Merger Proposal is approved, receive the same number of shares of the Company's
$.001 par value common stock that they would have received had they consented to
the Merger Proposal.
SIGNATURES
(ONLY FOR DISSENTING LIMITED PARTNERS)
Please sign exactly as your name is printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )______________________
Home Telephone: ( )______________________
Dated: __________________________, 1998
K-5
<PAGE>
PART VI
INSTRUCTIONS
1. Previously Transferred Interests. If a Limited Partner has transferred,
whether by sale, gift, death or otherwise, the beneficial ownership of any Units
of which he or she has been named a holder of record in this Letter of
Transmittal and Consent Statement without previously notifying the General
Partner or complying with the procedures set forth in the Partnership Agreement
for transferring his or her Units, he or she should notify the General Partner
of that fact and identify the Units transferred, the date of transfer and the
name, address and tax identification number of the assignee. The General Partner
will then send such Limited Partner and the assignee revised Letters of
Transmittal and Consent Statement and request from such Limited Partner or
assignee such other documents as the General Partner may require in order to
facilitate the closing and consummation of the Merger.
2. Participation in Exchange. To be entitled to receive shares of the Company's
$.001 par value common stock on the winding up and dissolution of the
Partnership, even if consent to the Merger Proposal is withheld, a Limited
Partner must deliver to the Exchange Agent one copy of this Letter of
Transmittal and Consent Statement, completed, dated and signed in PART IV.
Delivery of this Letter of Transmittal and Consent Statement is at the risk of
the Limited Partner. A consent will be effective only when this Letter of
Transmittal and Consent Statement is actually received by the Exchange Agent.
The Letter of Transmittal and Consent Statement must be received by the Exchange
Agent on or before 5:00 p.m. Pacific Time, on ____________, unless the Merger
Proposal is extended, in which event the Letter of Transmittal and Consent
Statement must be received by the latest time and date on which the Merger
Proposal, as so extended, will expire.
3. Signatures. This Letter of Transmittal and Consent Statement must be signed
by the Limited Partner whose name appears in PART I of this Letter of
Transmittal and Consent Statement. If Units are held in the names of two or more
persons, all such persons must sign this Letter of Transmittal and Consent
Statement. With respect to Units held by entities such as trusts, joint
ventures, limited partnerships or general partnerships, the Exchange Agent may
require that this Letter of Transmittal and Consent Statement be accompanied by
evidence acceptable to the Exchange Agent that the entity has satisfied all
requirements of its governing instruments, such as applicable partnership or
joint venture agreements, and that the person signing this Letter of Transmittal
and Consent Statement is authorized to sign for the Limited Partner under the
laws of the jurisdiction in which the entity was organized.
TO PARTICIPATE IN THE MERGER, A LIMITED PARTNER MUST SIGN IN THE SIGNATURE BLOCK
IN PART IV OF THIS LETTER OF TRANSMITTAL AND CONSENT STATEMENT. IF HE OR SHE
OBJECTS TO THE MERGER PROPOSAL BUT DOES NOT EXERCISE HIS OR HER DISSENTERS'
RIGHTS BY COMPLETING PART V, SUCH LIMITED PARTNER WILL NOT RECEIVE SHARES OF THE
COMPANY'S $.001 PAR VALUE COMMON STOCK UNTIL AN APPROPRIATELY SIGNED LETTER OF
TRANSMITTAL AND CONSENT STATEMENT IS RECEIVED BY THE EXCHANGE AGENT.
4. Conditional Tenders. No alternative, conditional or contingent consents will
be accepted.
5. Withdrawal or Revocation of Consents. This Letter of Transmittal and Consent
Statement may be withdrawn or revoked by a writing delivered to the Exchange
Agent prior to the date that the votes of the Limited Partners are counted
specifying that such Consent Statement is revoked.
6. Validity of Consents. All questions on the validity, form, eligibility
(including time of receipt) and acceptance of Units will be determined by the
Exchange Agent, in its sole and absolute discretion, and its determination will
be final and conclusive. The Exchange Agent reserves the right to waive any
irregularities or conditions on the manner of consent. Any irregularities in
connection with consents must be cured within such time as the Exchange Agent,
in its sole and absolute discretion, shall determine unless waived by it.
Consents will be deemed not to have been made until any irregularities have been
cured or waived. Any Letter of Transmittal and Consent Statement
K-6
<PAGE>
which is not properly completed and executed, and as to which irregularities are
not cured or waived, will be returned by the Exchange Agent to the Limited
Partner as soon as practicable. The Exchange Agent is under no duty to give
notification of defects in consents and will not incur any liability for failure
to give notification. The Exchange Agent will not accept consents of less than
all of a Limited Partner's Units.
7. Consents to Proposal. Only persons who are holders of record of Units on the
date determined as the record date for such purpose may vote on (i) the Merger
Proposal and (ii) to approve and adopt the proposed amendment to the Partnership
Agreement.
8. Dissenters' Rights. Non-Consenting Limited Partners have limited dissenters'
rights in accordance with the requirements for rollup transactions. By signing
PART V of this Consent Statement, Dissenting Limited Partners will be deemed to
exercise their dissenters' rights and will receive an unsecured subordinated
debenture issued pursuant to an indenture. Each Dissenting Limited Partner will
also be deemed to have sold his or her Units to the Company at the determined
exchange value, payment of which will be made pursuant to the provisions of the
indenture.
Specified below is the proposed amendment to the Partnership Agreement
("Amendment"). The Amendment shall be effective upon the acceptance of written
consents from Limited Partners holding not less than 75% of the Units approving
and adopting the Merger Proposal and the Amendment. If the Amendment becomes
effective, it will become a separate article of the Partnership Agreement and
shall be placed immediately after the last article specified in the Partnership
Agreement.
PROPOSED AMENDMENT
Notwithstanding any provisions of this Agreement to the contrary, it is hereby
agreed as follows:
1. Definitions. Except as defined in this Agreement or this article, each
capitalized term used herein shall, for the purposes of this article, have the
meaning ascribed to it in the Prospectus of Performance Asset Management
Company, a Delaware corporation ("Company"), dated October 31, 1997, which is
part of a Registration Statement on Form S-4 filed by the Company with the
Securities and Exchange Commission on November 4, 1997, ("Prospectus").
2. Elimination of Restrictions. No provision of this Agreement shall prohibit,
limit or prevent the (i) transfer and conveyance of all the assets and
liabilities of the Partnership to the Company in exchange for certain of the
Company's shares of $.001 par value common stock ("Partnership Merger Stock") in
accordance with the terms of the Prospectus or otherwise, or (ii) distribution
of the Partnership Merger Stock to the General Partner and the Limited Partners,
in exchange for their interests in the Partnership, upon the winding up and
dissolution of the Partnership. In addition, no consent of the Partnership or
any Partner, opinion of counsel or other procedure shall be required in order to
enable any Partner, the Partnership or the Company to effect any such transfer
and distribution.
3. Exchange of Partnership Assets and Liabilities for Subject Shares. On the
Closing Date of the Merger, the Partnership shall transfer and convey all of the
Partnership's assets and liabilities to the Company in exchange for the
Partnership Merger Stock, pursuant to and in accordance with the terms of the
Prospectus.
4. Election to Dissolve. Immediately after consummation of the issuance by the
Company to the Partnership of the Partnership Merger Stock, the Partnership
shall be wound up and dissolved. Upon the dissolution of the Partnership, the
business and affairs of the Partnership shall be terminated and wound up and, as
soon as practicable thereafter, any and all Partnership Merger Stock held by the
Partnership shall be distributed in kind to the Partners (or their assignees)
with each Partner (or his or her assignee) to receive a whole number of shares
of Partnership
K-7
<PAGE>
Merger Stock equal to the value of his or her interest in the Partnership
determined by the Exchange Value. Each Partner shall be paid cash for any
fractional shares of Partnership Merger Stock.
5. Authority of General Partner. The General Partner shall execute, acknowledge,
verify, deliver, file and record, for and in the name of the Partnership, any
and all documents and shall do and perform all acts required by applicable law
or that it deems necessary or desirable in order to give effect to this article
and the transactions contemplated herein, including, but not limited to, the
dissolution, termination, winding-up and distribution contemplated by Section 4
of this article.
6. This Article Controlling. The provisions of this article shall prevail and
control over all other provisions of this Agreement.
Except as herein expressly amended, all other terms and provisions of the
Certificate and this Agreement shall remain in full force and effect.
K-8
<PAGE>
APPENDIX L
THIS CONSENT IS BEING SOLICITED BY PERFORMANCE DEVELOPMENT, INC., IN ITS
CAPACITY AS GENERAL PARTNER, AS A MATTER OF CONVENIENCE FOR THE BOARD OF
DIRECTORS OF PERFORMANCE ASSET MANAGEMENT COMPANY, A DELAWARE CORPORATION
("Company").
PERFORMANCE DEVELOPMENT, INC.
LETTER OF TRANSMITTAL AND CONSENT STATEMENT
FOR LIMITED PARTNERS OF
PERFORMANCE ASSET MANAGEMENT FUND V, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP ("Partnership")
THE DATE OF THIS CONSENT STATEMENT IS ________________, 1998
Capitalized terms used but not defined herein have the meanings given to them in
the Prospectus dated May ____, 1998, and which is part of the Registration
Statement on Form S-4 filed on November 4, 1997, by the Company with the
Securities and Exchange Commission, as supplemented or amended ("Prospectus").
General instructions are included in this Letter of Transmittal and Consent
Statement.
This Letter of Transmittal and Consent Statement provides the limited partners
of the Partnership ("Limited Partners") the opportunity to vote "for" or
"against" the proposed merger as specified in the Prospectus, in accordance with
the terms and conditions specified in the Merger Agreement and Plan of
Reorganization dated ___________, 1998, by and between and among the Company,
the PCM Shareholders and the Partnerships ("Merger Proposal") and the proposed
amendment to the Agreement of Limited Partnership for the Partnership
("Partnership Agreement").
This Letter of Transmittal and Consent Statement must be received by U.S. Stock
Transfer Company, 1245 Gardena Avenue, Suite 200, Glendale, California
("Exchange Agent") on or before 5:00 p.m. Pacific Time, on ___________, 1998,
unless the Merger Proposal is extended. In the event the General Partner of the
Partnership ("General Partner") determines that it is in the best interests of
the Limited Partners that the Merger Proposal be extended, because of, for
example, the occurrence of an event beyond the control of the General Partner,
e.g., an event of force majeure (fire, flood, civil disturbance, etc.), all
Limited Partners will be notified in writing of the reasons for the extension
and the subsequent deadline for receipt of votes. To vote "for" the Merger
Proposal or vote "against" the Merger Proposal, please complete this Letter of
Transmittal and Consent Statement in accordance with the instructions in PARTS
IV, V and VI hereof, and send or deliver the completed Letter of Transmittal and
Consent Statement to the Exchange Agent.
The Merger Proposal, in summary, contemplates (i) that the assets of the
Partnership; (ii) the assets of other affiliated California limited partnerships
("Affiliated Partnerships"); and (iii) the assets of Performance Capital
Management, Inc., a California corporation ("PCM") will be acquired, by merger,
by the Company, in consideration for the issuance to the Partnership, the
Affiliated Partnerships, and the PCM Shareholders of certain shares of the
Company's $.001 par value common stock. Additionally, the Merger Proposal
contemplates that the Agreements of Limited Partnership for the Partnership and
the Affiliated Partnerships shall be amended so that the Partnership and the
Affiliated Partnerships, after they receive those shares of the Company's $.001
par value common stock, shall be wound up and dissolved and those shares of that
common stock shall be distributed to the General Partner and the Limited
Partners.
Approval of the Merger Proposal requires consent by Limited Partners holding 75%
of the units in the Partnership ("Units"). If the Merger Proposal is approved,
the Partnership will be wound up and dissolved. Limited Partners will receive
shares of the Company's common stock , unless they exercise dissenters' rights
to receive an unsecured subordinated debenture issued pursuant to an indenture.
See PART V below.
L-1
<PAGE>
THE EXCHANGE AGENT IS U.S. STOCK TRANSFER CORPORATION
Please send this Consent Statement by mail or by hand to:
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Suite 200
Glendale, California 91204
Attn: PAMCO Roll-up
Delivery of this Letter of Transmittal and Consent Statement to the Exchange
Agent is at the risk of the Limited Partners. If sent by U.S. Mail, it is
recommended that Limited Partners use certified mail, return receipt requested.
Limited Partners may not vote by facsimile machine.
PART I
NAME AND ADDRESS OF LIMITED PARTNER
------------------------------------
------------------------------------
------------------------------------
PART II
DESCRIPTION OF UNITS
Specified below with respect to your Units are (i) the number of Units held of
record, (ii) the determined exchange value attributable to your Units and (iii)
the number of shares of the Company's common stock which will be distributed by
the Partnership to you in exchange for your Units.
Units Exchange Value Common Shares
----- -------------- -------------
PART III
REPRESENTATIONS, WARRANTIES, COVENANTS AND POWER OF ATTORNEY
A Limited Partner checking the "for" box and signing PART IV below ("Consenting
Limited Partner") hereby accepts the Merger Proposal on the terms and subject to
the conditions set forth in the Prospectus, receipt of a copy of which is hereby
acknowledged, thereby consenting to the Merger Proposal.
A Limited Partner checking the "against" box and signing PART IV below
("Non-Consenting Limited Partner") and which does not desire to exercise his or
her dissenters' rights pursuant to PART V below hereby (i) acknowledges receipt
of the Prospectus and, (ii) assuming adoption of the Merger Proposal, will
accept from the Partnership his or her allocable portion of the Company's shares
of $.001 par value common stock distributed by the Partnership on its winding up
and dissolution.
The undersigned Limited Partner represents and warrants to the Company that, as
of the closing date of the Merger ("Closing Date"), (i) he or she has not
disposed of or agreed to dispose of his or her Units, other than pursuant to the
Merger Proposal; (ii) he or she has full legal right, power and authority to
convey his or her Units pursuant to
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<PAGE>
the Merger Proposal; (iii) he or she has received and reviewed a copy of the
Prospectus; and (iv) he or she is qualified to make decisions with respect to
investments presenting an investment decision similar to that involved in the
Merger Proposal. All representations, warranties and covenants contained herein
shall survive the Closing Date and all other transactions contemplated by this
Letter of Transmittal and the Prospectus.
In connection with the solicitation of written consents of Limited Partners,
each Consenting Limited Partner below hereby (i) represents and warrants to the
General Partner that he or she has full legal right, power and authority to
execute a written consent with respect to the Merger Proposal; (ii) consents to
the adoption of the Merger Proposal, as described in the Prospectus; and (iii)
consents to the amendment of the Partnership Agreement to facilitate the closing
and consummation of the Merger.
The undersigned Limited Partner hereby irrevocably appoints the General Partner
or any designee of the General Partner, with full power of substitution, as his
or her true and lawful attorney-in-fact, in his or her name, place and stead, to
execute on his or her behalf any additional documents necessary or appropriate
to close and consummate the Merger and the withdrawal and transfer to the
Company of the assets underlying his or her Units. This power of attorney shall
become effective upon the closing and consummation of the Merger, shall be
deemed coupled with an interest, shall be irrevocable, is granted in
consideration of the shares of the Company's $.001 par value common stock which
he or she shall receive on the winding up and dissolution of the Partnership,
shall survive his or her death, incapacity, dissolution or termination of the
existence and shall obligate his or her heirs, legal representatives, successors
or assigns.
The following information must be completed in order to entitle Income Network
Company, as the Soliciting Agent, to receive compensation in connection with the
Merger Proposal.
- ----------------------------
Name of Account Executive
(Please Print)
PART IV
ALL LIMITED PARTNERS, INCLUDING LIMITED PARTNERS WHO DESIRE TO VOTE AGAINST THE
MERGER PROPOSAL, SHOULD COMPLETE THIS PART IV.
THOSE LIMITED PARTNERS WHO WISH TO VOTE AGAINST THE MERGER AND EXERCISE
DISSENTERS' RIGHTS TO RECEIVE AN UNSECURED SUBORDINATED DEBENTURE IN LIEU OF
SHARES OF THE COMPANY'S $.001 PAR VALUE COMMON STOCK, IN THE EVENT THE MERGER
PROPOSAL IS APPROVED, SHOULD ALSO COMPLETE PART V.
If you vote to approve the Merger Proposal, you are voting to (i) transfer the
assets of the Partnership to Performance Asset Management Company, a Delaware
corporation ("Company"), on terms and conditions specified in the Merger
Agreement and Plan of Reorganization, in exchange for the issuance by the
Company to the Partnership of shares of the Company's $.001 par value common
stock; (ii) the termination, winding up and dissolution of the Partnership by
operation of law and, as liquidating distributions, the distribution by the
Partnership to its partners of the Company's $.001 par value common stock
received by the Partnership in exchange for the assets of the Partnership and
(iii) merge the business operations of the Partnership and PCM with and into the
Company, as a result of which the Company would be the surviving corporation.
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Consent to the Merger Proposal being submitted by the General Partner.
[ ] For [ ] Against
If you vote to approve the amendment to the Partnership Agreement, you are
voting to (i) eliminate restrictions on the transfer and conveyance of all the
assets and liabilities of the Partnership to the Company in exchange for certain
of the Company's shares of $.001 par value common stock ("Partnership Merger
Stock"); (ii) to exchange the Partnership's assets and liabilities for the
Partnership Merger Stock; (iii) to wind up and dissolve the Partnership; and
(iv) to authorize the General Partner to execute, acknowledge, verify, deliver,
file and record any and all documents necessary or appropriate to effect the
Merger Proposal.
Consent to approve and adopt the amendment to the Partnership Agreement.
[ ] For [ ] Against
SIGNATURES
Please sign your name exactly as printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )____________________
Home Telephone: ( )____________________
Dated: _______________________, 1998
IF THE LIMITED PARTNER FAILS TO INDICATE WHETHER CONSENT TO THE MERGER PROPOSAL
IS GIVEN OR WITHHELD, PURSUANT TO SUBPARAGRAPH 9.3.4.1 OF THE PARTNERSHIP
AGREEMENT, CONSENT WILL BE CONCLUSIVELY PRESUMED TO BE GIVEN.
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PART V
DISSENTING LIMITED PARTNERS
COMPLETE THIS PART V ONLY IF YOU (1) ARE A NON-CONSENTING LIMITED PARTNER AND
(2) YOU WISH TO EXERCISE YOUR DISSENTERS' RIGHTS.
A Non-Consenting Limited Partner may, but is not required to, exercise his or
her dissenter's rights. The NonConsenting Limited Partner signing in this PART V
withholds his or her consent to the Merger Proposal and to adoption of the
amendment to the Partnership Agreement and, additionally, elects to exercise his
or her dissenter's rights. Such a Non-Consenting Limited Partner, therefore,
will become a "Dissenting Limited Partner". By signing this PART V, a Dissenting
Limited Partner hereby exercises his or her dissenter's rights and will be
deemed to have made the representations, warranties and covenants (other than
the consent to the adoption of the Merger Proposal) set forth in PART III above,
and he or she will receive, pursuant to those dissenter's rights, an unsecured
subordinated debenture issued pursuant to an indenture in an amount equal to the
determined exchange value of such Dissenting Limited Partner's Units.
Non-Consenting Limited Partners who do not sign this PART V will not become
Dissenting Limited Partners. Those Non-Consenting Limited Partners will, if the
Merger Proposal is approved, receive the same number of shares of the Company's
$.001 par value common stock that they would have received had they consented to
the Merger Proposal.
SIGNATURES
(ONLY FOR DISSENTING LIMITED PARTNERS)
Please sign exactly as your name is printed in PART I above, unless printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator, trustee or guardian, please give full
title and send proper evidence of authority with this consent. For joint owners,
each joint owner must sign.
- -----------------------------------
Full Name of Limited Partner
(Please Print)
- -----------------------------------
Full Name of Co-owner, if any
(Please Print)
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Limited Partner
- -----------------------------------
Signature of Co-owner, if any
Business Telephone: ( )______________________
Home Telephone: ( )______________________
Dated: __________________________, 1998
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PART VI
INSTRUCTIONS
1. Previously Transferred Interests. If a Limited Partner has transferred,
whether by sale, gift, death or otherwise, the beneficial ownership of any Units
of which he or she has been named a holder of record in this Letter of
Transmittal and Consent Statement without previously notifying the General
Partner or complying with the procedures set forth in the Partnership Agreement
for transferring his or her Units, he or she should notify the General Partner
of that fact and identify the Units transferred, the date of transfer and the
name, address and tax identification number of the assignee. The General Partner
will then send such Limited Partner and the assignee revised Letters of
Transmittal and Consent Statement and request from such Limited Partner or
assignee such other documents as the General Partner may require in order to
facilitate the closing and consummation of the Merger.
2. Participation in Exchange. To be entitled to receive shares of the Company's
$.001 par value common stock on the winding up and dissolution of the
Partnership, even if consent to the Merger Proposal is withheld, a Limited
Partner must deliver to the Exchange Agent one copy of this Letter of
Transmittal and Consent Statement, completed, dated and signed in PART IV.
Delivery of this Letter of Transmittal and Consent Statement is at the risk of
the Limited Partner. A consent will be effective only when this Letter of
Transmittal and Consent Statement is actually received by the Exchange Agent.
The Letter of Transmittal and Consent Statement must be received by the Exchange
Agent on or before 5:00 p.m. Pacific Time, on ____________, unless the Merger
Proposal is extended, in which event the Letter of Transmittal and Consent
Statement must be received by the latest time and date on which the Merger
Proposal, as so extended, will expire.
3. Signatures. This Letter of Transmittal and Consent Statement must be signed
by the Limited Partner whose name appears in PART I of this Letter of
Transmittal and Consent Statement. If Units are held in the names of two or more
persons, all such persons must sign this Letter of Transmittal and Consent
Statement. With respect to Units held by entities such as trusts, joint
ventures, limited partnerships or general partnerships, the Exchange Agent may
require that this Letter of Transmittal and Consent Statement be accompanied by
evidence acceptable to the Exchange Agent that the entity has satisfied all
requirements of its governing instruments, such as applicable partnership or
joint venture agreements, and that the person signing this Letter of Transmittal
and Consent Statement is authorized to sign for the Limited Partner under the
laws of the jurisdiction in which the entity was organized.
TO PARTICIPATE IN THE MERGER, A LIMITED PARTNER MUST SIGN IN THE SIGNATURE BLOCK
IN PART IV OF THIS LETTER OF TRANSMITTAL AND CONSENT STATEMENT. IF HE OR SHE
OBJECTS TO THE MERGER PROPOSAL BUT DOES NOT EXERCISE HIS OR HER DISSENTERS'
RIGHTS BY COMPLETING PART V, SUCH LIMITED PARTNER WILL NOT RECEIVE SHARES OF THE
COMPANY'S $.001 PAR VALUE COMMON STOCK UNTIL AN APPROPRIATELY SIGNED LETTER OF
TRANSMITTAL AND CONSENT STATEMENT IS RECEIVED BY THE EXCHANGE AGENT.
4. Conditional Tenders. No alternative, conditional or contingent consents will
be accepted.
5. Withdrawal or Revocation of Consents. This Letter of Transmittal and Consent
Statement may be withdrawn or revoked by a writing delivered to the Exchange
Agent prior to the date that the votes of the Limited Partners are counted
specifying that such Consent Statement is revoked.
6. Validity of Consents. All questions on the validity, form, eligibility
(including time of receipt) and acceptance of Units will be determined by the
Exchange Agent, in its sole and absolute discretion, and its determination will
be final and conclusive. The Exchange Agent reserves the right to waive any
irregularities or conditions on the manner of consent. Any irregularities in
connection with consents must be cured within such time as the Exchange Agent,
in its sole and absolute discretion, shall determine unless waived by it.
Consents will be deemed not to have been made until any irregularities have been
cured or waived. Any Letter of Transmittal and Consent Statement
L-6
<PAGE>
which is not properly completed and executed, and as to which irregularities are
not cured or waived, will be returned by the Exchange Agent to the Limited
Partner as soon as practicable. The Exchange Agent is under no duty to give
notification of defects in consents and will not incur any liability for failure
to give notification. The Exchange Agent will not accept consents of less than
all of a Limited Partner's Units.
7. Consents to Proposal. Only persons who are holders of record of Units on the
date determined as the record date for such purpose may vote on (i) the Merger
Proposal and (ii) to approve and adopt the proposed amendment to the Partnership
Agreement.
8. Dissenters' Rights. Non-Consenting Limited Partners have limited dissenters'
rights in accordance with the requirements for rollup transactions. By signing
PART V of this Consent Statement, Dissenting Limited Partners will be deemed to
exercise their dissenters' rights and will receive an unsecured subordinated
debenture issued pursuant to an indenture. Each Dissenting Limited Partner will
also be deemed to have sold his or her Units to the Company at the determined
exchange value, payment of which will be made pursuant to the provisions of the
indenture.
Specified below is the proposed amendment to the Partnership Agreement
("Amendment"). The Amendment shall be effective upon the acceptance of written
consents from Limited Partners holding not less than 75% of the Units approving
and adopting the Merger Proposal and the Amendment. If the Amendment becomes
effective, it will become a separate article of the Partnership Agreement and
shall be placed immediately after the last article specified in the Partnership
Agreement.
PROPOSED AMENDMENT
Notwithstanding any provisions of this Agreement to the contrary, it is hereby
agreed as follows:
1. Definitions. Except as defined in this Agreement or this article, each
capitalized term used herein shall, for the purposes of this article, have the
meaning ascribed to it in the Prospectus of Performance Asset Management
Company, a Delaware corporation ("Company"), dated October 31, 1997, which is
part of a Registration Statement on Form S-4 filed by the Company with the
Securities and Exchange Commission on November 4, 1997, ("Prospectus").
2. Elimination of Restrictions. No provision of this Agreement shall prohibit,
limit or prevent the (i) transfer and conveyance of all the assets and
liabilities of the Partnership to the Company in exchange for certain of the
Company's shares of $.001 par value common stock ("Partnership Merger Stock") in
accordance with the terms of the Prospectus or otherwise, or (ii) distribution
of the Partnership Merger Stock to the General Partner and the Limited Partners,
in exchange for their interests in the Partnership, upon the winding up and
dissolution of the Partnership. In addition, no consent of the Partnership or
any Partner, opinion of counsel or other procedure shall be required in order to
enable any Partner, the Partnership or the Company to effect any such transfer
and distribution.
3. Exchange of Partnership Assets and Liabilities for Subject Shares. On the
Closing Date of the Merger, the Partnership shall transfer and convey all of the
Partnership's assets and liabilities to the Company in exchange for the
Partnership Merger Stock, pursuant to and in accordance with the terms of the
Prospectus.
4. Election to Dissolve. Immediately after consummation of the issuance by the
Company to the Partnership of the Partnership Merger Stock, the Partnership
shall be wound up and dissolved. Upon the dissolution of the Partnership, the
business and affairs of the Partnership shall be terminated and wound up and, as
soon as practicable thereafter, any and all Partnership Merger Stock held by the
Partnership shall be distributed in kind to the Partners (or their assignees)
with each Partner (or his or her assignee) to receive a whole number of shares
of Partnership Merger Stock equal to the value of his or her interest in the
Partnership determined by the Exchange Value. Each
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<PAGE>
Partner shall be paid cash for any fractional shares of Partnership Merger
Stock.
5. Authority of General Partner. The General Partner shall execute, acknowledge,
verify, deliver, file and record, for and in the name of the Partnership, any
and all documents and shall do and perform all acts required by applicable law
or that it deems necessary or desirable in order to give effect to this article
and the transactions contemplated herein, including, but not limited to, the
dissolution, termination, winding-up and distribution contemplated by Section 4
of this article.
6. This Article Controlling. The provisions of this article shall prevail and
control over all other provisions of this Agreement.
Except as herein expressly amended, all other terms and provisions of the
Certificate and this Agreement shall remain in full force and effect.
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APPENDIX M
- --------------------------------------------------------------------------------
PERFORMANCE ASSET MANAGEMENT COMPANY,
a Delaware corporation
and
___________________________, TRUSTEE
INDENTURE
Dated as of ________________
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
DEFINITIONS
<TABLE>
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Page
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Section 1.01. Certain Terms Defined................................................................M-1
ARTICLE 2
SECURITIES
Section 2.01. Forms Generally......................................................................M-3
Section 2.02. Form of Trustee's Certificate of Authentication......................................M-4
Section 2.03. Amount Unlimited; Certain Terms of Securities........................................M-4
Section 2.04. Authentication and Delivery of Securities............................................M-4
Section 2.05. Execution of Securities..............................................................M-5
Section 2.06. Certificate of Authentication........................................................M-5
Section 2.07. Denomination and Date of Securities; Payments of Interest............................M-5
Section 2.08. Registration, Transfer and Exchange..................................................M-6
Section 2.09. Mutilated, Defaced, Destroyed, Lost and Stolen Securities............................M-6
Section 2.10. Cancellation of Securities; Destruction Thereof......................................M-7
Section 2.11. Temporary Securities.................................................................M-7
ARTICLE 3
COVENANTS OF THE ISSUER AND THE TRUSTEE
Section 3.01. Payment of Principal and Interest....................................................M-7
Section 3.02. Offices for Payments.................................................................M-7
Section 3.03. Appointment to Fill a Vacancy in Office of Trustee...................................M-7
Section 3.04. Paying Agents........................................................................M-8
Section 3.05. Certificate of the Issuer............................................................M-8
Section 3.06. Securityholders Lists................................................................M-8
Section 3.07. Reports by the Issuer................................................................M-8
Section 3.08. Reports by the Trustee...............................................................M-8
ARTICLE 4
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT
Section 4.01. Event of Default Defined; Acceleration of Maturity; Waiver of
Default............................................................................M-9
Section 4.02. Collection of Indebtedness by Trustee; Trustee May Prove Debt.......................M-10
Section 4.03. Application of Proceeds.............................................................M-11
Section 4.04. Suits for Enforcement...............................................................M-12
Section 4.05. Restoration of Rights on Abandonment of Proceedings.................................M-12
Section 4.06. Limitations on Suits by Securityholders.............................................M-12
Section 4.07. Unconditional Right of Securityholders to Institute Certain Suits...................M-13
Section 4.08. Powers and Remedies Cumulative; Delay or Omission Not Waiver of
Default...........................................................................M-13
Section 4.09. Control by Securityholders..........................................................M-13
</TABLE>
M-i
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Section 4.10. Waiver of Past Defaults.............................................................M-13
Section 4.11. Trustee to Give Notice of Default, But May Withhold in Certain
Circumstances.....................................................................M-13
Section 4.12. Right of Court to Require Filing of Undertaking to Pay Costs........................M-14
ARTICLE 5
CONCERNING THE TRUSTEE
Section 5.01. Duties and Responsibilities of the Trustee; During Default; Prior to
Default...........................................................................M-14
Section 5.02. Certain Rights of the Trustee.......................................................M-15
Section 5.03. Trustee Not Responsible for Recitals, Disposition of Securities or
Application of Proceeds Thereof...................................................M-15
Section 5.04. Trustee and Agents May Hold Securities; Collections.................................M-16
Section 5.05. Moneys Held by Trustee..............................................................M-16
Section 5.06. Compensation and Indemnification of Trustee and Its Prior Claim.....................M-16
Section 5.07. Right of Trustee to Rely on Officers' Certificate...................................M-16
Section 5.08. Resignation and Removal; Appointment of Successor Trustee...........................M-16
Section 5.09. Acceptance of Appointment by Successor Trustee......................................M-17
ARTICLE 6
CONCERNING THE SECURITYHOLDERS
Section 6.01. Evidence of Action Taken by Securityholders.........................................M-18
Section 6.02. Proof of Execution of Instruments and of Holding of Securities; Record
Date..............................................................................M-18
Section 6.03. Holders to Be Treated as Owners.....................................................M-18
Section 6.04. Securities Owned by Issuer Deemed Not Outstanding...................................M-18
Section 6.05. Right of Revocation of Action Taken.................................................M-19
ARTICLE 7
SUPPLEMENTAL INDENTURES
Section 7.01. Supplemental Indentures Without Consent of Securityholders..........................M-19
Section 7.02. Supplemental Indentures with Consent of Securityholders.............................M-20
Section 7.03. Effect of Supplemental Indenture....................................................M-21
Section 7.04. Documents to Be Given to Trustee....................................................M-21
Section 7.05. Notation on Securities in Respect of Supplemental Indentures........................M-21
ARTICLE 8
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Section 8.01. Issuer May Consolidate on Certain Terms.............................................M-21
Section 8.02. Successor Entity Substituted........................................................M-22
Section 8.03. Opinion of Counsel to Trustee.......................................................M-22
</TABLE>
M-ii
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ARTICLE 9
SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS
<S> <C>
Section 9.01. Defeasance Within One Year of Payment...............................................M-22
Section 9.02. Defeasance..........................................................................M-23
Section 9.03. Covenant Defeasance.................................................................M-23
Section 9.04. Application of Trust Money..........................................................M-24
Section 9.05. Repayment to Issuer.................................................................M-24
ARTICLE 10
MISCELLANEOUS PROVISIONS
Section 10.01. Incorporators, Stockholders, Officers and Directors of Issuer and
Issuer Exempt from Individual Liability...........................................M-24
Section 10.02. Provisions of Indenture for the Sole Benefit of Parties and
Securityholders...................................................................M-25
Section 10.03. Successors and Assigns of Issuer Bound by Indenture.................................M-25
Section 10.04. Notices and Demands on Issuer, Trustee and Securityholder...........................M-25
Section 10.05. Officers' Certificates and Opinions of Counsel; Statements to Be
Contained Therein.................................................................M-25
Section 10.06. Payments Due on Saturdays, Sundays and Holidays.....................................M-26
Section 10.07. Conflict of Any Provision of Indenture with Trust Indenture Act of
1939..............................................................................M-26
Section 10.08. California Law to Govern............................................................M-26
Section 10.09. Counterparts........................................................................M-26
Section 10.10. Effect of Headings..................................................................M-26
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THIS INDENTURE, dated as of __________________ between Performance Asset
Management Company, a Delaware corporation ("Issuer"), and ________________
("Trustee") ("Indenture"),
W I T N E S S E T H:
WHEREAS, the Issuer has duly authorized the issue from time to time of its
unsecured debentures, notes or other evidences of indebtedness to be issued in
one or more series ("Securities") up to such principal amount or amounts as may
from time to time be authorized in accordance with the terms of this Indenture
and to provide, among other things, for the authentication, delivery and
administration thereof, the Issuer has duly authorized the execution and
delivery of this Indenture; and
WHEREAS, all things necessary to make this Indenture a valid indenture and
agreement according to its terms have been done;
NOW, THEREFORE:
In consideration of the premises and the purchase of the Securities by the
holders thereof, the Issuer and the Trustee mutually covenant and agree for the
equal and proportionate benefit of the respective holders from time to time of
the Securities as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Certain Terms Defined. (a) The following terms (except as
otherwise expressly provided or unless the context otherwise clearly requires)
for all purposes of this Indenture and of any indenture supplemental hereto
shall have the respective meanings specified in this section. All other terms
used in this Indenture that are defined in the Trust Indenture Act of 1939 or
the definitions of which in the Securities Act of 1933 are referred to in the
Trust Indenture Act of 1939, including terms defined therein by reference to the
Securities Act of 1933 (except as herein otherwise expressly provided or unless
the context otherwise clearly requires), shall have the meanings assigned to
such terms in the Trust Indenture Act of 1939 and in the Securities Act of 1933
as in force at the date of this Indenture. All accounting terms used herein and
not expressly defined shall have the meanings assigned to such terms in
accordance with generally accepted accounting principles, and the term
"generally accepted accounting principles" means such accounting principles as
are generally accepted at the time of any computation. The words "herein,"
"hereof" and "hereunder" and other words of similar import refer to this
Indenture as a whole and not to any particular article, section, paragraph or
other subdivision. The terms defined in this article have the meanings assigned
to them in this article and include the plural as well as the singular.
"Board of Directors" means the Board of Directors of the Issuer or any
committee of such Board of Directors duly authorized to act hereunder.
"Business Day" means, with respect to any Security, a day that in New York
City or the city (or in any of the cities, if more than one) in which amounts
are payable, as specified in the form of such Security, is not a day on which
banking institutions are authorized by law or regulation to close.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, or if at
any time after the execution and delivery of this Indenture the Securities and
Exchange Commission is not existing and performing the duties now assigned to it
under the Trust Indenture Act of 1939, then the agency performing such duties on
such date.
"Determination Date" means June 30, 1997 or, alternatively, the date set by
the Board of Directors to evaluate each Dissenting Limited Partner's capital
account.
"Dissenting Limited Partner" means a holder of a beneficial interest in a
limited partnership that is subject to
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a roll-up transaction who casts a vote against that roll-up transaction, except
that for purposes of an exchange or tender offer transaction dissenting limited
partner means any person who files a dissent regarding the terms of that
exchange or tender offer transaction with the party responsible for tabulating
the votes or tenders, to be received in connection with that rollup transaction
during the period in which the offer is outstanding.
"Exchange Value" means the value determined by the Company, PCM and the
General Partner for the assets of the Partnerships, shares of PCM common stock
and shares of the Company's common stock, as reviewed and determined to be fair
from a financial point of view by the Fairness Analyst.
"Event of Default" means any event or condition specified as such in
SECTION 4.01 of this Indenture or in any Officers' Certificate or indenture
supplemental hereto establishing the terms of any series of Securities.
"Fairness Analyst" means Willamette Management Associates, Inc., the
independent analyst retained to furnish an opinion regarding the fairness of the
Exchange Value.
"General Partner" means Performance Development, Inc., a California
corporation, which serves as the General Partner to the Partnerships.
"Holder", "Holder of Securities", "Securityholder" or other similar terms
mean the registered holder of any Security.
"Indenture" means this instrument as originally executed and delivered or,
if amended or supplemented as provided in this instrument, as so amended or
supplemented or both, and shall include the forms and terms of particular series
of Securities established as contemplated pursuant to this instrument.
"Interest" means the interest rate provided by the Issuer's Unsecured
Subordinated Debentures due January 31, 2005, which interest shall be equal to
120% of the applicable federal rate as determined in accordance with Section
1274 of the Internal Revenue Code of 1986, as from time to time amended.
"Issuer" means (except as otherwise provided in ARTICLE 5 of this
Indenture) Performance Asset Management Company, a Delaware corporation, and,
subject to ARTICLE 8 of this Indenture, its successors and assigns.
"Merger" means the proposed merger of PCM and the Partnerships with and
into the Company pursuant to that Agreement and Plan of Merger dated as of
___________ between the PCM shareholders, the Partnerships and the Issuer.
"Officers' Certificate" means a certificate signed by (i) the chairman of
the Board of Directors or the president or any vice president and (ii) the
treasurer or the secretary or any assistant secretary of the Issuer and
delivered to the Trustee. Each such certificate shall comply with Section 314 of
the Trust Indenture Act of 1939 and include the information required by the
provisions of SECTION 10.05 of this Indenture.
"Opinion of Counsel" means an opinion in writing signed by legal counsel
who may be an employee of or counsel to the Issuer. Each such opinion shall
comply with Section 314 of the Trust Indenture Act of 1939 and include the
information required by the provisions of SECTION 10.05 of this Indenture, if
and to the extent required by this Indenture.
"Original Issue Date" of any Security (or portion thereof) means the
earlier of (a) the date of such Security or (b) the date of any Security (or
portion thereof) for which such Security was issued (directly or indirectly) on
registration of transfer, exchange or substitution.
"Outstanding," when used with reference to Securities, subject to the
provisions of SECTION 6.04 of this Indenture, means, as of any particular time,
all Securities authenticated and delivered by the Trustee pursuant to this
Indenture, except
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(a) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(b) Securities, or portions thereof, for the payment or redemption of which
moneys in the necessary amount shall have been deposited in trust with the
Trustee or with any paying agent (other than the Issuer) or shall have been set
aside, segregated and held in trust by the Issuer for the holders of such
Securities (if the Issuer shall act as its own paying agent), provided that if
such Securities, or portions thereof, are to be redeemed prior to the maturity
thereof, notice of such redemption shall have been given as provided in this
Indenture, or provision satisfactory to the Trustee shall have been made for
giving such notice; and
(c) Securities in substitution for which other Securities shall have been
authenticated and delivered, or which shall have been paid, pursuant to the
provisions of SECTION 2.09 of this Indenture (except with respect to any such
Security as to which proof satisfactory to the Trustee is presented that such
Security is held by a person in whose hands such Security is a legal, valid and
binding obligation of the Issuer).
"Partnerships" means (i) Performance Asset Management Fund, Ltd., A
California Limited Partnership; (ii) Performance Asset Management Fund II, Ltd.,
A California Limited Partnership; (iii) Performance Asset Management Fund III,
Ltd., A California Limited Partnership; (iv) Performance Asset Management Fund
IV, Ltd., A California Limited Partnership; and (v) Performance Asset Management
Fund V, Ltd., A California Limited Partnership. "Partnership" means any one of
the Partnerships.
"PCM" means Performance Capital Management, Inc., a California corporation
and an affiliate of the Issuer.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Security" or "Securities" means the Issuer's Unsecured Subordinated
Debentures due January 31, 2005, or, as the case may be, Unsecured Subordinated
Debentures that have been authenticated and delivered pursuant to this
Indenture.
"Security Register" has the meaning specified in SECTION 2.08 of this
Indenture.
"Senior Debt" means the principal of, interest on and other amounts due on
indebtedness of, the Issuer, whether outstanding on the closing date of the
Merger or thereafter created, incurred, assumed or guaranteed by the Issuer;
unless, in the instrument creating or evidencing or pursuant to which
indebtedness is outstanding, it is expressly provided that such indebtedness is
not senior in right of payment to the Unsecured Subordinated Debentures. Senior
Debt includes, with respect to the obligations specified in this definition,
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Issuer, whether or not post-filing interest is
allowed in such proceedings at the rate specified in the instrument governing
the relevant obligation. Senior Debt also includes disbursements and advances
made by the Trustee in regard to the exercise of his duties pursuant to this
Indenture. Notwithstanding anything to the contrary in the foregoing, Senior
Debt shall not include: (a) indebtedness of or amount owed by the Issuer for
compensation to employees, or for goods, services or materials purchased in the
ordinary course of business; (b) indebtedness of the Issuer to a subsidiary or
affiliate of the Issuer or any officer, director or employee of the Issuer; (c)
any liability for federal, state, local or other taxes, owed or owing by the
Issuer; or (d) indebtedness evidenced by any other class of securities of the
Issuer.
"Trust Indenture Act of 1939" (except as otherwise provided in SECTIONS
7.01 and 7.02 of this Indenture) means the Trust Indenture Act of 1939 as in
force at the date on which this Indenture was originally executed.
"Trust Office" means the office of the Trustee at which the corporate trust
business of the Trustee shall, at any particular time, be principally
administered, which office is, at the date as of which this Indenture is dated,
located at _____________________.
"Trustee" means the Person identified as "Trustee" in the first paragraph
of this Indenture and, subject to the
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provisions of ARTICLE 5 of this Indenture, shall also include any successor
trustee.
"Yield to Maturity" means the yield to maturity on a series of Securities,
calculated at the time of issuance of such series, or, if applicable, at the
most recent redetermination of interest on such series, and calculated in
accordance with accepted financial practice.
ARTICLE 2
SECURITIES
SECTION 2.01. Forms Generally. The Securities shall be substantially in
such form (not inconsistent with this Indenture) as shall be established by or
pursuant to a resolution of the Board of Directors or in one or more indentures
which may supplement this Indenture, in each case with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have imprinted or otherwise reproduced
thereon such legend or legends or endorsements, not inconsistent with the
provisions of this Indenture, as may be required to comply with any law or with
any rules or regulations pursuant thereto, or with any rules of any securities
exchange or to conform to general usage, all as may be determined by the
officers executing the Securities, as evidenced by their execution of the
Securities.
The Securities may be printed, lithographed or engraved on steel engraved
borders or may be produced in any other manner, all as determined by the
officers executing the Securities, as evidenced by their execution of the
Securities.
SECTION 2.02. Form of Trustee's Certificate of Authentication. The
Trustee's certificate of authentication on all Securities shall be in
substantially the following form:
This is one of the Debentures referred to in the above-mentioned Indenture.
------------------------------
as Trustee
By:
---------------------------
Trustee
SECTION 2.03. Amount Unlimited; Certain Terms of Securities. The aggregate
principal amount of Securities which may be authenticated and delivered under
this Indenture is unlimited.
The Securities shall be issued in one series. Securities shall be Senior
Debt subordinated in right of payment to capital of the Issuer. Pursuant to a
resolution of the Board of Directors:
(1) the title of the Securities of the series shall be "Unsecured
Subordinated Debenture Due January 31, 2005";
(2) the price at which such Securities will be issued shall be the
value, in United States currency, of any Dissenting Limited Partner's
interest in any Partnership, determined in accordance with the Exchange
Value, as of the Determination Date, of any Dissenting Limited Partner who
perfects his dissenter's rights pursuant to the terms of the Merger;
(3) the date on which the principal of the Securities is payable shall
be January 31, 2005, which date or dates may be fixed or extendible;
(4) the rate or rates at which the Securities shall bear interest
shall be a variable interest rate equal to the federal rate as determined
in accordance with Section 1274 of the Internal Revenue Code of 1986,
payable on January 1 and July 1 of each year and based on a 365-day year;
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(5) the Securities shall be issued within 30 days of the closing date
of the Merger;
(6) the Securities shall limit total leverage of the Issuer to 70
percent of the appraised value of the assets previously owned by the
Partnerships; and
(7) the Securities shall be prepaid with 80 percent of the net
proceeds of any sale or refinancing by the Issuer of any of the assets
previously owned by the Partnerships.
SECTION 2.04. Authentication and Delivery of Securities. At any time and
from time to time after the execution and delivery of this Indenture, the Issuer
may deliver Securities executed by the Issuer to the Trustee for authentication,
and the Trustee shall thereupon authenticate and deliver such Securities to or
upon the written order of the Issuer. In authenticating such Securities and
accepting the additional responsibilities pursuant to this Indenture in relation
to such Securities, the Trustee shall be entitled to receive prior to the first
authentication of any Securities, and (subject to SECTION 5.01 of this
Indenture) shall be fully and completely protected in relying upon:
(1) a certified copy of any resolution or resolutions of the Board of
Directors relating to such Securities, in each case certified by the
Secretary or an Assistant Secretary of the Issuer;
(2) an Officers' Certificate setting forth the form and terms of such
Securities, as required pursuant to SECTIONS 2.01 and 2.03 of this
Indenture, respectively, and prepared in accordance with SECTION 10.05 of
this Indenture; or
(3) an Opinion of Counsel, prepared in accordance with SECTION 10.05
of this Indenture, specifying:
(a) the form or forms and terms of such Securities have been
established by or pursuant to a resolution of the Board of Directors
in conformity with the provisions of this Indenture;
(b) such Securities, when authenticated and delivered by the
Trustee and issued by the Issuer in the manner and subject to any
conditions specified in such Opinion of Counsel, will constitute valid
and binding obligations of the Issuer; and
(c) such other matters as the Trustee may reasonably request.
SECTION 2.05. Execution of Securities. The Securities shall be signed on
behalf of the Issuer by both (a) the chairman of the Board of Directors or any
vice chairman of the Board of Directors or the president or any vice president
of the Issuer and (b) the treasurer or any assistant treasurer or secretary or
any assistant secretary of the Issuer. Such signatures may be the manual or
facsimile signatures of present or future such officers. Typographical and other
minor errors or defects in any such reproduction of any such signature shall not
affect the validity or enforceability of any Security that has been duly
authenticated and delivered by the Trustee.
In the event that any officer of the Issuer who shall have signed any of
the Securities shall cease to be such officer before the Security so signed
shall be authenticated and delivered by the Trustee or disposed of by the
Issuer, such Security nevertheless may be authenticated and delivered or
disposed of as though the person who signed such Security had not ceased to be
such officer of the Issuer, and any Security may be signed on behalf of the
Issuer by such persons as, at the actual date of the execution of such Security,
shall be the proper officers of the Issuer, although at the date of the
execution and delivery of this Indenture any such person was not such an
officer.
SECTION 2.06. Certificate of Authentication. Only such Securities as shall
bear thereon a certificate of authentication substantially in the form specified
by SECTION 2.02 of this Indenture, executed by the Trustee by the manual
signature of one of its authorized officers or signatories, shall be entitled to
the benefits of this Indenture or be valid or obligatory for any purpose. Such
certificate by the Trustee upon any Security executed by the Issuer shall be
conclusive evidence that the Security so authenticated has been duly
authenticated and delivered pursuant to this Indenture and that the holder is
entitled to the benefits of this Indenture.
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SECTION 2.07. Denomination and Date of Securities; Payments of Interest.
The Securities shall be issuable as registered securities without coupons and in
denominations as shall be specified as contemplated by SECTION 2.03 of this
Indenture. In the absence of any such specification with respect to the
Securities, the Securities shall be issuable in denominations of $10.00 and any
multiple thereof. The Securities shall be numbered, lettered, or otherwise
distinguished in such manner or in accordance with such plan as the officers of
the Issuer executing the same may determine with the approval of the Trustee as
evidenced by the execution and authentication thereof.
Each Security shall be dated the date of its authentication and shall bear
interest, if any, from the date and shall be payable on the dates, in each case,
which shall be specified as contemplated by SECTION 2.03 of this Indenture.
The person in whose name any Security is registered at the close of
business on any record date with respect to any interest payment date shall be
entitled to receive the interest, if any, payable on such interest payment date,
notwithstanding any transfer or exchange of such Security subsequent to the
record date and prior to such interest payment date, except in the event and to
the extent the Issuer shall default in the payment of the interest due on such
interest payment date, in which event such defaulted interest shall be paid to
the persons in whose names Outstanding Securities are registered at the close of
business on a subsequent record date (which shall be not less than five Business
Days prior to the date of payment of such defaulted interest) established by
notice given by mail by or on behalf of the Issuer to the holders of Securities
not less than 15 days preceding such subsequent record date. The term "record
date" as used with respect to any interest payment date (except a date for
payment of defaulted interest) shall mean the date specified as such in the
terms of the Securities, or, if no such date is so specified, if such interest
payment date is the first day of a calendar month, the fifteenth day of the next
preceding calendar month or, if such interest payment date is the fifteenth day
of a calendar month, the first day of such calendar month, whether or not such
record date is a Business Day.
SECTION 2.08. Registration, Transfer and Exchange. The Issuer will keep or
cause to be kept at each office or agency to be maintained for the purpose as
provided in SECTION 3.02 of this Indenture a register or registers ("Security
Register") in which, subject to such reasonable regulations as it may prescribe,
it will register, and will register the transfer of, Securities as specified in
this article. The Security Register shall be in written form in the English
language or in any other form capable of being converted into such form within a
reasonable time. At all reasonable times the Security Register shall be open for
inspection by the Trustee.
Upon due presentation for registration of transfer of any Security at any
such office or agency to be maintained for the purpose as provided in SECTION
3.02 of this Indenture, the Issuer shall execute and the Trustee shall
authenticate and deliver in the name of the transferee or transferees a new
Security or Securities in authorized denominations for the same aggregate
principal amount.
All Securities presented for registration of transfer, exchange, redemption
or payment shall (if so required by the Issuer or the Trustee) be duly endorsed
by, or be accompanied by a written instrument or instruments of transfer in form
satisfactory to the Issuer and the Trustee duly executed by, the holder or his
attorney duly authorized in writing.
The Issuer may require payment of an amount sufficient to pay any tax or
other governmental charge that may be imposed in connection with any exchange or
registration of transfer of Securities. No service charge shall be made for any
such transaction.
All Securities issued upon any transfer or exchange of Securities shall be
valid obligations of the Issuer, evidencing the same debt, and entitled to the
same benefits pursuant to this Indenture, as the Securities surrendered upon
such transfer or exchange.
SECTION 2.09. Mutilated, Defaced, Destroyed, Lost and Stolen Securities. In
case any temporary or definitive Security shall become mutilated, defaced or be
destroyed, lost or stolen, the Issuer, in its discretion, may execute, and upon
the written request of any officer of the Issuer, the Trustee shall authenticate
and deliver, a new Security, bearing a number not contemporaneously outstanding,
in exchange and substitution for the mutilated
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or defaced Security, or in lieu of and substitution for the Security so
destroyed, lost or stolen. In every case the applicant for a substitute Security
shall furnish to the Issuer and to the Trustee and any agent of the Issuer or
the Trustee such security or indemnity as may be required by them to indemnify,
defend and save each of them harmless and, in every case of destruction, loss or
theft, evidence to their satisfaction of the destruction, loss or theft of such
Security and of the ownership thereof.
Upon the issuance of any substitute Security, the Issuer may require the
payment of an amount sufficient to pay any tax or other governmental charge that
may be imposed in relation thereto and any other expenses (including the fees
and expenses of the Trustee) connected therewith. In case any Security which has
matured or is about to mature shall become mutilated or defaced or be destroyed,
lost or stolen, the Issuer may instead of issuing a substitute Security, pay or
authorize the payment of such mutilated, defaced, destroyed, lost or stolen
Security (without surrender thereof, except in the case of a mutilated or
defaced Security), if the applicant for such payment shall furnish to the Issuer
and to the Trustee and any agent of the Issuer or the Trustee such security or
indemnity as any of them may require to save each of them harmless, and, in
every case of destruction, loss or theft, such applicant shall also furnish to
the Issuer and the Trustee and any agent of the Issuer or the Trustee evidence
to their satisfaction of the destruction, loss or theft of such Security and of
the ownership thereof.
Every substitute Security issued pursuant to the provisions of this section
by virtue of the fact that such Security is destroyed, lost or stolen shall
constitute an additional contractual obligation of the Issuer, whether or not
the destroyed, lost or stolen Security shall be at any time enforceable by
anyone and shall be entitled to all the benefits of (but shall be subject to all
the limitations of rights set forth in) this Indenture equally and
proportionately with any and all other Securities duly authenticated and
delivered pursuant to this Indenture. All Securities shall be held and owned
upon the express condition that, to the extent permitted by law, the foregoing
provisions are exclusive with respect to the replacement or payment of
mutilated, defaced or destroyed, lost or stolen Securities and shall preclude
any and all other rights or remedies, notwithstanding any law or statute
existing or hereafter enacted to the contrary with respect to the replacement or
payment of negotiable instruments or other securities without their surrender.
SECTION 2.10. Cancellation of Securities; Destruction Thereof. All
Securities surrendered for payment, redemption, registration of transfer or
exchange, if surrendered to the Issuer or any agent of the Issuer or the
Trustee, shall be delivered to the Trustee for cancellation or, if surrendered
to the Trustee, shall be canceled by it; and no Securities shall be issued in
lieu thereof, except as expressly permitted by any of the provisions of this
Indenture. The Trustee shall destroy canceled Securities held by it and deliver
a certificate of destruction to the Issuer. If the Issuer shall acquire any
Securities, such acquisition shall not operate as a redemption or satisfaction
of the indebtedness represented by such Securities, unless and until such
Securities are delivered to the Trustee for cancellation.
SECTION 2.11. Temporary Securities. Pending the preparation of definitive
Securities, the Issuer may execute and the Trustee shall authenticate and
deliver temporary Securities (printed, lithographed, typewritten or otherwise
reproduced, in each case in form satisfactory to the Trustee). Temporary
Securities shall be issuable as registered Securities without coupons, of any
authorized denomination, and substantially in the form of the definitive
Securities but with such omissions, insertions and variations as may be
appropriate for temporary Securities, all as may be determined by the Issuer
with the concurrence of the Trustee. Temporary Securities may contain such
reference to any provisions of this Indenture as may be appropriate. Every
temporary Security shall be executed by the Issuer and be authenticated by the
Trustee upon the same conditions and in substantially the same manner, and with
similar effect, as the definitive Securities. Without unreasonable delay the
Issuer shall execute and shall furnish definitive Securities and thereupon
temporary Securities may be surrendered in exchange therefor without charge at
each office or agency to be maintained by the Issuer for that purpose pursuant
to SECTION 3.02 of this Indenture, and the Trustee shall authenticate and
deliver in exchange for such temporary Securities the same aggregate principal
amount of definitive Securities of authorized denominations. Until so exchanged,
temporary Securities shall be entitled to the same benefits pursuant to this
Indenture as definitive Securities.
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ARTICLE 3
COVENANTS OF THE ISSUER AND THE TRUSTEE
SECTION 3.01. Payment of Principal and Interest. The Issuer covenants and
agrees for the benefit of the Securities that it will duly and punctually pay or
cause to be paid the principal of, and interest on, each of the Securities at
the place or places, at the respective times and in the manner provided in such
Securities. Each installment of interest on the Securities may be paid by
mailing checks for such interest payable to or upon the written order of the
holders of Securities entitled thereto as they shall appear on the registry
books of the Issuer.
SECTION 3.02. Offices for Payments. During such time that any of the
Securities remain outstanding, the Issuer will maintain in the United States an
office or agency (a) where the Securities may be presented for payment, (b)
where the Securities may be presented for registration of transfer and for
exchange as in this Indenture provided and (c) where notices and demands to or
upon the Issuer in respect of the Securities or of this Indenture may be served.
The Issuer will give to the Trustee written notice of the location of any such
office or agency and of any change of location thereof. Unless otherwise
specified in accordance with SECTION 2.03 of this Indenture, the Issuer hereby
initially designates the Trust Office, as the office to be maintained by it for
each such purpose. In case the Issuer shall fail to so designate or maintain any
such office or agency or shall fail to give such notice of the location or of
any change in the location thereof, presentations and demands may be made and
notices may be served at the Trust Office.
SECTION 3.03. Appointment to Fill a Vacancy in Office of Trustee. The
Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in SECTION 5.08 of this Indenture, a
Trustee, so that there shall at all times be a Trustee with respect to the
Securities.
SECTION 3.04. Paying Agents. Whenever the Issuer shall appoint a paying
agent, other than the Trustee with respect to the Securities, the Issuer will
cause such paying agent to execute and deliver to the Trustee an instrument in
which such paying agent shall agree with the Trustee, subject to the provisions
of this section:
(a) that such paying agent will hold all amounts received by it as
such paying agent for the payment of the principal of or interest on the
Securities (whether such amounts have been paid to it by the Issuer or by
any other obligor on the Securities ) in trust for the benefit of the
holders of the Securities or of the Trustee,
(b) that such paying agent will give the Trustee notice of any failure
by the Issuer (or by any other obligor on the Securities) to make any
payment of the principal of or interest on the Securities when the same
shall be due and payable, and
(c) that such paying agent will pay any such amounts so held in trust
by it to the Trustee upon the Trustee's written request at any time during
the continuance of the failure referred to in clause (b) of this SECTION
3.04.
The Issuer will, on or prior to each due date of the principal of or
interest on the Securities, deposit with the paying agent an amount sufficient
to pay such principal or interest so becoming due, and (unless such paying agent
is the Trustee) the Issuer will promptly notify the Trustee of any failure to
take such action.
If the Issuer shall act as its own paying agent with respect to the
Securities, the Issuer will, on or before each due date of the principal of or
interest on the Securities, set aside, segregate and hold in trust for the
benefit of the holders of the Securities an amount sufficient to pay such
principal or interest so becoming due. The Issuer will promptly notify the
Trustee of any failure to take such action.
Anything in this section to the contrary notwithstanding, the Issuer may at
any time, for the purpose of obtaining a satisfaction and discharge with respect
to the Securities, or for any other reason, pay or cause to be paid to the
Trustee all amounts held in trust by the Issuer or any paying agent, as required
by this section, such amounts to be held by the Trustee, in trust, for the
purposes required by this Indenture.
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Anything in this section to the contrary notwithstanding, the agreement to
hold amounts in trust as provided in this section is subject to the provisions
of SECTIONS 9.03 and 9.04 of this Indenture.
SECTION 3.05. Certificate of the Issuer. The Issuer will furnish to the
Trustee on or before April 30 of each year (beginning with the first April 30 to
occur after the initial issuance of Securities pursuant to this Indenture) a
summary certificate (which need not comply with SECTION 10.05 of this Indenture)
from the principal executive, financial or accounting officer of the Issuer as
to his or her knowledge of the Issuer's compliance with all conditions and
covenants specified by the Indenture (such compliance to be determined without
regard to any period of grace or requirement of notice specified by this
Indenture) which certificate shall comply with the Trust Indenture Act of 1939.
SECTION 3.06. Securityholders Lists. If and during such period that the
Trustee shall not be the registrar for the Securities, the Issuer will furnish
or cause to be furnished to the Trustee a list in such form as the Trustee may
reasonably require of the names and addresses of the holders of the Securities
pursuant to Section 312 of the Trust Indenture Act of 1939 (i) semi-annually, no
later than 15 days after each record date for the payment of interest on such
Securities, as hereinabove specified, as of such record date, and (ii) at such
other times as the Trustee may request in writing, no later than 30 days after
receipt by the Issuer of any such request, as of a date no later than 15 days
prior to the time such information is furnished.
SECTION 3.07. Reports by the Issuer. The Issuer shall file with the
Trustee, within 15 days after the Issuer is required to file the same with the
Commission, copies of the annual reports and the information, documents, and
other reports which the Issuer may be required to file with the Commission
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
SECTION 3.08. Reports by the Trustee. Any Trustee's report required
pursuant to Section 313(a) of the Trust Indenture Act of 1939 shall be
transmitted on or before July 15 of each year following the date of this
Indenture, for such time as any Securities are outstanding, pursuant to this
Indenture, and shall be dated as of a date convenient to the Trustee no more
than 60 nor less than 45 days prior thereto. A copy of each such report shall,
at the time of such transmission to Holders, be filed by the Trustee with each
stock exchange, if any, upon which any Securities are listed, with the
Commission and with the Issuer. The Issuer will notify the Trustee if and when
any Securities are listed on any stock exchange.
ARTICLE 4
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT
SECTION 4.01. Event of Default Defined; Acceleration of Maturity; Waiver of
Default. "Event of Default" with respect to Securities wherever used herein,
means each one of the following events which shall have occurred and be
continuing (whatever the reason for such Event of Default and whether it shall
be voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental agency):
(a) default in the payment of all or any part of the principal on any
of the Securities, as and when such principal shall become due and payable
either at maturity, or otherwise; or
(b) default in the payment of any installment of interest upon any of
the Securities, as and when such installment of interest shall become due
and payable, and continuance of such default for a period of 30 days; or
(c) default in the performance, or breach of any covenant or warranty
of the Issuer regarding the Securities (other than a covenant or warranty
regarding the Securities the default or breach of which is specifically
dealt with elsewhere in this section) and continuance of such default or
breach for a period of 60 days after there has been given, by registered or
certified mail, to the Issuer by the Trustee or to the Issuer and the
Trustee by the Holders of at least 25% in principal amount of the
Outstanding Securities affected
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thereby, a written notice specifying such default or breach and requiring
such default or breach to be remedied and stating that such notice is a
"Notice of Default" hereunder; or
(d) the Issuer shall commence a voluntary proceeding pursuant to any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consent to the entry of an order for relief in an involuntary
proceeding pursuant to any such law, or consent to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee
or sequestrator (or similar official) of the Issuer or for any substantial
part of its property, or make any general assignment for the benefit of
creditors; or
(e) a court having jurisdiction shall enter a decree or order for
relief regarding the Issuer in an involuntary proceeding pursuant to any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or appointing a receiver, liquidator, assignee, custodian, trustee
or sequestrator (or similar official) of the Issuer or for any substantial
part of its property or ordering the winding up or liquidation of its
affairs, and such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or
(f) any other Event of Default provided in the resolution of the Board
of Directors pursuant to which the Securities are issued or in the form of
Security.
If an Event of Default described in clauses (a) or (b) of this SECTION 4.01
occurs and is continuing regarding the Securities, then, and in each and every
such event, unless the principal of the Securities shall have already become due
and payable, either the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Securities then Outstanding, by notice in writing to the
Issuer (and to the Trustee if given by Securityholders), may declare the entire
principal of all Securities and the interest accrued thereon, if any, to be due
and payable immediately, and upon any such declaration such principal and
interest shall become immediately due and payable. If an Event of Default
described in clause (c) or (f) of this SECTION 4.01 occurs and is continuing
with respect to the Securities, then and in each and every such event, unless
the principal of all the Securities shall have already become due and payable,
either the Trustee or the Holders of not less than 25% in aggregate principal
amount of all Securities then Outstanding , by notice in writing to the Issuer
(and to the Trustee if given by Securityholders), may declare the entire
principal of all such Securities then Outstanding and interest accrued thereon,
if any, to be due and payable immediately, and upon any such declaration such
principal and interest shall become immediately due and payable. If an Event of
Default described in clause (d) or (e) of this SECTION 4.01 occurs and is
continuing, then, and in each and every such event, unless the principal amount
of all the Securities shall have already become due and payable, the principal
amount of all the Securities then Outstanding and interest accrued thereon, if
any, shall be and become due and payable immediately, without notice or other
action by any Holder or the Trustee, to the full extent permitted by applicable
law.
The foregoing provisions, however, are subject to the condition that if, at
any time after the principal of the Securities shall have been so declared due
and payable, and before any judgment or decree for the payment of moneys due
shall have been obtained or entered as hereinafter provided, the Issuer shall
pay or deposit with the Trustee an amount sufficient to pay all matured
installments of interest upon all the Securities and the principal of any and
all Securities which shall have become due otherwise than by acceleration (with
interest upon such principal and, to the extent that payment of such interest is
enforceable pursuant to applicable law, on past due installments of interest, at
the same rate as the rate of interest specified in the Securities to the date of
such payment or deposit) and such amount as shall be sufficient to pay
reasonable compensation to the Trustee, its agents, attorneys and counsel, and
all other expenses and liabilities incurred, and all advances made, by the
Trustee, except as a result of negligence or bad faith, and if any and all
Events of Default, other than the non-payment of the principal of Securities
which shall have become due by acceleration, shall have been cured, waived or
otherwise remedied as provided herein, then, and in every such event, the
Holders of a majority in aggregate principal amount of all the Outstanding
Securities that have been accelerated, by written notice to the Issuer and to
the Trustee, may waive all defaults with respect to the Securities and rescind
and annul such declaration and its consequences, but no such waiver or
rescission and annulment shall extend to or shall affect any subsequent default
or shall impair any right consequent thereon.
SECTION 4.02. Collection of Indebtedness by Trustee; Trustee May Prove
Debt. The Issuer covenants
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that (i) in the event that default shall be made in the payment of any
installment of interest on any of the Securities when such interest shall have
become due and payable, and such default shall have continued for a period of 30
days or (ii) in the event that default shall be made in the payment of all or
any part of the principal of any of the Securities when the same shall have
become due and payable, whether upon maturity of the Securities , or otherwise,
then upon demand of the Trustee, the Issuer will pay to the Trustee for the
benefit of the Holders the entire amount that then shall have become due and
payable on all Securities for principal or interest, as the case may be (with
interest to the date of such payment upon the past due principal and, to the
extent that payment of such interest is enforceable pursuant to applicable law,
on past due installments of interest at the same rate as the rate of interest
specified in the Securities); and, in addition thereto, such additional amount
as shall be sufficient to pay the costs and expenses of collection, including
reasonable compensation to the Trustee and each predecessor Trustee, their
respective agents, attorneys and counsel, and any expenses and liabilities
incurred, and all advances made, by the Trustee and each predecessor Trustee,
except as a result of their negligence or bad faith.
Until such demand is made by the Trustee, the Issuer may pay the principal
of and interest on the Securities to the registered Holders, whether or not the
principal of and interest on the Securities are past due.
In the event that the Issuer shall fail forthwith to pay such amounts upon
such demand, the Trustee, in its own name and as trustee of an express trust,
shall be entitled and empowered to institute any action or proceeding at law or
in equity for the collection of any amounts past due and unpaid, and may
prosecute any such action or proceeding to judgment or final decree, and may
enforce any such judgment or final decree against the Issuer or other obligor
upon such Securities and collect in the manner provided by law out of the
property of the Issuer or other obligor upon such Securities, wherever situated,
the moneys adjudged or decreed to be payable.
In the event that there shall be pending proceedings regarding the Issuer
or any other obligor upon the Securities pursuant to Title 11 of the United
States Code or any other applicable federal or state bankruptcy, insolvency or
other similar law, or in the event that a receiver, assignee or trustee in
bankruptcy or reorganization, liquidator, sequestrator or similar official shall
have been appointed for or taken possession of the Issuer or its property or
such other obligor, or in the event of any other comparable judicial proceedings
regarding the Issuer or other obligor upon the Securities, or the creditors or
property of the Issuer or such other obligor, the Trustee, irrespective of
whether the principal of any Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand pursuant to the provisions of this section, shall be
entitled and empowered, by intervention in such proceeding or otherwise:
(a) to file and prove a claim or claims for the entire amount of
principal and interest due and unpaid in respect of the Securities, and to
file such other papers or documents as may be necessary or appropriate in
order to have the claims of the Trustee (including any claim for reasonable
compensation to the Trustee and each predecessor Trustee, and their
respective agents, attorneys and counsel, and for reimbursement of all
expenses and liabilities incurred, and all advances made, by the Trustee
and each predecessor Trustee, except as a result of negligence or bad
faith) and of the Securityholders allowed in any judicial proceeding
regarding the Issuer or other obligor upon the Securities, or to the
creditors or property of the Issuer or such other obligor,
(b) unless prohibited by applicable law and regulations, to vote on
behalf of the Holders in any election of a trustee or a standby trustee in
arrangement, reorganization, liquidation or other bankruptcy or insolvency
proceeding or person performing similar functions in any comparable
proceeding , and
(c) to collect and receive any moneys or other property payable or
deliverable on any such claims, and to distribute all amounts received with
respect to the claims of the Securityholders and of the Trustee on their
behalf; and any trustee, receiver, or liquidator, custodian or other
similar official is hereby authorized by each of the Securityholders to
make payments to the Trustee, and, in the event that the Trustee shall
consent to the making of payments directly to the Securityholders, to pay
to the Trustee such amounts as shall be sufficient to pay reasonable
compensation to the Trustee, each predecessor Trustee and their respective
agents, attorneys and counsel, and all other expenses and liabilities
incurred, and all advances made, by the Trustee and each predecessor
Trustee, except as a result of negligence or bad faith and all other
amounts due to the
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Trustee or any predecessor Trustee pursuant to SECTION 5.06 of this
Indenture.
Nothing specified in this instrument shall be deemed to authorize the
Trustee to authorize or consent to or vote for or accept or adopt on behalf
of any Securityholder any plan of reorganization, arrangement, adjustment
or composition affecting the Securities or the rights of any Holder, or to
authorize the Trustee to vote in respect of the claim of any Securityholder
in any such proceeding except, as specified otherwise in this Indenture, to
vote for the election of a trustee in bankruptcy or similar person.
All rights of action and of asserting claims pursuant to this
Indenture, or pursuant to any of the Securities, may be enforced by the
Trustee without the possession of any of the Securities or the production
thereof at any trial or other proceeding relating thereto, and any such
action or proceeding instituted by the Trustee shall be brought in its own
name as trustee of an express trust, and any recovery of judgment, subject
to the payment of the expenses, disbursements and compensation of the
Trustee, each predecessor Trustee and their respective agents and
attorneys, shall be for the ratable benefit of the Holders in respect of
which such action was taken.
In any proceeding brought by the Trustee (and also any proceeding
involving the interpretation of any provision of this Indenture to which
the Trustee shall be a party) the Trustee shall be held to represent all
the Holders in connection with such proceeding, and it shall not be
necessary to make any Holders parties to any such proceedings.
SECTION 4.03. Application of Proceeds. Any moneys collected by the Trustee
pursuant to this Article in respect of Securities shall be applied in the
following order at the date or dates fixed by the Trustee and, in case of the
distribution of such moneys on account of principal or interest, upon
presentation of the Securities in respect of which monies have been collected
and stamping (or otherwise noting) thereon the payment, or issuing Securities in
reduced principal amounts in exchange for the presented Securities if only
partially paid, or upon surrender thereof if fully paid:
FIRST: To the payment of costs and expenses applicable to such
Securities in respect of which monies have been collected, including
reasonable compensation to the Trustee and each predecessor Trustee and
their respective agents, attorneys and counsel and of all expenses and
liabilities incurred, and all advances made, by the Trustee and each
predecessor Trustee, except as a result of negligence or bad faith, and all
other amounts due to the Trustee or any predecessor Trustee pursuant to
SECTION 5.06 of this Indenture;
SECOND: In case the principal of the Securities in respect of which
moneys have been collected and which shall not have become and be then due
and payable, to the payment of interest on the Securities in default in the
order of the maturity of the installments of such interest, with interest
(to the extent that such interest has been collected by the Trustee) upon
the past due installments of interest at the same rate as the rate of
interest specified in such Securities, such payments to be made ratably to
the persons entitled thereto, without discrimination or preference;
THIRD: In case the principal of the Securities in respect of which
moneys have been collected and which shall have become and shall be then
due and payable, to the payment of the whole amount then owing and unpaid
upon all the Securities for principal and interest, with interest upon the
past due principal, and (to the extent that such interest has been
collected by the Trustee) upon past due installments of interest at the
same rate as the rate of interest specified in the Securities; and in case
such moneys shall be insufficient to pay in full the whole amount so due
and unpaid upon the Securities, then to the payment of such principal and
interest, without preference or priority of principal over interest, or of
interest over principal, or of any installment of interest over any other
installment of interest, or of any Security over any other Security,
ratably to the aggregate of such principal and accrued and unpaid interest
or yield to maturity; and
FOURTH: To the payment of the remainder, if any, to the Issuer or any
other person lawfully entitled thereto.
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SECTION 4.04. Suits for Enforcement. In case an Event of Default has
occurred, has not been waived and is continuing, the Trustee may, in his
discretion, proceed to protect and enforce the rights vested in him by this
Indenture by such appropriate judicial proceedings as the Trustee shall deem
most effectual to protect and enforce any of such rights, either at law or in
equity or in bankruptcy or otherwise, whether for the specific enforcement of
any covenant or agreement contained in this Indenture or in aid of the exercise
of any power granted in this Indenture or to enforce any other legal or
equitable right vested in the Trustee by this Indenture or by law.
SECTION 4.05. Restoration of Rights on Abandonment of Proceedings. In case
the Trustee shall have proceeded to enforce any right under this Indenture and
such proceeding shall have been discontinued or abandoned for any reason, or
shall have been determined adversely to the Trustee, then and in every such case
the Issuer, the Trustee and the Holders shall be restored respectively to their
former positions and rights hereunder, and all rights, remedies and powers of
the Issuer, the Trustee and the Holders shall continue as though no such
proceeding had been taken.
SECTION 4.06. Limitations on Litigation by Securityholders. No Holder shall
have any right by virtue or by availing of any provision of this Indenture to
institute any action or proceeding at law or in equity or in bankruptcy or
otherwise upon or under or with respect to this Indenture, or for the
appointment of a trustee, receiver, liquidator, custodian or other similar
official or for any other remedy hereunder, unless such Holder previously shall
have given to the Trustee written notice of default and of the continuance
thereof, as hereinbefore provided, and unless also the Holders of not less than
25% in aggregate principal amount of the Securities then outstanding shall have
made written request upon the Trustee to institute such action or proceeding in
his own name as trustee hereunder and shall have offered to the Trustee such
reasonable indemnity as he may require against the costs, expenses and
liabilities to be incurred therein or thereby and the Trustee for 60 days after
his receipt of such notice, request and offer of indemnity shall have failed to
institute any such action or proceeding and no direction inconsistent with such
written request shall have been given to the Trustee pursuant to SECTION 4.09 of
this Indenture during such 60-day period; it being understood and intended, and
being expressly covenanted by the taker and Holder of every Security with every
other taker and Holder and the Trustee, that no one or more Holders shall have
any right in any manner whatever by virtue or by availing of any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holder,
or to obtain or seek to obtain priority over or preference to any other Holder
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal, ratable and common benefit of all Holders . For the
protection and enforcement of the provisions of this section, each and every
Holder and the Trustee shall be entitled to such relief as can be given either
at law or in equity.
SECTION 4.07. Unconditional Right of Securityholders to Institute Certain
Litigation. Notwithstanding any other provision in this Indenture and any
provision of any Security, the right of any Holder to receive payment of the
principal of and interest on a Security on or after the respective due dates
expressed in such Security, or to institute suit for the enforcement of any such
payment on or after such respective dates, shall not be impaired or affected
without the consent of such Holder.
SECTION 4.08. Powers and Remedies Cumulative; Delay or Omission Not Waiver
of Default. Except as provided in SECTION 4.06 of this Indenture, no right or
remedy herein conferred upon or reserved to the Trustee or to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy. No delay or omission of the
Trustee or of any Holder to exercise any right or power accruing upon any Event
of Default occurring and continuing as aforesaid shall impair any such right or
power or shall be construed to be a waiver of any such Event of Default or an
acquiescence therein; and, subject to SECTION 4.06 of this Indenture, every
power and remedy given by this Indenture or by law to the Trustee or to the
Holders may be exercised from time to time, and as often as shall be deemed
expedient, by the Trustee or by the Holders.
SECTION 4.09. Control by Securityholders. The Holders of a majority in
aggregate principal amount of the Securities at the time outstanding shall have
the right to direct the time, method, and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee with
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respect to the Securities by this Indenture; provided, that such direction shall
not be otherwise than in accordance with applicable law and the provisions of
this Indenture; and, provided, further, that (subject to the provisions of
SECTION 5.01 of this Indenture) the Trustee shall have the right to decline to
follow any such direction if the Trustee, being advised by counsel, shall
determine that the action or proceeding so directed may not lawfully be taken or
if the Trustee in good faith shall determine that the action or proceeding so
directed would involve the Trustee in personal liability or if the Trustee in
good faith shall so determine that the actions or forebearances specified in or
pursuant to such direction would be unduly prejudicial to the interests of
Holders not joining in the giving of said direction, it being understood that
(subject to SECTION 5.01 of this Indenture) the Trustee shall have no duty to
ascertain whether or not such actions or forebearances are unduly prejudicial to
such Holders.
Nothing in this Indenture shall impair the right of the Trustee in his
discretion to take any action deemed proper by the Trustee and which is not
inconsistent with such direction or directions by Securityholders.
SECTION 4.10. Waiver of Past Defaults. Subject to SECTIONS 4.01, 4.07 and
7.02 of this Indenture, the Holders of a majority in aggregate principal amount
of the Outstanding Securities may on behalf of the Holders waive any past
default or Event of Default and its consequences, except a default in respect of
a covenant or provision hereof which cannot be modified or amended without the
consent of each Holder affected as provided in SECTION 7.02 of this Indenture or
a default or Event of Default in the payment of principal or interest as
specified in clauses (a), (b) and (c) of SECTION 4.01 of this Indenture.
Upon any such waiver, such default shall cease to exist and be deemed to
have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured, and not to have occurred for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.
SECTION 4.11. Trustee to Give Notice of Default, But May Withhold in
Certain Circumstances. The Trustee shall give to the Holders, as the names and
addresses of such Holders appear on the registry books, notice by mail of all
defaults known to the Trustee which have occurred with respect to the
Securities, such notice to be transmitted within 90 days after the occurrence
thereof, unless such defaults shall have been cured before the giving of such
notice (the term "default" or "defaults" for the purposes of this section being
hereby defined to mean any event or condition which is, or with notice or lapse
of time or both would become, an Event of Default); provided, that, except in
the case of default in the payment of the principal of or interest on any of the
Securities, the Trustee shall be protected in withholding such notice if and so
long as the Trustee in good faith determines that the withholding of such notice
is in the interests of the Holders.
SECTION 4.12. Right of Court to Require Filing of Undertaking to Pay Costs.
All parties to this Indenture agree, and each Holder, by his acceptance thereof,
shall be deemed to have agreed, that any court may, in its discretion, require,
in any action for the enforcement of any right or remedy under this Indenture or
in any action against the Trustee for any action taken, suffered or omitted by
it as Trustee, the filing by any party litigant in such action of an undertaking
to pay the costs of such action, and that such court may in its discretion
assess reasonable costs, including reasonable attorneys' fees, against any party
litigant in such action, having due regard to the merits and good faith of the
claims or defenses made by such party litigant; but the provisions of this
section shall not apply to any action instituted by the Trustee, to any action
instituted pursuant to SECTION 4.07 of this Indenture or by any Holder or group
of Holders holding in the aggregate more than 10% in aggregate principal amount
of the Securities.
ARTICLE 5
CONCERNING THE TRUSTEE
SECTION 5.01. Duties and Responsibilities of the Trustee; During
Default; Prior to Default. With respect to the Holders, the Trustee, prior to
the occurrence of an Event of Default with respect to the Securities and after
the curing or waiving of all Events of Default which may have occurred with
respect to the Securities, undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture. In case an Event of
Default with respect to the Securities has occurred (which has not been cured or
waived) the Trustee shall exercise such of
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the rights and powers vested in him by this Indenture, and use the same degree
of care and skill in their exercise, as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
No provision of this Indenture shall be construed to relieve the Trustee
from liability for his own negligent action, his own negligent failure to act or
his own wilful misconduct, except that:
(a) prior to the occurrence of an Event of Default with respect to the
Securities and after the curing or waiving of all such Events of Default
with respect to the Securities which may have occurred:
(i) the duties and obligations of the Trustee with respect to the
Securities shall be determined solely by the express provisions of
this Indenture, and the Trustee shall not be liable, except for the
performance of such duties and obligations as are specifically set
forth in this Indenture, and no implied covenants or obligations shall
be read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon any
statements, certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture; but in the case of
any such statements, certificates or opinions which by any provision
hereof are specifically required to be furnished to the Trustee, the
Trustee shall be under a duty to examine the same to determine whether
or not they conform to the requirements of this Indenture;
(b) the Trustee shall not be liable for any error of judgment made in
good faith by him, unless it shall be proved that the Trustee was negligent
in ascertaining the pertinent facts; and
(c) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by him in good faith in accordance with the
direction of the Holders pursuant to SECTION 4.09 of this Indenture
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Indenture.
None of the provisions contained in this Indenture shall require the
Trustee to expend or risk his own funds or otherwise incur personal financial
liability in the performance of any of his duties or in the exercise of any of
his rights or powers, if there shall be reasonable ground for believing that the
repayment of such funds or adequate indemnity against such liability is not
reasonably assured to him.
The provisions of this SECTION 5.01 are in furtherance of and subject to
Sections 315 and 316 of the Trust Indenture Act of 1939. Whether or not therein
expressly so provided, every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this SECTION 5.01.
SECTION 5.02. Certain Rights of the Trustee. In furtherance of and subject
to the Trust Indenture Act of 1939, and subject to SECTION 5.01 of this
Indenture:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, Officers' Certificate or any
other certificate, statement, instrument, opinion, report, notice, request,
consent, order, bond, debenture, note, coupon, security or other paper or
document believed by him to be genuine and to have been signed or presented
by the proper party or parties;
(b) any request, direction, order or demand of the Issuer mentioned
herein shall be sufficiently evidenced by an Officers' Certificate (unless
other evidence in respect thereof be herein specifically prescribed); and
any resolution of the Board of Directors may be evidenced to the Trustee by
a copy thereof certified by the secretary or an assistant secretary of the
Issuer;
(c) the Trustee may consult with counsel and any advice or Opinion of
Counsel shall be full and complete authorization and protection in respect
of any action taken, suffered or omitted to be taken by him
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hereunder in good faith and in accordance with such advice or Opinion of
Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
trusts or powers vested in him by this Indenture at the request, order or
direction of any of the Securityholders pursuant to the provisions of this
Indenture, unless such Securityholders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred therein or thereby;
(e) the Trustee shall not be liable for any action taken or omitted by
him in good faith and believed by him to be authorized or within the
discretion, rights or powers conferred upon him by this Indenture;
(f) prior to the occurrence of an Event of Default and after the
curing or waiving of all Events of Default, the Trustee shall not be bound
to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, approval, appraisal, bond, debenture, note,
coupon, security, or other paper or document, unless requested in writing
so to do by the Holders of not less than a majority in aggregate principal
amount of the Securities then outstanding; provided, that, if the payment
within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by him in the making of such
investigation is, in the opinion of the Trustee, not reasonably assured to
the Trustee by the security afforded to him by the terms of this Indenture,
the Trustee may require reasonable indemnity against such expenses or
liabilities as a condition to proceeding; the reasonable expenses of every
such investigation shall be paid by the Issuer or, if paid by the Trustee
or any predecessor trustee, shall be repaid by the Issuer upon demand;
provided, further, that the Trustee, in his discretion, may make such
further inquiry or investigation into such facts or matters as he may see
fit, and, if the Trustee shall determine to make such further inquiry or
investigation, he shall be entitled to examine the books, records and
premises of the Issuer, relevant to the facts or matters that are the
subject of his inquiry, personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys not regularly in his employ and the Trustee shall not be
responsible for any misconduct or negligence on the part of any such agent
or attorney appointed with due care by him hereunder.
SECTION 5.03. Trustee Not Responsible for Recitals, Disposition of
Securities or Application of Proceeds Thereof. The recitals contained herein and
in the Securities, except the Trustee's certificates of authentication, shall be
taken as the statements of the Issuer, and the Trustee assumes no responsibility
for the correctness of the same. The Trustee makes no representation as to the
validity or sufficiency of this Indenture or of the Securities. The Trustee
shall not be accountable for the use or application by the Issuer of any of the
Securities or of the proceeds thereof.
SECTION 5.04. Trustee and Agents May Hold Securities; Collections. The
Trustee or any agent of the Issuer or the Trustee, in his individual or any
other capacity, may become the owner or pledgee of Securities with the same
rights he would have if he were not the Trustee or such agent and may otherwise
deal with the Issuer and receive, collect, hold and retain collections from the
Issuer with the same rights he would have if he were not the Trustee or such
agent.
SECTION 5.05. Moneys Held by Trustee. Subject to the provisions of SECTION
9.04 of this Indenture, all moneys received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds, except to the extent
required by mandatory provisions of law. Neither the Trustee nor any agent of
the Issuer or the Trustee shall be under any liability for interest on any
moneys received by such party hereunder.
SECTION 5.06. Compensation and Indemnification of Trustee and His Prior
Claim. The Issuer covenants and agrees to pay to the Trustee from time to time,
and the Trustee shall be entitled to, reasonable compensation (which shall not
be limited by any provision of law in regard to the compensation of a trustee of
an express trust) and the Issuer covenants and agrees to pay or reimburse the
Trustee and each predecessor Trustee upon his request for all reasonable
expenses, disbursements and advances incurred or made by or on behalf of him in
accordance with any
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of the provisions of this Indenture (including the reasonable compensation and
the expenses and disbursements of his counsel and of all agents and other
persons not regularly in his employ), except to the extent any such expense,
disbursement or advance may arise from his negligence or bad faith. The Issuer
also covenants to indemnify the Trustee and each predecessor Trustee for, and to
hold him harmless against, any loss, liability or expense arising out of or in
connection with the acceptance or administration of this Indenture or the trusts
hereunder and the performance of his duties hereunder, including the costs and
expenses of defending himself against or investigating any claim of liability
arising hereunder, except to the extent such loss liability or expense is due to
the negligence or bad faith of the Trustee or such predecessor Trustee. The
obligations of the Issuer under this section to compensate and indemnify the
Trustee and each predecessor Trustee and to pay or reimburse the Trustee and
each predecessor Trustee for expenses, disbursements and advances shall
constitute additional indebtedness hereunder and shall survive the satisfaction
and discharge of this Indenture. Such additional indebtedness shall be a senior
claim to that of the Securities upon all property and funds held or collected by
the Trustee as such, except funds held in trust for the benefit of the Holders
and the Securities are hereby subordinated to such senior claim.
SECTION 5.07. Right of Trustee to Rely on Officers' Certificate. Subject to
SECTIONS 5.01 and 5.02 of this Indenture, whenever in the administration of the
trusts of this Indenture the Trustee shall deem it necessary or desirable that a
matter be proved or established prior to taking or suffering or omitting any
action hereunder, such matter (unless other evidence in respect thereof be
herein specifically prescribed) may, in the absence of negligence or bad faith
on the part of the Trustee, be deemed to be conclusively proved and established
by an Officers' Certificate delivered to the Trustee, and such certificate, in
the absence of negligence or bad faith on the part of the Trustee, shall be full
warrant to the Trustee for any action taken, suffered or omitted by him under
the provisions of this Indenture upon the faith thereof.
SECTION 5.08. Resignation and Removal; Appointment of Successor Trustee.
(a) The Trustee, or any trustee or trustees hereafter appointed, may at any time
resign with respect to this Indenture by giving written notice of resignation to
the Issuer and by mailing notice thereof by first class mail to the Holders at
their last addresses as they shall appear on the Security Register. Upon
receiving such notice of resignation, the Issuer shall promptly appoint a
successor trustee or trustees by written instrument in duplicate, executed by
authority of the Board of Directors, one copy of which instrument shall be
delivered to the resigning Trustee and one copy to the successor trustee or
trustees; provided, however, that, unless a bank or trust company shall be
appointed as successor trustee, the successor trustee shall be appointed only
with the approval of the California Commissioner of Corporations pursuant to 10
California Administrative Code Section 260.140.5.
If no successor trustee shall have been so appointed and have accepted
appointment within 30 days after the mailing of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee, or any Holder who has been a bona fide
Holder for at least six months may, subject to the provisions of SECTION 4.12 of
this Indenture, on behalf of himself and all others similarly situated, petition
any such court for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
(b) In case at any time any of the following shall occur:
(i) the Trustee shall fail to comply with the provisions of
Section 310(b) of the Trust Indenture Act of 1939 with respect to the
Securities after written request therefor by the Issuer or by any
Holder who has been a bona fide Holder for at least six months; or
(ii) the Trustee shall cease to be eligible in accordance with
the provisions of Section 310(a) of the Trust Indenture Act of 1939
and shall fail to resign after written request therefor by the Issuer
or by any Securityholder; or
(iii) the Trustee shall become incapable of acting with respect
to the Securities, or shall be adjudged a bankrupt or insolvent, or a
receiver or liquidator of the Trustee or of his property shall be
appointed, or any public officer shall take charge or control of the
Trustee or of his property or affairs for the purpose of
rehabilitation, conservation or liquidation;
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then, in any such case, the Issuer may remove the Trustee with
respect to the Securities and appoint a successor trustee for such
Securities by written instrument, in duplicate, executed by order of
the Board of Directors , one copy of which instrument shall be
delivered to the Trustee so removed and one copy to the successor
trustee, or, subject to Section 315(e) of the Trust Indenture Act of
1939, any Holder who has been a bona fide Holder for at least six
months may on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of the
Trustee and the appointment of a successor trustee with respect to the
Securities. Such court may thereupon, after such notice, if any, as it
may deem proper and prescribe, remove the Trustee and appoint a
successor trustee.
(c) The Holders of a majority in aggregate principal amount of the
Securities at the time outstanding may at any time remove the Trustee with
respect to the Securities and appoint a successor trustee with respect to
the Securities by delivering to the Trustee so removed, to the successor
trustee so appointed and to the Issuer the evidence provided for in SECTION
6.01 of this Indenture of the action in that regard taken by the Holders.
(d) Any resignation or removal of the Trustee and any appointment of a
successor trustee pursuant to any of the provisions of this SECTION 5.08
shall become effective upon acceptance of appointment by the successor
trustee as provided in SECTION 5.09 of this Indenture.
SECTION 5.09. Acceptance of Appointment by Successor Trustee. Any successor
trustee appointed as provided in SECTION 5.08 of this Indenture shall execute
and deliver to the Issuer and to his predecessor trustee an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all rights,
powers, duties and obligations with respect to such series of his predecessor
hereunder, with like effect as if originally named as trustee for such series
hereunder; but, nevertheless, on the written request of the Issuer or of the
successor trustee, upon payment of his charges then unpaid, the trustee ceasing
to act shall, subject to SECTION 9.04 of this Indenture, pay over to the
successor trustee all moneys at the time held by him hereunder and shall execute
and deliver an instrument transferring to such successor trustee all such
rights, powers, duties and obligations. Upon request of any such successor
trustee, the Issuer shall execute any and all instruments in writing for more
fully and certainly vesting in and confirming to such successor trustee all such
rights and powers. Any trustee ceasing to act shall, nevertheless, retain a
prior claim upon all property or funds held or collected by such trustee to
secure any amounts then due him pursuant to the provisions of SECTION 5.06 of
this Indenture.
Upon acceptance of appointment by any successor trustee as provided in this
SECTION 5.09, the Issuer shall mail notice thereof by first-class mail to the
Holders at their last addresses as they shall appear in the Security Register.
If the acceptance of appointment is substantially contemporaneous with the
resignation, then the notice called for by the preceding sentence may be
combined with the notice called for by SECTION 5.08 of this Indenture. If the
Issuer fails to mail such notice within ten days after acceptance of appointment
by the successor trustee, the successor trustee shall cause such notice to be
mailed at the expense of the Issuer.
ARTICLE 6
CONCERNING THE SECURITYHOLDERS
SECTION 6.01. Evidence of Action Taken by Securityholders. Any request,
demand, authorization, direction, notice, consent, waiver or other action
provided by this Indenture to be given or taken by a specified percentage in
principal amount of the Securityholders may be embodied in and evidenced by one
or more instruments with substantially similar terms and conditions signed by
such specified percentage of Securityholders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee. Proof of execution of any instrument or of a writing appointing
any such agent shall be sufficient for any purpose of this Indenture and
(subject to SECTIONS 5.01 and 5.02 of this Indenture) conclusive in favor of the
Trustee and the Issuer, if made in the manner provided in
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this article.
SECTION 6.02. Proof of Execution of Instruments and of Holding of
Securities; Record Date. Subject to SECTIONS 5.01 and 5.02 of this Indenture,
the execution of any instrument by a Holder or his agent or proxy may be proved
in accordance with such reasonable rules and regulations as may be prescribed by
the Trustee or in such manner as shall be satisfactory to the Trustee. The
holding of Securities shall be proved by the Security Register or by a
certificate of the registrar thereof. The Issuer may set a record date for
purposes of determining the identity of Holders entitled to vote or consent to
any action referred to in SECTION 6.01 of this Indenture, which record date may
be set at any time or from time to time by notice to the Trustee, for any date
or dates (in the case of any adjournment or reconsideration) not more than 60
days nor less than five days prior to the proposed date of such vote or consent,
and thereafter, notwithstanding any other provisions hereof, only Holders of
record on such record date shall be entitled to so vote or give such consent or
revoke such vote or consent.
SECTION 6.03. Holders to Be Treated as Owners. The Issuer, the Trustee and
any agent of the Issuer or the Trustee may deem and treat the person in whose
name any Security shall be registered upon the Security Register for such series
as the absolute owner of such Security (whether or not such Security shall be
overdue and notwithstanding any notation of ownership or other writing thereon)
for the purpose of receiving payment of or on account of the principal of and,
subject to the provisions of this Indenture, interest on such Security and for
all other purposes; and neither the Issuer nor the Trustee nor any agent of the
Issuer or the Trustee shall be affected by any notice to the contrary. All such
payments so made to any such person, or upon his order, shall be valid, and, to
the extent of the sum or sums so paid, effectual to satisfy and discharge the
liability for moneys payable upon any such Security.
SECTION 6.04. Securities Owned by Issuer Deemed Not Outstanding. In
deZermining whether the Holders of the requisite aggregate principal amount of
Outstanding Securities have concurred in any direction, consent or waiver under
this Indenture, Securities which are owned by the Issuer or any other obligor on
the Securities with respect to which such determination is being made or by any
person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Issuer or any other obligor on the Securities
with respect to which such determination is being made shall be disregarded and
deemed not to be Outstanding for the purpose of any such determination, except
that for the purpose of determining whether the Trustee shall be protected in
relying on any such direction, consent or waiver only Securities which the
Trustee knows are so owned shall be so disregarded. Securities so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Issuer or any
other obligor upon the Securities or any person directly or indirectly
controlling or controlled by or under direct or indirect common control with the
Issuer or any other obligor on the Securities. In case of a dispute as to such
right, the advice of counsel shall be full protection in respect of any decision
made by the Trustee in accordance with such advice. Upon request of the Trustee,
the Issuer shall furnish to the Trustee promptly an Officers' Certificate
listing and identifying all Securities, if any, known by the Issuer to be owned
or held by or for the account of any of the above-described persons; and,
subject to SECTIONS 5.01 and 5.02 of this Indenture, the Trustee shall be
entitled to accept such Officers' Certificate as conclusive evidence of the
facts therein set forth and of the fact that all Securities not listed therein
are Outstanding for the purpose of any such determination.
SECTION 6.05. Right of Revocation of Action Taken. At any time prior to
(but not after) the evidencing to the Trustee, as provided in SECTION 6.01 of
this Indenture, of the taking of any action by the Holders of the percentage in
aggregate principal amount of the Securities specified in this Indenture in
connection with such action, any Holder of a Security the serial number of which
is shown by the evidence to be included among the serial numbers of the
Securities the Holders of which have consented to such action may, by filing
written notice at the Trust Office and upon proof of holding as provided in this
article, revoke such action so far as concerns such Security. Except as
aforesaid any such action taken by any Holder shall be conclusive and binding
upon such Holder and upon all future Holders and owners of such Security and of
any Securities issued in exchange or substitution therefor, irrespective of
whether or not any notation in regard thereto is made upon any such Security.
Any action taken by the Holders of the percentage in aggregate principal amount
of the Securities specified in this Indenture in connection with such action
shall be conclusively binding upon the Issuer, the Trustee and the Holders
affected by such action.
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ARTICLE 7
SUPPLEMENTAL INDENTURES
SECTION 7.01. Supplemental Indentures Without Consent of Securityholders.
The Issuer, when authorized by a resolution of the Board of Directors, and the
Trustee may from time to time and at any time enter into an indenture or
indentures supplemental hereto for one or more of the following purposes:
(a) to convey, transfer, assign, mortgage or pledge to the Trustee as
security for the Securities of one or more series any property or assets;
(b) to evidence the succession of another entity to the Issuer, or
successive successions, and the assumption by the successor entity of the
covenants, agreements and obligations of the Issuer pursuant to ARTICLE 8
of this Indenture;
(c) to add to the covenants of the Issuer such further covenants,
restrictions, conditions or provisions as the Board of Directors and the
Trustee shall consider to be for the protection of the Holders, and to make
the occurrence, or the occurrence and continuance, of a default in any such
additional covenants, restrictions, conditions or provisions an Event of
Default permitting the enforcement of all or any of the several remedies
provided in this Indenture as herein set forth; provided, that in respect
of any such additional covenant, restriction, condition or provision such
supplemental indenture may provide for a particular period of grace after
default (which period may be shorter or longer than that allowed in the
case of other defaults) or may provide for an immediate enforcement upon
such an Event of Default or may limit the remedies available to the Trustee
upon such an Event of Default or may limit the right of the Holders of a
majority in aggregate principal amount of the Securities to waive such an
Event of Default;
(d) to cure any ambiguity or to correct or supplement any provision
contained herein or in any supplemental indenture which may be defective or
inconsistent with any other provision contained herein or in any
supplemental indenture; or to make such other provisions in regard to
matters or questions arising under this Indenture or under any supplemental
indenture as the Board of Directors may deem necessary or desirable and
which shall not adversely affect the interests of the Holders in any
material respect;
(e) to modify the form and terms of Securities, as specified by
SECTIONS 2.01 and 2.03 of this Indenture;
(f) to evidence and provide for the acceptance of appointment
hereunder by a successor trustee with respect to the Securities and to add
to or change any of the provisions of this Indenture as shall be necessary
to provide for or facilitate the administration of the trusts hereunder by
more than one trustee, pursuant to the requirements of SECTION 5.09 of this
Indenture;
(g) to permit or facilitate the issuance of Securities in global form
or bearer form or to provide for uncertificated Securities to be issued;
(h) to change or eliminate any provision contained herein, provided
that any such change or elimination shall become effective only when there
are no Securities outstanding created prior to the execution of any
supplemental indenture which are entitled to the benefit of such provision;
and
(i) to amend or supplement any provision contained herein, which was
required to be contained herein in order for this Indenture to be qualified
under the Trust Indenture Act of 1939, if the Trust Indenture Act of 1939
or regulations thereunder change what is so required to be included in
qualified indentures, in any manner not inconsistent with what then may be
required for such qualification.
The Trustee is hereby authorized to join with the Issuer in the execution
of any such supplemental indenture, to make any additional appropriate
agreements and stipulations which may be therein contained and to accept the
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conveyance, transfer, assignment, mortgage or pledge of any property thereunder,
but the Trustee shall not be obligated to enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this section may
be executed without the consent of the Holders at the time outstanding,
notwithstanding any of the provisions of SECTION 7.02 of this Indenture.
SECTION 7.02. Supplemental Indentures with Consent of Securityholders. With
the consent (evidenced as provided in ARTICLE 6 of this Indenture) of the
Holders of not less than a majority in aggregate principal amount of the
Securities at the time Outstanding, the Issuer, when authorized by a resolution
of its Board of Directors, and the Trustee may, from time to time and at any
time, enter into an indenture or indentures supplemental hereto for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of any supplemental indenture or of modifying in
any manner the rights of the Holders of each such series; provided, that no such
supplemental indenture shall (a) extend the final maturity of any Security, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of interest thereon, or reduce any amount payable on redemption thereof,
or impair or affect the right of any Holder to institute action for the payment
thereof or, if the Securities provide therefor, any right of repayment at the
option of the Holder without the consent of each Holder so affected, or (b)
reduce the aforesaid percentage of Securities, the consent of the Holders of
which is required for any such supplemental indenture, without the consent of
the Holder of each Security so offered, or (c) reduce the percentage of
Securities necessary to consent to waive any past default under this Indenture
to less than a majority, without the consent of the Holder of each Security so
affected, or (d) modify any of the provisions of this SECTION 7.02 of this
Indenture, except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Security affected thereby, provided, however, that
this clause shall not be deemed to require the consent of any Holder with
respect to changes in the references to "the Trustee" and concomitant changes in
this section, or the deletion of this proviso, in accordance with the
requirements of SECTIONS 5.08, 5.09, 5.10 and 7.02 of this Indenture.
Upon the request of the Issuer, accompanied by a copy of a resolution of
the Board of Directors certified by the secretary or an assistant secretary of
the Issuer authorizing the execution of any such supplemental indenture, and
upon the filing with the Trustee of evidence of the consent of Securityholders
as aforesaid and other documents, if any, required by SECTION 6.01 of this
Indenture, the Trustee shall join with the Issuer in the execution of such
supplemental indenture, unless such supplemental indenture affects the Trustee's
own rights, duties or immunities under this Indenture or otherwise, in which
case the Trustee may in his discretion, but shall not be obligated to, enter
into such supplemental indenture.
It shall not be necessary for the consent of the Holders under this section
to approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such consent shall approve the substance thereof.
Promptly after the execution by the Issuer and the Trustee of any
supplemental indenture pursuant to the provisions of this section, the Issuer
shall mail a notice thereof by first class mail to the Holders at their
addresses as they shall appear on the registry books of the Issuer, setting
forth in general terms the substance of such supplemental indenture. Any failure
of the Issuer to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental indenture.
SECTION 7.03. Effect of Supplemental Indenture. Upon the execution of any
supplemental indenture pursuant to the provisions hereof, this Indenture shall
be and be deemed to be modified and amended in accordance therewith and the
respective rights, limitations of rights, obligations, duties and immunities
under this Indenture of the Trustee, the Issuer and the Holders shall thereafter
be determined, exercised and enforced hereunder subject in all respects to such
modifications and amendments, and all the terms and conditions of any such
supplemental indenture shall be deemed to be part of the terms and conditions of
this Indenture for any and all purposes.
SECTION 7.04. Documents to Be Given to Trustee. The Trustee, subject to the
provisions of SECTIONS 5.01 and 5.02 of this Indenture, may receive an Officers'
Certificate and an Opinion of Counsel as conclusive evidence that any
supplemental indenture executed pursuant to this ARTICLE 7 complies with the
applicable provisions of this
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Indenture.
SECTION 7.05. Notation on Securities in Respect of Supplemental Indentures.
Securities authenticated and delivered after the execution of any supplemental
indenture pursuant to the provisions of this article may bear a notation in form
approved by the Trustee as to any matter provided for by such supplemental
indenture or as to any action taken at any such meeting. If the Issuer or the
Trustee shall so determine, new Securities so modified as to conform, in the
opinion of the Trustee and the Board of Directors, to any modification of this
Indenture contained in any such supplemental indenture may be prepared by the
Issuer, authenticated by the Trustee and delivered in exchange for the
Securities then Outstanding.
ARTICLE 8
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
SECTION 8.01. Issuer May Consolidate, on Certain Terms. The Issuer
covenants that it will not merge or consolidate with any other entity or sell or
convey all or substantially all of its assets to any Person, unless (i) either
the Issuer shall be the continuing entity, or the successor entity or the Person
which acquires by sale or conveyance substantially all the assets of the Issuer
(if other than the Issuer) shall be an entity organized under the laws of the
United States of America or any state thereof and shall expressly assume the due
and punctual payment of the principal of and interest on all the Securities,
according to their tenor, and the due and punctual performance and observance of
all of the covenants and conditions of this Indenture to be performed or
observed by the Issuer, by supplemental indenture (complying with ARTICLE 7 of
this Indenture), executed and delivered to the Trustee by such corporation, and
(ii) after giving effect to such merger or consolidation, or such sale or
conveyance, no Event of Default, and no event which, after notice or lapse of
time or both would become an Event of Default, shall have occurred and be
continuing.
SECTION 8.02. Successor Entity Substituted. In case of any such
consolidation, merger, sale or conveyance, and following such an assumption by
the successor entity, such successor entity shall succeed to and be substituted
for the Issuer, with the same effect as if it had been named herein. Such
successor entity may cause to be signed, and may issue either in its own name or
in the name of the Issuer prior to such succession any or all of the Securities
which theretofore shall not have been signed by the Issuer and delivered to the
Trustee; and, upon the order of such successor entity instead of the Issuer and
subject to all the terms, conditions and limitations in this Indenture
prescribed, the Trustee shall authenticate and shall deliver any Securities
which previously shall have been signed and delivered by the officers of the
Issuer to the Trustee for authentication, and any Securities which such
successor entity thereafter shall cause to be signed and delivered to the
Trustee for that purpose. All of the Securities so issued shall in all respects
have the same legal rank and benefit under this Indenture as the Securities
theretofore or thereafter issued in accordance with the terms of this Indenture,
as though all of such Securities had been issued at the date of the execution
hereof.
In case of any such consolidation, merger, sale, lease or conveyance such
changes in phraseology and form (but not in substance) may be made in the
Securities thereafter to be issued as may be appropriate.
In the event of any such sale or conveyance (other than a conveyance by way
of lease) and upon any such assumption by a successor entity, the Issuer or any
successor entity which shall theretofore have become such in the manner
described in this Article 8 shall be discharged from all obligations and
covenants under this Indenture and the Securities and may be liquidated and
dissolved.
SECTION 8.03. Opinion of Counsel to Trustee. The Trustee, subject to the
provisions of SECTIONS 5.01 and 5.02 of this Indenture, may receive an Opinion
of Counsel, prepared in accordance with SECTION 10.05 of this Indenture, as
conclusive evidence that any such consolidation, merger, sale, lease or
conveyance, and any such assumption, and any such liquidation or dissolution,
complies with the applicable provisions of this Indenture.
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ARTICLE 9
SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS
SECTION 9.01. Defeasance Within One Year of Payment. Except as otherwise
provided in this SECTION 9.01, the Issuer may terminate its obligations under
the Securities and this Indenture with respect to Securities if:
(i) all Securities previously authenticated and delivered (other than
destroyed, lost or wrongfully taken Securities that have been replaced or
Securities that are paid pursuant to SECTION 3.01 of this Indenture or
Securities for whose payment money or securities have theretofore been held
in trust and thereafter repaid to the Issuer, as provided in SECTION 9.05
of this Indenture) have been delivered to the Trustee for cancellation and
the Issuer has paid all sums payable by it hereunder; or
(ii) (A) the Securities mature within one year or all of them are to
be called for redemption within one year under arrangements satisfactory to
the Trustee for giving the notice of redemption, (B) the Issuer irrevocably
deposits in trust with the Trustee, as trust funds solely for the benefit
of the Holders of such Securities, for that purpose, money sufficient
without consideration of any reinvestment, to pay principal of and interest
on the Securities to maturity or redemption, as the case may be, and to pay
all other sums payable by it hereunder, and (C) the Issuer delivers to the
Trustee an Officers' Certificate and an Opinion of Counsel, in each case
stating that all conditions precedent provided for herein relating to the
satisfaction and discharge of this Indenture with respect to the Securities
and of the Securities themselves have been complied with.
With respect to the foregoing clause (i), only the Issuer's obligations
under SECTION 5.06 of this Indenture in respect of the Securities shall survive.
With respect to the foregoing clause (ii), only the Issuer's obligations in
SECTIONS 2.02, 2.05, 2.06, 2.07, 2.08, 2.09, 2.10, 3.02, 3.04, 5.06, 5.08 and
9.05 of this Indenture in respect of the Securities shall survive until the
Securities are no longer outstanding. Thereafter, only the Issuer's obligations
in SECTIONS 5.06 and 9.05 of this Indenture in respect of the Securities shall
survive. After any such irrevocable deposit, the Trustee upon request shall
acknowledge in writing the discharge of the Issuer's obligations under the
Securities and this Indenture with respect to the Securities, except for those
surviving obligations specified above.
SECTION 9.02. Defeasance. When and if the Issuer will be deemed to have
paid and will be discharged from any and all obligations in respect of the
Securities, the provisions of this Indenture will, except as provided below, no
longer be in effect with respect to the Securities. The Trustee, at the expense
of the Issuer, shall execute proper instruments acknowledging the same and the
Securities will no longer be Outstanding pursuant to this Indenture; provided
that the following conditions shall have been satisfied:
(a) the Issuer has irrevocably deposited in trust with the Trustee as
trust funds solely for the benefit of the Holders, for payment of the
principal of and interest on the Securities, money without consideration of
any reinvestment and after payment of all federal, state and local taxes or
other charges and assessments in respect thereof payable by the Trustee, to
pay and discharge the principal of and accrued interest on the Outstanding
Securities to maturity or earlier redemption (irrevocably provided for
under arrangements satisfactory to the Trustee), as the case may be;
(b) such deposit will not result in a breach or violation of, or
constitute a default under, this Indenture or any other material agreement
or instrument to which the Issuer is a party or by which it is bound;
(c) no event which, with the giving of notice or lapse of time, would
become an Event of Default with respect to the Securities shall have
occurred and be continuing on the date of such deposit;
(d) the Issuer has delivered to the Trustee (1) either (A) a ruling
directed to the Trustee received from the Internal Revenue Service to the
effect that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of the Issuer's exercise of its option
under this SECTION 9.02 and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been
the case if such option had not been exercised or (B) an Opinion of Counsel
to the same effect as the ruling described in clause (A)
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above and (2) an Opinion of Counsel to the effect that the Holders have a
valid perfected first security interest in the trust funds subject to no
prior liens under the Uniform Commercial Code; and
(e) the Issuer has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, in each case stating that all conditions
precedent provided for herein relating to the defeasance contemplated by
this SECTION 9.02 of the Securities of such series have been complied with.
The Issuer's obligations in SECTIONS 2.02, 2.05, 2.06, 2.07, 2.08, 2.09,
2.10, 3.02, 3.04, 5.06, 5.08 and 9.05 of this Indenture with respect to the
Securities shall survive until such Securities are no longer outstanding.
Thereafter, only the Issuer's obligations in SECTIONS 5.06 and 9.05 of this
Indenture shall survive.
SECTION 9.03. Covenant Defeasance. The Issuer may omit to comply with any
term, provision or condition set forth in Article 3 of this Indenture (or any
other specific covenant relating to the Securities provided for in a resolution
of the Board of Directors or supplemental indenture pursuant to SECTION 2.03 of
this Indenture which may by its terms be defeased pursuant to this SECTION
9.03), and such omission shall be deemed not to be an Event of Default under
clauses (d) or (f) of SECTION 4.01 of this Indenture, with respect to the
Outstanding Securities if:
(i) the Issuer has irrevocably deposited in trust with the Trustee as
trust funds solely for the benefit of the Holders, for payment of the
principal of and interest, if any, on the Securities, money without
consideration of any reinvestment and after payment of all federal, state
and local taxes or other charges and assessments in respect thereof payable
by the Trustee, to pay and discharge the principal of and interest on the
Outstanding Securities to maturity or earlier redemption (irrevocably
provided for under arrangements satisfactory to the Trustee), as the case
may be;
(ii) such deposit will not result in a breach or violation of, or
constitute a default under, this Indenture or any other material agreement
or instrument to which the Issuer is a party or by which it is bound;
(iii) no event which, with the giving of notice or lapse of time,
would become an Event of Default with respect to the Securities of such
series shall have occurred and be continuing on the date of such deposit;
(iv) the Issuer has delivered to the Trustee an Opinion of Counsel to
the effect that (A) the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of the Issuer's exercise of its
option under this Section 9.03 and will be subject to federal income tax on
the same amount and in the same manner and at the same times as would have
been the case if such option had not been exercised and (B) the Holders
have a valid perfected first security interest in the trust funds subject
to no prior liens under the Uniform Commercial Code; and
(v) the Issuer has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, in each case stating that all conditions
precedent provided for herein relating to the covenant defeasance
contemplated by this SECTION 9.03 of the Securities of such series have
been complied with.
SECTION 9.04. Application of Trust Money. Subject to SECTION 9.05 of this
Indenture, the Trustee or paying agent shall hold in trust money deposited with
him pursuant to SECTIONS 9.01, 9.02 or 9.03 of this Indenture, as the case may
be, in respect of the Securities and shall apply the deposited money in
accordance with the Securities and this Indenture to the payment of principal of
and interest on the Securities; but such money need not be segregated from other
funds except to the extent required by law.
SECTION 9.05. Repayment to Issuer. Subject to SECTIONS 5.06, 9.01, 9.02 and
9.03 of this Indenture, the Trustee and each paying agent shall promptly pay to
the Issuer upon request set forth in an Officers' Certificate any excess money
held by them at any time and thereupon shall be relieved from all liability with
respect to such money. The Trustee and any paying agent shall pay to the Issuer
upon written request any money held by them under this Indenture that remains
unclaimed for two years; provided that the Trustee or such paying agent before
being required to make any payment may cause to be published at the expense of
the Issuer in a newspaper of general circulation in The City of New York (which
will, if practicable, be The Wall Street Journal (Eastern Edition)) published in
the English language at least once a day for at least five days in each calendar
week or mail to each
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<PAGE>
Holder entitled to such money at such Holder's address (as set forth in the
Security Register) notice that such money remains unclaimed and that after a
date specified therein (which shall be at least 30 days from the date of such
publication or mailing) any unclaimed balance of such money then remaining will
be repaid to the Issuer. After payment to the Issuer, Holders entitled to such
money must look to the Issuer for payment as general creditors, unless an
applicable law designates another Person, and all liability of the Trustee and
such paying agent with respect to such money shall cease.
ARTICLE 10
MISCELLANEOUS PROVISIONS
SECTION 10.01. Incorporators, Stockholders, Officers and Directors of
Issuer and Issuer Exempt from Individual Liability. No recourse under or upon
any obligation, covenant or agreement contained in this Indenture, or in any
Security, or because of any indebtedness evidenced thereby, shall be had against
any incorporator, as such or against any past, present or future stockholder,
officer or director, as such, of the Issuer or the Issuer or of any successor,
either directly or through the Issuer or any successor, under any rule of law,
statute or constitutional provision or by the enforcement of any assessment or
by any legal or equitable proceeding or otherwise, all such liability being
expressly waived and released by the acceptance of the Securities by the Holders
and as part of the consideration for the issue of the Securities.
SECTION 10.02. Provisions of Indenture for the Sole Benefit of Parties and
Securityholders. Nothing in this Indenture or in the Securities, expressed or
implied, shall give or be construed to give to any Person, other than the
parties hereto and their successors and the Holders, any legal or equitable
right, remedy or claim under this Indenture or under any covenant or provision
herein contained, all such covenants and provisions being for the sole benefit
of the parties hereto and their successors and of the Holders.
SECTION 10.03. Successors and Assigns of Issuer Obligated by Indenture. All
the covenants, stipulations, promises and agreements in this Indenture contained
by or in behalf of the Issuer shall bind its successors and assigns, whether so
expressed or not.
SECTION 10.04. Notices and Demands on Issuer, Trustee and Securityholder.
Any notice or demand which by any provision of this Indenture is required or
permitted to be given or served by the Trustee or by the Holders to or on the
Issuer may be given or served by being deposited postage prepaid, first-class
mail (except as otherwise specifically provided herein) addressed (until another
address of the Issuer is filed by the Issuer with the Trustee) to Performance
Asset Management Company, 4100 Newport Place, Suite 400, Newport Beach,
California 92660. Any notice, direction, request or demand by the Issuer or any
Holder to or upon the Trustee shall be deemed to have been sufficiently given or
made, for all purposes, if given or made at the Trust Office.
Where this Indenture provides for notice to Holders, such notice shall be
sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class postage prepaid, to each Holder entitled thereto, at his
last address as it appears in the Security Register. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
In case, by reason of the suspension of or irregularities in regular mail
service, it shall be impracticable to mail notice to the Issuer and
Securityholders when such notice is required to be given pursuant to any
provision of this Indenture, then any manner of giving such notice as shall be
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice.
SECTION 10.05. Officers' Certificates and Opinions of Counsel; Statements
to Be Contained Therein. Upon any application or demand by the Issuer to the
Trustee to take any action under any of the provisions of this
M-25
<PAGE>
Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate
stating that all conditions precedent provided for in this Indenture relating to
the proposed action have been complied with and an Opinion of Counsel stating
that in the opinion of such counsel all such conditions precedent have been
complied with, except that in the case of any such application or demand as to
which the furnishing of such documents is specifically required by any provision
of this Indenture relating to such particular application or demand, no
additional certificate or opinion need be furnished.
Each certificate or opinion provided for in this Indenture and delivered to
the Trustee with respect to compliance with a condition or covenant provided for
in this Indenture shall include (a) a statement that the Person making such
certificate or opinion has read such covenant or condition; (b) a brief
statement as to the nature and scope of the examination or investigation upon
which the statements or opinions contained in such certificate or opinion are
based; (c) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and (d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been complied with.
Any certificate, statement or opinion of an officer of the Issuer may be
based, insofar as it relates to legal matters, upon a certificate or opinion of
or representations by counsel, unless such officer knows that the certificate or
opinion or representations with respect to the matters upon which his
certificate, statement or opinion may be based as aforesaid are erroneous, or in
the exercise of reasonable care should know that the same are erroneous. Any
certificate, statement or opinion of counsel may be based, insofar as it relates
to factual matters, on information with respect to which is in the possession of
the Issuer, upon the certificate, statement or opinion of or representations by
an officer of officers of the Issuer, unless such counsel knows that the
certificate, statement or opinion or representations with respect to the matters
upon which his certificate, statement or opinion may be based as aforesaid are
erroneous, or in the exercise of reasonable care should know that the same are
erroneous.
Any certificate, statement or opinion of an officer of the Issuer or of
counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants in the employ of the Issuer, unless such officer or counsel, as the
case may be, knows that the certificate or opinion or representations with
respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should know that the same are erroneous.
Any certificate or opinion of any independent firm of public accountants
filed with the Trustee shall contain a statement that such firm is independent.
SECTION 10.06. Payments Due on Saturdays, Sundays and Holidays. If the date
of maturity of interest on or principal of the Securities or the date fixed for
redemption or repayment of any such Security shall not be a Business Day, then
payment of interest or principal need not be made on such date, but may be made
on the next succeeding Business Day with the same force and effect as if made on
the date of maturity or the date fixed for redemption, and no interest shall
accrue for the period from and after such date.
SECTION 10.07. Conflict of Any Provision of Indenture with Trust Indenture
Act of 1939. If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with another provision included in this Indenture by
operation of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939
(an "incorporated provision"), such incorporated provision shall control.
SECTION 10.08. California Law to Govern. This Indenture and each Security
shall be deemed to be a contract under the laws of the State of California, and
for all purposes shall be construed in accordance with the laws of such state,
except as may otherwise be required by mandatory provisions of law.
SECTION 10.09. Counterparts. This Indenture may be executed in any number
of counterparts, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
SECTION 10.10. Effect of Headings. The article and section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
M-26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed and attested, all as of ________________, 1998.
Attest: PERFORMANCE ASSET MANAGEMENT COMPANY,
a Delaware corporation
By: ___________________________
By: _______________________________
Its: Chief Executive Officer
By: _______________________________
Attest: Its: Secretary
By: ________________________ By: _______________________________
Trustee
M-28
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
There are provisions in the Partnership Agreements which specify that the
General Partner shall have no liability to the Partnerships for any loss
occurring because of any act or omission by the General Partner; provided,
however, that the General Partner's conduct was in the best interest of the
respective Partnership; and, provided, further, that the General Partner's
conduct did not constitute fraud, bad faith, gross misconduct or gross
negligence. As a result, Limited Partners may have a more limited right of
action in certain circumstances than they would in the absence of such a
provision in the Partnership Agreements.
The Partnership Agreements, also, provide, to the extent permitted by law,
that the Partnerships shall indemnify the General Partner against liability and
related expenses (including attorney's fees) incurred in dealings with third
parties; provided, however, the conduct of the General Partner is consistent
with the standards described in the preceding paragraph. A successful claim for
such indemnification would deplete Partnership assets by the amount of that
claim. The General Partner is not indemnified against liabilities occurring
pursuant to the provisions of the Securities Act of 1933. The Partnerships do
not and shall not pay for any insurance insuring the liability of the General
Partner or any other persons for actions or omissions for which indemnification
is not permitted by the Partnership Agreements; provided, however, the General
Partner may be an additional insured party on policies obtained for the benefit
of the Partnerships to the extent there is no additional cost to the
Partnerships or decrease in the insurance proceeds payable to the Partnerships.
Section 145 of the Delaware General Corporation Law specifies that the
Certificate of Incorporation of a Delaware corporation may include a provision
eliminating or limiting the personal liability of a director or officer to that
corporation or its stockholders for damages for breach of fiduciary duty as a
director or officer, but such a provision must not eliminate or limit the
liability of a director or officer for (a) acts or omissions which involve
intentional misconduct, fraud, or a knowing violation of law; or (b) unlawful
distributions to stockholders. The Certificate of Incorporation of the Company,
as amended, includes a provision eliminating or limiting the personal liability
of the officers and directors of the Company to the Company and its shareholders
for damages for breach of fiduciary duty as a director or officer. Moreover, the
Company's Bylaws provide certain indemnity to a controlling person, director or
officer which affects such a person's liability while acting in a corporate
capacity. The Company has entered into various indemnification agreements with
its officers and directors, copies of which are attached to the Registration
Statement as exhibits thereto. Furthermore, the Merger Agreement provides
indemnification for directors and officers of the Company. Accordingly, the
officers and directors of the Company may have no liability to the shareholders
<PAGE>
of the Company for any mistakes or errors of judgment or for any act or
omission, unless such act or omission involves intentional misconduct, fraud, or
a knowing violation of law or results in unlawful distributions to the
shareholders of the Company. The Company believes that the scope of the
liability and indemnification provisions contained, in the aggregate, in the
Company's Bylaws, Certificate of Incorporation, as amended, and the Merger
Agreement, while similar to those contained in the Partnership Agreements,
provides greater protection to the Company's directors and officers against
claims for personal liability than the protection afforded to the General
Partner under the Partnership Agreements.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS, THEREFORE, UNENFORCEABLE.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Each exhibit attached hereto is listed according to the number assigned to
it in the exhibit table specified in Regulation S-K Item 601(a)(2).
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------
1 Soliciting Agent Agreement*
2 Agreement and Plan of Merger (Included as Appendix A to Joint Consent
Statement/Prospectus and incorporated herein by reference)*
3.1 Certificate of Incorporation, as amended, for Performance Asset Management
Company*
3.1.1 Certificate of Amendment of Certificate of Incorporation of Performance
Asset Management Company*
3.2 Articles of Incorporation for Performance Capital Management, Inc.*
3.3 Restated Articles of Incorporation for Performance Capital Management,
Inc.*
3.4 Amended and Restated Bylaws of Performance Capital Management, Inc.*
3.5 Bylaws of Performance Asset Management Company*
4.1 Indenture Agreement (included as Appendix M to Joint Consent
Statement/Prospectus and incorporated herein by reference)*
4.2 Unsecured Subordinated Debenture (included as Appendix N to Joint Consent
Statement/Prospectus and incorporated herein by reference)*
4.3 Certificate of Designations, Preferences, and Relative Rights,
Qualifications and
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------
Restrictions of the Series A Convertible Preferred Stock of Performance
Asset Management Company
5 Form of Opinion re: Legality*
6 Not required
7 Not required
8 Opinion re: Tax Matters**
9 Voting Trust Agreement (not applicable)
10.1 This exhibit has been deleted*
10.2 Agreement for Indemnification with PCM (Collette)*
10.3 Agreement for Indemnification with PCM (Savage)*
10.4 Agreement for Indemnification with PCM (Cushing)*
10.5 Agreement for Indemnification with PCM (Galewick)*
10.6 Agreement for Indemnification with PDI (Cushing)*
10.7 Agreement for Indemnification with PDI (Galewick)*
10.8 Joint Venture Agreement (PCM and PAM)*
10.9 Joint Venture Agreement (PCM and PAM II)*
10.10 Joint Venture Agreement (PCM and PAM III)*
10.11 Amended and Restated Joint Venture Agreement (PCM and PAM)*
10.12 Amended and Restated Joint Venture Agreement (PCM and PAM II)*
10.13 Amended and Restated Joint Venture Agreement (PCM and PAM III)*
10.14 Amended and Restated Joint Venture Agreement (PCM and PAM IV)*
10.15 Amended and Restated Joint Venture Agreement (PCM and PAM V)*
10.16 Indemnification Agreement (the Company and Savage)*
10.17 Indemnification Agreement (the Company and Cushing)*
10.18 Indemnification Agreement (the Company and Galewick)*
11 Statement re: Computation of Per Share Earnings*
12 Statement re: Computation of Ratios*
13 Annual report to Security Holders (not applicable)
14 Not required
15 Letter re: Unaudited Interim Financial Information*
16 Letter re: Change in Certifying Accountant (not applicable)
17 Not required
18 Not required
19 Not required
20 Not required
21 Subsidiaries of the Registrant(not applicable)
22 Not required
23.1 Independent Auditor's Consent*
23.2 Consent of Independent Financial Advisor*
24 Power of Attorney (Included on Page II-5)*
25 Statement of Eligibility of Trustee(s)**
26 Invitation for Competitive Bids (not applicable)
27 Financial Data Schedule*
28 Not required
99.1 Agreement of Limited Partnership of Performance Asset Management Fund,
Ltd., a California Limited Partnership*
<PAGE>
99.2 Agreement of Limited Partnership of Performance Asset Management Fund II,
Ltd., a California Limited Partnership*
99.3 Agreement of Limited Partnership of Performance Asset Management Fund III,
Ltd., a California Limited Partnership*
99.4 Agreement of Limited Partnership of Performance Asset Management Fund IV,
Ltd., a California Limited Partnership*
99.5 Agreement of Limited Partnership of Performance Asset Management Fund V,
Ltd., a California Limited Partnership*
99.6 Certificate of Limited Partnership of Performance Asset Management Fund,
Ltd., a California Limited Partnership*
99.7 Certificate of Limited Partnership of Performance Asset Management Fund
II, Ltd., a California Limited Partnership*
99.8. Certificate of Limited Partnership of Performance Asset Management Fund
III, Ltd., a California Limited Partnership*
99.9 Certificate of Limited Partnership of Performance Asset Management Fund
IV, Ltd., a California Limited Partnership*
99.10 Certificate of Limited Partnership of Performance Asset Management Fund V,
Ltd., a California Limited Partnership*
* Previously filed on November 4, 1997
** To be Filed by Amendment
ITEM 22. UNDERTAKINGS
UNDERTAKINGS
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Registration Statement of Form S-4, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the Effective Date of this
Registration Statement on Form S-4 through the date of responding to the
request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and being
acquired involved therein, that was not the subject of and included in this
Registration Statement on Form S-4 when it became effective.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned registrant undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may
<PAGE>
be deemed underwriters, in addition to the information called for by the other
Items of the applicable form.
The undersigned registrant hereby undertakes that every prospectus (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 145, will be filed as
part of an amendment to this Registration Statement on Form S-4 and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the Exchange
Agent on the Closing Date certificates in such denominations and registered in
such names as required by the Exchange Agent to permit prompt delivery.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Newport Beach, State of California, on May 1, 1998.
Performance Asset Management Company
By: /s/ VINCENT E. GALEWICK
------------------------------------
Vincent E. Galewick
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Vincent E. Galewick as attorney-in-fact and agent, acting alone, with full
powers of substitution, to sign on his behalf, individually and in the
capacities stated below, and to file any and all amendments, including
post-effective amendments, to this registration statement and exhibits and other
documents in connection therewith, with Securities and Exchange Commission,
granting to said attorney-in-fact and agent full power and authority to perform
any other act on behalf of the undersigned required to be done in the premises.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------- -------------------------- ------------
/s/ VINCENT E. GALEWICK Chairman of the Board, May 1, 1998
- ------------------------------- Chief Executive Officer,
Vincent E. Galewick and President
/s/ MICHAEL CUSHING Director, Executive Vice May 1, 1998
- ------------------------------- President and Chief
Michael Cushing Financial Officer
/s/ WILLIAM SAVAGE Director, Vice President May 1, 1998
- ------------------------------- of Operations
William Savage
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- --------------------------------------------------------------------------- ------------
<S> <C> <C>
1 Soliciting Agent Agreement.................................................*
2 Agreement and Plan of Merger (Included as Appendix A to Joint Consent
Statement/Prospectus and incorporated herein by reference).................*
3.1 Certificate of Incorporation, as amended, for Performance Asset Management
Company....................................................................*
3.1.1 Certificate of Amendment of Certificate of Incorporation of Performance
Asset Management Company...................................................*
3.2 Articles of Incorporation for Performance Capital Management, Inc..........*
3.3 Restated Articles of Incorporation for Performance Capital Management,
Inc........................................................................*
3.4 Amended and Restated Bylaws of Performance Capital Management, Inc.........*
3.5 Bylaws of Performance Asset Management Company.............................*
4.1 Indenture Agreement (included as Appendix M to Joint Consent
Statement/Prospectus and incorporated herein by reference).................*
4.2 Unsecured Subordinated Debenture (included as Appendix N to Joint Consent
Statement/Prospectus and incorporated herein by reference).................*
4.3 Certificate of Designations, Preferences, and Relative Rights,
Qualifications and Restrictions of the Series A Convertible Preferred Stock
of Performance Asset Management Company....................................
5 Form of Opinion re: Legality...............................................*
6 Not required...............................................................*
7 Not required...............................................................*
8 Opinion re: Tax Matters....................................................**
9 Voting Trust Agreement (not applicable)....................................
10.1 This exhibit has been deleted..............................................
10.2 Agreement for Indemnification with PCM (Collette)..........................*
10.3 Agreement for Indemnification with PCM (Savage)............................*
10.4 Agreement for Indemnification with PCM (Cushing)...........................*
10.5 Agreement for Indemnification with PCM (Galewick)..........................*
10.6 Agreement for Indemnification with PDI (Cushing)...........................*
10.7 Agreement for Indemnification with PDI (Galewick)..........................*
10.8 Joint Venture Agreement (PCM and PAM)......................................*
10.9 Joint Venture Agreement (PCM and PAM II)...................................*
10.10 Joint Venture Agreement (PCM and PAM III)..................................*
10.11 Amended and Restated Joint Venture Agreement (PCM and PAM).................*
10.12 Amended and Restated Joint Venture Agreement (PCM and PAM II)..............*
10.13 Amended and Restated Joint Venture Agreement (PCM and PAM III).............*
10.14 Amended and Restated Joint Venture Agreement (PCM and PAM IV)..............*
10.15 Amended and Restated Joint Venture Agreement (PCM and PAM V)...............*
10.16 Indemnification Agreement (the Company and Savage).........................*
10.17 Indemnification Agreement (the Company and Cushing)........................*
10.18 Indemnification Agreement (the Company and Galewick).......................*
11 Statement re: Computation of Per Share Earnings............................*
12 Statement re: Computation of Ratios........................................*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- --------------------------------------------------------------------------- ------------
<S> <C> <C>
13 Annual report to Security Holders (not applicable).........................
14 Not required...............................................................
15 Letter re: Unaudited Interim Financial Information.........................*
16 Letter re: Change in Certifying Accountant (not applicable)................
17 Not required...............................................................
18 Not required...............................................................
19 Not required...............................................................
20 Not required...............................................................
21 Subsidiaries of the Registrant(not applicable).............................
22 Not required...............................................................
23.1 Independent Auditor's Consent..............................................*
23.2 Consent of Independent Financial Advisor...................................*
24 Power of Attorney (Included on Page II-5)..................................*
25 Statement of Eligibility of Trustee(s).....................................**
26 Invitation for Competitive Bids (not applicable)...........................
27 Financial Data Schedule....................................................*
28 Not required...............................................................
99.1 Agreement of Limited Partnership of Performance Asset Management Fund,
Ltd., a California Limited Partnership.....................................*
99.2 Agreement of Limited Partnership of Performance Asset Management Fund II,
Ltd., a California Limited Partnership....................................*
99.3 Agreement of Limited Partnership of Performance Asset Management Fund III,
Ltd., a California Limited Partnership.....................................*
99.4 Agreement of Limited Partnership of Performance Asset Management Fund IV,
Ltd., a California Limited Partnership.....................................*
99.5 Agreement of Limited Partnership of Performance Asset Management Fund V,
Ltd., a California Limited Partnership.....................................*
99.6 Certificate of Limited Partnership of Performance Asset Management Fund,
Ltd., a California Limited Partnership.....................................*
99.7 Certificate of Limited Partnership of Performance Asset Management Fund II,
Ltd., a California Limited Partnership.....................................*
99.8 Certificate of Limited Partnership of Performance Asset Management Fund
III, Ltd., a California Limited Partnership................................*
99.9 Certificate of Limited Partnership of Performance Asset Management Fund IV,
Ltd., a California Limited Partnership.....................................*
99.10 Certificate of Limited Partnership of Performance Asset Management Fund V,
Ltd., a California Limited Partnership.....................................*
</TABLE>
- ----------
* Previously filed on November 4, 1997
** To be Filed by Amendment
CERTIFICATE OF DESIGNATIONS, PREFERENCES,
AND RELATIVE RIGHTS, QUALIFICATIONS AND
RESTRICTIONS OF THE SERIES A CONVERTIBLE
PREFERRED STOCK OF
PERFORMANCE ASSET MANAGEMENT COMPANY
--------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-------------
Performance Asset Management Company, a corporation organized and existing
pursuant to and by virtue of, the provisions of the General Corporation Law of
the State of Delaware, certifies as follows:
The undersigned, Vincent E. Galewick, hereby certifies that:
1. He is the duly elected and acting President and Secretary of Performance
Asset Management Company, a Delaware corporation ("Corporation");
2. WHEREAS, the Certificate of Incorporation of the Corporation, as
amended, authorizes the issuance of 10,000,000 shares of Preferred Stock, par
value $.001 per share ("Preferred Shares"), and, additionally, authorizes the
issuance of shares of Preferred Stock from time to time in one or more series as
may from time to time be determined by the Board of Directors, each of those
series to be distinctly designated, and on such terms and for such consideration
as shall be determined by the Board of Directors of the Corporation, and,
additionally, grants to the Board of Directors of the Corporation the authority
to determine by resolution or resolutions adopted prior to the issuance of any
shares of a particular series of Preferred Stock, the voting powers, if any, and
the designations, privileges, powers, preferences and rights of the shares of
each such series and the qualifications, limitations and restrictions thereof;
and
3. WHEREAS, the Board of Directors of the Corporation, pursuant to action
taken by written consent of the sole director on May 29, 1996, has duly adopted
the following resolutions authorizing the creation of and issuance of a series
of that Preferred Stock to be known as Series A Convertible Preferred Stock;
NOW, THEREFORE, IT IS:
RESOLVED, the Board of Directors of the Corporation hereby determines and
fixes the number, designations, preferences, privileges, rights and limitations
of another series of the Preferred Shares on the terms and with the provisions
herein specified:
1
<PAGE>
1. Designation. A series of Preferred Stock of the Corporation is hereby
designated "Series A Convertible Preferred Stock" ("Series A Convertible
Preferred Stock"), consisting initially of 100,000 shares. The Series A
Convertible Preferred Stock shall have a par value of $.001 per share.
2. Parity with Common Stock. Shares of the Series A Convertible Preferred
Stock shall have parity with and rank equal to the Corporation's Common Stock,
$.001 par value per share ("Common Stock"), with respect to the payment of
dividends and upon liquidation. Other classes of Preferred Shares shall be
subordinated to and shall rank junior to the Series A Convertible Preferred
Stock with respect thereto; provided, however, that holders of Series A
Convertible Preferred Stock, by vote or written consent of the holders of
sixty-six and two-thirds percent (66 2/3%) or more of the then outstanding
Series A Convertible Preferred Stock, may elect from time to time to allow other
series or classes of Preferred Shares to rank senior to the Series A Convertible
Preferred Stock with respect to dividends, assets or liquidation.
3. Voting Rights. Except as specified in Sections 2 and 6 hereof, the
holders of Series A Convertible Preferred Stock shall not have any voting
powers, either general or special.
4. Conversion.
4.1. Voluntary Conversion. (a) Each share of Series A Convertible
Preferred Stock shall be convertible, at the option of the holder thereof,
at any time after the date of issuance of the Series A Convertible
Preferred Stock at the office of the Corporation or if the Corporation
shall have appointed a transfer agent for the Series A Convertible
Preferred Stock, at the office of such transfer agent, into twenty (20)
fully paid and nonassessable share of Common Stock.
(b) Each share of Series A Convertible Preferred Stock shall
automatically be converted into twenty (20) fully paid and nonassessable
share of the Corporation's Common Stock (i) upon a Change in Control (as
hereinafter defined) of the aggregate number of shares of Common Stock
outstanding as of the date on which the first share of Series A Convertible
Preferred Stock was issued, during any twelve (12) month period, and (ii)
upon the sale of all or substantially all of the assets of the Corporation.
(c) For purposes of this Section 4.1, the term "Change in Control"
shall mean the direct or indirect acquisition by any "person" (as that term
is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended) of the direct or indirect beneficial ownership of more than ten
percent (10%) of the aggregate number of shares of Common Stock outstanding
as of the date on which the first share of Series A Convertible Preferred
Stock was issued
4.2. Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon any conversion of Series A Convertible Preferred
Stock. In lieu of any fractional shares to which the holder would otherwise
be entitled, the Corporation shall pay cash equal to such fraction. Before
any holder of Series A Convertible Preferred Stock shall be entitled to
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convert the same into full shares of Common Stock and to receive
certificates therefor, the holder shall surrender the certificate or
certificates representing and evidencing the Series A Convertible Preferred
Stock, duly endorsed, at the office of the Corporation, or if the
Corporation shall have appointed a transfer agent for the Series A
Convertible Preferred Stock, at the office of such transfer agent, and
shall give written notice to the Corporation at either such office that the
holder elects to convert the same. The person or persons entitled to
receive the shares of Common Stock issuable upon any such conversion shall
be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
4.3. Adjustments for Subdivisions, Combinations or Consolidations of
Common Stock. If the outstanding shares of Common Stock are subdivided (by
stock split, stock dividend or otherwise), into a greater number of shares
of Common Stock, the number of shares of Common Stock into which each share
of Series A Convertible Preferred Stock may be converted shall,
concurrently with the effectiveness of such subdivision, be proportionately
increased. In the event the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, the number of shares of Common Stock
which each share of Series A Convertible Preferred Stock may be converted
into shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately decreased.
4.4. Adjustments for Stock Dividends and Other Distributions. If the
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive any
distribution (excluding any repurchases of securities by the Corporation
not made on a pro rata basis from all holders of any class of the
Corporation's securities) payable in property or in securities of the
Corporation other than shares of Common Stock, and other than as otherwise
adjusted in this Section 4, then and in each such event the holders of
Series A Convertible Preferred Stock shall receive at the time of such
distribution, the amount of property or the number of securities of the
Corporation that they would have received had their Series A Convertible
Preferred Stock been converted into Common Stock on the date of such event.
4.5. Adjustments for Reclassification, Exchange and Substitution. Upon
any liquidation, dissolution or winding up of the Corporation, if the
Common Stock issuable upon conversion of the Series A Convertible Preferred
Stock is changed into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of
shares provided for above), the number of shares of Common Stock into which
each share of Series A Convertible Preferred Stock may be converted shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series A
Convertible Preferred Stock shall be convertible into, in lieu of the
number of shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other class or classes
of stock equivalent to the number of shares of Common Stock that would have
been subject to receipt by the holders upon conversion of the Series A
Convertible Preferred Stock immediately before the change.
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4.6. Reorganization, Mergers, Consolidations or Sales of Assets. If at
any time or from time to time there is a capital reorganization of the
Common Stock (other than a subdivision, combination, consolidation,
reclassification, substitution or exchange of shares provided for elsewhere
in this Section 4), or a merger or consolidation of the Corporation with or
into another corporation, or the sale of all or substantially all of the
Corporation's properties and assets to any other person, then, as a part of
such reorganization, merger, consolidation, or sale, provision shall be
made so that the holders of the Series A Convertible Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series A
Convertible Preferred Stock, the number of shares of stock or other
securities or property of the Corporation, or of the successor corporation
resulting from such merger or consolidation or sale, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
capital reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment shall be made in the application of the provisions
of this Section 4 with respect to the rights of the holders of she Series A
Convertible Preferred Stock after the reorganization, merger,
consolidation, or sale to the end that the provisions of this Section 4
shall be applicable after that event as nearly equivalent as may be
practicable.
4.7. No Impairment. Except as provided in Section 5, the Corporation
will not, by amendment of its Certificate of Incorporation or by any
reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 4 and in
the taking of all such action as may be necessary or appropriate in order
to protect the conversion rights of the holders of the Series A Convertible
Preferred Stock against impairment.
4.8. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the number of shares of Common Stock which
each share of Series A Convertible Preferred Stock may be converted into
pursuant to this Section 4, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof
and furnish to each holder of Series A Convertible Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based.
4.9. Notices of Record Date. If the Corporation proposes at any time
to:
(a) offer for subscription pro rata to the holders of any class
or series of its capital stock any additional shares of capital stock
of any class or series or other rights;
(b) effect any reclassification or recapitalization of its Common
Stock outstanding involving a change in the Common Stock; or
(c) merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up;
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then, in connection with each such event, this Corporation shall send
to the holders of the Series A Convertible Preferred Stock at least
twenty (20) days prior written notice of the date when the same shall
take place (and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon the occurrence of such event).
Each such written notice shall be delivered personally or given by first
class mail, postage prepaid, addressed to the holders of the Series A
Convertible Preferred Stock at the address for each such holder as shown on the
books of this Corporation.
5. Status of Converted Stock. If any shares of Series A Convertible
Preferred Stock are repurchased or converted pursuant to Section 4, the shares
so repurchased or converted shall be retired and shall thereafter have the
status of authorized and unissued shares of Preferred Shares which may be
reissued by the Corporation at any time as shares of any series of Preferred
Shares.
6. Restrictions and Limitations
(a) At such time as any shares of Series A Convertible Preferred Stock
remain outstanding, the Corporation shall not, without the vote or written
consent of the holders of at least sixty-six and two-thirds percent (66 2/3 %)
of the then outstanding shares of Series A Convertible Preferred Stock:
(i) Redeem, purchase or otherwise acquire for value, any share or
shares of Series A Convertible Preferred Stock, otherwise than by
conversion in accordance with Section 4;
(ii) Redeem, purchase or otherwise acquire any of the Common Stock;
provided, however, that this restriction shall not apply to the repurchase
of shares of Common Stock from employees, officers, directors, consultants
or other persons performing services for the Corporation or any subsidiary
of the Corporation pursuant to agreements pursuant to which the Corporation
has the option to repurchase such shares at cost upon the occurrence of
certain events, such as the termination of employment;
(iii) Authorize or issue, or obligate itself to issue, any other
equity security (including any security convertible into or exercisable for
any equity security) senior to or on a parity with the Series A Convertible
Preferred Stock as to dividend or redemption rights and liquidation
preferences;
(iv) Effect any sale, lease, assignment, transfer, or other conveyance
of all or substantially all of the assets of the Corporation or any of its
subsidiaries, or any consolidation or merger involving the Corporation or
any of its subsidiaries, or any reclassification or other change of any
stock, or any
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recapitalization of the Corporation; or
(v) Increase or decrease (other than by conversion) the total number
of authorized shares of Series A Convertible Preferred Stock.
(b) The Corporation shall not amend its Certificate of Incorporation
without the approval, by vote or written consent, by the holders of 66 2/3% of
the Series A Convertible Preferred Stock, if such amendment would amend, modify,
annul, supersede, or otherwise change any of the rights, preferences, privileges
of, or limitations provided for herein for the benefit of any shares of the
Series A Convertible Preferred Stock. Without limiting the generality of the
preceding sentence, the Corporation will not amend its Certificate of
Incorporation without the approval by the holders of sixty-six and two-thirds
percent (66 2/3%) of the Series A Convertible Preferred Stock, if such amendment
would:
(i) Change the rights of the holders of the Series A Convertible
Preferred Stock as to the payment of dividends in relation to the holders
of any other capital stock of the Corporation;
(ii) Reduce the amount payable to the holders of the Series A
Convertible Preferred Stock upon the voluntary or involuntary liquidation,
dissolution, or winding up the Corporation, or change the liquidation
preferences of the holders of the Series A Convertible Preferred Stock in
relation to the rights upon liquidation of the holders of any other capital
stock of the Corporation;
(iii) Make the Series A Convertible Preferred Stock redeemable as the
option of the Corporation, or
(iv) Cancel or modify the conversion rights of the Series A
Convertible Preferred Stock provided for in Section 4.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designations, Preferences and Relative Rights, Qualifications and Restrictions
of the Series A Convertible Preferred Stock to be duly executed by its Chief
Executive Officer and attested to by its Secretary and has caused its corporate
seal to be affixed hereto, this 29th day of May, 1996.
--------------------------------
Vincent E. Galewick,
Chief Executive Officer
ATTEST:
------------------------------
Vincent E. Galewick, Secretary
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The undersigned, Vincent E. Galewick, the President and Secretary of
Performance Asset Management Company, a Delaware corporation, declares under
penalty of perjury under the laws of the State of California that the matters
set out in the foregoing Certificate are true of his own knowledge.
Executed at Newport Beach, California on May 29, 1996.
--------------------------------
Vincent E. Galewick,
President
--------------------------------
Vincent E. Galewick,
Secretary
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