<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from.............................................
Commission file number: 333-76401
PACIFIC COMMUNITY BANKING GROUP
CALIFORNIA NO.: 33-0778067
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
23332 Mill Creek Drive, Suite 230, Laguna Hills, California 92653
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 460-4540
Not Applicable
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports requires
to be filed by Section 13 or 15(c) of the Securities Exchange Act of 1934 during
the preceding 12 months (of shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [ X ] No. [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
On August 10, 1999, there were 10,000 shares of Pacific Community Banking Group
Common Stock outstanding.
<PAGE>
Pacific Community Banking Group
June 30, 1999
INDEX
PART 1 - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1 - Financial Statements
Balance Sheets at June 30, 1999 and
December 31, 1998....................................................................... 1
Statements of Operations for the three
months and six months ended June 30, 1999 and 1998...................................... 2
Statements of Cash Flows for the six months ended
June 30, 1999 and 1998.................................................................. 3
Notes to the Unaudited Financial Statements.................................................. 4
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results to Operations................................................................... 5
Item 3 - Quantitative and Qualitative Disclosures About Market Risk....................................... 9
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
Item 1 - Legal Proceedings ............................................................................... 10
Item 2 - Changes in Securities............................................................................ 10
Item 3 - Defaults upon Senior Securities.................................................................. 10
Item 4 - Submission of Matters to a Vote of Securities Holders............................................ 10
Item 6 - Exhibits and Reports on Form 8-K................................................................. 10
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
PACIFIC COMMUNITY BANKING GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 77,850 $ 395,948
Prepaid expenses - 1,333
Capitalized offering and acquisition costs 2,283,604 198,127
---------- ----------
Total current assets 2,361,454 595,408
---------- ----------
EQUIPMENT AND FURNITURE, at cost 7,096 7,096
Less--accumulated depreciation 2,430 1,458
---------- -----------
4,666 5,638
---------- -----------
$2,366,120 $ 601,046
========== ===========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $1,615,884 $ 94,429
Line of credit with shareholder 172,605 -
---------- -----------
Total current liabilities 1,788,489 94,429
---------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized-100,000,000 shares
Series A: 1,085,000 shares authorized,
1,085,000 shares outstanding at
June 30, 1999 and none at
December 31, 1998 1,085,000 -
Series B: 375,000 shares authorized,
375,000 shares outstanding at
June 30, 1999 and none at
December 31, 1998 375,000 -
Common stock, $0.25 stated value:
Authorized-100,000,000 shares
Issued and outstanding-10,000 shares 2,500 2,500
Common stock subscriptions - 1,305,000
Common stock subscriptions receivable (25,390) (205,764)
Accumulated deficit (859,479) (595,119)
----------- -----------
Total shareholders' equity 577,631 506,617
---------- ----------
$2,366,120 $ 601,046
========== =========
</TABLE>
The accompanying notes are an integral part of these unaudited balance sheets.
-1-
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ - $ - $ - $ -
GENERAL AND ADMINISTRATIVE
EXPENSES 128,687 62,823 268,909 139,964
----------- ------------ ----------- ------------
Loss from operations 128,687 62,823 268,909 139,964
INTEREST INCOME 981 7,905 4,549 7,905
----------- ------------ ----------- ------------
Net loss before taxes 127,706 54,918 264,360 132,059
PROVISION FOR INCOME TAXES - - - -
----------- ------------ ----------- ------------
Net loss $ 127,706 $ 54,918 $ 264,360 $ 132,059
=========== ============ =========== ============
Basic and diluted loss
per share $ 12.77 $ 5.49 $ 26.44 $ 13.21
=========== ============ =========== ============
Weighted average shares
outstanding 10,000 10,000 10,000 10,000
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these unaudited statements.
-2-
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(264,360) $(132,059)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 972 473
Expenses recorded on issuance of stock
subscriptions in exchange for services - 10,000
Changes in assets and liabilities:
Increase in capitalized acquisition and
offering costs (2,085,477) (90,903)
Decrease in prepaid expenses 1,333 -
Increase (decrease)in accounts payable 1,521,455 (2,186)
---------- ----------
Net cash used in operating activities (826,077) (214,675)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and furniture - (6,773)
---------- ----------
Net cash used in investing activities - (6,773)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance line of credit 172,605
Proceeds from the issuance of stock and stock
subscriptions 335,374 460,390
---------- ----------
Net cash provided by financing
activities 507,979 460,390
---------- ----------
NET INCREASE (DECREASE)IN CASH (318,098) 238,942
CASH, beginning of year 395,948 170,131
---------- ----------
CASH, end of year $ 77,850 $ 409,073
========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON CASH FINANCING ACTIVITIES:
During the six months ended June 30, 1998, common stock subscriptions in the
amount of $10,000 were issued a third party in exchange for services.
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
PACIFIC COMMUNITY BANKING GROUP
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements include
the accounts of Pacific Community Banking Group (the Company), and
gives effect to all adjustments (which are normal recurring accruals)
necessary in the opinion of management to present fairly the financial
statements for the interim periods presented. The unaudited financial
statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements and may be subject to
year-end adjustments, which, in the opinion of management, are
necessary for a fair statement of the results of interim periods.
2. On April 19, 1999, the Company announced the filing of Registration
Statements with the Securities and Exchange Commission for the
acquisition of The Bank of Hemet located in Riverside, California, and
Valley Bank of Moreno Valley, California, as well as for an initial
public offering the Company's Common Stock underwritten by Sutro & Co.
The consummation of the acquisitions is subject to certain conditions,
including the continuation of the banks' operating results, regulatory
and shareholder approval, the completion of arrangements for an
underwritten public offering of the Company, and certain other
conditions. The shareholders of The Bank of Hemet and Valley Bank have
each approved the acquisitions, and the parties are awaiting the
completion of the aforementioned Initial Public Offering.
3. In April 1999, the Company entered into a promissory note with its
Chief Executive Officer and sole shareholder of its common stock, which
provides for up to $325,000.
At June 30, 1999, borrowings of $172,605 were outstanding under this
arrangement. The note bears interest at the prime rate, as defined,
plus one percent. The note matures in full, with all accrued but unpaid
interest, on September 1, 1999.
4. During March 1999, the Company amended its common stock subscription
agreements. Funds that have been invested in the Company, which at
June 30, 1999 totalled $1,434,610 will be exchanged for one share of
preferred stock for every dollar invested. Each share of preferred
stock will automatically convert into shares of common stock upon the
closing of the IPO. Initial founding investors will receive Series A
Preferred Stock for all contributions, while subsequent investors
will receive Series B Preferred Stock for their contributions.
Series A Preferred Stock shall convert to common stock at a per
share price of eighty percent of the IPO price per share. Series B
Preferred Stock shall convert at a per share price of eighty-five
percent of the IPO price per share.
-4-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. PACIFIC COMMUNITY BANKING GROUP'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS.
On April 19, 1999, the Pacific Community Banking Group ("the Company") announced
the filing of Registration Statements with the Securities and Exchange
Commission for the acquisition of The Bank of Hemet, located in Riverside,
California, and Valley Bank of Moreno Valley, California, as well as for an
initial public offering of the Company's Common Stock underwritten by Sutro &
Co. The consummation of the acquisitions is subject to certain conditions,
including the continuation of the banks' operating results, regulatory and
shareholder approval, the completion of arrangements for an underwritten public
offering of the Company, and certain other conditions. The shareholders of The
Bank of Hemet and Valley Bank have each approved the acquisitions, and the
parties are awaiting the completion of the aforementioned Initial Public
Offering.
RESULTS OF OPERATIONS
Pacific Community Banking Group was formed in 1997 for the purpose of
becoming a multi-bank, community oriented, independent bank holding company that
will own a number of community banks, predominantly in high-growth areas of
Southern California. Since inception, Pacific Community Banking Group has
investigated a number of banks for possible acquisition. These discussions have
resulted in the proposed acquisitions of The Bank of Hemet and Valley Bank.
Until these proposed acquisitions are completed immediately before the offering,
Pacific Community Banking Group has no revenue-generating operations. Since its
founding, Pacific Community Banking Group's only income has been interest earned
on investments and deposits. Nearly all of its expenses have been used for
organizational purposes in connection with proposed acquisition opportunities
and the initial public offering of its stock.
CAPITAL CONTRIBUTIONS
The holders of Pacific Community Banking Group's common stock have
provided approximately $2,500, and the holders of Pacific Community Banking
Group's convertible preferred stock have provided capital of approximately $1.4
million as of June 30, 1999, in each case to fund the costs associated with
identifying and acquiring selected community banks and raising the funds for the
initial acquisitions and operations.
-5-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Based on its current operating plan, Pacific Community Banking Group
believes the net proceeds of the public offering of its common stock, together
with its available funds, are sufficient to provide working capital and fund
capital expenditures in the near future. Pacific Community Banking Group
currently plans to acquire other banks. If the shareholders of the banks it
seeks to acquire will not accept Pacific Community Banking Group stock in
exchange for their shares, Pacific Community Banking Group will need to raise
additional capital to make these acquisitions for cash. If so, Pacific Community
Banking Group may seek to raise capital through sales of its securities to
private investors or to the public. These sales may not be feasible at times
because of market conditions. There is no guarantee that Pacific Community
Banking Group will acquire other banks.
YEAR 2000 COMPLIANCE
Since the formation of Pacific Community Banking Group, information
technology has not played an important role in its operations. These operations
have consisted of investigating and negotiating potential bank acquisitions.
Pacific Community Banking Group has acquired all of its computer hardware and
software since October, 1997 and believes its systems are Year 2000 compliant.
This hardware and software consists only of personal computers used for word
processing and spreadsheet calculations. If, notwithstanding the assurances
received from vendors regarding the fact that these computers are Year 2000
compliant, they prove to be noncompliant, as a contingency, Pacific Community
Banking Group could obtain word processing and spreadsheet capabilities from
third party services. After the acquisitions, Pacific Community Banking Group
will not perform data processing services for its banking subsidiaries. Rather,
The Bank of Hemet will continue to conduct data processing operations through
its subsidiary, BankLink Corporation. Valley Bank became a customer of BankLink
Corporation for data processing and item processing on approximately June 27,
1999.
BUSINESS OF PACIFIC COMMUNITY BANKING GROUP
GENERAL
A private group of investors led by E. Lynn Caswell, an experienced
California community banker, formed the Company in 1997. The Company was formed
to become a multi-bank, community oriented, independent bank holding company,
which intends to acquire a select number of community banks, predominantly in
high-growth areas of Southern California. We intend to find strategically
located community banks, each of which has a successful history and a favorable
image in its market area. Where appropriate we will consolidate the operations
of acquired banks, but generally each bank will retain its separate market
identity. We plan to
-6-
<PAGE>
achieve economies of management and scale by combining some administrative
and support functions, such as financial administration, data processing,
insurance, bonding, employee benefits and contracts for services.
Since inception, we have investigated a number of banks for possible
acquisition, and have initiated discussions with several banks. These
discussions have resulted in the proposed acquisitions of The Bank of Hemet and
Valley Bank. We intend to continue discussing potential acquisitions with other
banks where those discussions are appropriate. No such acquisitions are
currently pending.
BUSINESS STRATEGY
We base our business philosophy on the belief that banking customers
value doing business with locally managed institutions that can provide a full
service commercial banking relationship through an understanding of the
customer's financial needs and the flexibility to customize products and
services to meet those needs. We also believe that banks can better build
successful customer relationships by affiliating with a holding company that
provides cost effective administrative support services while promoting bank
autonomy and flexibility.
To implement this philosophy, we intend to operate some of our acquired
banks as separate subsidiaries and retain their independent names along with
their individual boards of directors. We expect that many of our acquired banks,
such as The Bank of Hemet and Valley Bank, will have established strong
reputations and customer followings in their respective market areas through
attention to client service and an understanding of client needs. Where market
overlap makes a consolidation of operations among existing banks more
cost-efficient, as is the case with Valley Bank and The Bank of Hemet, we intend
to consolidate their operations. In addition, where we perceive that a community
lacks a strong independent community bank and would be an appropriate market for
one, we intend to form a new bank to fill that community need. We intend, within
the next two years, to develop a community bank in Orange County, based on our
perception that Orange County is one such community.
We intend to keep client service decisions and day-to-day operations at
the bank level. But we also plan to offer the advantages of affiliation with a
multi-bank holding company by providing improved access to the capital markets
and expanded client support services, such as financial administration,
management and accounting services and possibly internet-based asset and
liability generation. In addition, our centralized administration, including
support in credit policy formulation and review, investment management, data
processing, employee benefits, accounting, insurance and other specialized
support functions will allow the banks to focus on client service.
-7-
<PAGE>
Our goal is to become the preeminent financial services company for
independent banks in high growth areas of Southern California, commencing with
Riverside and San Bernardino counties. Our business strategy is to increase our
market share within the communities we serve through internal growth after we
acquire The Bank of Hemet and Valley Bank. We will also pursue opportunities to
expand our market share through select acquisitions and development of banks
that complement our existing businesses.
EMPLOYEES
At June 30, 1999, we had two employees, one of whom was an executive
officer. Neither is represented by a union or covered by a collective
bargaining agreement. We believe our employee relations are excellent.
PREMISES
We lease approximately 1,050 square feet of space in an executive
office suite in Laguna Hills, California. The lease will expire in April 2000.
Lease payments include various office support services, and average
approximately $3,000 per month. These premises are not large enough for our
future needs. We expect to move into larger premises.
SUPERVISION AND REGULATION
As a bank holding company, we are subject to many governmental rules
that affect our operations.
LITIGATION
We have not become involved in any litigation, and know of no
threatened litigation against us that would be material to our operations.
-8-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of
June 30, 1999. Further, the Company has minimal exposure to interest rate
risk as the Company's line of credit agreement has a fixed interest rate but
is short term in nature, with a maturity date of less than six months from
the date of inception. Therefore, the fair value of this financial instrument
is not materially affected by changes in market interest rates. The Company
believes that the market risk arising from holding its financial instrument
is not material.
-9-
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company has not become involved in any litigation, and it knows
of no threatened litigation against it that would be material to its
operations.
Item 2 - Changes in Securities
None
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
Exhibit No.
2.1 First Restatement of Agreement and Plan of Reorganization by and
between Registrant and The Bank of Hemet dated
January 5, 1999. (A)
2.2 First Amendment to First Restatement of Agreement and Plan of
Reorganization by and between Registrant and The Bank of Hemet
dated March 24, 1999. (A)
2.3 Second Amendment to First Restatement of Agreement and Plan of
Reorganization by and between Registrant and The Bank of Hemet
dated April 2, 1999. (A)
2.4 First Restatement of Agreement and Plan of Reorganization by
and between Registrant and Valley Bank dated as of January 5,
1999. (A)
2.5 First Amendment to First Restatement of Agreement and Plan of
Reorganization by and between Registrant and Valley Bank dated
March 4, 1999. (A)
2.6 Second Amendment to First Restatement of Agreement and Plan of
Reorganization by and between Registrant and Valley Bank dated
April 12, 1999. (A)
3.1 Articles of Incorporation of Registrant. (A)
3.2 Certificate of Amendment to Articles of Incorporation of
Registrant. (A)
3.3 Amended and Restated Bylaws of Registrant. (A)
3.4 Certificate of Determination. (A)
4.1 Specimen Stock Certificate. (A)
4.2 Forms of Warrant to Shareholders of Bank of Hemet and Valley
Bank. (A)
10.1 Form of Indemnification Agreement. (A)
10.2 Employment Agreement between Registrant and E. Lynn Caswell. (A)
-10-
<PAGE>
10.3 Registrant's 1999 Stock Option Plan. (A)
10.4 Shareholder Agreement. (A)
-----------------
(A) Filed as an Exhibit to the Registrant's Registration Statement on Form
S-1 (File No. 333-76403) originally filed on April 16, 1999, which
exhibit is incorporated herein by this reference.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC COMMUNITY BANKING GROUP
Date: August 13, 1999 /s/ E. Lynn Caswell
--------------------------------------
E. Lynn Caswell
Chairman, Chief Executive Officer and
Chief Financial Officer
-12-
