<PAGE> 1
As Filed with the Securities and Exchange Commission March 1, 1996
Registration No. 33-64573
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
AMENDMENT NO. ONE
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
PACIFIC UNITED GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 6162 95-4465729
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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21031 VENTURA BOULEVARD
WOODLAND HILLS, CALIFORNIA 91364
(818) 992-8999
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(Address, including Zip Code, and
telephone number, including area code, of
registrant's principal executive office)
-----------------------------------
JOEL R. SCHULTZ COPIES OF COMMUNICATIONS TO:
21031 VENTURA BOULEVARD, SUITE 102 CATHERINE DEBONO HOLMES, ESQ.
WOODLAND HILLS, CALIFORNIA 91364 JEFFER, MANGELS, BUTLER & MARMARO LLP
(818) 992-8999 2121 AVENUE OF THE STARS
(Name, address, including Zip Code, LOS ANGELES, CA 90067
and telephone number, including area (310) 201-3553
code, of agent for service)
-----------------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as possible after the effective date of the Registration
Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
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Title of each Amount Proposed maximum Proposed maximum Amount of
class of securities to be offering price aggregate registration
to be registered registered per unit offering price fee
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Common Stock, par 1,650,000 $10.00 $16,500,000 $5,690
value $.01 per share
General Partner Warrants 563,333 $ .68 $ 385,000 $ 133
Common Stock Issuable Upon 563,333 $15.00 $ 8,449,995 $2,914
Exercise of General
Partner Warrants
Subscriber Warrants 164,000 -0- -0- -0-
Common Stock Issuable Upon 164,000 $12.50 $ 2,050,000 $ 707
exercise of Subscriber Warrants
Common Stock Issuable Upon 33,000 $ 2.45 $ 80,850 $ 28
Exercise of Bank Warrant
Total Registration Fee $ 9,472*
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* $7,120 previously paid.
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 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 416, there are also being registered hereby such additional
indeterminate number of shares of such Common Stock as may become issuable by
reason of stock splits, stock dividends and similar adjustments as set forth in
the provisions of the Subscriber Warrants, the General Partner Warrants and the
Bank Warrant.
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PACIFIC UNITED GROUP, INC.
CROSS-REFERENCE SHEET
FOR
REGISTRATION STATEMENT ON FORM S-4 AND PROSPECTUS
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FORM S-4 REGISTRATION STATEMENT CAPTION OR
ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
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1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus................... Front Cover Page
2. Inside Front, Outside Back Cover
Pages of Prospectus........................ Available Information
3. Risk Factors, Ratio of Earnings to
Fixed Charges, and Other
Information................................ Summary; Selected
Financial Data; Unaudited
Pro Forma Consolidated
Financial Statements of
the Corporation; The
Restructuring Plan --
Conditions to the
Restructuring Plan
4. Terms of the Transaction....................... The Restructuring Plan;
Comparison of Rights of
Limited Partners of the
Partnership and
Stockholders of the
Corporation; Federal
Income Tax Consequences;
Fairness of the
Restructuring Plan
5. Pro Forma Financial Information................ Unaudited Pro Forma
Consolidated Financial
Statements of the
Corporation
6. Material Contracts with the Company
Being Acquired............................. Not applicable
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters.................. Not applicable
8. Interests of Named Experts and
Counsel.................................... Legal Matters
9. Disclosure of Commission Position on
Indemnification for
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Securities Act Liabilities................. Fiduciary Responsibility
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
14. Information With Respect to
Registrants Other than S-3 or
S-2 Registrants............................ Business; Dividend
Policy; Market for
Limited Partnership Units
and Common Stock of the
Corporation; Financial
Statements; Selected
Financial Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Change in
and Disagreements with
Accountants
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-3 or
S-2 Companies.............................. Business; Dividend
Policy; Market for
Limited Partnership Units
and Common Stock of the
Corporation; Financial
Statements; Selected
Financial Data;
Management's Discussion
and Analysis of Financial
Conditions and Results of
Operations; Change in and
Disagreements with
Accountants
18. Information if Proxies, Consents or
Authorizations are to be
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Solicited.................................. Voting Requirements;
Conflicts of Interest;
Fiduciary Responsibility;
Beneficial Ownership of
Common Stock; Management;
Certain Transactions
19. Information if Proxies, Consents or
Authorizations are not to be
Solicited or in an Exchange
Offer...................................... Not Applicable
20. Indemnification of Directors and
Officers................................... Part II - Item 20
21. Exhibits and Financial Statement
Schedules.................................. Part II - Item 21
22. Undertakings.................................. Part II - Item 22
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PRESIDENTIAL MORTGAGE COMPANY
21031 Ventura Boulevard
Woodland Hills, California 91364
March __, 1996
Dear Limited Partner:
From 1981 through 1992, Presidential Mortgage Company (the
"Partnership") operated a profitable real estate lending business and made
regular quarterly distributions of net profits to all of Limited Partners and
the General Partner (collectively, the "Partners"). Changes in business
conditions since 1990, however, resulted in net losses for the three years ended
December 31, 1995, and have necessitated changes in the Partnership's lending
business. The Partnership made substantial progress in its goal of returning to
profitable operations in 1995, and management believes that the Partnership's
business will continue to improve in 1996. However, restrictions under the
Partnership's bank loan agreement will require that the Partnership continue the
current suspension of distributions and withdrawal payments until June 30, 1997.
Thereafter, even if the Partnership operates profitably, the General Partner
believes that it will be difficult for the Partnership to make quarterly
distributions comparable to the amounts paid from 1981 through 1992, or to allow
partners to withdraw capital upon request as previously permitted. The General
Partner therefore believes that it is necessary for all of the Partners to
consider whether a change in the business structure of the Partnership would
result in greater benefits to the Partners than the current structure.
The General Partner has given substantial consideration to several
alternative business plans over the past year, including liquidation of the
business and various restructuring plans. Based upon its analysis of the
Partnership's business prospects, the General Partner believes that a
restructuring of the business into a corporation with publicly traded common
stock would result in the highest potential value to all of the partners of the
Partnership. Accordingly, the General Partner has determined to propose a
restructuring plan (the "Restructuring Plan") to the Limited Partners, the terms
of which are described in the Proxy Statement/Prospectus which accompanies this
letter.
The terms of the Restructuring Plan provide for the Partnership to
transfer all of its assets and liabilities to a new Delaware corporation,
Pacific United Group, Inc. (the "Corporation"), in exchange for an amount of
shares of the common stock (the "Common Stock") of the Corporation, to be
determined as the net tangible equity of the Partnership (defined as total
assets minus total liabilities, goodwill and capitalized organization costs,
other than costs of the offerings described herein, as adjusted for an increase
of $385,000 due to the General Partner's purchase of certain warrants, as
described below), as of the last day of the month preceding the closing date of
the Restructuring Plan, divided by 10; provided that the total number of shares
issued will not be less than 830,000. This is expected to result in a valuation
of $10 per share issued in exchange for the assets and liabilities of the
Partnership, based on management's estimate of a projected $8.3 million net
tangible equity of the Partnership by March 31, 1996. The Partnership will then
distribute all of the shares of Common Stock received by it pro rata to the
Partners of the Partnership based upon their respective original and any
additional capital contributions to the Partnership, less capital withdrawals
and amounts distributed as a return of capital by the Partnership ("net
contributed capital").
The Restructuring Plan must be approved by Limited Partners holding at
least 51% of the capital contributions in the Partnership (voting as a single
class), without considering the capital contributions of the General Partner.
The vote of the Limited Partners on the Restructuring Plan will be conducted by
written Ballot in lieu of a meeting. The Ballot of each Limited Partner
accompanies this letter. Ballots will be solicited during the period beginning
on the date hereof and ending on April __, 1996 (the "Solicitation Period"),
provided that the General Partner may, in its sole discretion, extend the
Solicitation Period for one or more periods not to exceed May __, 1996.
In order to raise additional capital to fund the Corporation's growth
plan, subject to the approval of the Restructuring Plan, the Corporation will
simultaneously offer (the "Rights Offering") to all of the existing Partners of
<PAGE> 6
the Partnership, pro rata in accordance with their respective net contributed
capital in the Partnership, the right (the "Basic Subscription Right") to
purchase an aggregate of 820,000 additional shares of Common Stock (the
"Additional Shares"), at a purchase price of $10 per share (the "Subscription
Price"). The Subscription Price will be subject to reduction in the event that
the offering price of shares of Common Stock in a Public Offering immediately
following the Solicitation Period (as described below) is lower than the
Subscription Price. All Partners will also have the right to oversubscribe
(the "Oversubscription Privilege") for any additional shares not purchased by
other Partners through the exercise of their Basic Subscription Rights,
subject to allocation in the event subscriptions are received for an amount in
excess of 820,000 shares. Partners who wish to purchase Additional Shares in
the Rights Offering must return a Subscription Agreement, in the form which
accompanies this letter, together with a check for the Subscription Price for
all Additional Shares subscribed for, by the end of the Solicitation Period.
For every five shares of Common Stock purchased by Partners in the
Rights Offering, the Corporation will issue a transferable warrant
(collectively, "Subscriber Warrants") for one additional share of Common Stock,
exercisable at any time after issuance for a period of two years, at an exercise
price equal to 125% of the price per share of Common Stock sold in the Public
Offering (as described below). Subscriber Warrants will not be issued to
investors in the Public Offering.
LIMITED PARTNERS WHO WISH TO EXERCISE BASIC SUBSCRIPTION RIGHTS AND
OVERSUBSCRIPTION PRIVILEGES MUST VOTE "FOR" THE RESTRUCTURING PLAN.
The Basic Subscription Right allocable to the General Partner will be
exercisable by each partner of the General Partner, pro rata in accordance with
each partner's interest in the General Partner, and each such partner will also
have the right to exercise the Oversubscription Privilege. In addition, the
Corporation has extended the Oversubscription Privilege to all officers,
directors and employees of the Partnership and its subsidiaries, so that these
employees will be entitled to subscribe for shares of Common Stock to the extent
existing Partners do not exercise their Basic Subscription Rights or the
Oversubscription Privilege. These subscribers will also receive Subscriber
Warrants. To the extent that shares are available, certain partners of the
General Partner and officers and employees of the Partnership and its
subsidiaries have committed to subscribe for a minimum of 115,000 shares
($1,150,000) through the exercise of Basic Subscription Privileges and the
Oversubscription Privilege.
If the Restructuring Plan is approved by the requisite vote of Limited
Partners, as soon as possible following the end of the Solicitation Period, but
not later than 60 days from the Solicitation Period Expiration Date, the
Corporation will conduct a Public Offering of that number of shares of Common
Stock (the "Public Offering Shares") as will be necessary for the Corporation to
achieve a total market capitalization of $16.5 million. The amount of Public
Offering Shares will be determined immediately prior to the Public Offering.
Friedman, Billings, Ramsey & Co., Inc. has agreed to act as representative (the
"Representative") of a group of underwriters in a firm underwriting of the
Public Offering Shares. The price per share of the Public Offering Shares (the
"Public Offering Price") is expected to be between $8 and $10 per share, and
will be determined by negotiation between management of the Corporation and the
Representative immediately prior to the commencement of the Public Offering. If
the Public Offering Price per share is less than $8 per share, the vote of the
Limited Partners on the Restructuring Plan will be re-solicited, and a new
Rights Offering will be conducted during the re-solicitation period.
As a condition to completion of the Restructuring Plan, the Corporation
must achieve a minimum market capitalization (total number of shares issued
times Public Offering Price) of $16,500,000 (the "Minimum Market
Capitalization"). This will enable the Corporation to meet the requirements for
listing of the Common Stock on the Nasdaq National Market. If the Minimum Market
Capitalization is not achieved, the Restructuring Plan will not be completed and
no shares will be sold by the Corporation. In that event, the Partnership will
continue in business under its current structure.
If the Restructuring Plan is completed, the General Partner will
terminate all management fees and other compensation it receives from the
Partnership, and will not receive any management fees or other compensation from
the Corporation. The General Partner will receive no additional consideration
for its general partner's interest in
2
<PAGE> 7
the Partnership other than its pro rata interest in shares of Common Stock based
upon its net contributed capital in the Partnership. However, the General
Partner will purchase warrants ("General Partner Warrants") to purchase
additional shares of the Common Stock equal to 25% of the total outstanding
shares of Common Stock on the closing date of the Restructuring Plan, on a fully
diluted basis assuming the exercise of all Subscriber Warrants and General
Partner Warrants. The General Partner Warrants will be exercisable at any time
after issuance for a period of 18 months at an exercise price per share equal to
150% of the Public Offering Price. The General Partner will pay $385,000 for the
General Partner Warrants, which management believes is equal to the fair value
of the General Partner Warrants.
If the Restructuring Plan is completed, the business of the Partnership
will be transferred to the Corporation. Two organizational charts illustrating
the changes from the partnership to the corporate holding company structure
appear on page 5 of the Proxy Statement/Prospectus accompanying this letter.
After the consummation of this Offering and the Restructuring,
management of the Corporation intends to continue the improvement and growth of
the lending business of Pacific Thrift and Loan Company ("Pacific Thrift"), the
Partnership's primary operating subsidiary. While there can be no assurance that
management of the Corporation will be successful in executing its business
strategy, principal strategic objectives include:
- CONTINUE TO EMPHASIZE FEE INCOME FROM LOANS ORIGINATED FOR
SALE. Pacific Thrift has developed the ability to originate a
high volume of mortgage loans for sale to larger mortgage
lenders for securitization. For the year ended December 31,
1995, Pacific Thrift increased gains on sale of loans
originated for sale by $7.7 million (890%), to $8.6 million
from $.9 million for the prior year.
- INCREASE VOLUME OF LOANS ORIGINATED FOR SALE IN STATES IN
WHICH PACIFIC THRIFT HAS RECENTLY COMMENCED LENDING
OPERATIONS. In 1994, management of Pacific Thrift began to
implement a geographic expansion strategy to increase the
volume of loans originated for sale. As of December 31, 1995,
Pacific Thrift had loan representatives in 11 states,
including the states of Washington, Oregon, California,
Idaho, Nevada, Arizona, Utah, Colorado, New York, Connecticut
and Massachusetts. In addition, as of December 31, 1995,
Pacific Thrift was in the early stages of commencing
operations in Minnesota, Missouri, Illinois, Florida,
Georgia, Virginia, Pennsylvania, Delaware and Maryland.
- EXPAND LOAN OPERATIONS INTO NEW STATES. As of December 31,
1995, management was preparing to commence operations in
Texas, New Mexico, North Carolina and South Carolina.
Management has targeted the states of West Virginia,
Kentucky, Tennessee, Hawaii, Ohio, Indiana, Wisconsin,
Michigan, Vermont, New Hampshire, Kansas, Oklahoma,
Louisiana, Iowa, New Jersey, Rhode Island and the District of
Columbia for commencing loan origination activity within the
next 12 months.
- MINIMIZE OVERHEAD COSTS BY OPERATING WITHOUT OFFICES IN MOST
AREAS. Pacific Thrift hires local loan representatives in
each state, who operate without offices. These loan
representatives typically have contacts with local mortgage
loan brokers, which provide sources of loan referrals. All
loan applications and supporting documentation are delivered
to Pacific Thrift's California loan review office for all
processing and underwriting.
- CONTINUE TO EVALUATE POSSIBLE SECURITIZATION PROGRAMS.
Although management does not believe that historical loan
volume levels support securitization programs by Pacific
Thrift directly, management will continue to evaluate
possible programs to securitize loans to the extent that
future lending volume permits.
- GRADUALLY REBUILD PACIFIC THRIFT'S LOAN PORTFOLIO BALANCE.
Although management intends to emphasize loans originated for
sale, it also intends to gradually rebuild Pacific Thrift's
loan portfolio balance with residential and commercial
mortgage loans.
- CONTINUE TO IMPROVE ASSET QUALITY. In 1994, management of
Pacific Thrift began an ongoing effort to improve loan
underwriting policies and procedures. While loan
delinquencies over 60 days on loans originated prior to
January 1, 1994 were approximately 9.23% of all such loans at
December 31, 1995, loan delinquencies over 60 days on loans
originated after January 1, 1994 were only .93% of all of
those loans as of December 31, 1995. There can be no
assurance that the level of delinquencies experienced with
respect to loans originated after January 1, 1994 will not
increase as the pool of loans continues to age.
[SUBJECT TO NASDAQ APPROVAL: The Common Stock of the Corporation has
been conditionally approved for trading on the Nasdaq National Market, subject
to completion of the Restructuring Plan and notification of issuance of the
Common Stock.] It is anticipated that the Common Stock will be listed for
trading immediately upon issuance to the Limited Partners. If, for any reason,
the Common Stock is not listed for trading on the Nasdaq National Market, the
American Stock Exchange or the Pacific Stock Exchange, the Limited Partners will
be notified and a new vote will be required as a condition to the closing of the
Restructuring Plan.
THE GENERAL PARTNER RECOMMENDS THAT LIMITED PARTNERS VOTE FOR THE
RESTRUCTURING PLAN BECAUSE THE GENERAL PARTNER BELIEVES THAT IT REPRESENTS THE
BEST AVAILABLE ALTERNATIVE FOR MAXIMIZING THE VALUE AND LIQUIDITY OF THE LIMITED
PARTNERS' EXISTING INVESTMENT IN THE PARTNERSHIP. IF THE RESTRUCTURING PLAN IS
APPROVED, THE GENERAL PARTNER WILL HAVE NO RIGHT TO RECEIVE MANAGEMENT FEES OR
ANY OTHER COMPENSATION FROM THE PARTNERSHIP OR THE CORPORATION, BUT THE GENERAL
PARTNER WILL PURCHASE FROM THE CORPORATION FOR $385,000, GENERAL PARTNER
WARRANTS EXERCISABLE FOR UP TO 25% OF THE TOTAL OUTSTANDING COMMON STOCK OF THE
CORPORATION ON THE CLOSING DATE OF THE RESTRUCTURING PLAN (ON A FULLY DILUTED
BASIS ASSUMING EXERCISE OF ALL SUBSCRIBER WARRANTS AND GENERAL PARTNER WARRANTS,
EXERCISABLE AT ANY TIME FOR A PERIOD OF 18 MONTHS AFTER ISSUANCE) AT AN EXERCISE
PRICE EQUAL TO 150% OF THE PUBLIC OFFERING PRICE. IN ADDITION, THE MANAGING
OFFICERS OF THE CORPORATION WILL BE ENTITLED TO SALARIES AND BENEFITS, INCLUDING
STOCK OPTIONS, WHICH MAY EXCEED THEIR CURRENT COMPENSATION IF THE CORPORATION
SUBSTANTIALLY INCREASES ITS EARNINGS. FURTHER, THE CORPORATION HAS ADOPTED
CERTAIN PROVISIONS WHICH WOULD MAKE IT MORE DIFFICULT TO CHANGE MANAGEMENT IN
THE FUTURE.
Only Limited Partners as of the record date of March __, 1996, will be
entitled to vote on the Restructuring Plan. To indicate your vote FOR or AGAINST
the proposed Restructuring Plan, a form of Ballot (which is included herewith)
properly completed and signed, must be received by U.S. Stock Transfer
Corporation by 5:00 P.M. (California time), April __, 1996 (the "Expiration
Date"). The General Partner may, in its sole discretion, extend the Expiration
Date for one or more periods, not to exceed May __, 1996. See "Restructuring
Plan - Voting Procedures" in the Proxy Statement/Prospectus for the exact
procedure. Please complete, sign, date and return your Ballot in the enclosed
envelope.
FAILURE TO RETURN YOUR BALLOT BY THE SOLICITATION PERIOD EXPIRATION
DATE WILL BE TREATED AS A VOTE AGAINST THE RESTRUCTURING PLAN.
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If you have any questions regarding the proposed Restructuring Plan or
any of the information contained in the Proxy Statement/Prospectus, please call
Richard B. Fremed at (818) 992-8999 ext. 250.
Very truly yours,
JOEL R. SCHULTZ,
President, Presidential Services Corporation, the
general partner of Presidential Management
Company, the general partner of the Partnership
4
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TABLE OF CONTENTS
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AVAILABLE INFORMATION............................................................. 2
SUMMARY........................................................................... 3
Risk Factors................................................................. 3
Comparison of Ownership of Limited Partnership Units of the Partnership
and Common Stock of the Corporation.......................................... 3
The Partnership..................................................... 3
The Corporation..................................................... 4
Current Organizational Structure of the Partnership.......................... 5
Proposed Organizational Structure of the Corporation......................... 5
Summary of The Restructuring Plan............................................ 6
Fairness of Restructuring Plan............................................... 9
RISK FACTORS...................................................................... 10
Investment Considerations if the Restructuring Plan is Completed ............ 10
Changes in Nature of Investment.............................................. 10
Conflicts of Interest........................................................ 12
Investment Considerations if the Restructuring Plan is Not Completed
and the Partnership Continues under its Present Structure.................... 12
Risk Factors Which Apply Whether or Not the Restructuring Plan is Approved... 12
COMPARISON OF OWNERSHIP OF
LIMITED PARTNERSHIP UNITS OF THE PARTNERSHIP
AND COMMON STOCK OF THE CORPORATION............................................... 17
Form of Organization......................................................... 17
Length of Investment......................................................... 17
Distribution of Net Profits.................................................. 18
Withdrawal of Capital........................................................ 18
Permitted Investments........................................................ 19
Additional Equity............................................................ 19
Borrowing Policies........................................................... 20
Restrictions Upon Related Party Transactions................................. 20
Management Control and Responsibility........................................ 21
Management Liability and Indemnification..................................... 21
Anti-Takeover Provisions..................................................... 22
Voting Rights................................................................ 23
Special Meetings and Action Without a Meeting................................ 24
Compensation, Fees and Distributions......................................... 24
Limited Liability of Investors............................................... 25
Review of Investor Lists..................................................... 25
Taxation..................................................................... 26
THE RESTRUCTURING PLAN............................................................ 27
Changes in Business Conditions Which Necessitate Restructuring............... 27
Transfer of Assets and Liabilities and Distribution of Common Stock.......... 28
Rights Offering.............................................................. 28
Public Offering.............................................................. 32
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General Partner Warrants..................................................... 33
Conditions to Restructuring Plan............................................. 33
Manner of Effecting the Restructuring Plan................................... 34
Accounting Treatment of the Restructuring Plan............................... 34
Expenses of the Restructuring Plan........................................... 34
Right to Inspect List of Limited Partners.................................... 35
USE OF PROCEEDS................................................................... 36
CAPITALIZATION.................................................................... 36
FAIRNESS OF THE RESTRUCTURING PLAN................................................ 38
General Partner Conclusions.................................................. 38
Alternatives to the Restructuring Plan....................................... 38
Fairness Opinion............................................................. 40
Experience of Houlihan Lokey................................................. 41
Summary of Methodology....................................................... 41
Assumptions.................................................................. 41
Limitations and Qualifications............................................... 41
Compensation................................................................. 41
VOTING REQUIREMENTS............................................................... 42
Distribution of Solicitation Materials....................................... 42
Vote Required................................................................ 42
Voting Procedures and Ballots................................................ 42
Ballot Completion Instructions............................................... 43
Withdrawal and Change of Election Rights..................................... 43
Solicitation of Ballots by Soliciting Agent.................................. 43
Tabulation of Ballots........................................................ 44
CONFLICTS OF INTEREST............................................................. 44
Benefits and Detriments to the General Partner in Completing the
Restructuring Plan........................................................... 44
Directors and Officers of the Corporation.................................... 44
Lack of Independent Representation of Limited Partners....................... 45
FIDUCIARY RESPONSIBILITY.......................................................... 45
Directors and Officers of the Corporation.................................... 45
General Partner of the Partnership........................................... 45
SELECTED FINANCIAL DATA........................................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................... 49
General...................................................................... 49
Financial Condition.......................................................... 50
Results of Operations........................................................ 52
Liquidity and Capital Resources.............................................. 59
Asset/Liability Management................................................... 60
Effect of Federal Laws and Regulations....................................... 61
Impact of Inflation and Changing Prices...................................... 61
Effect of New Accounting Standards........................................... 62
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE
CORPORATION....................................................................... 64
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS...................................... 68
BUSINESS.......................................................................... 70
The Partnership.............................................................. 70
The Corporation.............................................................. 70
Pacific Thrift............................................................... 70
CRC, CRC Washington and LPPC................................................. 71
Unified...................................................................... 71
Business Strategy............................................................ 72
Lending Activities........................................................... 72
Lending Policies............................................................. 75
Maturities and Rate Sensitivities of Loan Portfolio.......................... 83
Classified Assets and Loan Losses............................................ 84
Investment Activities........................................................ 88
Sources of Funds............................................................. 88
Deposit Analysis............................................................. 89
Deposit Maturities........................................................... 89
Competition.................................................................. 91
Employees.................................................................... 91
Properties................................................................... 91
Legal Proceedings............................................................ 92
DIVIDEND POLICY...................................................................
MARKET FOR LIMITED PARTNERSHIP UNITS
AND COMMON STOCK OF THE CORPORATION............................................... 96
Limited Partnership Units.................................................... 96
Common Stock................................................................. 96
SUPERVISION AND REGULATION........................................................ 97
Consumer Protection Law...................................................... 97
State Law.................................................................... 97
Federal Law.................................................................. 99
BENEFICIAL OWNERSHIP OF COMMON STOCK.............................................. 109
MANAGEMENT........................................................................ 112
Directors and Executive Officers............................................. 112
Board of Directors and Committees............................................ 114
Compensation of Board of Directors........................................... 114
Executive Compensation....................................................... 115
Employment Agreements........................................................ 116
1995 Stock Option Plan....................................................... 118
Retirement Plan.............................................................. 122
Stock Purchase Plan.......................................................... 122
Supplemental Executive Retirement Plan....................................... 124
Limitation of Liability and Indemnification of Directors..................... 125
Director and Officer Indemnification......................................... 126
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CERTAIN TRANSACTIONS.............................................................. 128
Management and Other Fees and Reimbursements
Paid to the General Partner................................................ 128
Payments to General Partner Related to Purchase of CRC and LPPC ............. 128
Payments for Purchase of Equipment........................................... 128
General Partner Capital Note................................................. 128
Amounts Owed From and to the General Partner and the Partnership............. 129
Payments to Managing Officers................................................ 129
Personal Guaranty of Partnership Debt by Managing Officers................... 129
Consulting Agreement with Director of Pacific Thrift......................... 129
DESCRIPTION OF CAPITAL STOCK...................................................... 131
Common Stock................................................................. 131
Preferred Stock.............................................................. 132
Transfer Agent............................................................... 132
Certain Anti-Takeover Provisions............................................. 132
Effect of Quasi-California Corporation Law................................... 134
Market for Common Stock...................................................... 135
Subscriber Warrants.......................................................... 135
General Partner Warrants..................................................... 136
Bank Warrant................................................................. 136
SHARES ELIGIBLE FOR FUTURE SALE................................................... 137
UNDERWRITING OF PUBLIC OFFERING................................................... 137
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
OF THE RESTRUCTURING PLAN......................................................... 139
Introduction................................................................. 139
Summary of Tax Consequences.................................................. 139
Qualification of Restructuring Plan under Code Section 351................... 140
Tax Consequences to the Limited Partners..................................... 142
Allocation of Final Items.................................................... 143
Net Operating Losses......................................................... 143
Potential Application of Section 304 to Transfer of Stock of Subsidiary...... 144
Treatment of Stockholders of Corporation..................................... 144
Collapsible Corporation Roles................................................ 145
State, Local and Other Taxation.............................................. 145
LEGAL MATTERS..................................................................... 146
EXPERTS........................................................................... 146
GLOSSARY.......................................................................... 147
PACIFIC UNITED GROUP, INC. FINANCIAL STATEMENTS................................... 150
PRESIDENTIAL MORTGAGE COMPANY FINANCIAL STATEMENTS................................ 153
</TABLE>
-iv-
<PAGE> 13
PROXY STATEMENT/PROSPECTUS
Pacific United Group, Inc. - (LOGO)
Restructuring Plan of Presidential Mortgage Company
and
Rights Offering of 820,000 Shares
of Common Stock at $10 Per Share(1)
The General Partner of Presidential Mortgage Company, a California
limited partnership (the "Partnership"), is proposing a restructuring plan (the
"Restructuring Plan") whereby the Partnership will contribute all of its assets
and liabilities to Pacific United Group, Inc., a Delaware corporation (the
"Corporation") in exchange for shares of Common Stock, $.01 par value, of the
Corporation (the "Common Stock"), equal to the net tangible equity ("Net
Tangible Equity") of the Partnership (total assets minus total liabilities,
goodwill and capitalized organization costs, other than costs of the Rights
Offering and Public Offering described herein, as adjusted for an increase of
$385,000 due to the General Partner's purchase of certain warrants, as described
below) as of the last day of the month preceding the closing date of the
Restructuring Plan (the "Closing Date"), divided by 10; provided that the number
of shares so determined shall not be less than 830,000. The Partnership will
then distribute the shares of Common Stock to the general partner and limited
partners of the Partnership, pro rata in accordance with their respective
original capital contributions plus additional capital contributions to the
Partnership, less withdrawals of capital and amounts distributed as a return of
capital by the Partnership ("Net Contributed Capital").
The terms of the Restructuring Plan, including a rights offering (the "Rights
Offering") and a public offering (the "Public Offering") by the Corporation, are
described herein. Following the Partnership's transfer of assets and
liabilities, the Corporation will continue all of the existing business
operations of the Partnership and the Partnership will dissolve.
The Restructuring Plan must be approved by Limited Partners holding at
least 51% of the total capital contributions in the Partnership, as required by
the partnership agreement of the Partnership, as currently in effect. Because of
the interest of the General Partner and its affiliates in the Restructuring
Plan, the capital contributions of the General Partner representing either its
general partner's interest or its limited partner's interests will not be
counted for the vote.
The proposed Restructuring Plan involves a number of risks, as
described in detail under the heading "Risk Factors" at pages 10 through 16
hereof, including but not limited to the following:
- No entitlement to distributions of net profits
- No right to withdraw capital
- Uncertainties of trading market for Common Stock
- Risk of immediate dilution if Public Offering price is less than $10
per share
- Additional management control provisions of the Corporation
- Limitation on annual use of net operating loss carryforward benefits
- Taxation of all corporate earnings
- Lack of independent representation of limited partners
There has been no previous trading market for limited partnership
interests in the Partnership or the Common Stock. [The Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "PUGG,"
subject to completion of the Restructuring Plan and official notice of issuance
of the Common Stock.] The trading price of the Common Stock will be subject to
fluctuation, and initially may be less than the net equity per share of the
Corporation. There can be no assurance of the trading value of the Common Stock
at any future date, or that the Common Stock will continue to be traded on the
Nasdaq National Market, or that an active and liquid market for the Common Stock
will develop.
NEITHER THIS TRANSACTION NOR THE SHARES OF COMMON STOCK TO BE ISSUED UNDER THE
RESTRUCTURING PLAN HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. NEITHER THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE
FAIRNESS OR MERITS OF THIS TRANSACTION OR THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS MARCH __, 1996.
- --------
(1) The purchase price per share is subject to reduction in the event
the Public Offering Price per share, as described herein under the headings
"Summary -- The Restructuring Plan" and "The Restructuring Plan" is less than
$10 per share, so that the purchase price per share for shares sold in the
Rights Offering shall be equal to the Public Offering Price per share.
<PAGE> 14
AVAILABLE INFORMATION
The Corporation has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act") with respect to
the Common Stock. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Corporation and
the Common Stock, reference is made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements made in this Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected without
charge at the offices of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048, and copies of all or any
part of the Registration Statement may be obtained from the Public Reference
Section of the Commission upon payment of the prescribed fee.
The Partnership is (and, following the Restructuring Plan the
Corporation will be) subject to the requirements of the Securities Exchange Act
of 1934 (the "Exchange Act") and, in accordance therewith, each files (or will
file) reports, proxy statements and other information with the Commission.
Copies of such reports, proxy statements and other information can be obtained,
at prescribed rates, from the public reference facilities at the offices of the
Commission. Copies of such material can also be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE
IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
The Corporation will be required to furnish its stockholders with
annual reports containing financial statements audited by its independent
accountants. In addition, the Corporation will file quarterly reports containing
unaudited financial statements, which will be furnished to stockholders upon
request.
2
<PAGE> 15
THE SHARES OF COMMON STOCK ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. THE COMMON STOCK MAY NOT BE USED TO SECURE A LOAN FROM PACIFIC THRIFT
AND LOAN COMPANY.
SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the detailed information and financial
statements and notes thereto set forth elsewhere in this Proxy
Statement/Prospectus. Capitalized terms referred to in this summary and
elsewhere herein are defined in the Glossary section appearing at the end of
this Proxy Statement/Prospectus.
RISK FACTORS
The completion of the Restructuring Plan involves a number of risk
factors for existing Partners of the Partnership, as described in detail under
the heading "Risk Factors" at pages 10 through 16 hereof, including but not
limited to the following:
- Partners of the Partnership will no longer be entitled to
distributions of net profits, but may receive dividends from the
Corporation, as and when declared by the Board of Directors;
- Partners of the Partnership will no longer have the right to
withdraw capital upon request and approval of the General
Partner, but may sell their Common Stock in the Corporation in
the public trading market;
- The Common Stock of the Corporation will be subject to an
uncertain trading market;
- The Common Stock to be received by the Limited Partners in
liquidation of their Units in the Partnership will be subject to
immediate dilution to the extent that the Public Offering Price
is less than $10 per share;
- The Corporation's organization documents contain a number of
anti-takeover provisions which reduce the ability of investors to
change the management of the Corporation;
- It is likely that the completion of the Restructuring Plan or
trading in Common Stock following the Restructuring Plan will
cause the Corporation to be subject to annual limitation on use
of the net operating loss carryforward benefits currently
available due to past net operating losses of Pacific Thrift;
- The Corporation will be subject to taxation on all of its net
earnings, whereas the Partnership is currently subject to
taxation only on the earnings of Pacific Thrift and Loan Company
("Pacific Thrift"), its primary operating subsidiary; and
- The terms of the Restructuring Plan have been determined without
independent representation of the existing Limited Partners of
the Partnership.
COMPARISON OF OWNERSHIP OF LIMITED PARTNERSHIP UNITS OF THE PARTNERSHIP AND
COMMON STOCK OF THE CORPORATION
THE PARTNERSHIP. The Partnership is a California limited partnership,
organized on June 15, 1981, terminating on December 31, 2025, or sooner upon the
occurrence of certain events. The Partnership currently owns 100% of the
outstanding stock of Pacific United Group, Inc. (the "Corporation"), which
itself owns 100% of the outstanding stock of Pacific Thrift and Loan Company
("Pacific Thrift"), a California corporation, Pacific Unified Mortgage, Inc.,
("Unified") a Delaware corporation, and Consolidated Reconveyance Company
("CRC Washington"),
3
<PAGE> 16
Washington corporation. The Partnership also owns 100% of the limited
partnership interests and 99% of the income, gain and loss of Consolidated
Reconveyance Company ("CRC") and Lenders Posting and Publishing Company
("LPPC"), both California limited partnerships, the other 1% of which is owned
by the General Partner, as general partner of each entity.
The Partnership's General Partner is Presidential Management Company, a
California limited partnership with 39 limited partners. The Partnership
currently has 2,493 Limited Partners holding six classes of Limited Partnership
Units. All classes of Units are treated equally under the Restructuring Plan. No
single Limited Partner or group of Limited Partners owns more than 5% of the
total Limited Partnership Units, and the largest owner of Limited Partnership
Units is the General Partner, which owns 4.57% of the total Limited Partnership
Units. The principal executive offices of the Partnership are located at 21031
Ventura Boulevard, Woodland Hills, California 91364, telephone number (818)
992-8999.
The terms of the Partnership Agreement of the Partnership provide for
quarterly distributions of the net profits of the Partnership; however, there
have been no distributions since 1993 due to a lack of distributable net
profits. The Partnership Agreement also provides a right of Limited Partners to
withdraw capital upon request, provided that the General Partner may withhold
approval of requests if necessary to prevent impairment of the capital or
operations of the Partnership; however, there have been no capital withdrawals
approved since 1993 due to restrictions imposed on the Partnership under its
bank loan agreement. The Partnership is managed exclusively by the General
Partner; the General Partner may be removed by the vote of Limited Partners
holding at least 51% of the total Capital Contributions in the Partnership. The
General Partner receives certain management fees from the Partnership based upon
the amount of loan fees generated on all loans originated by the Partnership and
Pacific Thrift. See "COMPARISON OF OWNERSHIP OF LIMITED PARTNERSHIP UNITS OF THE
PARTNERSHIP AND COMMON STOCK OF THE CORPORATION -- Compensation, Fees and
Distributions."
THE CORPORATION. The Corporation is a Delaware corporation organized on
February 22, 1994. Presidential is currently the sole stockholder of the
Corporation. The principal executive offices of the Corporation are located at
21031 Ventura Boulevard, Woodland Hills, California 91364, telephone number
(818) 992-8999. The Corporation is not a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHC" Act") or a savings and loan
association holding company under the Home Owners Loan Act of 1933, as amended
(the "HOLA"), and therefore is not regulated or supervised by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") or the
Office of Thrift Supervision (the "OTS").
The Corporation may continue in existence in perpetuity. The
Corporation may, but is not required, to pay dividends from its net earnings,
subject to certain regulatory and legal limitations. There is no right to
withdraw capital from the Corporation, and investors wishing to liquidate their
investment in the Corporation will be required to sell their Common Stock in the
public trading market. The Corporation will be managed by its Board of
Directors, who will be subject to election by the shareholders in accordance
with the terms of the Corporation's Restated Certificate of Incorporation. The
Corporation's organizational documents contain a number of anti-takeover
provisions which limit the ability of investors to change the management of the
Corporation. The Corporation will pay no management or other fees to the General
Partner or any other affiliate, but the Corporation has entered employment and
other agreements with certain executive officers pursuant to which the
Corporation will pay salaries and benefits including stock options, which may
exceed the amounts currently payable to such officers if the Corporation
substantially increases its earnings. See "COMPARISON OF OWNERSHIP OF LIMITED
PARTNERSHIP UNITS OF THE PARTNERSHIP AND COMMON STOCK OF THE CORPORATION" and
"MANAGEMENT -- Compensation, Fees, and Distributions."
Following are two organizational charts, one illustrating the current
structure of the Partnership, and the other illustrating the proposed structure
of the Corporation after the Restructuring Plan is completed.
4
<PAGE> 17
CURRENT ORGANIZATIONAL STRUCTURE OF THE PARTNERSHIP
-----------------------
Presidential Services
Company ("Services")
-----------------------
|
-----------------------
Presidential Management
Company (the "General
Partner")
-----------------------
|
---------------------
Presidential Mortgage
Company
(the "Partnership")
------------------------------------
| | |
- -------------- -------------- -----------------------
Consolidated Pacific United Lenders Posting
Reconveyance Group, Inc. and
Company ("United") Publishing Co. ("LPPC")
("CRC")
- -------------- -------------- -----------------------
|
---------------------------------
| | |
- -------------- -------------- -------------------------------
Pacific Thrift Pacific United Consolidated Reconveyance
and Loan Mortgage, Inc. Corporation, a Washington corp.
Company ("Unified") ("CRC Washington")
("Pacific
Thrift")
- -------------- -------------- -------------------------------
PROPOSED ORGANIZATIONAL STRUCTURE OF THE CORPORATION
<TABLE>
<S> <C>
--------------------------
Pacific United Group, Inc.
(the "Corporation"),
a Del. Corp.
-----------------------------------------------------------------------------
| | | | |
- -------------- ---------------- -------------------- --------------- ----------------
Pacific Thrift CRC Reconveyance LPPC Posting and Pacific Unified Consolidated
and Loan Company, Inc. Publishing Co., Inc. Mortgage, Inc. Reconveyance
Company ("CRC") ("LPPC") ("Unified") Corporation, a
("Pacific Washington corp.
Thrift") ("CRC
Washington")
- -------------- ---------------- -------------------- --------------- ----------------
</TABLE>
Upon completion of the Restructuring Plan, the Corporation will own
100% of the stock of Pacific Thrift, CRC Washington, and Unified, and 99% of the
limited partnership interests of CRC and LPPC. The Corporation may also form
other corporate subsidiaries in the future for specific lending or related
business operations. The Corporation intends to conduct business exclusively
through its subsidiaries.
5
<PAGE> 18
SUMMARY OF THE RESTRUCTURING PLAN
Following is a summary of the proposed Restructuring Plan:
Restructuring Offer ......... The Partnership will transfer all of its assets
and liabilities to the Corporation, in exchange
for shares of Common Stock of the Corporation
equal to the Partnership's Net Tangible Equity
as of the last day of the month preceding the
Closing Date of the Restructuring Plan, divided
by 10, provided that the number of shares shall
not be less than 830,000. The Partnership will
then liquidate, making a final distribution of
the Common Stock to all of the Partners, pro
rata in accordance with their respective Net
Contributed Capital. For example, a Partner
with Net Contributed Capital of $1,000
would have a .000024338 percentage interest in
the Partnership, and would therefore receive
approximately 20 shares if 830,000 shares were
issued to the Partnership.
Rights Offering ............. The Corporation will concurrently make a rights
offering to all Partners, entitling them to
purchase up to 820,000 additional shares of
Common Stock for a purchase price (the
"Subscription Price") equal to $10 per share,
subject to adjustment in the event the price per
share of shares offered in the Public
Offering is less than $10 per share. In the
event the Public Offering Price is lower than
$10 per share, the Corporation will issue an
additional number of shares of Common Stock to
each subscriber for the largest number of whole
shares which could be sold at the Public
Offering Price and return any excess
subscription funds to the subscriber in cash
(without interest), within 10 business days
after the completion of the Public Offering. In
order to exercise subscription rights, each
Partner must send a check equal to $10 per share
subscribed for in the Rights Offering, which
must be received by the end of the Solicitation
Period.
Basic Subscription
Rights and Oversubscription
Privilege ................... Each Partner will have the right to subscribe
for a percentage of the total 820,000 shares
offered in the Rights Offering equal to that
Partner's percentage interest in the Partnership
based on his, her or its Net Contributed
Capital. Each Partner will also have the right
to subscribe (the "Oversubscription Privilege")
at the Subscription Price for an unlimited
number of shares of Common Stock that are not
otherwise purchased pursuant to the exercise of
the Basic Subscription Rights, subject to
proration in the event there are insufficient
shares available to satisfy all
oversubscriptions received, in amounts
proportionate to the amount of Basic
Subscription Rights exercised by each Partner.
For example, a Partner with Net Contributed
Capital of $1,000 would have the Basic
Subscription Right to purchase approximately 20
shares in the Rights Offering. If that Partner
exercised his Basic Subscription Right and also
subscribed for 20 additional shares pursuant to
the Oversubscription Privilege, but the total
shares subscribed for by all Partners exercising
the Oversubscription Privilege exceeded the
remaining shares available, then the Partner
with the $1,000 Net Contributed Capital would be
allocated that number of shares in excess of his
Basic Subscription Right as would equal the
total remaining available shares times a
fraction the numerator of which is that
Partner's Net Contributed Capital and the
denominator of which is the total Net
Contributed Capital of all Partners exercising
the Oversubscription Privilege.
Subscriber Warrants ......... For every five shares of Common Stock purchased
by Partners in the Rights Offering, the
Corporation will issue a transferable warrant
(collectively, the "Subscriber Warrants") for
one additional share of Common Stock,
exercisable at
6
<PAGE> 19
any time after issuance for a period of two
years, at an exercise price equal to 125% of
the Public Offering Price per share.
General Partner
Participation ............... The General Partner will receive Common Stock
based upon its Net Contributed Capital, on the
same basis as all other Partners. The Basic
Subscription Rights and Oversubscription
Privileges of the General Partner will be
exercisable by the individual partners of the
General Partner.
Oversubscription Privilege
Extended to Officers,
Directors and Employees ..... The Partnership will extend the Oversubscription
Privilege to all officers, directors and
employees of the Partnership and its
subsidiaries, to the extent that Basic
Subscription Rights and the Oversubscription
Privilege are not exercised by existing Partners
and partners of the General Partner. Officers,
directors and employees who subscribe for shares
will also receive Subscriber Warrants.
Commitment to Purchase
Common Stock ................ Certain partners of the General Partner and
officers and employees of the Partnership and
its subsidiaries have indicated their intention
to purchase up to 115,000 shares of Common Stock
through the exercise of Basic Subscription
Rights and the Oversubscription Privilege, to
the extent that additional shares are available.
Public Offering ............. If the Restructuring Plan is approved by the
requisite vote of Limited Partners, as soon as
possible following the Solicitation Period
Expiration Date, but not later than 60 days
thereafter, the Corporation will conduct a
Public Offering of that number of shares of
Common Stock (the "Public Offering Shares")
necessary to achieve the Minimum Market
Capitalization (total outstanding shares times
the Public Offering Price per share) of $16.5
million. Friedman, Billings, Ramsey & Co., Inc.
has agreed to act as representative (the
"Representative") of a group of underwriters in
a firm offering of the Public Offering Shares.
The Public Offering Price per share is
anticipated to be between $8 and $10 per share,
to be determined by negotiation between
management of the Corporation and the
Representative immediately prior to the Public
Offering. If the Public Offering Price is lower
than $8 per share, the vote of the Limited
Partners will be re- solicited, and the
Restructuring Plan will not be completed unless
the requisite number of Limited Partners consent
to the modified terms of the Public Offering. If
the Minimum Market Capitalization is not raised,
the Restructuring Plan will not be completed,
and the Partnership will continue under its
current structure.
Market for Common Stock ..... [SUBJECT TO NASDAQ APPROVAL: The Corporation has
obtained conditional approval for listing of the
Common Stock on the Nasdaq National Market.] The
Common Stock must be listed on the Nasdaq
National Market, the American Stock Exchange or
Pacific Stock Exchange as a condition to the
completion of the Restructuring Plan.
General Partner Warrants .... The General Partner will purchase from the
Corporation General Partner Warrants to purchase
25% of the total outstanding Common Stock of the
Corporation on the Closing Date, on a fully
diluted basis assuming the exercise of all
Subscriber Warrants and General Partner
Warrants, at an exercise price equal to 150% of
the Public Offering Price per share. The General
Partner Warrants will be exercisable at any time
after issuance for a period of eighteen months.
The General Partner will pay the Corporation
$385,000 for the General Partner Warrants, which
management believes represents the fair market
value of the General Partner Warrants.
7
<PAGE> 20
Bank Warrant ................ In connection with an extension of the Loan
Agreement by NatWest Bank, N.A. ("NatWest") in
November 1995, the Corporation has agreed to
grant to NatWest a five-year warrant (the "Bank
Warrant") to purchase 2% of the outstanding
Common Stock of the Corporation on the Closing
Date, exercisable at a price equal to 25% of the
book value per share of the Common Stock at
December 31, 1995, as adjusted for the increase
in book value after the completion of the
Restructuring Plan. The Corporation will have
the right to redeem the Bank Warrant at any time
within one year after the date of issuance for
$200,000.
Use of Proceeds ............. The net proceeds of the additional capital
raised in the Rights Offering and the Public
Offering, which management estimates will total
$7,427,000 if 820,000 shares are sold at $10.00
per share, net of underwriters' discounts and
offering expenses, will be used as follows:
- approximately $1 million to pay down the
bank debt;
- approximately $1.3 million, to pay the
amount owing to former Limited Partners who
are now creditors of the Partnership, whose
withdrawal requests were approved prior to
June 30, 1993; and
- the balance of the net proceeds will be
added to working capital of the Corporation,
which may be contributed from time to time
as additional capital of Pacific Thrift, as
management deems appropriate.
Fairness Opinion ............ The consideration to be received by the Limited
Partners collectively has been reviewed by
Houlihan Lokey and determined to be fair, from a
financial point of view, to the Limited Partners
collectively. See "FAIRNESS OF THE RESTRUCTURING
PLAN."
Solicitation Agent .......... Georgeson & Company, Inc.
Transfer Agent and
Subscription Agent .......... U.S. Stock Transfer Corporation
Fractional Share Interests .. No fractional shares will be issued. Any
fractional interests resulting from allocation
of shares to Partners will be rounded up to the
next whole share. See "THE RESTRUCTURING PLAN --
Manner of Effecting the Restructuring Plan."
Record Date ................. March __, 1996
Distribution Date ........... Certificates representing the Common Stock will
be mailed to Partners within two business days
after the Closing Date.
Solicitation Period ......... Commencing on the date of distribution of this
Proxy Statement/Prospectus and expiring on April
__, 1996, or such later date, not to exceed May
__, 1996, as the General Partner determines in
its sole discretion.
Tax Consequences ............ See "FEDERAL INCOME TAX CONSEQUENCES."
Dissolution of the
Partnership ................. If the proposed Restructuring Plan is approved,
all of the assets and business
8
<PAGE> 21
operations of the Partnership will be
transferred to the Corporation and the
Partnership will be dissolved.
FAIRNESS OF RESTRUCTURING PLAN
The General Partner believes that the Restructuring Plan is fair to the
Limited Partners of the Partnership because it will increase liquidity and
potential for capital appreciation of the Partner's existing investment in the
Partnership. The Partnership has obtained a fairness opinion (the "Fairness
Opinion") from Houlihan, Lokey, Howard & Zukin ("Houlihan Lokey") that the
consideration to be received by the Limited Partners collectively in connection
with the Restructuring Plan is fair, from a financial point of view, to the
Limited Partners collectively. Houlihan Lokey is a nationally recognized
provider of financial advisory services that regularly engages in, among other
things, the valuation of businesses and their securities in connection with
mergers and acquisitions, private placements, going-private transactions, and in
valuations for estate, corporate and other purposes. See "FAIRNESS OF THE
RESTRUCTURING PLAN."
9
<PAGE> 22
RISK FACTORS
In evaluating the Restructuring Plan, Limited Partners should carefully
consider the contents of this Proxy Statement/Prospectus and should give
particular consideration to the following risk factors. The risk factors
described herein have been classified into three categories: (1) risk factors
which apply only if the Restructuring Plan is completed; (2) risk factors which
apply if the Restructuring Plan is not completed, and Limited Partners continue
to hold Limited Partnership Units in the Partnership as currently structured;
and (3) risk factors which apply generally to the lending business of either the
Partnership or the Corporation, regardless of whether or not the Restructuring
Plan is completed.
INVESTMENT CONSIDERATIONS IF THE RESTRUCTURING PLAN IS COMPLETED
If the Restructuring Plan is completed, the Limited Partners will no
longer hold limited partnership Units of the Partnership, but Common Stock of
the Corporation. The nature of an investment in the Common Stock is different in
many respects from an investment in limited partnership Units, which Limited
Partners should consider when determining whether to approve the Restructuring
Plan. In addition, Limited Partners should consider whether the terms of the
Restructuring Plan are fair. The terms of the Restructuring Plan were determined
by the General Partner, which has certain conflicts of interest, as further
described below in this section, with respect to the determination of certain
terms of the Restructuring Plan.
CHANGES IN NATURE OF INVESTMENT
NO ENTITLEMENT TO DISTRIBUTIONS OF NET PROFITS. If the Restructuring
Plan is completed, Limited Partners will no longer have the right to receive
quarterly distributions of the Net Profits, if any, earned by the Partnership or
the Corporation. The Partnership has suspended all distributions since June
1993, and distributions will continue to be suspended due to restrictions under
the Loan Agreement until at least June 30, 1997. To the extent that the
Corporation earns net profits in the future, the Board of Directors may, but is
not required to, declare dividends on the Common Stock. The Board of Directors
does not intend to consider the payment of any dividends until the fourth
quarter of 1997, depending upon the earnings and financial condition of the
Corporation and its operating subsidiaries. Payment of future dividends will be
subject to the discretion of the Board of Directors and will depend upon the
consolidated earnings and financial condition of the Corporation, the capital
requirements of Pacific Thrift, applicable governmental policies and regulations
and such other matters as the Board deems appropriate. See "DIVIDEND POLICY".
Pacific Thrift's ability to pay cash dividends is limited by the provisions of
California law with respect to licensed industrial loan companies and by
regulatory policies of the Federal Deposit Insurance Corporation ("FDIC") and
the California Department of Corporations ("DOC"). See "SUPERVISION AND
REGULATION."
NO RIGHT TO WITHDRAW CAPITAL. If the Restructuring Plan is approved, no
further requests to withdraw capital will be approved by the Partnership, and
all Limited Partners will receive Common Stock in liquidation of their interests
in the Partnership. Stockholders will thereafter be required to sell their
Common Stock in order to liquidate their investment in the Corporation.
UNCERTAINTIES OF COMMON STOCK TRADING MARKET. The Common Stock has been
conditionally approved, subject to completion of the Restructuring Plan, for
listing on the Nasdaq National Market, under the symbol "PUGG." Friedman,
Billings, Ramsey & Co., Inc. has indicated an intention to make a market in the
Common Stock. That firm is not obligated, however, to make a market in the
Common Stock and any market making may be discontinued at any time. No assurance
can be given that the Common Stock will continue to be quoted on the Nasdaq
National Market, or that an active and liquid market for the Common Stock will
develop. There has been no prior public market for either the Common Stock or
the Limited Partnership Units of the Partnership. Furthermore, there is
substantial uncertainty as to the price at which the Common Stock will trade
following the completion of the Restructuring Plan. It is possible that the
Common Stock will initially trade below the net equity per share of the
Corporation. Historically, equity securities of new companies formed through the
consolidation of partnerships have traded below, and in many cases substantially
below, the net equity per share of the
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<PAGE> 23
consolidated entity. Among the factors that might adversely affect the initial
trading prices of the Common Stock are the following: potential pent-up selling
pressure as a result of the historic illiquidity of the Limited Partnership
Units; the recent net operating losses of the Partnership; the absence of an
active market for the Common Stock; and the unfamiliarity of institutional
investors, financial analysts and broker/dealers with the Corporation and its
prospects as an investment when compared against other equity securities
(including securities issued by other financial institution holding companies).
RISK OF DILUTION. Common Stock to be issued in exchange for the assets
and liabilities of the Partnership will be valued at approximately $10 per
share, based on management's estimate that the Partnership will have a Net
Tangible Equity of $8.3 million by March 31, 1996. To the extent that the Public
Offering Price per share, which is currently anticipated to be between $8 and
$10, is less than the value per share of the shares issued in exchange for the
assets and liabilities of the Partnership, Limited Partners will experience an
immediate dilution in the net tangible book value per share of their Common
Stock. For example, if 830,000 shares of Common Stock were issued in exchange
for the assets of the Partnership with a valuation of $10.00 per share, and the
Public Offering price were set $8.00 per share, Limited Partners would
experience immediate dilution of $2.00 per share, or 20% of their investment.
See "DILUTION."
ADDITIONAL MANAGEMENT CONTROL PROVISIONS. Limited Partners currently
have the right to remove the General Partner, elect a new general partner, amend
the Partnership Agreement, sell all or substantially all the assets of the
Partnership, or dissolve the Partnership by vote of a majority interest. The
Corporation has a number of provisions in its Certificate of Incorporation and
its Bylaws which limit the right of the Stockholders to change the management of
the Corporation or approve certain business combinations, including the election
of only one-third of the total number of directors annually, the requirement
that an elected director be removed only for cause and only upon the vote of
66-2/3% of the total outstanding Common Stock, the requirement that the number
of directors may be increased or decreased only by a majority vote of the
directors then in office, the requirement that any vacancy on the Board of
Directors be filled only by a majority vote of directors then in office, the
requirement that certain business combinations be approved by 66-2/3% of the
outstanding Common Stock unless the transaction is first approved by the Board
of Directors, and the requirement that amendments to these provisions be adopted
by 66-2/3% of the outstanding Common Stock. In addition, Stockholders have no
right to call special meetings, and no right to take actions by written consent
unless approved by the Board of Directors. See "DESCRIPTION OF THE CAPITAL STOCK
OF THE CORPORATION -- Anti-Takeover Provisions."
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARD. Management
believes that it is likely the completion of the Restructuring Plan or trading
in Common Stock after the Restructuring Plan will limit the Corporation's
ability to utilize federal net operating loss carryforwards ("NOL") of Pacific
Thrift equal to approximately $4.0 million at December 31, 1995. Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code") provides that, if an
"ownership change" occurs with respect to Pacific Thrift, the ability to use NOL
to offset future taxable income of the Corporation is limited annually to the
product of the value of Pacific Thrift immediately prior to the ownership change
times the long term tax exempt rate determined by the Treasury Department
(currently 5.46%). Assuming that the Corporation does become subject to the
annual limitation, the future use of the remaining net operating loss
carryforward will be limited to approximately $.4 million per year, which would
not be fully utilized until 2002. See "FEDERAL INCOME TAX CONSEQUENCES -- Net
Operating Loss Carryforward."
TAXATION OF THE CORPORATION. The Corporation is subject to taxation at
corporate income tax rates under federal and state tax laws. The earnings of
Presidential, CRC and LPPC are not subject to entity-level taxation, although
the earnings of Pacific Thrift, Unified and CRC Washington are subject to
taxation, and the Partners are each subject to taxation of their allocated
shares of taxable income of the Partnership. The future tax liability of the
Corporation will decrease the net operating income of Presidential, CRC and
LPPC. However, Limited Partners should note that, since a substantial portion of
the anticipated earnings of the Corporation is expected to be earned by Pacific
Thrift, which is already a corporation subject to federal and state taxation at
the rates applicable to corporations, the increased tax on the consolidated
earnings of the Corporation is not expected to be substantially different than
if the Partnership were to continue under its present structure. In addition,
the Stockholders will be
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<PAGE> 24
subject to income tax liability for any dividends that may be paid by the
Corporation in the future. See "FEDERAL INCOME TAX CONSEQUENCES -- Taxation of
Stockholders of the Corporation."
CONFLICTS OF INTEREST
LACK OF INDEPENDENT REPRESENTATION. The terms of the Restructuring Plan
have been established by the General Partner, and the Limited Partners were not
separately represented in structuring and negotiating the terms of the
Restructuring Plan, by representative groups of Limited Partners or outside
experts and consultants, such as investment bankers, legal counsel, accountants
and financial experts, who would have been engaged solely to represent the
independent interests of the Limited Partners. Had separate representation been
arranged for the Limited Partners, the terms of the Restructuring Plan might
have been different and possibly more favorable to the Limited Partners.
See "CONFLICTS OF INTEREST."
COMPENSATION OF DIRECTORS AND OFFICERS OF THE CORPORATION. Certain
executive officers of the General Partner will receive salaries and benefits
from the Corporation, including incentive stock options, a stock purchase plan
and a supplemental executive retirement plan, if the Restructuring Plan is
approved. Most of the executive officers could receive higher bonus compensation
from the Corporation than from the Partnership if the earnings of the
Corporation substantially increase. In addition, these officers could also
receive additional compensation in connection with the exercise of stock options
if the value of the Corporation's stock increases, as well as benefits payable
under the supplemental executive retirement plan. Had the Limited Partners been
separately represented, the terms of management compensation might have been
different and possibly more favorable to the Limited Partners. See "MANAGEMENT
- -- Executive Compensation."
INVESTMENT CONSIDERATIONS IF THE RESTRUCTURING PLAN IS NOT COMPLETED AND THE
PARTNERSHIP CONTINUES UNDER ITS PRESENT STRUCTURE
If the Restructuring Plan is not completed, the Partnership will
continue under its present structure unless and until an alternative plan is
presented by either the General Partner or the Limited Partners. If the
Partnership is continued under its present structure, Limited Partners should
consider the following risk factors that will affect their investment in Limited
Partnership Units.
CONTINUING SUSPENSION OF DISTRIBUTIONS. The Partnership has suspended
all distributions of Net Profits since July 1993 due to restrictions under the
Loan Agreement and the fact that no Net Profits have been earned by the
Partnership. The terms of the Loan Agreement will restrict the payment of all
distributions through June 30, 1997. Thereafter, there can be no assurance of
the amount of net profits that will be earned by the Partnership for
distribution to the Partners.
CONTINUING SUSPENSION OF WITHDRAWAL PAYMENTS AND APPROVAL OF REQUESTS
TO WITHDRAW CAPITAL. The Partnership has suspended all withdrawal payments to
Limited Partners whose requests to withdraw capital were previously approved,
and the General Partner has not approved any requests to withdraw capital
received since July 1993. If the Restructuring Plan is not approved and the
Partnership continues under its present structure, the terms of the Loan
Agreement will restrict all payments of capital to withdrawing Limited Partners
through June 30, 1997. Thereafter, there can be no assurance that additional
requests to withdraw capital will be approved in the future.
RISK FACTORS WHICH APPLY WHETHER OR NOT THE RESTRUCTURING PLAN IS APPROVED
There are certain risk factors inherent in the lending business and
other risk factors particular to the Partnership's existing lending business,
which apply whether the lending business continues to be conducted by the
Partnership or is transferred to the Corporation, as described below.
RISK OF CONTINUING LOAN LOSSES. For the years ended December 31, 1995,
1994 and 1993, the Partnership sustained consolidated net operating losses of
$1.7 million, $9.5 million and $5.9 million, respectively. These losses were due
primarily to losses on portfolio loans secured by California real property
originated prior to
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<PAGE> 25
1994. At December 31, 1995, the Partnership continued to hold a combined gross
loan portfolio of approximately $19.0 million (net of specific reserves of
approximately $1.0 million) originated prior to 1994, all of which is secured by
California real property. In addition, 90.5% of the total loan portfolio at
December 31, 1995 was secured by California real property. The Corporation may
continue to experience high levels of loan losses on loans originated prior to
1994, because of declines in the value of real property securing these loans
since their origination. Further, there can be no assurance that California real
property values will not continue to decline, which could cause additional loan
losses. See "BUSINESS -- Classified Assets and Loan Losses."
REGULATORY ACTION. Pacific Thrift is subject to a Cease and Desist
Order dated May 18, 1995 (the "1995 Order") issued by the FDIC which requires it
to: have and retain qualified management; by September 30, 1995, increase and
maintain core capital (consisting of shareholders' equity) at 8% of its total
assets; eliminate assets classified "loss" as of September 26, 1994; reduce the
level of adversely classified assets; in certain instances, refrain from
extending additional credit to borrowers whose prior credits have been adversely
classified; maintain a fully funded allowance for loan losses; implement Pacific
Thrift's capital restoration and business/profitability plans; correct a past
violation of the thrift ratio requirement and comply with all applicable laws
and regulations; file reports of condition and income which accurately reflect
its financial condition; obtain FDIC approval prior to payment of any cash
dividends; continue to comply with its policy for transactions and relationships
between affiliates; obtain FDIC approval before opening additional offices; and
furnish written quarterly progress reports to the FDIC detailing actions taken
to comply with the 1995 Order. Management of Pacific Thrift believes that it is
in full compliance with the terms of the 1995 Order. However, if the conditions
of the 1995 Order were not met, Pacific Thrift could be subject to civil
penalties or other regulatory enforcement actions which could have a material
adverse effect upon its business. Pacific Thrift will remain subject to the 1995
Order until it is terminated by the FDIC; the FDIC may determine to retain the
1995 Order, even after the conditions have been met, for any length of time
which it determines to be appropriate. See "SUPERVISION AND REGULATION --
Federal Law -- Regulatory Actions."
RELIANCE ON PRIMARY LOAN PURCHASER. For the year ended December 31,
1995, Aames Capital Corporation ("Aames") was the largest purchaser of loans
originated for sale by Pacific Thrift, representing 85.2% of all loans sold by
Pacific Thrift. Management believes that it has an excellent working
relationship with Aames, and anticipates this relationship to continue in the
future. In the event that Pacific Thrift were to terminate sales of loans to
Aames, management believes that Pacific Thrift could develop relationships with
other purchasers, including some to whom it currently sells loans, which could
replace the volume of loans sold to Aames. However, there can be no assurance
that this would occur, or that the pricing or other terms would be as favorable
as current arrangements with Aames.
COMPETITION IN THE LENDING INDUSTRY. For the past four years, the
lending industry has experienced substantial consolidation, as large banks and
mortgage banks have acquired smaller lending operations. In addition, the
residential lending market has substantially changed as a result of the
proliferation of securitization of residential loans. Larger institutions often
are able to reduce loan origination costs, and thereby reduce rates to
borrowers, which increases price competition among lenders. In addition, as more
loans have become eligible for securitization, competition for loan product has
driven interest margins down on residential loans. To meet these challenges,
Pacific Thrift has changed its lending business to emphasize the origination of
securitizable loans for sale. There are many mortgage lenders which are also
seeking to increase the volume of loans they originate for sale and
securitization. There can be no assurance that Pacific Thrift will continue to
increase the volume of loans originated for sale, which is necessary for the
Corporation to operate profitably. Further, there can be no assurance that
future changes will not occur in the lending industry which make it more
difficult for Pacific Thrift to operate profitably.
Pacific Thrift has significant competition for all loans from other
thrift and loans, commercial banks, savings and loan associations, credit
companies, mortgage bankers and, to a lesser extent, life insurance companies
and pension funds. Pacific Thrift also faces competition for depositors' funds
from banks, savings and loans, other thrift and loans, credit unions and,
increasingly, from mutual funds and life insurance annuity products. See
"BUSINESS -- Competition."
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<PAGE> 26
EXPOSURE TO INTEREST RATE RISK. Although interest rate risks are
minimized on loans originated for sale, the Corporation's profitability on
portfolio loans may be adversely affected by rapid changes in interest rates.
Presidential and Pacific Thrift have sought to limit interest rate risk by
generally maintaining over 75% of the combined loan portfolio in adjustable rate
loans that can adjust upward when interest rates increase. Management attempts
to match interest sensitive assets with interest sensitive liabilities to
minimize the impact on profitability of fluctuations in interest rates.
Nonetheless, fluctuations in interest rates due to general economic conditions
and other economic factors beyond management's control can have adverse effects
on borrowers' abilities to repay loans and on the Corporation's future
profitability. A rise in interest rates could result in more defaults and loan
losses if borrowers are unable to pay the higher rates. A reduction in interest
rates, on the other hand, could increase prepayments, which could reduce the
value of certain securitization fees retained by Pacific Thrift on loans sold to
Aames.
In addition, rapid changes in interest rates could result in an adverse
impact on net interest income earned on the Corporation's combined loan
portfolio. For example, if interest rates rise rapidly, variable rate loans will
stop repricing as interest rate caps on such loans take effect, The
Corporation's variable rate loans typically have lifetime interest rate caps
that limit rate increases to five percent (or 10 percent in some cases).
Conversely, if interest rates decline, because the Corporation is currently
asset sensitive, its assets will tend to reprice downward more rapidly than its
liabilities, causing a decrease in net interest income. Management believes a
prolonged decline in interest rates, however, would tend to increase net
interest income, as variable rate loans would reach their interest rate floors,
which are typically at their origination rate, while rates paid on liabilities
would continue to decline. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition --
Asset/Liability Management."
RISKS OF REAL ESTATE SECURED LENDING. The Corporation's primary
business will be real estate secured lending, including loans secured by
residential, multi-family and commercial property. Although the Corporation's
predecessors have historically focused on residential lending, since 1994
portfolio lending has included a higher amount of commercial lending. At
December 31, 1995, properties securing the combined loan portfolio, based on
aggregate principal balances, consisted of 33% residential property, 21%
multi-family property and 46% commercial property. Income producing properties,
including primarily multi-family and commercial property, are generally viewed
as exposing the lender to a greater risk of loss than residential one-to-four
family lending. Income producing property values are also generally subject to
greater volatility than residential property values. The liquidation values of
income producing properties may be adversely affected by risks generally
incident to interests in real property, including changes or continued weakness
in general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental, room or occupancy rates;
increases in interest rates, real estate and personal property tax rates and
other operating expenses (including energy costs); the availability of
refinancing; changes in governmental rules, regulations and fiscal policies,
including rent control ordinances, environmental legislation and taxation; and
other factors beyond the control of the borrower or the lender. For a more
detailed discussion of the specific characteristics of the Corporation's real
estate loan portfolio, see "BUSINESS -- Lending Activities -- Portfolio
Lending."
CONCENTRATION OF CALIFORNIA REAL PROPERTY SECURING LOAN PORTFOLIO. At
December 31, 1995, approximately 94% of all loans in the combined loan
portfolio, on an aggregate principal balance basis, were secured by real
property located in California, including approximately 74% in Southern
California and approximately 20% in Northern California. The remaining 6% of all
loans are secured by real property located in Washington (5%) and Oregon (1%).
However, Pacific Thrift's policy is to limit the concentration of loans in any
one zip code area to no more than 5% of all loans held in its portfolio.
Concentration of collateral in any one geographic area may increase the risk of
loss should conditions in that geographic area deteriorate. The California
economy suffered a serious economic recession from 1990 through 1994. While the
California economy exhibited positive trends in 1995, residential property
values continued to decline in some parts of the state, including Southern
California. A worsening of economic conditions in the state could have an
adverse effect on the Corporation's business, including reducing the demand for
new loans, limiting the ability of borrowers to pay existing loans and impairing
the value of real property collateral and real property acquired in foreclosure
("OREO").
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<PAGE> 27
ENVIRONMENTAL RISKS. Under various federal, state and local
environmental laws and regulations, a current or previous owner or operator of
real property may be liable for the costs of removal or remediation of hazardous
substances on, under or in such property. In addition, any person or entity who
arranges for the disposal or treatment of hazardous substances may also be
liable for the costs of removal or remediation of hazardous substances at the
disposal or treatment facility. Such laws and regulations often impose liability
regardless of fault and liability has been interpreted to be joint and several
unless the harm is divisible and there is a reasonable basis for allocation of
responsibility. Pursuant to these laws and regulations, under certain
circumstances, a lender may become liable for the environmental liabilities in
connection with its borrowers' properties, if, among other things, it either
forecloses or participates in the management of its borrowers' operation or
hazardous substances handling or disposal practices. Although the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") and
certain state counterparts provide exemptions for secured lenders, the scope of
such exemptions is limited and a rule issued by the Environmental Protection
Agency clarifying such exemption under CERCLA has recently been held invalid. In
addition, CERCLA and certain state counterparts impose a statutory lien, which
may be prior to a lender's interest securing a loan, for certain costs incurred
in connection with removal or remediation of hazardous substances. Other laws
and regulations may also require the removal or remediation of hazardous
substances located on a property before such property may be sold or
transferred.
In 1993, Presidential and Pacific Thrift acquired two properties in
foreclosure which were used by borrowers unaffiliated with the Partnership for
metal plating operations involving hazardous materials. After acquisition of the
two properties, Presidential and Pacific Thrift each received notices from local
government authorities requiring removal of hazardous materials left by the
prior owners of each of the properties and remediation of soil contamination.
Presidential has completed remediation of one property, and is now awaiting
government agency approval of its closure report. When that approval is
obtained, the property will be listed for sale. Pacific Thrift has completed
remediation of the other property, and the closure report on that property was
not subject to government approval. That property has now been listed for sale.
Although management believes that the Corporation should have no further
liability with respect to the two properties, there can be no assurance that
additional contamination will not be discovered, for which the Corporation may
be obligated for the cost of additional remediation. In addition, although
management is not aware of any other properties containing contamination or
hazardous substances, there can be no assurance that such contamination or
substances will not be discovered on any property in the future, or that the
cost of any required removal or remediation or related liabilities on any such
property would not be material or substantially exceed the value of the
property, or that the Corporation's ability to sell the property would not be
adversely affected.
Since 1994, it has been Pacific Thrift's policy to identify and review
certain environmental issues pertaining to its borrowers and the properties
securing the loans of its borrowers prior to making any loan and foreclosing on
property. If such review reveals any environmental issues, a Phase I
environmental audit (which generally involves a physical inspection without any
sampling) and under certain circumstances, a Phase II environmental audit (which
generally involves sampling) may be conducted by an independent environmental
consultant. It is also Pacific Thrift's current policy with respect to loans
secured by income producing property to automatically conduct a toxic screen or
Phase I environmental audit prior to foreclosing on such property if a Phase I
audit was not done at the time of loan origination. Under certain circumstances,
Pacific Thrift may decide not to foreclose on a property. There can be no
assurances that such a review, toxic screen, Phase I environmental audits or
Phase II environmental audits have identified or will identify all potential
environmental liabilities that may exist with respect to a foreclosed property
or a property securing any loan or that historical, current or future uses of
such property or surrounding properties will not result in the imposition of
environmental liability on Pacific Thrift.
GOVERNMENT REGULATION. Pacific Thrift is subject to extensive
governmental supervision, regulation and control. Future legislation may have
the effect of increasing the cost of doing business, limiting or expanding
permissible activities of, or affecting the competitive balance between banks
and other financial institutions. Other applicable laws, regulations,
interpretations and enforcement policies have been subject to significant and
sometimes retroactively applied changes in recent years and may be subject to
significant future changes. There can be no assurance that future changes will
not adversely affect the business of Pacific Thrift, and thereby negatively
impact either the Partnership or the Corporation. See "SUPERVISION AND
REGULATION."
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<PAGE> 28
NO PRIOR MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE.
Prior to this Offering, there has been no public market for the Common Stock.
The Common Stock has been approved for listing on the Nasdaq National Market.
However, there can be no assurance that, following this offering, an active
trading market for the Common Stock will develop or be sustained. The
Representative has indicated its intention to make a market in the Common Stock;
however, the Representative has no obligation to make such a market and may
discontinue making a market at any time. The initial public offering price of
the Common Stock offered hereby has been determined by negotiation between the
Corporation and the Representative, and will not necessarily reflect the market
price of the Common Stock after this Offering. See "UNDERWRITING."
ABSENCE OF DIVIDENDS. To the extent that the Corporation has net income
in the future, the Board of Directors may, but is not required to, declare
dividends on the Common Stock. The Board of Directors does not intend to
consider the payment of any dividends until the fourth quarter of 1997,
depending upon the earnings and financial condition of the Corporation and its
operating subsidiaries. Payment of future dividends will be subject to the
discretion of the Board of Directors and will depend upon the consolidated
earnings and financial condition of the Corporation, the capital requirements of
Pacific Thrift, applicable governmental policies and regulations and such other
matters as the Board deems appropriate. See "DIVIDEND POLICY". Pacific Thrift's
ability to pay cash dividends is limited by the provisions of California law
with respect to licensed industrial loan companies and by regulatory policies of
the Federal Deposit Insurance Corporation ("FDIC") and the California Department
of Corporations ("DOC"). Under the terms of the 1995 Order, Pacific Thrift may
not pay dividends without the consent of the FDIC. See "SUPERVISION AND
REGULATION."
MANAGEMENT CONTROL. The Corporation has a number of provisions in its
Certificate of Incorporation and its Bylaws which limit the right of the
Stockholders to change the management of the Corporation or approve certain
business combinations, including the election of only one-third of the total
number of directors annually, the requirement that an elected director be
removed only for cause and only upon the vote of 66-2/3% of the total
outstanding Common Stock, the requirement that the number of directors may be
increased or decreased only by a majority vote of the directors then in office,
the requirement that any vacancy on the Board of Directors be filled only by a
majority vote of directors then in office, the requirement that certain business
combinations be approved by 66-2/3% of the outstanding Common Stock unless the
transaction is first approved by the Board of Directors, and the requirement
that amendments to these provisions be adopted by 66-2/3% of the outstanding
Common Stock. In addition, Stockholders have no right to call special meetings,
and no right to take actions by written consent unless approved by the Board of
Directors. See "DESCRIPTION OF THE CAPITAL STOCK OF THE CORPORATION --
Anti-Takeover Provisions."
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<PAGE> 29
COMPARISON OF OWNERSHIP OF
LIMITED PARTNERSHIP UNITS OF THE PARTNERSHIP
AND COMMON STOCK OF THE CORPORATION
The information below highlights a number of the significant
differences between the Partnership and the Corporation relating to, among other
things, form of organization, distribution policies, liquidity of investment,
management structure, compensation and fees and investor rights. These
comparisons are intended to assist Limited Partners in understanding how their
investments will be changed if, as a result of the Restructuring Plan, their
investment in Limited Partnership Units of the Partnership becomes an investment
in Common Stock of the Corporation. Following the captioned sections is a
summary discussion of the expected effects of the Restructuring Plan upon
Limited Partners as a result of the change in their investment from Limited
Partnership Units to Common Stock.
- --------------------------------------------------------------------------------
PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
FORM OF ORGANIZATION
The Partnership is a limited The Corporation is a recently
partnership organized under California organized Delaware corporation formed
law, formed for the purpose of for the purpose of engaging in the
engaging in the business of business of originating, purchasing
originating, purchasing and selling and selling real estate secured loans
real estate secured loans and loan and loan participations and related
participations and related business business activities. The Corporation
activities. The Partnership has not will be a taxable corporation for
been subject to tax under federal tax federal and state income tax purposes.
laws. The Partnership may continue in The Corporation may remain in
existence until December 31, 2025 existence in perpetuity.
under the Partnership Agreement.
The Partnership and the Corporation are each vehicles recognized as
appropriate for investing in business enterprises by passive investors, such as
Limited Partners and Stockholders. The Partnership is under the control of the
General Partner, while the Corporation is governed by its Board of Directors.
There are significant differences in the tax treatment of the Partnership and
the Corporation, as summarized below under the caption "Federal Income Tax
Consequences."
- --------------------------------------------------------------------------------
PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
LENGTH OF INVESTMENT
The Partnership is engaged in an The Corporation will engage in an
ongoing business operation, and ongoing lending business, and will
reinvests the proceeds from loan reinvest all revenues in new lending
repayments and loan sales in new activity and related businesses,
lending activity and related except to the extent the Board of
businesses. The Limited Partners are Directors may declare dividends from
entitled to receive distributions of the earnings of the Corporation. The
Net Profits earned from Partnership Corporation could continue in business
operations. Under the Partnership in perpetuity.
Agreement, the Partnership's stated
term of existence is for approximately
40 years.
The Partnership could continue in business for a substantial period of
time unless sooner dissolved by the vote of the Limited Partners, whereas the
Corporation could continue in business for an indefinite period of time unless
liquidated or merged into another entity by its Board of Directors.
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<PAGE> 30
DISTRIBUTION OF NET PROFITS
The Partnership Agreement provides for The Corporation is not required to
regular quarterly distributions of the distribute net profits except as
Net Profits, if any, earned by the dividends may be declared by its Board
Partnership, to the Partners in of Directors. The Board of Directors
accordance with specified initial does not intend to consider the
return rates. If the Partnership were payment of dividends until at least
to continue as presently structured, the fourth quarter of 1997, depending
distributions of Net Profits will be upon the future earnings of the
suspended until at least June 30, 1997 Corporation. The Corporation's
under the Loan Agreement. Thereafter earnings will be dependent upon the
the General Partner does not believe earnings of its subsidiaries. In the
that the Partnership will have the case of Pacific Thrift, dividends
ability to earn or distribute Net payable to the Corporation will be
Profits at the levels distributed from limited by statutory and regulatory
1981 through 1992. requirements. See "DIVIDEND POLICY."
Limited Partners have the right to receive distributions of the Net
Profits, if any, earned by the Partnership, although distributions have been
suspended since July 1993, and are expected to remain suspended until at least
June 30, 1997. If Limited Partners receive Common Stock upon completion of the
Restructuring Plan, they will have no right to receive distributions of net
profits, although the Board of Directors intends to consider the payment of
dividends in approximately the fourth quarter of 1997. Neither the Partnership
nor the Corporation provides the right to its investors to receive distributions
of loan repayment proceeds, which are reinvested by both the Partnership and the
Corporation into continuing business operations.
- --------------------------------------------------------------------------------
PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
WITHDRAWAL OF CAPITAL
The Partnership Agreement provides Stockholders of the Corporation will
that any Limited Partner may request a have no right to request a return of
withdrawal of his or her capital their capital from the Corporation.
account at any time, which request may However, Stockholders will have the
be disapproved by the General Partner ability to sell their Common Stock in
if, in the opinion of the General a public trading market, as the Common
Partner, it will impair the capital or Stock will be listed for trading on
operations of the Partnership. In the Nasdaq National Market. The value
addition, the Partnership Agreement of the Common Stock, however, will be
limits the total amount of capital subject to fluctuation as a result of
that may be withdrawn during any a number of factors, and could be less
calendar year to no more than 10% of than the net equity per share of the
the total capital of the Partnership. Common Stock, as shown on the books of
However, all capital withdrawal the Corporation. See "RISK FACTORS --
payments have been suspended since Change in Nature of Investment --
June 1993 due to restrictions imposed Uncertainties of Common Stock Trading
under the Loan Agreement, and no new Market" and "MARKET FOR LIMITED
requests to withdraw capital have been PARTNERSHIP UNITS AND COMMON STOCK."
approved since June 1993 due to the
restrictions under the Loan Agreement.
Under the terms of the Loan Agreement,
withdrawal payments will continue to
be suspended until June 30, 1997.
Thereafter, the General Partner does
not believe that the Partnership will
have the ability to allow capital
withdrawals upon request.
The Partnership Agreement provides limited rights to withdraw capital
from the Partnership, but these rights have been restricted since 1993. There is
no public trading market for the Limited Partnership Units, so it is very
difficult for the Limited Partners to liquidate their investment in the
Partnership without the ability to withdraw capital. If the Restructuring Plan
is not completed, it cannot be predicted when the Partnership will resume
payment of capital withdrawals or begin approving new requests to withdraw
capital. In contrast, the Common Stock of the
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<PAGE> 31
Corporation is expected to be listed for trading on the Nasdaq National Market.
Although no assurance can be given, it is anticipated that there will be
substantially increased liquidity for the Common Stock compared to the current
liquidity of Limited Partnership Units. However, the market price for the Common
Stock will be subject to all of the risks normally attendant to a publicly
traded security, including fluctuations in price due to market conditions and
the future value of the Corporation's business operations.
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PARTNERSHIP CORPORATION
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PERMITTED INVESTMENTS
The Partnership is permitted to engage Under its Bylaws, the Corporation may
in the business of originating, engage in any lawful business
purchasing and selling loans and loan activity. The Corporation intends to
participations and related business engage in the same lending and trust
activities. The Partnership has deed service businesses as the
engaged in lending activities directly Partnership, and has no intention of
and through Pacific Thrift, and has conducting any other business
engaged in the trust deed servicing activities at this time. However, the
business through CRC and LPPC. The Corporation will have the authority to
Partnership is required to obtain the engage in other business activities
consent of the Limited Partners before unrelated to the lending business if
engaging in any other business approved by its Board of Directors.
activities.
The Partnership's business is limited under the Partnership Agreement
to real estate secured lending and related businesses. The Corporation expects
to engage only in the businesses of real estate secured lending and related
businesses, but the Corporation is not limited in its authority to engage in
other businesses which the Board of Directors determine to be in the best
interests of the Corporation.
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PARTNERSHIP CORPORATION
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ADDITIONAL EQUITY
The Partnership is authorized to issue The Board of Directors of the
and sell new classes of Limited Corporation may, in its discretion,
Partnership Units in the discretion of issue additional equity securities
the General Partner. The Partnership consisting of Common Stock or
has sold six classes of Limited Preferred Stock, provided that the
Partnership Units over the past twelve total number of shares issued does not
years of its operations. The consent exceed the authorized number of shares
of the Limited Partners is not of Common Stock or of Preferred Stock
required to sell new classes of set forth in the Corporation's
Limited Partnership Units unless the Certificate of Incorporation. The
return or other rights granted to the rights of any Preferred Stock could be
new Limited Partners would be more more favorable than the rights of the
favorable than the return or the Common Stockholders, without the
rights of any existing class of consent of the Stockholders. The
Limited Partners. Corporation may issue warrants
convertible into Common Stock in
connection with the proposed debt
offering to refinance the bank debt.
The Corporation expects to issue
options to its officers, directors and
employees to acquire Common Stock
pursuant to the Corporation's Stock
Option Plan. See "MANAGEMENT -- 1995
Stock Option Plan." In addition,
the Corporation may raise additional
equity from time to time to increase
its available capital as necessary to
fund its business operations.
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<PAGE> 32
Both the Partnership and the Corporation have substantial flexibility
to raise equity to finance their businesses. The issuance of additional equity
securities by the Corporation would dilute the percentage ownership interest of
the Limited Partners and, if new equity interests were issued at a price below
the net equity value of the Corporation, it would dilute the book value per
share of the Common Stock. In addition, the rights of the holders of any
Preferred Stock may be senior to the holders of the Common Stock, without the
consent of the holders of the Common Stock, whereas the consent of the Partners
is currently required for the Partnership to issue any class of Limited
Partnership Units with a more favorable return or rights than any existing class
of Limited Partners.
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PARTNERSHIP CORPORATION
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BORROWING POLICIES
The Partnership is authorized to The Corporation is authorized to
borrow funds for use in its lending borrow funds for use in its lending
business in such amounts as the business in such amounts as the Board
General Partner determines of Directors determines appropriate.
appropriate. The Partnership has The Corporation intends to pay off the
historically used substantial amounts remaining $6.8 million bank debt owed
of bank debt to fund its lending by the Partnership by June 30, 1997,
activities, but has been required to but the Corporation may seek
reduce its bank borrowings over the additional debt financing if the Board
past five years due to a reduction in of Directors determines that the
the availability of such financing and Corporation would benefit from the use
adverse conditions in the real estate of such funds in the Corporation's
lending market. The Partnership's business. In addition, Pacific Thrift
subsidiary, Pacific Thrift, also uses will continue to fund its lending
borrowed financing derived from the operations through the issuance of
issuance of FDIC insured thrift FDIC insured thrift certificates.
certificates to fund its lending
activities.
Both the Partnership and the Corporation have the authority to obtain
debt financing. The Partnership has historically utilized substantial amounts of
debt financing but such financing has not been available for the past five
years. The Corporation may obtain new debt financing to the extent that such
debt financing is available on terms approved by the Board of Directors.
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PARTNERSHIP CORPORATION
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RESTRICTIONS UPON RELATED PARTY TRANSACTIONS
The Partnership Agreement authorizes The Corporation may engage in
the Partnership to engage in certain transactions with affiliates, provided
transactions with affiliates of the that such transactions are approved by
General Partner, including the a majority of the directors or
purchase and sale of loans, the stockholders not interested in the
temporary placement of surplus funds transaction, and provided that the
with affiliates at specified interest independent directors determine the
rate minimums, the engagement of transaction to be fair, competitive
affiliates to provide loan referral, and commercially reasonable.
loan servicing and trustee services
and the use of lines of credit
provided by affiliates. The
Partnership could not engage in any
other transactions with an affiliate
without the specific approval of a
majority of the Limited Partners.
The Partnership Agreement specifically authorizes the Partnership to
engage in certain transactions with affiliates. Except for transactions
specifically approved in the Partnership Agreement, the Partnership is not
authorized to enter into transactions with the General Partner and its
affiliates unless such transactions are approved in advance by a vote of the
Limited Partners. The Corporation may enter into transactions with interested
parties,
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<PAGE> 33
such as directors, officers, significant stockholders and affiliates thereof,
provided that any such transaction may be voidable unless it is approved or
ratified by a majority of disinterested directors or stockholders.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT CONTROL AND RESPONSIBILITY
Under the Partnership Agreement, the The Board of Directors of the
General Partner is, subject to certain Corporation will have exclusive
narrow limitations, vested with all control over the Corporation's
management authority to conduct the business and affairs subject only to
business of the Partnership, including the restrictions in the Certificate of
authority and responsibility for Incorporation and the Bylaws.
overseeing all executive, supervisory Stockholders have the right to elect
and administrative services rendered one-third of the members of the Board
to the Partnership. The General of Directors at each annual meeting of
Partner has the right to continue to the Stockholders. Stockholders also
serve as general partner unless have the authority to remove directors
removed by a majority vote of the for cause upon the vote of at least
Limited Partners. Limited Partners 66-2/3% of the total outstanding
have no right to participate in the Common Stock. The directors are
management and control of the accountable to the Corporation as
Partnership and have no voice in its fiduciaries and are required to
affairs except for certain limited exercise good faith and integrity in
matters that may be submitted to a conducting the Corporation's affairs.
vote of the Limited Partners, See "FIDUCIARY RESPONSIBILITY" and
including removal of the General "MANAGEMENT."
Partner; election of a new general
partner; amendment of the Partnership
Agreement; sale of all or
substantially all of the assets of the
Partnership; or dissolution of the
Partnership. The General Partner is
accountable as a fiduciary to the
Partnership and is required to
exercise good faith and integrity in
its dealings in conducting the
Partnership's affairs.
The Partnership is managed by the General Partner and the Corporation
is managed by its Board of Directors. Limited Partners currently have the
authority to remove the General Partner and elect a new general partner by
majority vote. Stockholders will have the power to elect one-third of the
members of the Board of Directors annually, and to remove directors for cause by
a vote of 66-2/3% of the outstanding Common Stock.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of state law, the General The Certificate of Incorporation
Partner has liability for the payment provides that a director's liability
of Partnership obligations and debts, for breach of a fiduciary duty will be
unless limitations are expressly limited to the full extent allowable
stated in the obligation. The under Delaware law. The Bylaws and
Partnership Agreement provides that state law provide broad
neither the General Partner nor any of indemnification rights to directors
its affiliates performing services on and officers who act in good faith,
behalf of the Partnership will be and in a manner reasonably believed to
liable to the Partnership or its be in or not opposed to the best
Limited Partners for any act or interests of the Corporation and, with
omission performed in good faith respect to criminal actions or
pursuant to authority granted by the proceedings, without reasonable cause
Partnership Agreement, and in a manner to believe their conduct was unlawful.
reasonably believed to be within the In addition, the Corporation has
scope of authority granted and in the entered indemnification agreements
best interests of the Partnership, with all of the directors and
provided that such act did not executive officers of the Corporation
constitute fraud, misconduct, bad which indemnify such directors and
faith or gross negligence. In officers against
21
<PAGE> 34
addition, the Partnership Agreement amounts paid in settlement, authorize
indemnifies the General Partner and the Corporation to advance expenses
its affiliates for liability, loss, incurred in defense, upon the
damage, costs and expenses, including Corporation's receipt of an
attorneys' fees, incurred by them in appropriate undertaking to repay such
conducting the Partnership's business, amounts if appropriate, and authorize
except in the event of fraud, the Corporation to carry insurance for
misconduct, bad faith or gross the benefit of its officers and
negligence. directors even for matters as to which
such persons are not entitled to
indemnification. See "FIDUCIARY
RESPONSIBILITY." If the Restructuring
Plan is approved, the Corporation will
assume all existing and contingent
liabilities of the Partnership,
including its obligation to indemnify
the General Partner and others for
litigation expenses that might be
incurred by them for serving as
General Partner of the Partnership or
for sponsoring the Restructuring Plan.
Although the standards are expressed somewhat differently, there are
similar limitations upon the liability of the General Partner and its affiliates
and upon the directors and officers of the Corporation when acting on behalf of
the Partnership or on behalf of the Corporation, respectively. The Corporation
believes that the scope of the liability and indemnification provisions in the
Corporation's governing documents provides protection against claims for
personal liability against the Corporation's directors and officers which is
comparable to, though not identical with, the protections afforded to the
General Partner and its Affiliates under the Partnership Agreement. The
Corporation may provide enhanced protection to officers and directors by
obtaining a policy of insurance on their behalf, the cost of which would be
borne by the Corporation.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
ANTI-TAKEOVER PROVISIONS
Changes in management of the The Certificate of Incorporation and
Partnership can be effected only by Bylaws of the Corporation contain a
removal of the General Partner, which number of provisions that might have
requires a majority vote of Limited the effect of entrenching current
Partners. management and delaying or
discouraging a hostile takeover of the
Corporation. These provisions include,
among others, the following:
(a) election of only one-third of the
Board of Directors annually and the
lack of cumulative voting;
(b) limitations on the ability to
increase or decrease the Board of
Directors and to appoint new directors
to fill vacancies on the Board;
(c) the requirement that directors
only be removed for cause with the
vote of 66-2/3% of the total
outstanding Common Stock unless
approved by a majority of
disinterested directors;
(d) restrictions on the ability to
call special meetings of Stockholders
which permit only the Board of
Directors, the Chairman of the Board
or
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<PAGE> 35
the President to call a meeting for
only such business as directed by the
Board;
(e) restrictions on the ability of
Stockholders to take action by written
consent without a meeting unless the
Board first approves the action;
(f) requirements that certain business
combinations be approved by a vote of
66-2/3% of the total outstanding
Common Stock unless approved by a
majority of the disinterested Board of
Directors, in addition to certain
anti-takeover provisions provided
under Delaware law; and
(g) requirements that amendments to
the Certificate of Incorporation and
Bylaws concerning certain control
provisions receive the consent of
66-2/3% of the total outstanding
Common Stock unless first approved by
a majority of disinterested directors;
(h) authorization of the Board of
Directors to issue up to 2,000,000
shares of Preferred Stock, having such
rights and preferences as the Board
may determine, which may be used by
the Board to deter a future takeover
attempt;
(i) provisions in the stock options
granted to employees of the
Corporation which accelerate the
exercisability of such options in the
event of a change in control, unless
the Board of Directors prior to the
change in control approves a carryover
of the options to the new entity.
Certain provisions of the governing documents of the Corporation could
be used to deter attempts to obtain control of the Corporation in transactions
not approved by the Board of Directors. However, since the Common Stock will be
freely transferable and a market for the Common Stock is expected to develop
facilitating the transfers of the Common Stock, and the Corporation's Board of
Directors is subject to election by the Stockholders, there could be a greater
likelihood of changes in control in the case of the Corporation than the
Partnership, notwithstanding those provisions that might be employed by the
Board of Directors to resist efforts to change control.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Limited Partners by a majority vote Stockholders are entitled to elect
may, without the concurrence of the one-third of the Corporation's Board
General Partner, remove the General of Directors at each annual meeting of
Partner, elect a new General Partner, the Corporation. Stockholders may
amend the Partnership Agreement, sell elect to remove one or more directors
all or substantially all the assets of for cause upon the vote of at least
the Partnership, or dissolve the 66-2/3% of the total outstanding
Partnership. Limited Partners are not Common Stock. The vote of at least
entitled to vote on any other matters. 66-2/3% of the total outstanding
Common Stock is also required to
approve certain business combinations
unless previously approved by a
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<PAGE> 36
majority of disinterested directors of
the Corporation. Stockholders are also
entitled to vote to amend the
Certificate of Incorporation or Bylaws
of the Corporation, provided that
certain amendments in the control and
voting provisions require the vote of
at least 66-2/3% of the total
outstanding Common Stock. See
"DESCRIPTION OF CAPITAL STOCK --
Common Stock."
Stockholders have broader voting rights than those currently afforded
to Limited Partners, although certain matters upon which Stockholders may vote
require a higher majority vote (66-2/3%) than the Partnership Agreement
currently requires for the limited matters upon which Limited Partners are
allowed to vote.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
SPECIAL MEETINGS AND ACTION WITHOUT A MEETING
Limited Partners holding 10% or more Stockholders of the Corporation have
of the Capital Contributions of all no right to call special meetings of
Limited Partners may call a special the Corporation. In addition, no
meeting of the Limited Partners to action may be taken by the
vote upon any matter that may be Stockholders by written consent unless
presented for the vote of Limited first approved by the Board of
Partners. In addition, the Partnership Directors.
Agreement allows Limited Partners to
take actions by written consent in
lieu of a meeting.
Stockholders of the Corporation would have more limited rights than
Limited Partners currently have to hold special meetings and take actions by
written consent.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
COMPENSATION, FEES AND DISTRIBUTIONS
The Partnership currently pays the The Corporation will not pay any
following compensation, fees and management fees, servicing fees,
distribution to the General Partner: employee reimbursements or
distributions of net profits to the
(a) a management fee based upon the General Partner or any other third
amount of Net Profits allocated to parties. However, the Corporation will
each class of Limited Partners; hire the employees of the General
Partner, and will enter into
(b) loan origination, processing and employment agreements with certain
servicing fees equal to 35% of the executive officers of the Corporation.
loan origination fee paid by the In addition, the Corporation will
borrower of each loan made by the provide employee benefits, and will
Partnership or Pacific Thrift; provide stock option plans and
retirement plans to the officers,
(c) an additional servicing fee equal directors and employees of the
to 3/8ths of 1% of every loan made by Corporation.
the Partnership or Pacific Thrift with
an original maturity of three or more
years;
(d) reimbursement of salary and
employee expenses for every employee
who devotes part of all of his
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<PAGE> 37
or her time to the business operations
of the Partnership or any of its
subsidiaries; and
(e) distributions of any Partnership
Net Profits equal to 50% of any
remaining undistributed Net Profits
after each class of Partners has
received a return on their Capital
Contribution equal to their specified
initial return rate.
Under the Partnership Agreement, the Partnership pays compensation,
fees and distributions to the General Partner. If the Restructuring Plan is
completed, the Corporation will pay no management fees or distributions to any
outside management company. The Corporation or its subsidiaries will directly
employ the former employees of the General Partner, including the current
managing officers of the Partnership and its subsidiaries. See "PRO FORMA
HISTORICAL FINANCIAL STATEMENTS OF THE CORPORATION" for a comparison of the
anticipated expenses of the Corporation compared with the actual expenses of the
Partnership in 1994.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
LIMITED LIABILITY OF INVESTORS
Under the Partnership Agreement and The Common Stock, upon issuance, would
California state law, the liability of be fully paid and nonassessable. Under
Limited Partners for the Partnership's Delaware law, Stockholders would not
debts and obligations is generally be liable for Corporation debts or
limited to the amount of their obligations.
investment in the Partnership,
together with an interest in
undistributed income, if any. The
Limited Partnership Units are fully
paid and (except for Class A Units)
nonassessable.
The limitations on personal liability of stockholders of the
Corporation are substantially the same as that of Limited Partners in the
Partnership.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
REVIEW OF INVESTOR LISTS
Limited Partners of the Partnership A stockholder is entitled, upon
are entitled to request, at their own written demand, to inspect and copy
cost, copies of investor lists showing the stock records of the Corporation,
the names and addresses of all Limited at any time during usual business
Partners of the Partnership. hours, for a purpose reasonably
related to an interest as a
stockholder.
Limited Partners and Stockholders have the right to obtain investor
lists. The Corporation has the right to refuse a demand for the stockholder list
if the purpose is not related to a person's interest as a Stockholder. This
right could be used by the Corporation to delay or refuse a demand for the
stockholder list.
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PARTNERSHIP CORPORATION
- --------------------------------------------------------------------------------
TAXATION
Earnings of the Partnership are not Earnings of the Corporation are
taxable at the entity level. The subject to taxation at corporate
earnings of Pacific Thrift, however, income tax rates under federal and
are subject to taxation at corporate state tax laws. In addition, the
income tax rates under federal and Stockholders will be subject to income
state laws. The Partners are each tax liability for any future dividends
subject to taxation of their allocated that may be paid by the Corporation.
shares of taxable income of the
Partnership.
Limited Partners are subject to a single tax on the earnings of the
Partnership. However, since the net income of Pacific Thrift is currently
subject to corporate tax, and these earnings represent the substantial majority
of the Partnership's consolidated net income, the amount of additional tax
liability is not anticipated to be substantially greater than the net income
currently subject to taxation under the Partnership structure. Stockholders will
be subject to double taxation, once at the corporate level and again to the
extent of any dividends paid to Stockholders.
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<PAGE> 39
THE RESTRUCTURING PLAN
CHANGES IN BUSINESS CONDITIONS WHICH NECESSITATE RESTRUCTURING
From 1981 through 1993, the Partnership's primary business consisted of
the origination of "B and C" credit residential loans, which the Partnership
retained and serviced for the life of the loans. The Partnership further
increased its return on partners' equity by using credit lines to increase
lending volume. The Partnership's lending volume and rate structure on the
Partnership's loans enabled the Partnership to provide distributions to its
Partners based upon specified percentages above the Bank of America reference
rate for each class of Partners, as set forth in the Partnership Agreement (the
"Specified Annual Return Rates"). However, there have been significant changes
in the availability of credit to the Partnership and in the residential lending
market over the past four years, which have resulted in net operating losses
over the past three years.
As Limited Partners are aware from prior reports, the Partnership has
been required since 1990 to pay down over $75 million on its bank debt, which in
1990 totalled over $82 million. This has required the Partnership to
substantially reduce its loan portfolio, from a high of $130.2 million in 1989,
to $56.5 million (net of general reserves of $4.2 million, but including $12.6
million in loans held for sale) as of December 31, 1995. As a result, the
Partnership has experienced substantial reductions in interest income over the
past five years. Moreover, the Partnership has been unable to replace the
existing bank debt with a new credit line. Without a reliable source of
available debt financing, the Partnership can no longer originate the volume of
portfolio loans it was formerly able to fund using credit lines.
During the period from 1985 through 1989, the Partnership was also able
to raise equity financing through public offerings of limited partnership Units.
Due in large part to a number of real estate limited partnership failures after
1989, investment in limited partnerships of any type have fallen out of favor.
Therefore, the Partnership does not have the ability to raise equity financing
to support the growth of its lending business under its current structure.
However, current investment trends have supported various public stock offerings
of thrift and loans and similar lending businesses. Because of this trend,
management of the Partnership has been able to generate investment interest in
Pacific Thrift, but only if the Partnership converts to corporate form. Under a
letter agreement with the Representative, subject to customary terms and
conditions, if the Restructuring Plan is approved, the Public Offering will
raise approximately $8 to $9 million in additional capital. Management believes
this additional capital will enhance the Corporation's ability to meet its goals
for revenue growth over the next one to three years. The Restructuring Plan
therefore will enhance the Corporation's ability to raise financing to support
its business operations.
The residential lending market has also substantially changed over the
past several years, due to the consolidation of the lending industry and the
proliferation of loan securitization. These two factors have dramatically
increased competition for all grades of residential loans, with a resulting
decrease in market interest rates for these loans. The Partnership has therefore
modified the nature of its lending business in order to originate B and C credit
loans primarily for sale to other lending companies. The purchasers pool and
securitize residential loans for resale in the secondary mortgage market. As a
result of this change in the lending market, the Partnership's primary source of
revenues has changed from interest income on portfolio loans to fee income from
loans originated for sale.
Pacific Thrift reported net income of $3.2 million in 1995, primarily
from fee income from loans originated for sale. However, this level of profits
would not have been sufficient to support distributions to Partners equal to the
Specified Annual Return Rates, even if such profits could have been distributed
to the Partners. In order improve its capital ratios and increase earnings, it
was necessary for Pacific Thrift to retain earnings for funding additional
lending activities. Management believes that Pacific Thrift may continue to
expand the volume of loans originated for sale and portfolio lending over the
next one to three years, which may result in significant revenue growth during
that period. However, during this rebuilding period, the Partners would not
receive quarterly distributions at all, or at reduced amounts from past
distribution levels.
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<PAGE> 40
Finally, the Partnership's net partners' equity of $8.7 million at
December 31, 1995, does not allow the Partnership to approve requests to
withdraw capital, as originally intended. If the Partnership were to honor
requests to withdraw capital at this time, it would impair the ability of the
Partnership to continue its business operations, which would harm all of the
Partners. Due to the limited capital available to the Partnership, management
does not anticipate that the Partnership will have the ability to honor any
additional requests to withdraw capital for the foreseeable future. Moreover,
due to the lack of an active trading market for limited partnership Units, it
would continue to be extremely difficult for Limited Partners to liquidate their
investment in the Partnership.
In order to provide for the continued growth of Pacific Thrift's
business and provide an alternative means for the Limited Partners to realize
capital appreciation and greater liquidity for their investment in the
Partnership, the General Partner developed the Restructuring Plan. The
Restructuring Plan essentially allows the businesses of the Partnership to
continue under existing management, but under a corporate rather than a
partnership structure. The General Partner believes that, under the constraints
of current business conditions, Limited Partners will have substantially more
flexibility with an investment in Common Stock than their current investment in
Units.
TRANSFER OF ASSETS AND LIABILITIES AND DISTRIBUTION OF COMMON STOCK
The Corporation was formed by the Partnership on February 22, 1994,
with Presidential as its sole stockholder. On March __, 1996, Presidential
transferred to the Corporation all of the outstanding stock of Pacific Thrift,
CRC Washington and Unified, for the purpose of allowing these entities to file
consolidated tax returns. If the Restructuring Plan is approved, the Partnership
will transfer all of its remaining assets and liabilities to the Corporation in
exchange for a number of shares of Common Stock of the Corporation equal to the
Net Tangible Equity of the Partnership on the last day of the month preceding
the Closing Date, divided by 10, provided that the number of shares so issued
shall not less than 830,000. The Partnership will, within two business days of
the Closing Date, distribute the Common Stock received by it to all of the
Partners pro rata based upon their respective Net Contributed Capital.
Each Partner's percentage interest in the Partnership based on his,
her or its Net Contributed Capital as of December 31, 1995 is stated in the top
right corner of the first page of each Partner's Subscription Agreement. The
percentage amount shown represents the percentage of the total amount of Common
Stock to be issued by the Corporation to the Partnership that would be received
by that Partner if the Restructuring Plan is completed. The exact number of
shares of Common Stock to be issued to each Partner will be determined based
upon the Partnership's Net Tangible Equity as of the last day of the month
preceding the Closing Date.
RIGHTS OFFERING
BASIC SUBSCRIPTION RIGHTS. The Corporation is concurrently issuing
non-transferable Basic Subscription Rights to all Partners of the Partnership
pursuant to the Restructuring Plan, subject to the completion of the
Restructuring Plan. The Basic Subscription Rights entitle each Partner to
purchase a portion of the 820,000 shares offered in the Rights Offering, at a
Subscription Price of $10 per share (subject to adjustment as described below),
pro rata in accordance with that Partner's Net Contributed Capital in the
Partnership. The Basic Subscription Rights must be exercised by the
28
<PAGE> 41
Solicitation Period Expiration Date. Each Partner is entitled to
subscribe for all, or any portion of, the shares subject to the Basic
Subscription Rights. Each Partner's Ballot and Subscription Agreement states in
the upper right hand corner the number of shares which that Partner has the
right to subscribe for through the exercise of Basic Subscription Rights, based
upon that Partner's Net Contributed Capital as a percentage of the total Net
Contributed Capital of all Partners in the Partnership as of December 31, 1995.
OVERSUBSCRIPTION PRIVILEGE. Subject to the allocation and possible
reduction described below, Partners who exercise their own Basic Subscription
Rights will also be eligible to exercise the Oversubscription Privilege to
subscribe for and purchase, at the Subscription Price of $10 per share, an
unlimited number of the shares offered in the Rights Offering, but only up to
the amount available after satisfaction of all exercises of the Basic
Subscription Privilege. A Partner's election to exercise that Partner's
Oversubscription Privilege must be made at the same time that Partner exercises
the Basic Subscription Right.
If the 820,000 shares offered in the Rights Offering are not
sufficient to satisfy all subscriptions pursuant to the Oversubscription
Privilege, the shares will be allocated pro rata (subject to the elimination of
fractional shares) among those Partners exercising Oversubscription Privileges
in proportion to the Basic Subscription Rights exercised by such Partners,
relative to the number of Basic Subscription Rights exercised by all Partners;
provided, however, that if such pro rata allocation results in any Partner being
allocated a greater number of shares than such Partner subscribed for pursuant
to the exercise of the Oversubscription Privilege, then such Partner will be
allocated only that number of shares for which such Partner subscribed, and the
remaining shares will be allocated among all other Partners exercising the
Oversubscription Privilege on the same pro rata basis outlined above. For
example, a Partner with Net Contributed Capital of $1,000 would have a
.000024338 percentage interest in the Partnership, and would therefore have the
Basic Subscription Right to purchase approximately 20 shares in the Rights
Offering. If that Partner exercised his Basic Subscription Right and also
subscribed for 20 additional shares pursuant to the Oversubscription Privilege,
but the total shares subscribed for by all Partners exercising the
Oversubscription Privilege exceeded the remaining shares available, then the
Partner with the Net Contributed Capital would be allocated that number of
shares in excess of his Basic Subscription Right as would equal the total
remaining available shares times a fraction the numerator of which is that
Partner's Net Contributed Capital and the denominator of which is the Net
Contributed Capital of all Partners exercising the Oversubscription Privilege.
Payments for subscriptions will be deposited upon receipt by the
Subscription Agent and held in escrow pending a final determination of the
number of shares to be issued pursuant to the exercise of Oversubscription
Privileges. If a proration of the shares results in a Partner's receiving fewer
shares than the Partner subscribed for pursuant to its Oversubscription
Privilege, then the excess funds paid by that Partner as the Subscription Price
for shares not issued will be returned promptly without interest or deduction.
ADJUSTMENT OF SUBSCRIPTION PRICE. In the event the Public Offering
Price of the Public Offering Shares is lower than $10 per share, the Corporation
will issue an additional number of shares of Common Stock for the largest number
of whole shares which could be sold at the Public Offering Price for the excess
subscription price, and return any remaining excess to the Partner in cash
(without interest), within 10 business days after the completion of the Public
Offering.
SUBSCRIBER WARRANTS. For every five shares of Common Stock purchased in
the Rights Offering by Partners, partners of the General Partner or officers,
directors or employees of the Partnership or its subsidiaries, the Corporation
will issue a transferable warrant for one additional share of Common Stock,
exercisable at any time after issuance for a period of two years, at a price
equal to 125% of the Public Offering Price. Although the Subscriber Warrants are
freely transferable, they will not be listed for trading on the Nasdaq National
Market, and there can be no assurance that a market will develop for the
Subscriber Warrants.
EXERCISE OF BASIC SUBSCRIPTION RIGHTS AND OVERSUBSCRIPTION PRIVILEGE.
Partners may exercise their Subscription Rights by delivering to the
Subscription Agent at the address specified below, at or prior to the
29
<PAGE> 42
Expiration Date, the properly completed and executed Subscription Agreement,
together with payment in full of the Subscription Price for each Additional
Share subscribed for pursuant to the exercise of such Subscription Rights.
Payment in full must be made by (i) check or bank draft drawn upon a
United States bank, or postal, telegraphic or express money order, payable to
U.S. Stock Transfer Corporation, as Subscription Agent, or (ii) wire transfer of
funds to the account maintained for this purpose at First Professional Bank, ABA
# 122239335, Trust No. 11, Account No. 004-802578. The Subscription Price will
be deemed to have been received by the Subscription Agent only upon (i)
clearance of any uncertified check, (ii) receipt by the Subscription Agent of
any certified check or bank draft drawn upon a United States bank or of any
postal, telegraphic or express money order or (iii) receipt of collected funds
in the Subscription Agent's account designated above. Funds paid by uncertified
personal check may take at least five business days to clear. Accordingly,
Partners who wish to pay the Subscription Price by means of uncertified personal
check are urged to make payment sufficiently in advance of the Expiration Date
to ensure that the payment is received and clears by that time, and are urged to
consider in the alternative payments by means of certified or cashier's check,
money order or wire transfer of funds.
Pending disbursement to the Corporation upon issuance of the shares,
all funds received in payment of the Subscription Price will be held in an
escrow account by the Subscription Agent and invested at the direction of the
Corporation in short-term certificates of deposit, short-term obligations of the
United States, any state or any agency thereof, or money market mutual funds
investing in the foregoing instruments. The account in which these funds will be
held is not insured by the FDIC. Any interest earned on these funds will be
retained by the Corporation if the Restructuring Plan is approved, or returned
to Partners if the Restructuring Plan is not approved.
The Subscription Agent's address to which the Subscription Agreement
and payment of the Subscription Price should be delivered is as follows: U.S.
Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California
91204-2991.
The Corporation will pay the fees and expenses of the Subscription
Agent, and has also agreed to indemnify the Subscription Agent against certain
liabilities that it may incur in connection with the Rights Offering.
If an exercising Partner does not indicate the number of shares of
Common Stock being subscribed for pursuant to the exercise of Rights, or does
not forward full payment of the aggregate subscription price for the number of
shares of Common Stock indicated as being subscribed for, then such Partner will
be deemed to have exercised the maximum number of Basic Subscription Rights that
may be exercised for the aggregate subscription price payment delivered by such
Partner, and, to the extent the aggregate subscription price payment delivered
by the Partner exceeds the product of the subscription price multiplied by the
number of Basic Subscription Rights evidenced by the Subscription Agreement
delivered by such Partner, such Partner will be deemed to have exercised the
Oversubscription Privilege to purchase, to the extent available, the number of
whole shares equal to the quotient obtained by dividing the subscription
excess by the subscription price. Any amount remaining after application of
the foregoing procedures shall be returned to such Partner promptly by mail
without interest or deduction.
Certificates representing shares of Common Stock purchased pursuant to
the exercise of Basic Subscription Rights and Oversubscription Privilege will be
issued to Partners within two business days after the Closing Date of the
Restructuring Plan.
Pending issuance of certificates representing shares of Common Stock,
funds received for the exercise of Subscription Rights will be held in a
segregated escrow account maintained by the Subscription Agent and, if and when
shares are issued in respect of exercises of Subscription Rights, payment
therefor will be transferred to the Corporation. If for any reason shares
are not issued pursuant to the exercise of Basic Subscription Rights, or
a Partner exercising an Oversubscription Privilege is allocated less than all of
the shares for which that Partner subscribed pursuant to the
Oversubscription Privilege, then the funds paid by the Partner that are held in
escrow as the subscription price for shares not issued or for shares
not allocated to such Partner will be returned by mail without interest or
deduction after the Expiration Date promptly following completion of all
prorations and adjustments contemplated by the terms of the Rights Offering.
30
<PAGE> 43
Record owners of Partnership interests who hold such interests for the
account of others, such as brokers, trustees or depositories for securities,
should contact the respective beneficial owners of such Partnership interests as
soon as possible to ascertain those beneficial owners' intentions and to obtain
instructions with respect to Subscription Rights. If a beneficial owner so
instructs, the record holder of that Partnership interest should complete a
Subscription Agreement and submit it to the Subscription Agent together with
payment for the number of shares of Common Stock subscribed for thereby. In
addition, beneficial owners of Partnership interests held through such a nominee
should contact the nominee and request the nominee to effect transactions in
accordance with the beneficial owner's instructions. In order to exercise the
Oversubscription Privilege, banks, brokers and other nominee record holders of
Partnership interests will be required to certify to the Subscription Agent and
the Corporation the aggregate number of Basic Subscription Rights that have been
exercised on behalf of each beneficial owner of such rights and the number of
Additional Shares subscribed for pursuant to the Oversubscription Privilege by
each such beneficial owner on whose behalf such nominee record holder is acting.
The instructions accompanying the Subscription Agreement should be read
carefully and followed in detail. SUBSCRIPTION AGREEMENTS SHOULD BE SENT WITH
PAYMENT TO THE SUBSCRIPTION AGENT. DO NOT SEND SUBSCRIPTION AGREEMENTS OR
PAYMENTS TO THE PARTNERSHIP OR THE CORPORATION.
THE METHOD OF DELIVERY OF SUBSCRIPTION AGREEMENTS AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE PARTNERS. IF SUBSCRIPTION AGREEMENTS AND PAYMENTS ARE SENT BY MAIL,
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, IS
RECOMMENDED. PERSONS WISHING TO EXERCISE SUBSCRIPTION RIGHTS ARE URGED TO ALLOW
A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND
CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, PARTNERS ARE STRONGLY
URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK,
MONEY ORDER OR WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility
of any exercise of Subscription Rights will be determined by the Corporation,
whose determinations will be final and binding. The Corporation, in its sole
discretion, may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Subscription Rights because of any defect or
irregularity. Subscription Agreements will not be deemed to have been received
or accepted until all irregularities have been waived or cured within such time
as the Corporation determines, in its sole discretion. Neither the Corporation
nor the Subscription Agent will be under any duty to give notification of any
defect or to give such notification. The Corporation reserves the right to
reject any exercise if such exercise is not in accordance with the terms of the
Rights Offering or not in proper form or if the acceptance thereof or the
issuance of shares of Common Stock pursuant thereto could be deemed unlawful or
materially burdensome.
Any questions or requests for assistance concerning the method of
exercising Basic Subscription Rights or Oversubscription Rights or requests for
additional copies of this Offering Circular, should be directed to Richard B.
Fremed, at telephone: (818) 992-8999, ext. 250.
NO REVOCATION. EXERCISES OF SUBSCRIPTION RIGHTS ARE NOT REVOCABLE BY
PARTNERS.
DETERMINATION OF SUBSCRIPTION PRICE. The Subscription Price has been
determined by the General Partner in consultation with the Representative. Prior
to this offering, there has not been an established public market for the Common
Stock of the Corporation or the Partnership interests of the Partnership. The
major factors considered in determining the Subscription Price were the
projected Net Tangible Equity of the Partnership by March 31, 1996, prevailing
market conditions, the market prices relative to earnings, cash flow and assets
for publicly traded common stock of comparable companies, the revenues and
earnings (or losses) of the Partnership and comparable
31
<PAGE> 44
companies in recent periods, the regulatory status of Pacific Thrift, the
Corporation's earning potential, the experience of its management and the
position of the Partnership in the lending industry. There can be no assurance,
however, that the market price of the Common Stock will not decline, or that a
person will be able to sell shares of Common Stock at a price equal to or
greater than the Subscription Price.
The Public Offering Price, which will be determined by negotiation
between the General Partner and the Representative immediately prior to the
Public Offering, may be lower than the Subscription Price. However, in that
event, the Subscription Price will be adjusted to equal the Public Offering
Price, and persons exercising subscription rights in the Rights Offering will
receive the highest number of whole shares equal to the Subscription Price paid
by each subscriber divided by the Public Offering Price, with any remaining
excess returned in cash to the subscriber.
EXERCISE OF BASIC SUBSCRIPTION RIGHTS AND OVERSUBSCRIPTION PRIVILEGE BY
PARTNERS OF GENERAL PARTNER. The Basic Subscription Rights and Oversubscription
Privilege allocable to the General Partner for its pro rata share of the
Partnership will not be exercised by the General Partner directly. Instead,
these rights shall be exercisable by the individual partners of the General
Partner. Basic Subscription Rights will be exercisable by these partners pro
rata based on the amount of their respective investment in the General Partner,
up to the full amount of the Basic Subscription Rights allocable to the General
Partner. In addition, each of these partners will be allowed to exercise the
Oversubscription Privilege to the extent Partners do not exercise their Basic
Subscription Rights.
EXERCISE OF OVERSUBSCRIPTION PRIVILEGE BY OFFICERS AND EMPLOYEES.
Certain employees of the Partnership and its subsidiaries will have the
opportunity to subscribe for shares through the Oversubscription Privilege.
However, officers and employees will only be entitled to subscribe for shares
to the extent not purchased by existing Partners through their Basic
Subscription Rights and the Oversubscription Privilege.
Certain partners of the General Partner and officers and employees of
the Partnership and its subsidiaries have indicated their intention to purchase
up to 115,000 shares ($1,150,000) through the exercise of Basic Subscription
Rights and the Oversubscription Privilege, to the extent that shares are
available. Joel Schultz has committed to purchase any of the 115,000 shares
which are not purchased by other partners of the General Partner or officers
or employees of the Partnership and its subsidiaries.
CONDITION TO EXERCISE OF BASIC SUBSCRIPTION RIGHTS AND OVERSUBSCRIPTION
PRIVILEGE BY LIMITED PARTNERS. LIMITED PARTNERS WHO WISH TO EXERCISE BASIC
SUBSCRIPTION RIGHTS AND OVERSUBSCRIPTION PRIVILEGES MUST VOTE "FOR" THE
RESTRUCTURING PLAN.
PUBLIC OFFERING
If the Restructuring Plan is approved by the requisite vote of Limited
Partners, as soon as possible following the end of the Solicitation Period, but
not later than 60 days from the Solicitation Period Expiration Date, the
Corporation will conduct a Public Offering of that number of shares of Common
Stock (the "Public Offering Shares") as will be necessary for the Corporation to
achieve a Minimum Market Capitalization of $16.5 million. The amount of Public
Offering Shares will be determined immediately prior to the Public Offering
based upon the Public Offering Price per share and the total number of
Additional Shares subscribed for in the Rights Offering. It is anticipated that
the Public Offering Price per share will be between $8 and $10 per share, as
determined by negotiation between the General Partner and the Representative. If
the price per share is less than $8 or more than $10 per share, the vote of the
Limited Partners on the Restructuring Plan will be re-solicited, and a new
Rights Offering will be conducted during the re-solicitation period. Subject to
customary terms and conditions, Friedman, Billings, Ramsey & Co., Inc. has
agreed to act as Representative of a group of underwriters participating in the
Public Offering on a firm offering basis. See "UNDERWRITING OF PUBLIC OFFERING."
As a condition to completion of the Restructuring Plan, the Corporation
must achieve a Minimum Market Capitalization of $16.5 million as a result of the
Rights Offering and the Public Offering. If the Minimum
32
<PAGE> 45
Market Capitalization is not achieved, the Restructuring Plan will not
completed, and the Partnership will continue under its current structure.
GENERAL PARTNER WARRANTS
The General Partner of Partnership will purchase warrants from the
Corporation ("General Partner Warrants") exercisable for up to 25% of the Common
Stock outstanding on the Closing Date, on a fully diluted basis assuming the
exercise of all outstanding Subscriber Warrants and General Partner Warrants,
exercisable at any time for a period of 18 months after the Closing Date, at an
exercise price equal to 150% of the Public Offering Price per share. The General
Partner will pay the Corporation $385,000 to purchase the General Partner
Warrants, which management believes represents the fair market value of the
General Partner Warrants.
The General Partner Warrants will be non-transferable, except to and
between partners of the General Partner. The General Partner presently
anticipates that it will distribute all of the General Partner Warrants to its
partners. The Common Stock issuable upon exercise of the General Partner
Warrants ("Warrant Stock") has been registered concurrently with the
registration of the shares, and the Corporation will commit to maintain the
effectiveness of such registration until the earlier of the sale of all the
Warrant Stock or five years after the Closing Date. In addition, under certain
circumstances, the holders of the General Partner Warrants will have one
demand registration right and unlimited "piggyback" registration rights for a
period of five years following the Closing Date, for the purpose of resale of
the Warrant Stock.
Holders of General Partner Warrants will not be entitled, by virtue of
being such holders, to receive dividends or subscription rights, vote, consent,
or receive notice as Stockholders of the Corporation in respect of any meeting
of Stockholders for the election of directors of the Corporation or any other
matter, or exercise any other rights whatsoever as Stockholders of the
Corporation.
CONDITIONS TO RESTRUCTURING PLAN
The Partnership will not complete the Restructuring Plan unless each of
the following conditions is satisfied on or prior to the Distribution Date:
(a) Limited Partners holding at least 51% of the total Capital
Contributions of all Limited Partners (except the General Partner to
the extent of its ownership of Limited Partnership Units) vote to
approve the Restructuring Plan;
(b) Minimum Market Capitalization of $16.5 million is achieved as a
result of the Rights Offering and the Public Offering;
(c) the Common Stock is listed on the Nasdaq National Market, the
American Stock Exchange or the Pacific Stock Exchange;
(d) the Bank consents to the completion of the Restructuring Plan; and
(e) the FDIC consents to the change in control of Pacific Thrift as a
result of the Restructuring Plan.
(f) there is no moratorium resulting from federal or state legislative
action that would prohibit the closing of the Restructuring Plan;
(g) there is no material adverse change in the business or prospects of
the Partnership; and
(h) there is no injunction or court order relating to the Restructuring
Plan that would have a material adverse effect upon the Corporation or
which would prevent the completion of the Restructuring Plan.
33
<PAGE> 46
None of the conditions specified in paragraphs (a), (b), (c), (d) or (e) above
may be waived, except with respect to the listing of the Common Stock on the
NNM, AMEX or PSE, which may only be waived upon re-solicitation and the
requisite vote of the Limited Partners to complete the Restructuring Plan on a
modified basis. The conditions specified in paragraphs (f), (g) and (h) may be
waived by the General Partner if it determines, in its sole discretion, that the
waiver would have no material adverse impact upon the business of the
Corporation.
Except with respect to the required consent of the FDIC, there are no
federal or state regulatory requirements that must be complied with or approvals
that must be obtained as a condition of completion of the Restructuring Plan.
MANNER OF EFFECTING THE RESTRUCTURING PLAN
If the conditions to the Restructuring Plan are satisfied by the
Closing Date, the Partnership will effect the Restructuring Plan by delivering
certificates for shares of Common Stock to the Partners of record on the Record
Date, pro rata in accordance with their Net Contributed Capital, within two days
following the Closing Date. The Partnership will concurrently file a Certificate
of Dissolution of the Partnership with the California Secretary of State.
Simultaneously, the Corporation will issue certificates for the shares of Common
Stock sold in the Rights Offering and the Public Offering.
No certificates or scrip representing fractional shares of Common Stock
will be issued to Partners as part of the Restructuring Plan. Any fractional
interests resulting from allocation of shares to Partners will be rounded up to
the next whole share.
No Partner will be required to pay any cash for the shares of Common
Stock received in exchange for partnership interests or to surrender or exchange
any Limited Partner Certificate in order to receive Common Stock.
ACCOUNTING TREATMENT OF THE RESTRUCTURING PLAN
The transfer of the Partnership's assets and liabilities to the
Corporation, dissolution of the Partnership and pro rata distribution of the
Common Stock of the Corporation to the Partners will be accounted for as a
change in legal organization but not in the enterprise. Therefore, the
transaction will be treated in a manner similar to that in a pooling of interest
accounting. The direct costs incurred in connection with effecting the
Restructuring Plan will be treated as expenses to be charged against operations
in the periods in which such expenses are incurred. The specific incremental
costs attributable directly to the raising of additional capital in the Rights
Offering and the Public Offering, however, will be deferred and charged against
the gross proceeds of such offerings.
EXPENSES OF THE RESTRUCTURING PLAN
Substantial expenses have been and will be incurred by the Corporation
in connection with the Restructuring Plan. These expenses include, among others,
the costs and expenses of organizing the Corporation, structuring the terms and
conditions of the Restructuring Plan, obtaining the Fairness Opinion from
Houlihan Lokey, the offering and issuance of the Common Stock by the
Corporation, the registration of the Common Stock with the Securities and
Exchange Commission, the listing of the Common Stock on the Nasdaq National
Market, soliciting Ballots from Limited Partners and selling commissions and
costs associated with the offering and sale of Common Stock pursuant to the
Rights Offering and the Public Offering.
If the Restructuring Plan is completed, all transaction and
solicitation expenses will be borne by the Corporation. If the Restructuring
Plan is not completed, the Partnership will pay the transaction and solicitation
expenses of the Restructuring Plan.
The General Partner estimates that the expenses of the Restructuring,
the Rights Offering and the Public Offering will total approximately $1,173,000.
Set forth below is an itemization of the estimated expenses:
34
<PAGE> 47
<TABLE>
<S> <C>
Restructuring Expenses
Legal $ 125,000
Fairness Opinion 160,000
Accounting 25,000
Printing & Postage 20,000
Soliciting Agent 20,000
Transfer Agent 14,000
Registration, Listing and Filing Fees 16,000
Miscellaneous 20,000
----------
Total Restructuring Expenses $ 400,000
Offering Expenses in Connection with Rights Offering
and Public Offering
Selling Commissions 485,000
Reimbursed Underwriting Expenses 85,000
Legal 125,000
Accounting 25,000
Printing & Postage 15,000
Transfer Agent 5,000
Registration, Listing and Filing Fees 9,000
Other 24,000
----------
Total Offering Expenses $ 773,000
TOTAL $1,173,000
==========
</TABLE>
RIGHT TO INSPECT LIST OF LIMITED PARTNERS
Limited Partners of the Partnership are entitled to request at their
own cost copies of investor lists showing the names and addresses of all Limited
Partners of the Partnership. Limited Partners who desire to request a list of
Limited Partners may do so by written request addressed to Richard B. Fremed,
Presidential Mortgage Company, 21031 Ventura Boulevard, Woodland Hills,
California 91364. A check for $50, representing the approximate costs of copying
and mailing of such list, payable to Presidential Mortgage Company, must be
included with the request.
35
<PAGE> 48
USE OF PROCEEDS
The net proceeds of the Rights Offering and the Public Offering
assuming an initial offering price of $10.00 per share (after deducting
estimated offering expenses, including the Underwriters' discount) are estimated
to be $7,427,000 ($________ if the Underwriters' overallotment option is
exercised in full). The Corporation intends to use the net proceeds
approximately as follows:
<TABLE>
<S> <C>
Pay down of bank debt $1,000,000
Pay off debts owed to Partners whose withdrawal
requests were approved prior to June 1993 1,290,000
Working Capital 5,137,000
----------
$7,427,000
==========
</TABLE>
The Corporation may contribute some or all of the balance of net
proceeds from time to time as additional capital of Pacific Thrift.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Partnership at December 31, 1995, and of the Corporation as adjusted to give
effect to the sale by the Corporation of 820,000 shares of Common Stock at a
public offering price of $10.00 per share (net of underwriting discount and
estimated expenses payable by the Corporation).
<TABLE>
<CAPTION>
December 31, 1995
--------------------------
(Dollars in Thousands)
Partnership Corporation
Historical As Adjusted
----------- -----------
<S> <C> <C>
Deposits ......................................... $60,156 $60,156
Borrowings:
Bank debt ....................................... 6,771 5,771
Liabilities owed to Withdrawing Partners ........ 1,290 -0-
Liabilities owed to General Partner ............. 565 210
Other Liabilities ............................... 4,732 4,732
Equity
Partners' capital accounts
(Stockholders' Equity) ...................... 8,727 8,727
Additional Shares ............................... -0- 7,427
------- -------
Total Equity ..................................... 8,727 16,154
------- -------
Total Liabilities and Equity ..................... $82,241 $87,023
======= =======
Number of shares of Common Stock
outstanding(1) ............................... -0- 1,650
Tangible book value per share(1) ................. N/A $ 9.53
</TABLE>
(1) Not including shares issuable pursuant to the Subscriber Warrants, the Bank
Warrant or the General Partner Warrants, or shares issuable under stock options
granted pursuant to the Corporation's 1995 Stock Option Plan. See "MANAGEMENT --
1995 Stock Option Plan."
36
<PAGE> 49
DILUTION
If as management believes, Net Tangible Equity of the Partnership is
approximately $8.3 million by March 31, 1996, then the pro forma net tangible
book value per share will be $10.00 per share. After giving effect to the
issuance of 1,232,500 additional shares necessary to achieve the Minimum Market
Capitalization of $16.5 million assuming the lowest Public Offering Price of $8
per share, the pro forma net tangible book value of the Corporation at December
31, 1995 would have been $17,262,000, or approximately $8.37 per share of Common
Stock, representing an immediate dilution (i.e., the difference between the
purchase price per share and the pro forma net tangible book value per share
after the offering) to the Limited Partners of $1.63, or 16% per share, and an
immediate increase in net tangible book value of $.37, or 5% per share, to
subscribers in the Rights Offering and the Public Offering, as illustrated by
the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering per share of $8.00
Common Stock
Pro forma net tangible book value per $10.00
share at March 31, 1996
Decrease per share of Common Stock $ 1.63
attributable to subscribers in Rights
Offering and Public Offering
Pro forma net tangible book value per share of $8.37
Common Stock after the Rights Offering and the
Public Offering
Dilution per share of Common Stock to Limited $1.63
Partners
</TABLE>
The following table sets forth the number of shares of Common Stock to
be distributed to the Partners of the Partnership in exchange for the assets and
liabilities of the Partnership, based upon the pro forma Net Tangible Equity of
$8.3 million of the Partnership at March 31, 1996, and the number of additional
shares to be sold in the Rights Offering and the Public Offering, assuming the
lowest Public Offering Price of $8.00 per share, the respective aggregate
consideration to be paid to the Company and the average price per share of
Common Stock.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price Per
---------------- ------------------- -----------------
Share
-----
Number Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Partners 830,000 40.2% $8,300,000 45.7% $ 10.00
Subscribers 1,232,500 59.8% $9,860,000 54.3% $ 8.00
</TABLE>
37
<PAGE> 50
FAIRNESS OF THE RESTRUCTURING PLAN
GENERAL PARTNER CONCLUSIONS
The General Partner believes that the terms of the Restructuring Plan,
when considered as a whole, are fair to the Limited Partners. This belief is
based upon the General Partner's analysis of the terms of the Restructuring
Plan, an assessment of its potential economic impact upon the Limited Partners,
a consideration of the potential benefits and detriments of the Restructuring
Plan and the available alternatives, and a review of the financial condition and
performance of the Partnership. This section of the Proxy Statement/Prospectus
is devoted to a discussion of the factors upon which the General Partner has
based its conclusions as to the fairness of the Restructuring Plan and should be
carefully reviewed by the Limited Partners. The General Partner is not in a
position to quantify the relative importance of these factors but has, where
appropriate, noted which of the factors support or detract from its belief as to
the fairness of the Restructuring Plan to the Limited Partners.
ALTERNATIVES TO THE RESTRUCTURING PLAN
The following is a brief discussion of the benefits and disadvantages
of alternatives to the Restructuring Plan that were considered by the General
Partner.
LIQUIDATION. One alternative to the Restructuring Plan would have been
to liquidate the assets of the Partnership and distribute the net liquidation
proceeds to the Partners. Management believes that the value of the
Partnership's business as a going concern is significantly in excess of its
current liquidation value. However, the benefit of a liquidation would be that
Limited Partners could liquidate their investment in the Partnership and use the
proceeds for investment, business and other purposes. The detriment would be
that Limited Partners might receive less value for their investment if the
Partnership were liquidated than the fair market value of the Common Stock
Limited Partners would receive if the Restructuring Plan is completed. The
Partnership's primary assets consist of (1) the loan portfolio of Presidential;
(2) the shares of Pacific Thrift; and (3) the interests of Presidential in CRC
and LPPC.
The General Partner has made the following assumptions in connection
with its estimate of liquidation values: (1) loans receivable of Presidential
could be sold at book value; (2) OREO of Presidential could be sold at a 10%
discount to book value; (3) no value would be received by Presidential for fixed
assets, capitalized organization costs or goodwill; (4) Pacific Thrift could be
sold for 110% of its book value plus a premium for loans available for sale,
less a 10% discount for selling costs, severance pay, and lease buyouts; CRC and
LPPC could each be sold at book value, less book value of fixed assets,
leasehold improvements and prepaid expenses and a 10% discount for selling
costs.
Based upon the above assumptions, the General Partner estimates that
the following proceeds could be obtained in a liquidation:
38
<PAGE> 51
LIQUIDATION ANALYSIS
DEC. 31, 1995
(000'S OMITTED)
<TABLE>
<CAPTION>
ASSETS BALANCE ADJUSTMENT ADJ. BALANCE
- ------ ------- ---------- ------------
<S> <C> <C> <C>
Cash & Investments $ 609 $ 609
Accounts Receivable 1 1
Loans Receivable (Presidential only) 9,461 9,461
Reserve For Bad Debts (2,771) (2,771)
Fixed Assets, Net 48 (1) (48) 0
R.E.O., Net 848 (2) (85) 763
Other Assets 91 (1) (21) 70
Organization 103 (1) (103) 0
Investment in Subs: 0
Pacific Thrift 6,819 (3) 602 7,421
CRC 922 (216) 706
LPP 226 (44) 182
Goodwill 1,807 (1) (1,807) 0
------- -------- -------
18,164 (1,722) 16,442
======= ======== =======
Less: Liabilities
Credit Line 6,771 6,771
Interest Payable 170 170
Accounts Payable 758 758
Partnership Payable 1,120 1,120
Due to Pres. Management 565 565
------- -------
9,384 0 9,384
------- -------
Capital $ 8,780 ($ 1,722) $ 7,058
======= ======== =======
</TABLE>
(1) Assumed no value for these assets
(2) Assumed 10% reduction in value due to time to sell
(3) Assumed 110% book value plus premium for loans available for sale less 10%
for selling costs, severance, lease buyouts, etc.
Under the above analysis, the net proceeds of liquidation would be
approximately $7,058,000, representing approximately 80% of the total book value
of the Partnership on a consolidated basis at December 31, 1995.
LIMITED PARTNERS SHOULD NOTE THAT THE ABOVE ESTIMATE OF LIQUIDATION PROCEEDS IS
BASED UPON INFORMATION CONCERNING THE GENERAL MARKET FOR ASSETS SIMILAR TO THE
PARTNERSHIP'S ASSETS, AND IS NOT BASED UPON ANY ACTUAL MARKETING EFFORTS BY THE
PARTNERSHIP. THE ACTUAL PROCEEDS WHICH COULD BE OBTAINED IN A LIQUIDATION COULD
BE MORE OR LESS THAN THE AMOUNTS ESTIMATED ABOVE.
If the Corporation or the Partnership were to continue to experience
net losses for the next one to two years, there can be no assurance that a
liquidation of the Partnership at this time would not result in a higher return
to
39
<PAGE> 52
the Limited Partners than the Restructuring Plan. However, based upon current
trends in Pacific Thrift's lending business, including primarily the trend
toward increasing monthly loan originations and sales, as described herein under
the heading "BUSINESS -- Lending Activities," management believes that Pacific
Thrift has the potential for substantial growth in earnings over the next one to
three years.
CONTINUATION OF THE PARTNERSHIP UNDER THE CURRENT STRUCTURE. Another
alternative to the Restructuring Plan would be to continue the Partnership in
accordance with the existing Partnership Agreement. The benefit of this
alternative is that Limited Partners would retain their existing rights under
the Partnership Agreement, including the rights to remove the General Partner,
dissolve the Partnership or amend the Partnership Agreement by the vote of a
majority in interest of Limited Partners. The General Partner estimates that
limited annual distributions could be resumed sometime in 1997, but these
distributions would be less than the Specified Annual Return Rates provided in
the Partnership Agreement. A substantial portion of Pacific Thrift's earnings
would be retained by it to support its capital ratios and fund lending activity.
No additional equity or debt would be raised. The General Partner further
believes that no additional requests to withdraw capital could be permitted for
the foreseeable future, because such withdrawals would impair the capital and
operations of the Partnership.
Although Limited Partner Units are freely transferable, and therefore
could be sold in the existing secondary market for limited partnership units,
these types of investments are generally sold at a discount to book value,
reflecting the lower market valuation generally given to investments in limited
partnerships. In contrast, market valuation of common stock is generally based
upon price/earnings ratio, book value and free cash flow.
Although a continuation of the Partnership would, in management's view,
result in a higher potential value of the Partnership's business than
liquidation, because it would allow the continued growth of Pacific Thrift's
business, it would not meet the investment objectives of the Limited Partners.
For the reasons described herein, the Partnership is no longer capable of
meeting its original investment objectives of regular distributions equal to the
Specified Annual Return Rates or withdrawal of capital upon demand. See " The
Restructuring Plan -- Changes in Business Conditions Which Necessitate
Restructuring." Therefore, the General Partner believes that a continuation of
the Partnership under the Partnership Agreement is not in the best interests of
the Limited Partners.
OTHER RESTRUCTURING PLANS. The General Partner considered various other
forms of restructuring plans. One such plan was the same as the Restructuring
Plan but without a concurrent sale of Additional Shares. That alternative would
have the advantage of not causing a dilution of the existing Partner's interests
in the Corporation. However, the market capitalization and tangible net worth of
the Corporation would not be sufficient to satisfy the listing standards of the
Nasdaq National Market, which would reduce the liquidity of an investment in
Common Stock. Therefore, the General Partner believes that the Restructuring
Plan described herein is preferable to a restructuring without a concurrent
offering of additional Common Stock and a standby purchase commitment.
FAIRNESS OPINION
The General Partner selected Houlihan, Lokey, Howard & Zukin ("Houlihan
Lokey") to review the terms of the Restructuring Plan and to provide an opinion
concerning the fairness of the consideration to be received by the Limited
Partners, collectively, in connection with the Restructuring Plan. The General
Partner selected Houlihan Lokey from a field of several valuation firms located
in the greater Los Angeles area, due to its national reputation in the field of
business restructurings. Houlihan Lokey has never had any relationship or
participated in any other transactions with the Partnership or any of its
affiliates. Houlihan Lokey did not determine or recommend the terms of the
Restructuring Plan, or the amount of consideration to be paid to the Limited
Partners, collectively, in connection with the Restructuring Plan. The General
Partner did not give any instructions to Houlihan Lokey in connection with the
review of the Restructuring Plan, and did not impose any limitation on the scope
of its review.
In a written opinion dated ____________, 199_, Houlihan Lokey stated
that, based upon the considerations set forth therein and on other factors it
deemed relevant, it was its opinion that, assuming the Restructuring Plan is
completed as proposed, the consideration to be received by the Limited Partners
collectively in connection with the Restructuring Plan is fair, from a financial
point of view. As used in its Fairness Opinion,
40
<PAGE> 53
"consideration" solely means Common Stock of the Corporation. A copy of the
opinion may be obtained by any Limited Partner upon written request directed to:
Richard B. Fremed, Presidential Mortgage Company, 21031 Ventura Boulevard,
Woodland Hills, California 91364.
EXPERIENCE OF HOULIHAN LOKEY
Houlihan Lokey is a nationally recognized provider of financial
advisory services that regularly engages in, among other things, the valuation
of businesses and their securities in connection with mergers and acquisitions,
private placements, going-private transactions, and in valuations for estate,
corporate and other purposes.
SUMMARY OF METHODOLOGY
In rendering its opinion, Houlihan Lokey made such reviews, analyses,
and inquiries as it deemed necessary and appropriate under the circumstances,
including, but not limited to, a review of the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1994 and other filings with the
Securities and Exchange Commission, a review of material agreements, meetings
with members of senior management of the Partnership to discuss operations,
financial condition, future prospects, and projected operations and performance,
visits to certain facilities and business offices of the Partnership, and review
of forecasts and projections prepared by management through 1998. In arriving
at its opinion, Houlihan Lokey did not make any physical inspection or
independent appraisal of any of the properties or assets of the Partnership.
ASSUMPTIONS
In conducting its review and arriving at its Fairness Opinion, Houlihan
Lokey relied upon and assumed the accuracy and completeness of the financial and
other information provided to it and did not attempt to independently verify
such information. Houlihan Lokey relied upon the statements and information
provided it by management of the Partnership as to the reasonableness of the
financial forecasts and projections (and the assumptions and bases therefor).
Houlihan Lokey relied upon and assumed, without independent verification, that
the financial forecasts and projections have been reasonably prepared and
reflect the best currently available estimates of the future financial results
and condition of the Partnership. For purpose of its analysis, Houlihan Lokey
assumed that there has been no material adverse change in the assets, financial
condition, business or prospects of the Partnership since the date of the most
recent financial statements made available to Houlihan Lokey.
Houlihan Lokey did not solicit third-party indications of interest
concerning the acquisition of all or any part of the Partnership or any of its
underlying assets. Houlihan Lokey did not negotiate the Restructuring Plan on
behalf of any party or provide advice or counsel to any party with respect to
the Restructuring Plan or any of the alternatives which may otherwise be
available to the Partnership or to the Limited Partners.
LIMITATIONS AND QUALIFICATIONS
Houlihan Lokey was not asked to opine on and is not expressing any
opinion as to (i) the terms of the Restructuring Plan (other than the
consideration to be received by the Partners as discussed in the Fairness
Opinion), (ii) the relative fairness of the Restructuring Plan to each
Partnership class individually, (iii) tax consequences of the Restructuring Plan
for the Limited Partners or any other party to the Restructuring Plan; or (iv)
the fairness of the Public Offering Price. Houlihan Lokey's opinion does not
address the Partnership's underlying business decision to proceed with the
Restructuring Plan and the Fairness Opinion should not be construed or
interpreted as a recommendation by Houlihan Lokey either for or against the
Restructuring Plan. Houlihan Lokey's opinion is based on business, economic,
market and other conditions as they existed on the date of the Fairness Opinion
and can be evaluated as of that date.
COMPENSATION
The Partnership agreed to pay Houlihan Lokey total fees and expenses of
approximately $165,000 for rendering the Fairness Opinion. The fee was
negotiated between the Partnership and Houlihan Lokey and payment
41
<PAGE> 54
thereof is not dependent upon completion of the Restructuring Plan. The
Partnership has not previously engaged Houlihan Lokey to render other consulting
or related services prior to the present engagement.
VOTING REQUIREMENTS
DISTRIBUTION OF SOLICITATION MATERIALS
This Proxy Statement/Prospectus, together with the Limited Partner
Ballot and the Subscription Agreement enclosed herewith constitutes the
solicitation materials to be distributed to the Limited Partners to obtain their
votes for or against the Restructuring Plan. The Solicitation Period commences
upon delivery of this Proxy Statement/Prospectus and will continue until the
later of (i) April __, 1996 or (ii) such later date as may be selected by the
General Partner in its sole discretion, not to exceed May __, 1996 (the
"Expiration Date"). Any Ballots received by U.S. Stock Transfer Corporation
prior to 11:59 p.m. on the Solicitation Period Expiration Date will be effective
provided that such Ballots have been properly completed, signed and delivered.
There will be no meeting of the Partnership to discuss the solicitation
materials or the terms of the Restructuring Plan. The General Partner intends to
actively solicit the support of the Limited Partners for the Restructuring Plan
and may, subject to applicable federal and state securities laws, hold informal
meetings with Limited Partners, answer questions about the Restructuring Plan
and the solicitation materials and explain the General Partner's reasons for
recommending the approval of the Restructuring Plan.
VOTE REQUIRED
The Partnership will not complete the Restructuring Plan unless it is
approved by Limited Partners whose Capital Contributions equal at least 51% of
the total Capital Contributions of all Limited Partners (excluding Limited
Partnership Units held by the General Partner). See "THE RESTRUCTURING PLAN --
Conditions to Completion of Restructuring Plan" for a discussion of the other
conditions precedent to the Partnership's completion of the Restructuring Plan.
Upon expiration of the Solicitation Period, the Partnership will
proceed to (a) determine whether Limited Partners holding at least 51% of the
total Capital Contributions of all Limited Partners (including Limited
Partnership Units held by the General Partner) have approved the Restructuring
Plan, (b) assess whether the conditions to the Restructuring Plan have been
satisfied or, to the extent applicable, waived by the General Partner, and (c)
if the conditions to the Restructuring Plan have been satisfied, proceed to
close the Restructuring Plan as soon as reasonably practicable following the
completion of the Solicitation Period.
VOTING PROCEDURES AND BALLOTS
Limited Partners of record on March __, 1995 (the Record Date) will
receive notice of, and be entitled to vote, with respect to the Restructuring
Plan. If Limited Partnership Units are transferred after the date the
Solicitation Period commences but before the expiration of the Solicitation
Period, and the holders of the Units are admitted as Limited Partners, the
solicitation materials will be sent to the new substitute Limited Partners along
with notice of their admission. Such substitution will terminate the right of
the prior holder of the Units to vote in connection with the Restructuring Plan.
By marking the Ballot enclosed with this Proxy Statement/Prospectus,
each Limited Partner may either vote "for," "against" or "abstain" as to the
Restructuring Plan. Any Limited Partner who fails to submit a Ballot, completes
his or her Ballot in an unintelligible manner, or votes "abstain" will be deemed
to have voted "against." Limited Partners who submit signed Ballots but fail to
make the election required by the Ballot will be deemed to have voted "for" the
Restructuring Plan.
Persons who own Limited Partnership Units through Individual Retirement
Accounts or other trust accounts must instruct the banks or other trustees of
such accounts, as the record owners of such Limited Partnership
42
<PAGE> 55
Units, of the manner in which they wish their Ballots to be voted. For this
purpose the Partnership has provided Special Instructions that each beneficial
owner must send to the bank or trustee to vote the Limited Partnership Units
held in such account in accordance with the Ballot completed by the beneficial
owner. A copy of the letter and the completed Ballot should be sent to U.S.
STOCK TRANSFER CORPORATION in the enclosed return envelope.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the Ballots will be determined by U.S.
Stock Transfer Corporation whose determination will be final and binding. The
General Partner reserves the absolute right to reject any or all Ballots that
are not in proper form or the acceptance of which, in the opinion of the General
Partner's counsel, would be unlawful. The General Partner also reserves the
right to waive any irregularities or conditions of the Ballots as to particular
Limited Partnership Units. Unless waived, any irregularities in connection with
the Ballots must be cured within such time as the General Partner shall
determine. The delivery of the Ballots will not be deemed to have been made
until such irregularities have been cured or waived.
BALLOT COMPLETION INSTRUCTIONS
Each Limited Partner is requested to complete and execute the Ballot in
accordance with the instructions contained therein. For his or her Ballot to be
effective, each Limited Partner must deliver his or her Ballot at any time on or
prior to the Solicitation Period Expiration Date. Ballots must be delivered to
U.S. Stock Transfer Corporation.
A self-addressed stamped envelope for return of the Ballot has been
included with the solicitation materials. Completed Ballots may also be
delivered to the General Partner for forwarding to U.S. Stock Transfer
Corporation. The Ballots will be effective only upon actual receipt by U.S.
Stock Transfer Corporation. The method of delivery of the Ballot to U.S. Stock
Transfer Corporation is at the election and risk of the Limited Partner, but if
such delivery is by mail it is suggested that the mailing be made sufficiently
in advance of the Solicitation Period Expiration Date to permit delivery to U.S.
Stock Transfer Corporation prior to that date.
If a Limited Partner has any questions regarding the completion of his
or her Ballot or the options available to him or her or needs an additional
Ballot, he or she should call Richard Fremed at (818) 992-8999, ext. 250.
WITHDRAWAL AND CHANGE OF ELECTION RIGHTS
Ballots may be withdrawn at any time prior to the expiration of the
Solicitation Period. For a withdrawal or change in election to be effective, the
Limited Partner must submit to U.S. Stock Transfer Corporation a second Ballot,
properly signed and completed, together with a letter indicating that the prior
Ballot has been revoked. The new Ballot and letter must specify the name of the
person having executed the Ballot to be withdrawn or election changed and the
name of the registered holder of the Limited Partnership Units in which the
Ballot applies, if different from that of the person who executed the old
Ballot.
SOLICITATION OF BALLOTS BY SOLICITING AGENT
Georgeson & Company, Inc. (the "Soliciting Agent") has entered into a
Soliciting Agent Agreement with the Partnership under which it will use its best
efforts to solicit Limited Partners to approve the Restructuring Plan. The
Soliciting Agent will be paid a fee of $15,000, plus all out-of-pocket expenses
(including telephone, mailing and legal expenses) incurred by the Soliciting
Agent. All fees and expenses of the Soliciting Agent will be treated as
solicitation expenses and shall be handled as described under the "THE
RESTRUCTURING PLAN -- Expenses of the Restructuring Plan."
The Partnership has agreed to indemnify the Soliciting Agent against
certain liabilities, including certain liabilities under the Securities Act and
state securities laws. TO THE EXTENT THAT SUCH INDEMNIFICATION PROVISIONS
PURPORT TO INCLUDE INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES
43
<PAGE> 56
ACT, IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH
INDEMNIFICATION IS CONTRARY TO PUBLIC POLICY AND, THEREFORE, UNENFORCEABLE.
TABULATION OF BALLOTS
U.S. Stock Transfer Corporation has been engaged to receive and
tabulate the Ballots. U.S. Stock Transfer Corporation has also been engaged as
the transfer agent for the Common Stock of the Corporation if the Restructuring
Plan is completed. U.S. Stock Transfer Corporation will be paid total fees of
approximately $19,000 in connection with the Restructuring, the Rights Offering
and the Public Offering.
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships of
the Partnership, the General Partner and the officers and directors of the
Corporation. Certain of these conflicts of interest are summarized below.
BENEFITS AND DETRIMENTS TO THE GENERAL PARTNER IN COMPLETING THE RESTRUCTURING
PLAN
Because the General Partner has a financial interest in completing the
Restructuring Plan, insofar as the General Partner would receive the General
Partner Warrants, there is an inherent conflict of interest in its structuring
the terms and conditions of the Restructuring Plan. The manner in which the
Restructuring Plan has been structured might have been different if structured
by persons having no financial interest in whether or not the Restructuring Plan
is completed. In addition, the General Partner currently has substantial control
over the business and affairs of the Partnership. If the Restructuring Plan is
completed, the General Partner will relinquish its control of the Partnership,
since the Corporation will be controlled by its Board of Directors, one-third of
which will be elected annually by the Stockholders. While the investors in the
General Partner will acquire Common Stock in the Corporation, such interests are
not expected, in the aggregate, to be sufficient to permit those persons to
elect members to the Board of Directors.
DIRECTORS AND OFFICERS OF THE CORPORATION
The Corporation has entered into employment agreements with six of the
executive officers of the Corporation, all of whom are current managing officers
of the Partnership and its subsidiaries. The Board of Directors of the
Corporation established the terms of compensation of the Corporation's officers
and directors, which were approved by the independent directors of the
Corporation, subject to completion of the Restructuring Plan. The executive
officers of the Corporation all are currently employees of either the General
Partner or Pacific Thrift, but none of them presently has an employment
contract. The terms of compensation of the executive officers have been
determined annually by the General Partner. Under the heading "MANAGEMENT --
Executive Officers," there is included a comparison of the salaries and bonuses
earned by the executive officers for the past three years with the salaries and
bonuses which would have been earned under the terms of the employment
agreements with the Corporation. The executive officers may receive higher
compensation than under the Partnership structure if the Corporation
substantially increases it earnings. In addition, the executive officers will
also be eligible to receive grants of stock options under a stock option plan of
the Corporation, to participate in an employee stock purchase plan of the
Corporation, and to receive benefits under a supplemental executive retirement
plan, none of which is currently offered by the Partnership. In addition, the
executive officers will continue to be eligible to participate in a 401(k)
retirement plan, which is currently offered by the Partnership. The terms of
compensation of the Corporation's officers and directors might have been
different if the initial Board of Directors had been elected by the
Stockholders.
44
<PAGE> 57
LACK OF INDEPENDENT REPRESENTATION OF LIMITED PARTNERS
The terms of the Restructuring Plan were established by the General
Partner, and the Proxy Statement/Prospectus was prepared by the General Partner
in consultation with the Partnership's legal counsel. The Partnership's legal
counsel has not represented the General Partner or the Limited Partners in
connection with the Restructuring Plan. However, legal counsel to the
Partnership receives its directions from the General Partner. Bruce P. Jeffer, a
partner of the Partnership's legal counsel, Jeffer, Mangels, Butler & Marmaro,
LLP, owns a 2.23% beneficial limited partner's interest in the General Partner.
There are inherent conflicts of interest between the General Partner
and the Limited Partners in connection with the Restructuring Plan. In
recognition of these conflicts of interest, the Partnership has obtained a
fairness opinion from Houlihan Lokey. However, due to the lack of independent
legal representation, every Limited Partner is urged to consult with his, her or
its own legal counsel in connection with the Restructuring Plan.
FIDUCIARY RESPONSIBILITY
DIRECTORS AND OFFICERS OF THE CORPORATION
The directors are accountable to the Corporation and its Stockholders
as fiduciaries and must perform their duties in good faith, in a manner believed
to be in the best interests of the Corporation and its Stockholders and with
such care, including reasonable inquiry, as an ordinarily prudent person in a
like position would use under similar circumstances. The Corporation's
Certificate of Incorporation provides that the directors will not be personally
liable to the Corporation or to any Stockholder for the breach of a fiduciary
responsibility, to the full extent that such limitation or elimination of
liability is permitted under Delaware law. The Bylaws provide that the
Corporation will indemnify its directors and officers to the full extent
permitted under the Delaware law. Pursuant to the Bylaws and Delaware law, the
Corporation will indemnify each director and officer against any liability and
related expenses (including attorneys' fees) incurred in connection with any
proceeding in which he or she may be involved by reason of serving in such
capacity so long as the director or officer acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interest of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. A director or
officer is also entitled to indemnification against expenses incurred in any
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of serving in such capacity if he or she acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the Corporation, except that no such indemnification will be made
if the director or officer is judged to be liable to the Corporation, unless the
applicable court of law determines that despite the adjudication of liability
the director or officer is reasonably entitled to indemnification for such
expenses. The Bylaws require the Corporation to advance funds to a director or
officer for costs and expenses (including attorneys' fees) incurred in a suit or
proceeding upon receipt of an undertaking by such director or officer to repay
such amounts if it is ultimately determined that he or she is not entitled to be
indemnified. The Corporation will enter into agreements with the Corporation's
directors and executive officers, indemnifying them to the fullest extent
permitted by Delaware law. Stockholders may have more limited recourse against
such persons than would apply absent these provisions. To the extent that the
foregoing provisions concerning indemnification apply to actions arising under
the Securities Act, the Corporation has been advised that, in the opinion of the
Commission, such provisions are contrary to public policy and therefore are not
enforceable. The Corporation is attempting to obtain insurance policies
indemnifying the directors and officers against certain civil liabilities,
including liabilities under the federal securities laws, which might be incurred
by them in such capacity.
GENERAL PARTNER OF THE PARTNERSHIP
Under California partnership law, the General Partner is accountable to
the Partnership as a fiduciary and is required to exercise good faith and
integrity in all its dealings in Partnership affairs. The Partnership Agreement
provides that neither the General Partner nor any of its Affiliates performing
services on behalf of the Partnership will be liable to the Partnership or any
of the Limited Partners for any act or omission by any such person if done
pursuant to advice of legal counsel employed by the General Partner on behalf of
the Partnership, or if done
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<PAGE> 58
in good faith to promote the best interest of the Partnership, provided that
such act or omission did not constitute gross negligence, willful or wanton
misconduct or failure to adhere to its fiduciary obligations to the Partnership,
or from or out of a violation of any federal or state securities laws associated
with the offer and sale of any Limited Partnership Units. As a result, Limited
Partners might have a more limited right of action in certain circumstances than
they would have in the absence of such a provision in the Partnership Agreement.
The Partnership Agreement also provides that the General Partner and
certain related parties shall be indemnified by the Partnership from any and all
liability, damage and costs (including reasonable attorneys' fees) incurred by
reason of any act performed or omitted to be performed by them in connection
with the business of the Partnership, including all such liabilities under the
state and federal securities laws, provided that no indemnity shall be provided
for acts or omissions constituting fraud, bad faith, or gross negligence.
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SELECTED FINANCIAL DATA
The following selected financial information is based upon the
financial statements of the Partnership on a consolidated basis appearing
elsewhere herein. The consolidated financial statements for the years ended
December 31, 1993 and 1994 were audited by Ernst & Young LLP ("E&Y"). [The
consolidated financial statements for the year ended December 31, 1995
will be audited by BDO Seidman LLP ("BDO").]
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income ....................................... $ 9,577 $ 11,404 $ 14,212 $ 16,827 $ 18,668
Total interest expense ...................................... 5,199 4,927 5,718 6,725 8,683
-------- -------- -------- -------- --------
Net interest income ....................................... 4,378 6,477 8,494 10,102 9,985
Total noninterest income .................................... 13,265 6,002 5,305 5,316 4,865
Provision for loan losses ................................... 3,289 6,096 4,655 3,888 2,617
Other real estate owned expense ............................. 1,212 732 3,307 1,014 881
General and administrative expense .......................... 16,062 15,164 11,705 10,367 7,517
Provision (benefit) for income taxes ........................ (1,222) 1 1 1 -0-
-------- -------- -------- -------- --------
Net income (loss) ........................................... $ (1,698) $ (9,514) $ (5,869) $ 148 $ 3,835
======== ======== ======== ======== ========
Distributions paid .......................................... -0- -0- 1,943 4,610 5,747
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets ................................................ $ 82,557 $103,747 $114,324 $120,216 $138,405
Net loans(1) ................................................ 56,486 65,056 84,755 101,405 122,628
Total deposits .............................................. 60,156 69,501 62,421 50,561 39,555
Partners' equity ............................................ 8,726 10,425 19,939 28,830 36,706
PARTNERSHIP:
SELECTED RATIOS (%)
Return on average assets .................................... (1.82)% (8.73)% (5.00)% .11% 2.77%
Return on average partners' equity .......................... (17.73)% (62.67)% (24.07)% .45% 10.13%
Net interest margin(2) ...................................... 5.79% 6.82% 8.65% 8.71% 7.57%
Noninterest expense to average assets ....................... 18.54% 14.58% 12.80% 8.80% 6.07%
Efficiency ratio(3) ......................................... 97.91% 127.38% 108.79% 73.82% 56.55%
Efficiency ratio excluding REO expense(3) ................... 91.04% 121.52% 84.82% 67.24% 50.62%
General and administrative expense to average assets ........ 17.24% 13.91% 7.78% 8.02% 5.43%
Average partners' equity to average assets .................. 10.28% 13.92% 20.79% 25.34% 27.35%
Loan originations ........................................... $170,961 $ 76,838 $ 48,612 $ 53,207 $ 60,278
ASSET QUALITY DATA:
Nonaccrual loans ............................................ $ 793 $ 3,146 $ 5,316 $ 3,253 $ 3,942
REO (net of senior liens) ................................... 2,545 5,308 4,225 6,973 4,199
Total nonperforming assets .................................. 3,338 8,454 9,541 10,226 8,141
Troubled debt restructurings ................................ 948 -0- -0- -0- -0-
Allowance for credit losses ................................. 4,229 4,307 3,122 2,646 1,821
Net loan charge offs ........................................ 3,367 4,912 4,178 3,063 1,907
ASSET QUALITY RATIOS:
Nonperforming assets to total assets ........................ 4.04% 8.15% 8.35% 8.51% 5.88%
Allowance for credit losses to net loans .................... 7.49% 6.62% 3.68% 2.61% 1.48%
Allowance for credit losses to nonaccrual loans ............. 533.29% 136.94% 58.74% 81.34% 46.19%
Net loan charge offs to average loans ....................... 5.28% 5.79% 4.12% 2.67% 1.32%
</TABLE>
47
<PAGE> 60
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
(DOLLARS IN THOUSANDS)
------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
DISTRIBUTION DATA
Distributions to Partners and -0-
Net Income (Loss) Per Unit
Class A Limited Partners(4)(5) -0- -0- 52 220 264
Net Income (Loss) Per Unit (207) (1,157) (708) 17 756
Distributions Per Unit -0- -0- 148 628 756
Class B Limited Partners -0- -0- 74 324 429
Net Income (Loss) Per Unit (207) (1,157) (708) 17 448
Distributions Per Unit -0- -0- 123 528 448
Class C Limited Partners -0- -0- 298 1,383 1,887
Net Income (Loss) Per Unit (207) (1,157) (708) 17 414
Distributions Per Unit -0- -0- 111 478 414
Class D Limited Partners -0- -0- 280 1,314 1,802
Net Income (Loss) Per Unit (207) (1,157) (708) 17 414
Distributions Per Unit -0- -0- 111 478 414
Class E Limited Partners -0- -0- 198 857 1,086
Net Income (Loss) Per Unit (207) (1,157) (708) 17 363
Distributions Per Unit -0- -0- 92 394 363
DRP Units -0- -0- 3 12 9
Net Income (Loss) Per Unit (207) (1,157) (708) 17 311
Distributions Per Unit -0- -0- 74 328 311
General Partner(6) -0- -0- 12 50 118
</TABLE>
- --------------------
(1) Net of allowances for loan loss and deferred loan fees and costs, including
loans held for sale.
(2) Net interest margin represents net interest income divided by total average
earning assets.
(3) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
(4) These amounts include income earned in the reported periods but not
distributed until 45 days after the end of each quarter and 90 days after
the end of each year, and also include interests of the General Partner(s)
in Class A, B, C and D Units.
(5) All per Unit information is reported on the basis of one Unit equalling a
$5,000 Capital Contribution.
(6) Includes distributions based on the General Partner's Interests only, not
on the Class A, B, C or D Units owned by the General Partner.
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<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Corporation has only recently been formed and, accordingly, has no
results of operations. The following discussion is intended to provide
information to facilitate the understanding and assessment of significant
changes and trends related to the financial condition of the Partnership and its
current operating subsidiaries, Pacific Thrift, CRC and LPPC.
GENERAL
The Partnership operates two business segments: (i) the real estate
lending business, which is conducted through the Partnership and Pacific Thrift
and (ii) the trust deed foreclosure services business, which is conducted
through CRC and LPPC. The Partnership reports its financial condition and
results of operations on a consolidated basis with Pacific Thrift, CRC and LPPC.
Since 1994 the primary source of operating income of the Partnership's
lending business has been fee income from origination and sale of residential
loans. This reflects a change from prior years in which the primary source of
operating income was net interest income, which is the difference between the
interest income earned on its real estate secured loan portfolio and investment
portfolio and the cost of funds, consisting primarily of interest and fees on
the Bank Loan, and interest paid on deposits issued by Pacific Thrift.
Over the past two years, Pacific Thrift's ability to originate
portfolio loans has been limited by its capital levels. In 1994, Pacific
Thrift's capital was reduced by loan losses and expenses associated with the
changes in its lending business operations. In addition, certain differences
between regulatory accounting principles and generally accepted accounting
principles in connection with sales of senior loan participation interests
resulted in a reduction of Pacific Thrift's regulatory capital levels. As a
result of these factors, Pacific Thrift's regulatory capital declined to levels
which substantially restricted new portfolio lending. However, between November
1994 and December 1995, Pacific Thrift restored its capital with fee income from
its loan sale programs, capital contributions from the Partnership and savings
from staff reductions and changes in compensation structure for loan
representatives. Management anticipates that Pacific Thrift will gradually
increase portfolio lending in 1996.
For the years ended December 31, 1994 and 1993, the Partnership
experienced consolidated net operating losses due to high loan losses caused by
substantial declines in California real estate values between 1990 and 1995. In
addition, Presidential experienced a decline in net interest income over the
past four years as a result of the steady reduction of its loan portfolio, which
has been necessary to pay down the Bank Loan. Over the past five years, the Bank
Loan had been reduced from a high of $82 million in 1990 to $6.8 million as of
December 31, 1995. The Bank Loan is required to be fully repaid by June 1997.
Management anticipates that the Bank Loan will be paid off with a combination of
interest income and principal reductions on the Presidential loan portfolio
(which had an aggregate gross principal balance of $9.2 million, net of specific
reserves of $.9 million but including loans held for sale of $3.0 million as of
December 31, 1995), sales of OREO ($.8 million at December 31, 1995, net of
senior liens) and sales of portfolio loans as necessary to augment interest and
fee income.
Management's goals for Pacific Thrift's lending business are to (i)
continue to emphasize fee income from loans originated for sale; (ii) increase
the volume of loans originated for sale in states in which Pacific Thrift has
recently commenced lending operations; (iii) expand loan operations into new
states; (iv) minimize overhead costs by operating without offices in most areas;
(v) continue to evaluate possible securitization programs; and (vi) gradually
rebuild Pacific Thrift's loan portfolio balance. See "BUSINESS -- Business
Strategy."
The primary source of operating income of the trust deed foreclosure
services business is fee income for services performed by CRC, LPPC, and CRC
Washington on behalf of other lenders, including the Partnership and Pacific
Thrift. CRC currently provides foreclosure services nationwide for over 300
banks, thrifts, mortgage companies, life insurance companies and federal
regulatory agencies. None of CRC, CRC Washington or LPPC own substantial
tangible assets or have substantial operating expenses other than general and
administrative and personnel expenses.
The Corporation's basic goal for its trust deed foreclosure services
business is to increase fee income through growth of CRC's and LPPC's customer
bases. Trust deed foreclosure services fees are limited by statute in
substantially all cases, and therefore the primary means of increasing fee
income is by increasing the volume of services provided and reducing the costs
of providing the services. CRC doubled its customer base between 1991 and 1993,
from approximately 150 to
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<PAGE> 62
300 customers. However, during the past two years, some customers have been lost
as a result of mergers and acquisitions. While many of these customers were
replaced with new accounts during the year, they were not replaced soon enough
to fully offset declines in revenues from accounts lost. Less than 5% of the
revenues of each of CRC and LPPC were provided by Presidential and Pacific
Thrift for the three years ended December 31, 1995.
FINANCIAL CONDITION
GENERAL
Total consolidated assets decreased $37.6 million to $82.6 million at
December 31, 1995 from $120.2 million at December 31, 1992, a decrease of 31.3%.
The decrease in consolidated assets during this period was due primarily to a
decrease of $46.7 million in net loans of Presidential and a $10.8 million
decrease in net loans of Pacific Thrift, for a total decrease of $57.5 million
in net loans receivable (excluding loans held for sale) to $43.9 million at
December 31, 1995 from $101.4 million at December 31, 1992.
A substantial amount of the proceeds from loan payoffs and loan sales
of Presidential have been used to pay down the Bank Loan over the past five
years. The Bank Loan has been reduced $26.6 million to $6.8 million at December
31, 1995 from $33.4 million at December 31, 1992.
Total deposits of Pacific Thrift have increased $9.6 million to $60.2
million at December 31, 1995 from $50.6 million at December 31, 1992, an
increase of 19%. Over the past 12 months, management undertook to reduce Pacific
Thrift's total deposits by $9.3 million, from a high of $69.5 million at
December 31, 1994, in order to reduce assets and reduce interest expense. Based
upon historical experience, management believes that Pacific Thrift has the
ability to further increase deposits if necessary to fund lending activities.
Total Partnership capital decreased by $20.1 million to $8.7 million at
December 31, 1995 from $28.8 million at December 31, 1992. Reductions in capital
were due to capital withdrawals of $1.4 million paid in 1993 to withdrawing
Limited Partners in accordance with the terms of the Partnership Agreement, $1.9
million in distributions paid in 1993 (which were in excess of net profits and
were therefore a return of capital) and net losses on operations of $1.7
million, $9.5 million and $5.9 million for the years ended December 31, 1995,
1994 and 1993, respectively, partially offset by $.3 million in capital
contributions in 1993. During the years ended December 31, 1995, 1994 and 1993,
the Partnership received additional requests to withdraw capital of
approximately $.3 million, $.9 million and $8.2 million, respectively, which
were not approved, in accordance with the restrictions provided in the
Partnership Agreement and the Bank Loan.
AT DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1994.
Total consolidated assets of the Partnership decreased $21.1 million
(20.4%) to $82.6 million at December 31, 1995 from $103.7 million at December
31, 1994. The decrease resulted primarily from declines in cash and cash
equivalents, loans receivable, accounts receivable, real estate acquired in
settlement of loans ("OREO") and interest receivable, offset by increases in
excess yield receivable. Loans receivable decreased by $9.1 million (17.2%), to
$43.9 million from $53.0 million, as a result of loan pay offs and loan sales.
Cash and cash equivalents decreased by $9.1 million (46.6%), to $10.5 million
from $19.6 million. Accounts receivable declined by $1.8 million (34.2%) to $3.3
million at December 31, 1995 from $5.1 million at December 31, 1994. Excess
yield receivable increased $1.8 million, (206.9%) to $2.7 million from $.9
million due to sales of loans for which Pacific Thrift receives a servicing
release fee over the life of the loans sold. See "BUSINESS -- Lending Activities
- -- Loans Originated for Sale." OREO declined by $4.5 million (58.6%), to $3.1
million at December 31, 1995 from $7.6 million at December 31, 1994, reflecting
sales of OREO. Interest receivable declined by $.2 million (19.7%), to $.9
million from $1.1 million, primarily due to the reduction of the loan portfolio.
Total liabilities decreased $19.5 million (20.9%) to $73.8 million at
December 31, 1995 from $93.3 million at December 31, 1994. The decrease resulted
from declines in notes payable, thrift certificates payable, accounts payable,
accrued expenses and interest payable and mortgages payable on OREO. Notes
payable decreased by $8 million (54.2%), to $6.8 million from $14.8 million, due
to pay down of the Bank Loan. Thrift certificates payable decreased by $9.3
million (13.4%) to $60.2 million from $69.5 million, reflecting the reduction in
total assets of Pacific Thrift. Accounts payable, accrued expenses and
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<PAGE> 63
interest payable decreased by $.4 million (7.8%), to $5.2 million from $5.6
million, primarily due to a $.4 million reduction in accrued expenses for the
environmental remediation of OREO acquired by Pacific Thrift after receiving a
lower bid for completion of the work. Mortgages payable on OREO decreased by
$1.7 million (73.6%), to $.6 million from $2.3 million, due to sale of OREO.
Total Partnership capital decreased by $1.7 million (16.3%) to $8.7
million from $10.4 million, due to consolidated net losses of $1.7 million
incurred during the year ended December 31, 1995. The consolidated net loss was
comprised of a $5.8 million net loss of Presidential, partially offset by a $3.2
million net profit after tax provision of Pacific Thrift, a $.6 million net
profit of CRC and a $.3 million net profit of LPPC.
AT DECEMBER 31, 1994 COMPARED WITH DECEMBER 31, 1993
Total consolidated assets decreased $10.6 million to $103.7 million at
December 31, 1994 from $114.3 million at December 31, 1993, a decrease of 9.3%.
The decrease in assets during the year was primarily due to reductions in the
Partnership's loans receivable and OREO, offset by an increase in cash and cash
equivalents held to maintain Pacific Thrift's required liquidity ratio.
Presidential's loans receivable declined by $21.6 million, and Pacific Thrift's
loans receivable by $9.6 million, resulting in a total decline of $31.2 million
in 1994, to $53.0 million at December 31, 1994 from $84.2 million at December
31, 1993, a net decline of 37.0%. OREO increased by $1.6 million in 1994 to $7.6
million at December 31, 1994 from $6.0 million at December 31, 1993, an increase
of 26.7%. Offsetting these declines was an increase in cash and cash
equivalents, which increased by $6.4 million in 1994, to $19.6 million at
December 31, 1994 from $13.2 million at December 31, 1993.
Total deposits of Pacific Thrift increased $7.1 million to $69.5
million at December 31, 1994 from $62.4 million at December 31, 1993, an
increase of 11.4%.
Total Partners' capital decreased $9.5 million to $10.4 million at
December 31, 1994 from $19.9 million at December 31, 1993, a decline of 47.7%.
Reductions in capital were due to a $9.5 million net operating loss for 1994.
During 1994, the Partnership received additional requests to withdraw capital of
approximately $0.9 million which were not approved, in accordance with the
restrictions provided in the Partnership Agreement and the Bank Loan.
AT DECEMBER 31, 1993 COMPARED WITH DECEMBER 31, 1992
Total consolidated assets decreased $5.9 million to $114.3 million at
December 31, 1993 from $120.2 million at December 31, 1992, a decrease of 4.9%.
The decrease in assets during the year was primarily due to reductions in the
Partnership's loans receivable and OREO, offset by an increase in cash and cash
equivalents held to maintain Pacific Thrift's required liquidity ratio.
Presidential's loans receivable declined by $17.7 million, while Pacific
Thrift's loans receivable increased by $.5 million, resulting in a net decline
of $17.2 million in 1993, to $84.2 million at December 31, 1993 from $101.4
million at December 31, 1992, a net decline of 17.0%. OREO declined by $3.5
million in 1993 to $6.0 million at December 31, 1993 from $9.5 million at
December 31, 1992, a decline of 36.8% Offsetting these declines was an increase
in cash and cash equivalents, which increased by $12.7 million in 1993, to $13.2
million at December 31, 1993 from $0.5 million at December 31, 1992.
Total deposits of Pacific Thrift increased $11.8 million to $62.4
million at December 31, 1993 from $50.6 million at December 31, 1992, an
increase of 23.3%.
Total Partners' capital decreased $8.9 million to $19.9 million at
December 31, 1993 from $28.8 million at December 31, 1992, a decline of 30.9%.
Reductions in capital were due to capital withdrawals of $1.4 million paid to
withdrawing Limited Partners in accordance with the terms of the Partnership
Agreement, $1.9 million in distributions, capital contributions of $.3 million
and a $5.9 million net operating loss for 1993. During 1993, the Partnership
received additional requests to withdraw capital of approximately $8.2 million
which were not approved, in accordance with the restrictions provided in the
Partnership Agreement and the Bank Loan.
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RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following table sets forth certain information concerning average
interest-earning assets and interest bearing liabilities and the yields and
rates thereon. Average balances are calculated on a quarterly basis and
nonaccrual loans have been included in interest earning assets for the
computations. Fee income on loans included in interest income and in the
calculation of average yields was $.7 million, $1.7 million and $2.7 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
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YIELDS AND RATES ON INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $63,711 $ 8,885 13.95% $ 84,776 11,003 12.98%
Interest-bearing deposits in
other financial institutions
and securities purchased under
agreements to sell 11,852 692 5.84% 10,138 401 3.96%
------- ------- ----- -------- ------ -----
Total interest-earning assets 75,563 9,577 12.67% 94,914 11,404 12.02%
======= ======= ====== ======== ====== =====
Noninterest-earning assets:
Cash and due from banks 5,536 3,782
Premises & equipment, net 1,483 1,452
Real estate acquired in settlement 5,322 6,276
of loans
Other Assets 5,290 6,734
------- --------
Total noninterest-earning assets 17,631 18,244
------- --------
Less allowance for loan losses 3,911 3,085
------- --------
89,283 9,577 110,073 11,404
======= ======= ======== ======
Liabilities & Partners' Capital
Interest-bearing liabilities:
Notes payable 12,601 1,379 10.94% 18,734 1,982 10.58%
Savings deposits 13,322 718 5.39% 23,867 904 3.79%
Time CDs 50,031 3,102 6.20% 44,241 2,041 4.61%
------- ------- ----- -------- ------ -----
Total interest-bearing liabilities 75,954 5,199 6.84% 86,842 4,927 5.67%
======= ======= ===== ======== ====== =====
Noninterest-bearing liabilities:
Accounts payable & accrued
expenses 3,123 8,047
------- --------
Total liabilities 79,077 94,889
Partners' Capital 10,206 15,184
------- ------- -------- ------
$89,283 5,199 $110,073 4,927
======= ======= ======== ======
Net interest income/spread 4,378 5.83% 6,477 6.34%
======= ===== ====== =====
Net interest margin 5.79% 6.82%
Net Income (loss) (1,698) (9,514)
======= ======
Average interest earning assets to 0.995% 1.093%
average interest bearing liabilities
</TABLE>
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Interest income and interest expense can fluctuate widely based on
changes in the level of interest rates in the economy. Pacific Thrift attempts
to minimize the effect of interest rate fluctuations on net interest margins by
matching as nearly as possible interest sensitive assets and interest sensitive
liabilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Asset/Liability Management."
Net interest income can also be affected by a change in the composition
of assets and liabilities, such as when higher yielding loans replace lower
yielding loans. Net interest income is affected by changes in volume and changes
in rates. Volume changes are caused by differences in the level of earning
assets and interest-bearing liabilities. Rate changes result from differences in
yields earned on assets and rates paid on liabilities.
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities due to changes in volume and interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume; (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume which cannot be segregated, have been
allocated proportionately to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
Rate Volume Analysis
--------------------
(Dollars in Thousands)
1995 compared to 1994 1994 compared to 1993
Increase (decrease) Increase (decrease)
due to change in due to change in
------------------------------------------------------------------
Volume Yield/ Net Volume Yield/ Net
Rate Change Rate Change
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2,891) 773 (2,118) (1,821) (1,385) (3,206)
Interest-bearing deposits in
other financial institutions and
securities purchased under
agreements to sell 76 215 291 399 (1) 398
------ ------ ------ ------ ------ ------
Total interest-earning assets (2,815) 988 (1,827) (1,422) (1,386) (2,808)
====== ====== ====== ====== ====== ======
Liabilities & Partners' Capital
Interest-bearing liabilities:
Notes payable (669) 66 (603) (1,243) 728 (515)
Savings deposits (485) 299 (186) 734 10 744
Time Cds 293 768 1,061 (382) (638) (1,020)
------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities (861) 1,133 272 (891) 100 (791)
====== ====== ====== ====== ====== ======
Change in net interest income (1,954) (145) (2,099) (531) (1,486) (2,017)
====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE> 67
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL
The Partnership incurred a net loss of $1.7 million for the year ended
December 31, 1995, compared with a net loss of $9.5 million for the year ended
December 31, 1994. Net losses for 1995 were $2.9 million before tax provision
and $1.7 million after tax provision, reflecting a tax benefit due to Pacific
Thrift's net operating loss carryforwards of $1.2 million. Pacific Thrift has a
remaining net operating loss carryforward of $4.0 million as of December 31,
1995, which may be used to offset tax liability on future taxable income of the
Corporation. However, management believes that it is likely that future use of
the remaining net operating loss carryforward will be limited to approximately
$.4 million per year until 2002 as a result of the anticipated change of
ownership of the Corporation following the Restructuring Plan. The reduction in
the net operating loss in 1995 compared to 1994 was due primarily to increases
in noninterest income and decreases in noninterest expenses from 1994.
NET INTEREST INCOME
Net interest income before provision for loan losses decreased by $2.1
million (32.4%), to $4.4 million for the year ended December 31, 1995 compared
to $6.5 million for the year ended December 31, 1994, as a result of the
reduction in total interest income and increase in total interest expense.
TOTAL INTEREST INCOME
Total interest income decreased by $1.8 million (16%), to $9.6 million
for 1995 compared to $11.4 million for 1994, due to reductions in the loan
portfolio as assets were reduced to improve capital ratios in Pacific Thrift and
pay down the Bank Loan at Presidential.
TOTAL INTEREST EXPENSE
Total interest expense increased by $.3 million (5.5%), to $5.2 million
for 1995 compared to $4.9 million for 1994, due to higher market interest rates
paid on thrift certificates by Pacific Thrift, which offset lower levels of
deposits and a reduction in the Bank Loan.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $3.3 million for the year ended
December 31, 1995, compared to $6.1 million for the year ended December 31,
1994. The total allowance for loan losses was $4.2 million at December 31, 1995,
compared with $4.3 million at December 31, 1994, reflecting sales and payoffs of
loans as to which reserves had previously been taken and improvements in status
in some portfolio loans.
The calculation of the adequacy of the allowance for loan losses is
based on a variety of factors, including loan classifications and underlying
loan collateral values, and is not directly proportional to the level of
nonperforming loans. See "BUSINESS -- Classified Assets and Nonperforming Loans
- -- Allowance for Loan Losses." The ratio of nonaccrual loans past due 90 days or
more to total loans was 1.62% at December 31, 1995, compared to 5.35% at
December 31, 1994. The ratio of the allowance for loan losses to nonaccrual
loans past due 90 days or more was 533.29% at December 31, 1995, compared to
136.94% at December 31, 1994.
NONINTEREST INCOME
Total noninterest income increased by $7.3 million (121%), to $13.3
million for the year ended December 31, 1995 compared to $6.0 million for the
year ended December 31, 1994, due to increases in gains on sale of loans by
Pacific Thrift. Gains on sale of loans increased by $8.0 million (840.3%), to
$8.9 million for 1995 compared to $.9 million for 1994. Pacific Thrift sold a
total of $155.4 million of loans during 1995, for a total gain on sale of $8.9
million. These sales included $144.9 million of securitizable loans, for a gain
on sale of $8.6 million, $8.5 million of portfolio loans, for a gain on sale of
$.2 million and $2.0 million of home improvement
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loans, sold at a gain of $.1 million. Other income decreased by $.6 million
(34.4%), to $1.1 million for 1995 compared to $1.9 million for 1994, due to
lower revenues of CRC and LPPC.
NONINTEREST EXPENSE
Noninterest expense increased by $1.4 million (8.7%), to $17.3 million
for 1995 compared to $15.9 million for 1994. Increases in noninterest expense
were primarily due to increases in salaries, employee benefits and personnel
services and operations of OREO, partially offset by declines in general and
administrative expenses. General and administrative expenses decreased by $.8
million (11.5%) to $6.3 million for 1995 compared to $7.1 million for 1994.
Salaries, employee benefits and personnel services increased by $1.4 million
(21.0%) to $7.9 million for 1995 compared to $6.5 million for 1994. Expenses on
OREO decreased by $.7 million (58.0%) to $.5 million for 1995 compared to $1.2
million for 1994. The Partnership recognized net losses on sales of OREO of $.7
million for 1995 and net gains of $.4 million for 1994.
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL
The Partnership incurred a net loss of $9.5 million for the year ended
December 31, 1994, compared with a net loss of $5.9 million for the year ended
December 31, 1993. The increase in net loss in 1994 from 1993 was due primarily
to a $3.4 million decline in net interest income after provision for loan losses
to $.4 million in 1994 from $3.8 million in 1993, and a $.9 million increase in
non-interest expense to $15.9 million in 1994 from $15.0 million in 1993,
partially offset by a $.7 million increase in non-interest income.
NET INTEREST INCOME
Net interest income before provision for loan losses for the year ended
December 31, 1994 was $6.5 million, a decrease of $2.0 million from the year
ended December 31, 1993. This decrease resulted primarily from the decrease in
average interest earning assets, which declined by $3.3 million, or 3.4%, to
$94.9 million in 1994 from $98.2 million in average interest earning assets in
1993.
TOTAL INTEREST INCOME
Total interest income decreased $2.8 million, or 19.7%, to $11.4
million in 1994 from $14.2 million in 1993 due to the reduction of $3.3 million
in average interest earning assets.
TOTAL INTEREST EXPENSE
Total interest expense decreased $0.8 million to $4.9 million in 1994
from $5.7 million in 1993. The decline in interest expense was due primarily to
a substantial reduction in the Bank Loan balance, which was partially offset by
an increase in deposits, principally time certificates of deposit, issued by
Pacific Thrift at lower rates of interest than the rate payable on the Bank
Loan.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $6.1 million in 1994 compared with
$4.6 million in 1993. The provision for loan losses remained high in 1994 and
1993 due to the continuing high levels of loan delinquencies and declines in
California real estate values over the past five years. The total allowance for
loan losses has increased as a percentage of the total loan portfolio to 7.33%
of the combined portfolio at December 31, 1994 compared with 3.49% of the
combined portfolio at December 31, 1993. New policies and procedures were
initiated by Pacific Thrift in 1993, which included obtaining new outside
appraisals for most delinquent loans when the most recent outside appraisal was
over six months old. In the last quarter of 1993, new management was hired for
Pacific Thrift, and it determined to make changes in the method of determining
the allowance for loan losses, which resulted in significant adjustments to the
provision for loan loss in the fourth quarter of 1993. In 1994, management
56
<PAGE> 69
of the Partnership conducted a further review of its portfolio, which included
review appraisals of many properties. As a result, a substantial adjustment to
the provision for loan losses of the Partnership was made in the fourth quarter
of 1994. See "BUSINESS -- Classified Assets and Loan Losses."
The ratio of nonaccrual loans past due 90 days or more to total loans
was 5.35% at December 31, 1994 and 5.98% at December 31, 1993. The ratio of the
allowance for loan losses to nonaccrual loans past due 90 days or more was
136.94% at December 31, 1994 and 58.74% at December 31, 1993.
NONINTEREST INCOME
Noninterest income increased by $0.7 million to $6.0 million in 1994
compared to $5.3 million in 1993. Noninterest income was primarily provided by
trustee and reconveyance fees earned by CRC and LPPC. Trustee and reconveyance
fees decreased by $0.5 million in 1994 to $3.3 million in 1994 compared to $3.8
million in 1993, due to a reduction in loan default levels in 1994.
Gain on sale of loans increased by $0.8 million (800%) in 1994, to $0.9
million in 1994 from $0.1 million in 1993. The increase is the result of an
increase in originations of loans for sale in 1994. A total of $58 million in
loans were sold in 1994, including $29.6 million of loans originated for sale by
Pacific Thrift.
NONINTEREST EXPENSE
Noninterest expense increased by $0.9 million to $15.9 million in 1994
from $15.0 million in 1993. The major components of this increase included a
$1.4 million increase in salaries and employee benefits, a $1.6 million increase
in general and administrative expenses and a $.5 million increase in
depreciation and amortization, offset by a decrease of $2.6 million in operation
of OREO. The increase in salaries and benefits was due to increased staffing at
Pacific Thrift in 1994 and reduced deferred loan origination costs pursuant to
FASB 91. The increase in general and administrative expenses was due to
increased professional fees.
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
GENERAL
The Partnership incurred a net operating loss of $5.9 million for 1993,
compared with net income of $.1 million for 1992. The net loss in 1993 was due
primarily to a $2.4 million decline in net interest income after provision for
loan losses to $3.8 million in 1993 from $6.2 million in 1992, and a $3.6
million increase in non-interest expense to $15.0 million in 1993 from $11.4
million in 1992.
NET INTEREST INCOME
Net interest income before provision for loan losses for 1993 was $8.5
million, a decrease of $1.6 million from 1992. This decrease resulted primarily
from the decrease in average interest earning assets, which declined by $17.7
million, or 15.3%, to $98.2 million in 1993 from $115.9 million in average
interest earning assets in 1992.
TOTAL INTEREST INCOME
Total interest income decreased $2.6 million, or 15.5%, to $14.2
million in 1993 from $16.8 million in 1992 due to reductions in loans
receivable. Reductions in Presidential's loans receivable were partially offset
by increases in Pacific Thrift's average loans receivable to $57.3 million in
1993 from $50.6 million in 1992. Although there was no increase in interest
rates on loans made in 1993, loans that paid off in 1993 were at lower average
interest rates than existing loans that did not pay off in 1993, resulting in a
higher average rate of interest on the average portfolio in 1993.
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<PAGE> 70
TOTAL INTEREST EXPENSE
Total interest expense decreased $1.0 million to $5.7 million in 1993
from $6.7 million in 1992. The decline in interest expense was due primarily to
a substantial reduction in the Bank Loan balance, which was partially offset by
an increase in deposits, principally time certificates of deposit, issued by
Pacific Thrift at lower rates of interest than the rate payable on the Bank
Loan.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.7 million in 1993 compared with
$3.9 million in 1992. The provision for loan losses remained high in 1993 and
1992 due to the continuing high levels of loan delinquencies and declines in
California real estate values. The total allowance for loan losses increased as
a percentage of the total loan portfolio to 3.49% of the combined portfolio at
December 31, 1993 compared with 2.49% of the combined portfolio at December 31,
1992. New policies and procedures were initiated by Pacific Thrift in 1993,
which included obtaining new outside appraisals for most delinquent loans when
the most recent outside appraisal was over six months old. In the last quarter
of 1993, new management was hired for Pacific Thrift, and it determined to make
changes in the method of determining the allowance for loan losses, which
resulted in significant adjustments to the provision for loan loss in the fourth
quarter of 1993. "BUSINESS -- Classified Assets and Loan Losses."
The ratio of nonaccrual loans past due 90 days or more to total loans
was 5.94% and 3.06% at December 31, 1993 and 1992, respectively. The ratio of
the allowance for loan losses to nonaccrual loans past due 90 days or more was
58.74% and 81.34% at December 31, 1993 and 1992, respectively.
NONINTEREST INCOME
Noninterest income remained unchanged at $5.3 million in 1993 and in
1992. Noninterest income was primarily provided by trustee and reconveyance fees
earned by CRC and LPPC in 1993. Trustee and reconveyance fees increased by $.7
million in 1993 to $3.8 million in 1993 compared to $3.1 million in 1992.
Trustee and reconveyance fee income increased due to generally higher loan
default levels in California in 1992 and 1993 and increases in the customer
bases of CRC and LPPC.
The increase in trustee and reconveyance fee income was offset by
decreases in other income and gain on sale of home improvement loans. Gain on
sale of home improvement loans decreased to $15,177 from $.4 million in 1992.
The decrease in gain on sale of home improvement loans was due to the
discontinuation of the home improvement loan division in March 1993, which
management determined was necessary because of the lack of resources available
to support the volume expansion of the program necessary to make it profitable.
NONINTEREST EXPENSE
Noninterest expense increased by $3.6 million to $15.0 million in 1993
from $11.4 million in 1992. The major components of this increase included a
$1.4 million increase in salaries and employee benefits, a $1.8 million increase
in expenses on operation of OREO and a $.5 million increase in net loss on sale
of OREO. The increase in salary and employee expenses is due to a reduction in
loan originations in 1993, which reduced the amount of employee expenses which
could be deferred under FASB 91 over the life of loans originated in 1993.
Therefore, although the total amount of salaries and benefits paid in 1993
declined by $.1 million from 1992, the Partnership recognized $1.3 million more
in expense in 1993. Similar costs had been deferred in 1992. The increase in
expenses on operation of OREO was due to an increase in the number of properties
acquired and held as OREO.
In 1993, the general partner of the Partnership voluntarily reduced the
base compensation it receives for providing personnel services to Presidential
and Pacific Thrift from 35% of loan origination fees to 30% of such fees, which
resulted in a reduction of $.1 million in 1993 from the amount that otherwise
would have been paid to the General Partner.
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<PAGE> 71
LIQUIDITY AND CAPITAL RESOURCES
Neither Presidential nor any of its subsidiaries other than Pacific
Thrift maintain significant cash and cash equivalent assets. The primary source
of Pacific Thrift's liquidity is the cash and cash equivalents maintained by
Pacific Thrift in connection with its deposit-taking and lending activities. At
December 31, 1995, cash and cash equivalent assets totalled $10.5 million,
compared with $19.6 million at December 31, 1994.
At December 31, 1995, neither Presidential nor Pacific Thrift had
material outstanding commitments to fund loans. Certificates of deposit which
are scheduled to mature in one year or less from December 31, 1995 totalled
$35.2 million. Based upon historical experience, management believes that a
significant portion of such deposits may be renewed to the extent deemed
desirable by management. In general, depositors have historically tended to
renew deposits when the rates paid on such deposits remain competitive with
rates offered by comparable financial institutions. However, from time to time
during 1994 and 1995, management of Pacific Thrift has intentionally taken steps
to reduce deposit renewals in order to reduce the total amount of deposits.
These steps include reducing the interest rates offered on maturing deposits and
declining to renew certain large deposits.
Presidential's primary sources of funds are principal and interest
payments on loans, substantially all of which have been used to pay down the
Bank Loan and pay expenses since July 1993. Pacific Thrift's primary sources of
funds are deposits, principal and interest payments on loans and gains on sales
of loans. Gains on sales of loans cannot be predicted with certainty, because
they depend on new loan originations, which are subject to fluctuation. While
scheduled principal amortization on loans and deposit flows are a reasonably
predictable source of funds, mortgage loan prepayments are greatly influenced by
the level of interest rates, economic conditions and competition.
The primary lending and investment activities of Presidential and
Pacific Thrift are the origination of fixed and adjustable rate real estate
loans. Since November 1991, substantially all new loans (other than loan
rewrites of existing loans) have been originated by Pacific Thrift. Effective
January 1, 1994, Pacific Thrift began to invest in short-term investment
securities, primarily federal funds sold and U.S. Treasury Notes, which provides
income from those assets required for liquidity. The levels of these assets
depend on Pacific Thrift's operating, financing, lending and investing
activities during any given period.
For the past four years, Presidential has reduced its lending
activities as a result of the need to reduce its borrowings under the Bank Loan.
Beginning in 1991, Presidential began to pay down the Bank Loan, which has been
reduced by $26.6 million to $6.8 million at December 31, 1995 from $33.4 million
at December 31, 1992. Pacific Thrift has increased its lending activities over
the same period, including primarily loans originated for sale in 1994 and 1995,
which are funded with loan sale proceeds.
Pacific Thrift maintains minimum levels of liquid assets as required
under the liquidity policy adopted by the board of directors of Pacific Thrift.
The relationship between short-term liquid assets and total deposits at December
31, 1995 was 31.7%, which exceeded the 10% minimum established by the board. At
December 31, 1994 and 1993, the liquidity ratio was 26.9% and 20.5%,
respectively.
On December 1, 1995, Pacific Thrift obtained from First Interstate Bank
of California a federal funds credit line, bearing interest at the federal funds
rate as announced from time to time by the Federal Reserve Board, in the amount
of $2.5 million, which was increased to $3.5 million on January 3, 1996. The
line is intended to support short term liquidity, and is not expected to be used
for more than ten consecutive days or more than 12 times during any 30 day
period.
Pacific Thrift is subject to certain leverage and risk-based capital
adequacy standards applicable to FDIC-insured institutions. At December 31,
1994, Pacific Thrift was classified by the FDIC as "undercapitalized." However,
by March 31, 1995, Pacific Thrift was reclassified by the FDIC as "adequately
capitalized." As of December 31, 1995, Pacific Thrift's regulatory capital
levels have increased to levels meeting the FDIC's definition of "well
capitalized;" however, due to the existence of the 1995 Order requiring Pacific
Thrift to maintain certain
59
<PAGE> 72
capital levels, it is classified as "adequately capitalized." See "SUPERVISION
AND REGULATION -- Federal Law -- Capital Standards."
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that same time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would generally tend to adversely affect net
interest income while a positive gap would generally tend to result in an
increase in net interest income. During a period of declining interest rates, a
negative gap would generally tend to result in increased net interest income
while a positive gap would generally tend to adversely affect net interest
income. At December 31, 1995, total interest-earning assets maturing or
repricing during each period exceeded total interest-bearing liabilities
maturing or repricing in the same periods by $1.7 million, representing a
cumulative interest rate sensitivity gap ratio of 3.0%. However, because
interest rates for different asset and liability products offered by depository
institutions respond differently to changes in the interest rate environment,
the gap is only a general indicator of interest rate sensitivity.
Presidential does not actively originate new loans, and has not done so
in approximately four years. Therefore, Presidential does not actively monitor
its interest rate risk at this time.
Pacific Thrift actively monitors its interest rate risk. Pacific Thrift
has an asset/liability committee which includes its President, Chief Financial
Officer and Deposit Operations Manager. The committee meets regularly to review
Pacific Thrift's interest rate risk position and make whatever adjustments are
necessary. In addition, the board of directors of Pacific Thrift reviews its
asset/liability position on a quarterly basis.
To the extent consistent with its interest rate spread objectives,
Pacific Thrift attempts to reduce its interest rate risk and has taken a number
of steps to match its interest sensitive assets and liabilities to minimize the
potential negative impact of changing interest rates. Pacific Thrift has focused
on making adjustable rate loans, virtually all of which adjust quarterly, and
focuses its investment activity on short-term obligations of banks and U.S.
government securities.
The following table sets forth the interest rate sensitivity of Pacific
Thrift's assets and liabilities at December 31, 1995 on the basis of certain
assumptions. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature during a particular period were determined in accordance
with the earlier of the repricing timing or contractual term of the asset or
liability. Pacific Thrift has assumed that its savings accounts, which totalled
$24.3 million at December 31, 1995 reprice immediately. Certificates of deposit
are included in the table below at their dates of maturity.
Certain shortcomings are inherent in the method of analysis presented
in the following table. For example, interest rate floors on some adjustable
rate loans can have the effect of increasing the net interest income as interest
rates decline or, conversely, limiting net interest income as interest rates
rise. Also, loan prepayments and early withdrawal of certificates of deposit
could cause the interest sensitivities to vary from what appears in the table.
Finally, the ability of many borrowers to service their adjustable rate debt may
be adversely affected by an interest rate increase.
60
<PAGE> 73
INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
After
Assets or Liabilities Which 1 Day 3 Months Six Months 1-5 5
Mature or Reprice to 3 Months to 6 Months to 1 Year Years Years Total
- --------------------------- ----------- ----------- ---------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Cash and Investments ................. 9,506,287 0 0 0 0 9,506,287
Variable Rate Loans Receivable ....... 36,479,178 942,408 192,872 901,850 4,264,215 42,780,523
Loans Held for Sale (1) .............. 9,577,341 0 0 0 0 9,577,341
Interest-earning assets ............ 55,562,806 942,408 192,872 901,850 4,264,215 61,864,151
Certificates of deposit .............. 12,722,796 13,439,390 9,084,164 635,000 0 35,881,350
Savings accounts ..................... 24,274,630 0 0 0 0 24,274,630
Interest-bearing liabilities ....... 36,997,426 13,439,390 9,084,164 635,000 0 60,155,980
Interest rate sensitivity gap ........ 18,565,380 (12,496,982) (8,891,292) 266,850 4,264,215 1,708,171
Cumulative interest rate
sensitivity gap ...................... 18,565,380 6,068,398 (2,822,894) (2,556,044) 1,708,171 1,708,171
Interest rate sensitivity ratio (2) .. 1.50 0.07 0.02 1.42 0.00 1.03
Cumulative interest rate
sensitivity gap ratio (3) ............ 0.33 0.11 -0.05 -0.04 0.03 0.03
</TABLE>
(1) Includes pre-approved loans sold at each month end, for which cash has
not yet been received.
(2) The interest rate sensitivity gap ratio represents total
interest-earning assets divided by total interest-bearing liabilities.
(3) The cumulative interest rate sensitivity gap ratio represents the
cumulative interest rate sensitivity gap divided by total
interest-earning assets.
EFFECT OF FEDERAL LAWS AND REGULATIONS
Pacific Thrift's operating results are impacted by Federal laws and
regulations. See "SUPERVISION AND REGULATION."
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of operations of the Partnership and its subsidiaries.
Like most mortgage companies and industrial loan companies, nearly all the
assets and liabilities of the Partnership and Pacific Thrift are monetary. As a
result, interest rates have a greater impact on the Partnership's consolidated
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
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<PAGE> 74
EFFECT OF NEW ACCOUNTING STANDARDS
In December 1991, the Financial Accounting Standards Board (FASB)
issued its Statement of Financial Accounting Standards No. 107 ("SFAS 107")
"Disclosures About Fair Value of Financial Instruments." SFAS 107 requires all
entities to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the statement of financial
condition, for which it is practicable to estimate fair value. SFAS 107 is
effective for fiscal years ending after December 15, 1995, for entities with
less than $150 million in total assets, as of its December 1991 issuance date.
The adoption of SFAS 107 did not have a material impact on the Partnership's
financial statements for the year ended December 31, 1995, and is not expected
to have a material impact on the Corporation's financial statements.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 applies to all loans except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or a lower of cost or fair value,
leases, and debt securities as defined in SFAS No. 115. SFAS No. 114 requires
that impaired loans be valued at the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair market value of the collateral
if the loan is collateral dependent. SFAS No. 114 is effective for fiscal years
beginning after December 15, 1994, with earlier adoption encouraged. SFAS No.
114 applies primarily to the Partnership's combined mortgage loan portfolio.
Presidential and Pacific Thrift actively monitor this portfolio and evaluate the
net realizable value of any loan which is deemed to be impaired. Net realizable
value is assessed based upon current appraised value of the underlying
collateral. If carrying value exceeds this estimated realizable value, carrying
value is reduced to the estimated realizable value by a charge to earnings. As
such, SFAS No. 114 does not represent a material change from the Partnership's
and Pacific Thrift's current accounting practices and management does not expect
implementation of SFAS No. 114 to have any material effect on the reported
financial results of the Corporation.
In October, 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS
No. 118 amends Statement No. 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans and also amends the disclosure
requirements of Statement No. 114 to require information about the recorded
investment in certain impaired loans and about how a creditor recognizes
interest income related to these impaired loans. SFAS No. 118 is effective
concurrent with the effective date of Statement 114, that is, for financial
statements for fiscal years beginning after December 15, 1994. As with Statement
No. 114, management believes it is following the requirements of SFAS No. 118.
In March, 1995, the FASB used SFAS No. 121 "Accounting for the
impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of."
SFAS 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset.
This Statement is effective for financial statements for fiscal years
beginning after December 15, 1995. Earlier application is encouraged.
Restatement of previously issued financial statements is not permitted.
Impairment losses resulting from the application of this Statement should be
reported in the period in which the recognition criteria are first applied and
met. The initial application of this Statement to assets that are being held for
disposal at the date of adoption should be reported as the cumulative effect of
a change in accounting principle. Management does not believe that the adoption
of SFAS 121 will have a material impact on the Corporation's financial
statements.
In May, 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65." SFAS No. 122 requires
that a mortgage banking enterprise recognize as separate
62
<PAGE> 75
assets rights to service mortgage loans for others, however those servicing
rights are acquired. A mortgage banking enterprise that acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells or securitizes those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values if it is practicable to estimate those fair values. If it is not
practicable to estimate the fair values of the mortgage servicing rights and the
mortgage loans (without the mortgage servicing rights), the entire cost of
purchasing or originating the loans should be allocated to the mortgage loans
(without the mortgage servicing rights) and no cost should be allocated to the
mortgage servicing rights.
This Statement requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. A mortgage banking enterprise should stratify its mortgage
servicing rights that are capitalized after the adoption of this Statement based
on one or more of the predominant risk characteristics of the underlying loans.
Impairment should be recognized through a valuation allowance for each impaired
stratum.
This Statement applies prospectively in fiscal years beginning after
December 15, 1995, to transactions in which a mortgage banking enterprise sells
or securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of this Statement. Earlier application is
encouraged. Retroactive capitalization of mortgage servicing rights retained in
transactions in which a mortgage banking enterprise originates mortgage loans
and sells or securitizes those loans before the adoption of this Statement is
prohibited. Based on management's belief that no material amount of portfolio
loans will be sold for the foreseeable future, management does not believe that
the adoption of SFAS 122 will have a material impact on the Corporation's
financial statements.
In October 1995, the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a method of accounting for
stock compensation plans based on fair value of grants made under such plans on
the date of grant using certain option-pricing models. SFAS No. 123 allows
companies to continue to account for their stock option plans in accordance with
APB Opinion 25 "Accounting for Stock Issued to Employees," which provides for an
intrinsic valuation model that recognizes only the difference between the fair
market value of a company's stock and the price paid to acquire the stock under
the stock compensation plan. However, SFAS No. 123 encourages the adoption of
the fair value accounting method. Companies electing not to follow the new fair
value based method are required to provide expanded footnote disclosures,
including pro forma net income and earnings per share, determined as if the
company had applied the new method. SFAS No. 123 is required to be adopted
prospectively beginning January 1, 1996. Management intends to account for
grants under the Company's stock option plan under the intrinsic value method
allowed under APB Opinion 25 and to provide the footnote disclosure required by
SFAS No. 123 in its financial statements beginning in 1996.
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<PAGE> 76
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE CORPORATION
The following unaudited pro forma consolidated financial statements
give effect to the Restructuring Plan. The unaudited pro forma consolidated
balance sheet is presented on the basis that the Restructuring Plan took place
on December 31, 1995. The unaudited pro forma consolidated statement of
operations is presented on the basis that the Restructuring Plan was consummated
as of January 1, 1995.
These unaudited pro forma consolidated financial statements should be
read in conjunction with the historical consolidated financial statements and
the related notes thereto of Presidential Mortgage Company and Subsidiaries
included in this Proxy/Prospectus Statement.
The unaudited pro forma consolidated statement of operations is not
necessarily indicative of the operating results which would have been achieved
by the Corporation had the Restructuring Plan been consummated as of January 1,
1995 and should not be construed as representative of future operating results
or financial position of the Corporation.
The direct costs incurred in connection with effecting the
Restructuring Plan are period costs to be charged to operations as incurred. The
specific incremental costs directly attributable to the raising of additional
capital in the Rights Offering and the Public Offering are deferred and charged
against the gross proceeds of the offerings.
The unaudited pro forma consolidated balance sheet assumes that 830,000
shares of common stock of the Corporation are exchanged for the assumed
$8,300,000 of Net Tangible Equity of the Partnership, that 200,000 shares of
Common Stock of the Corporation are sold in the Rights Offering for $10.00 per
share, that 40,000 Subscriber Warrants are issued to subscribers in the Rights
Offering and that 620,000 shares of common stock of the Corporation are sold in
the Public Offering for $10.00 per share.
The pro forma Primary and Fully Diluted Weighted Average Common Shares
Outstanding at December 31, 1995 assumes that 1,650,000 shares of Common Stock
of the Corporation were outstanding for the entire year.
Pro forma Fully Diluted Earnings Per Share assumes the exercise of all
outstanding Subscriber Warrants, the Bank Warrant, the General Partner Warrants,
and shares issuable under incentive stock options granted pursuant to the
Corporation's 1995 Stock Option - See "MANAGEMENT - 1995 Stock Option Plan."
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<PAGE> 77
PRO FORMA BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
ASSETS BALANCE ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Cash & cash equivalents $10,489,000 (1) $ 7,427,000 $15,626,000
(2) (1,290,000)
(3) (1,000,000)
(4) (385,000)
(5) 385,000
Accounts receivable 3,337,000 0 3,337,000
Accrued interest receivable 903,000 0 903,000
Loans receivable 43,908,000 0 43,908,000
Loans held for sale 12,577,000 0 12,577,000
Excess yield receivable 2,725,000 0 2,725,000
Other real estate 3,156,000 0 3,156,000
Receivable from related party 347,000 0 347,000
Property and equipment, net 1,398,000 0 1,398,000
Goodwill 1,808,000 0 1,808,000
Other assets 1,909,000 (4) 0 1,909,000
----------- ----------- -----------
$82,557,000 5,137,000 87,692,000
LIABILITIES AND OWNERS'
EQUITY
Liabilities:
Thrift certificates payable $60,156,000 $ 0 $60,156,000
Accounts payable and accrued 4,291,000 (2) ($170,000) $ 4,163,000
expenses
Partnership withdrawals payable 1,120,000 (2) (1,120,000) 0
Notes payable 6,771,000 (3) (1,000,000) 5,771,000
Mortgages payable 611,000 0 611,000
Payable to general partner 881,000 (4) (385,000) 496,000
----------- ----------- -----------
$73,830,000 (2,675,000) $71,155,000
Owners' Equity: 8,727,000 (5) 385,000 0
Additional -0- (1) 7,427,000 6,539,000
----------- ----------- -----------
$82,557,000 $ 5,137,000 $87,694,000
=========== =========== ===========
</TABLE>
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<PAGE> 78
PRO FORMA STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
BALANCE ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Interest Income:
Loans receivable $ 8,885,000 $ 0 $ 8,885,000
Deposits with financial institutions 692,000 0 692,000
----------- --------- -----------
Total interest income 9,577,000 0 9,577,000
=========== ========= ===========
Interest Expense:
Thrift certificates 3,820,000 0 3,820,000
Notes payable 1,379,000 (11) (165,000) 1,214,000
----------- --------- -----------
Total interest expense 5,199,000 (165,000) 5,034,000
=========== ========= ===========
Net interest income 4,378,000 165,000 4,543,000
Provision for loan losses 3,299,000 0 3,289,000
----------- --------- -----------
Net interest after provision for loan losses 1,089,000 165,000 1,254,000
Noninterest income:
Trustee and reconveyance fees 3,248,000 0 3,248,000
Other income 1,122,000 0 1,122,000
Gain on sale of loans 8,895,000 0 8,895,000
----------- --------- -----------
13,265,000 0 13,265,000
Noninterest Expense:
General and administrative 6,273,000 (9) 336,000 6,842,000
(8) (167,000)
(12) 400,000
Salaries and employee benefits 7,858,000 (6) (767,000) 7,414,000
(7) (245,000)
(8) 568,000
Related party fees 1,012,000 0 1,012,000
Depreciation and amortization 919,000 0 919,000
Operations of other real estate 1,212,000 0 1,212,000
----------- --------- -----------
17,274,000 125,000 17,399,000
----------- --------- -----------
Loss before income taxes (benefit) (2,920,000) 40,000 (2,880,000)
----------- --------- -----------
Income taxes (benefit) (1,222,000) 16,000 (1,206,000)
----------- --------- -----------
Net loss $(1,698,000) $ 24,000 $(1,674,000)
=========== ========= ===========
</TABLE>
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<PAGE> 79
Weighted average common shares outstanding
<TABLE>
<S> <C> <C>
Primary 830,000 1,650,000
Fully Diluted 830,000 2,445,333
Loss per share:
Primary $ (2.05) $ (0.87)
Fully Diluted $ (2.05) $ (0.59)
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The adjustments to the unaudited pro forma consolidated financial statements are
as follows:
(1) To reflect the minimum cash proceeds from issue of stock in the Rights
Offering and Public Offering, net of estimated offering costs as
follows:
<TABLE>
<S> <C>
Public offering $6,200,000
Rights offering $2,000,000
Estimated offering costs $ (773,000)
----------
$7,427,000
==========
</TABLE>
(2) To reflect the payment of limited partnership capital withdrawals
payable of $1,120,000 and related accrued interest of $170,000 that
were approved by the general partner but not paid by the Partnership
due to limitations in the Partnership Agreement and restrictions on
such withdrawals under the Bank Loan with NatWest.
(3) To reflect a $1,000,000 paydown of the notes payable to NatWest under
the terms of the Restructuring Plan and the Bank Loan with NatWest.
(4) To reflect payment of $385,000 owed to the General Partner.
(5) To reflect the purchase of General Partner Warrants for a purchase
price of $385,000.
(6) To remove payment to the General Partner of a base fee up to 35% of the
loan origination fees paid by borrowers to the Partnership, as provided
in the Restructuring Plan.
(7) To remove payment of management and supervision fee to general partner
of 3/8 of 1% per annum on loans with terms over three years, as
provided in the Restructuring Plan.
(8) To reflect payment of salaries that were previously paid by the General
Partner, which will now be paid directly by the Corporation under the
Restructuring Plan.
(9) To remove payment of legal fees of $100 per loan to an officer of the
Partnership, as provided in the Restructuring Plan.
(10) To reflect payment of additional directors fees and directors and
officers liability insurance premiums.
(11) To remove interest expense associated with the $1,000,000 paydown of
the NatWest loan and the $1,120,000 payoff of the approved limited
partner withdrawals.
(12) To reflect expenses of the Restructuring, estimated at $400,000.
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CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
On September 12, 1995, the Partnership dismissed E&Y as independent
accountants of the Partnership and its subsidiaries, and engaged BDO as
independent accountants of the Partnership and its subsidiaries.
The report of E&Y for the years ended December 31, 1994 and 1993 did
not contain an adverse opinion or a disclaimer of an opinion, and was not
qualified or modified as to audit scope or accounting principles. The report for
the year ended December 31, 1994 contained an explanatory paragraph concerning a
substantial doubt about the ability of the Partnership to continue as a going
concern due to losses from nonperforming loans that resulted in significant
recurring losses from operations, substantial debt service and other
requirements of the note payable to the Partnership's lender, and the regulatory
capital classification of Pacific Thrift. In addition, the report for the two
years ended December 31, 1994 contained an explanatory paragraph concerning
certain securities litigation containing allegations of securities fraud and
aiding and abetting a breach of fiduciary duty relating to the Partnership and
its Chief Executive Officer. The report for the year ended December 31, 1993
also contained an explanatory paragraph concerning the Partnership's liability
for environmental remediation of two properties acquired in foreclosure and
possible government action if the Partnership did not comply with a consent
agreement regarding one of the properties. The environmental remediation action
was not referred to in the report for the year ended December 31, 1994, as there
was no material uncertainty regarding any further liability as of that date.
As of the date hereof, Pacific Thrift has been reclassified as
"adequately capitalized" by the FDIC, and its regulatory capital ratios meet the
FDIC's regulatory definition of "well capitalized," although it is classified as
"adequately capitalized" due to the provisions of the 1995 Order requiring it to
maintain certain capital levels (which it currently meets).
During the Partnership's two most recent fiscal years and subsequent
interim period, there were disagreements between the Partnership and E&Y
regarding the following matters:
There was a disagreement concerning the scope of the work necessary to
be performed by E&Y in connection with a proposed restructuring of the
Partnership, including procedures and issues raised with respect to the
allowance for loan losses, deferred tax asset and other transactions recorded by
the Partnership in its unaudited financial information as of June 30, 1995.
Prior to resolving the disagreement, the client-auditor relationship was
terminated by the Partnership.
There were disagreements regarding the amount of the provision and
allowance for loan losses for the fiscal years ended December 31, 1994 and 1993,
which were resolved by the Partnership recording an additional provision for
each year.
There were disagreements about the scope of audit procedures to be
performed to ascertain the status of certain regulatory matters concerning
Pacific Thrift and the ability of the Partnership to continue as a going concern
for the fiscal year ended December 31, 1994, which were resolved by E&Y
performing the additional procedures.
There was a disagreement about the need to add an explanatory paragraph
to the report of E&Y for the year ended December 31, 1994 concerning the ability
of the Partnership to continue as a going concern, which was resolved by the
Partnership accepting such explanatory paragraph.
There were disagreements regarding the interpretation of regulatory
accounting principles applicable to sales of senior loan participation interests
to third parties by Pacific Thrift which were resolved by Pacific Thrift
requesting an opinion of the FDIC and revising its regulatory reports to conform
to the FDIC's interpretation of such principles.
There was a disagreement regarding the scope of audit procedures
necessary and the necessity of footnote disclosure concerning certain litigation
in which allegations of securities fraud and aiding and abetting in the breach
of fiduciary duty were made against the Partnership and its Chief Executive
Officer by investors in companies affiliated with the Partnership until 1984.
The disagreement was resolved by the Partnership adding footnote disclosure in
its financial statements for the fiscal years ended December 31, 1994 and 1993.
The securities litigation naming the Partnership and
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the Chief Executive Officer referred to in the explanatory paragraphs contained
in the 1994 and 1993 reports was dismissed by the plaintiffs in October 1995.
There was a disagreement concerning the disclosure required in
connection with the Partnership's liability for remediation of environmental
contamination of two properties acquired in foreclosure in 1993. At the time the
audit of the Partnership's 1993 financial statements was completed there existed
potential civil or criminal claims against the Partnership, and the Partnership
was engaged in negotiations with governmental authorities to settle any
potential claims. Until the settlement agreement was completed, the
Partnership's counsel was unable to provide an opinion as to whether civil or
criminal liability was probable or remote. The Partnership delayed issuance of
the financial statements until the settlement agreement was entered and an
opinion of counsel was obtained to the effect that the possibility of criminal
liability was remote. The disagreement was resolved by the Partnership
increasing the disclosure in its financial statement footnotes in 1993,
including the disclosure that, in the opinion of its legal counsel, the
likelihood of criminal action was remote if the terms of a settlement agreement
reached with regulatory authorities were complied with. As of the date hereof,
the Partnership is in full compliance with the terms of the Settlement
Agreement.
There was a disagreement regarding the accounting and footnote
disclosure of certain related party transactions, which was resolved by
adjustments to the accounting and by additional disclosures for the related
party transactions.
E&Y has advised the Partnership that there are certain deficiencies in
its lending and credit administration procedures and its procedures for
determination of its allowance for loan losses that, taken as a whole,
constitute a material weakness in its internal controls and a "reportable event"
pursuant to Item 304 of Rule S-K. The Partnership has taken or is in the process
of taking the necessary steps to improve each of the procedures identified by
its accountants as requiring improvement, to the extent deemed appropriate by
management.
The managing officers of the Partnership's general partner discussed
the subject matter of each disagreement with the Partnership's former
accountants. The Partnership has authorized its former accountants to respond
fully to all inquiries of the Partnership's successor accountants concerning the
subject matter of each disagreement.
Prior to the engagement of BDO as the independent accountants for the
Partnership and its subsidiaries, the Partnership did not consult BDO concerning
the application of accounting principles to any specified transaction or any
matter that was the subject of a disagreement with E&Y or a reportable event.
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BUSINESS
THE PARTNERSHIP
The Partnership is a California limited partnership formed in 1981.
Since 1986, Presidential Management Company has been the sole general partner of
the Partnership. In 1988, the Partnership formed Pacific Thrift as a
wholly-owned subsidiary. In 1990, the Partnership acquired all of the limited
partnership interests of CRC and LPPC. In 1994, the Partnership formed the
Corporation and Unified as wholly-owned subsidiaries.
THE CORPORATION
The Corporation is a newly organized financial institution holding
company. In March 1996, the Partnership transferred all of the outstanding stock
of Pacific Thrift, CRC Washington and Unified to the Corporation, for the
purpose of allowing all of its corporate subsidiaries to file consolidated tax
returns. Upon the Closing Date of the Restructuring Plan, the Partnership will
transfer to the Corporation all of Presidential's assets and liabilities and all
of the limited partnership interests in CRC and LPPC. The executive offices of
the Partnership and the Corporation are located at 21031 Ventura Boulevard,
Woodland Hills, California, telephone number (818) 992-8999.
The Corporation currently intends to conduct business primarily through
its operating subsidiaries, Pacific Thrift, CRC, CRC Washington, LPPC and
Unified.
PACIFIC THRIFT
Pacific Thrift is a California licensed industrial loan company that
commenced business in 1988 and is supervised and regulated by the California
Department of Corporations ("DOC") and the Federal Deposit Insurance Corporation
("FDIC"). The deposits of Pacific Thrift are insured by the FDIC up to
applicable limits. Pacific Thrift conducts its operations at its main office in
Woodland Hills and produces loans through five loan production offices located
in Walnut Creek, San Jose, Costa Mesa and West Covina, California and, Bellevue,
Washington. In addition, Pacific Thrift originates loans through 60 commission
based loan representatives (as of December 31, 1995) who operate in California,
Washington and nine other states, but Pacific Thrift does not maintain offices
for such representatives except those based in California and Washington.
Pacific Thrift focuses its lending activities exclusively on real estate secured
loans to individuals and small businesses. Pacific Thrift does not offer lease
financing or credit lines. Pacific Thrift offers passbook accounts, term
certificates and money market certificates. Pacific Thrift does not offer other
traditional banking services, such as checking accounts, travelers' checks or
safe deposit boxes.
For the past year, management of Pacific Thrift has concentrated on
improving its operations by: (i) increasing fee income from loans originated for
sale; (ii) improving asset quality; and (iii) restoring and maintaining capital
ratios in excess of regulatory requirements. Management believes that it has
successfully achieved these goals. Gains on sale of loans originated for sale
increased by $7.7 million (890.0%), to $8.6 million for the year ended December
31, 1995 compared with $.9 million for the year ended December 31, 1994.
Management's goal is to continue strong growth of gains on sale of loans through
1996. Asset quality, measured as the percentage of adversely classified assets
compared with the total loan and OREO portfolio, improved to 9.65% at December
31, 1995 compared to 14.5% at December 31, 1994. Capital ratios improved from
"adequately capitalized" to levels which would be deemed "well capitalized" in
the absence of an order requiring the maintenance of capital. However, since
Pacific Thrift was subject to the 1995 Order of the FDIC as of December 31,
1995, Pacific Thrift was classified as "adequately capitalized" on that date, in
spite of its higher capital ratios.
Pacific Thrift earned net income of $3.2 million for the year ended
December 31, 1995, compared with net losses of approximately $2.9 million and
$3.2 million for the years ended December 31, 1994 and 1993, respectively. The
net income earned in 1995 reflect primarily the substantial increase in gains on
sale of loans in 1995 compared with all prior periods. Net losses in 1994 and
1993 were due primarily to increased loan losses on Pacific Thrift's loan
portfolio caused by continuing declines in the value of California real estate
held as collateral.
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CRC, CRC WASHINGTON AND LPPC
CRC is a California limited partnership formed by the General Partner
in December 1986 and purchased by the Partnership in 1990. CRC provides
foreclosure related services on real estate trust deeds, including conduct of
foreclosure sales and trust deed reconveyances. LPPC was formed by the General
Partner in 1990 and purchased by the Partnership in the same year. LPPC provides
posting and publishing of notices of default and notices of sale for CRC and
other trust deed foreclosure companies. CRC provides services on California
trust deeds to over 300 banks, thrifts, mortgage banks, life insurance companies
and federal regulatory agencies located across the country. Approximately
one-third of CRC's revenues are derived from lenders located outside of
California, and management anticipates that this percentage will continue to
grow. Less than 5% of the revenues of CRC or of LPPC are derived from services
provided to the Partnership and Pacific Thrift.
In October 1995, the Partnership incorporated a new wholly-owned
subsidiary, CRC Reconveyance Corporation, a Washington corporation ("CRC
Washington"). In March 1996, the stock of CRC Washington was transferred to the
Corporation. CRC Washington will provide foreclosure related services on real
estate trust deeds secured by property located in the State of Washington. CRC
Washington will reimburse Pacific Thrift for office space used by CRC Washington
at the office of Pacific Thrift in Bellevue, Washington. CRC Washington has not
conducted significant business operations as of the date hereof.
Trustee foreclosure services accounted for net income of approximately
$.9 million, $.9 million and $1.4 million for each of the years ended December
31, 1995, 1994 and 1993, respectively. Management believes that the primary
reason for the decline in net income has been the merger or acquisition of many
small lending companies into larger banks and lending companies. The acquiring
entities often have affiliated foreclosure service companies or arrangements
with other foreclosure service companies, resulting in the loss of business to
CRC. CRC has been able to replace many of its lost customers with new customers,
which has partially mitigated the loss of some accounts. CRC has now refocused
its marketing strategy to target primarily small and medium-sized lenders. CRC
has hired a sales representative in the San Diego area, and is seeking a sales
representative for the northern California area. In the meantime, CRC's southern
California sales representatives are covering the northern California area.
Management of CRC believes that it can increase net income by increasing its
volume of sales through its current marketing strategy. There can be no
assurance, however, that it will successfully increase net income.
UNIFIED
Unified is a newly formed corporation with no business operations as of
December 31, 1996. On the Closing Date, Presidential will transfer its loan
portfolio to Unified. The loans will continue to be serviced by Pacific Thrift
for a servicing fee of 1.5% per year of the principal balance of each loan
serviced.
Although management currently does not anticipate that Unified will
actively originate new loans for the foreseeable future, it is expected that
Unified will obtain a California finance lender's license. Unified may also
obtain mortgage lender licenses in other states, as management deems
appropriate. Unified is expected to rewrite loan receivables as they mature or
are otherwise refinanced in the future. In addition, Unified may from time to
time purchase loans from other lenders for securitization or for its own
portfolio. It is not anticipated at this time that Unified would have a full
time staff or separate office.
Pacific Thrift will continue to be the primary focus of the
Corporation's lending business. However, Pacific Thrift, as a regulated
financial institution, is subject to certain regulatory requirements and
restrictions which may limit its ability to engage in certain lending
activities, or limit the amount of certain types of loans it may make. Unified
will provide flexibility to management where the need arises for a separate
entity subject to fewer regulatory restrictions than Pacific Thrift.
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BUSINESS STRATEGY
After the consummation of the Public Offering and the Restructuring,
management of the Corporation intends to continue the improvement and growth of
the Corporation's lending business. While there can be no assurance that
management of the Corporation will be successful in executing its business
strategy, principal strategic objectives include:
- CONTINUE TO EMPHASIZE FEE INCOME FROM LOANS ORIGINATED FOR SALE.
Pacific Thrift has developed the ability to originate a high volume
of mortgage loans for sale to larger mortgage lenders for
securitization. For the year ended December 31, 1995, Pacific Thrift
increased gains on sale of loans originated for sale by $7.7 million
(890%), to $8.6 million from $.9 million for the prior year. By
focusing its business on the origination of loans for sale, Pacific
Thrift has reduced its reliance on interest income, the primary
source of income for traditional banks and mortgage lenders. The
origination of loans for sale substantially mitigates the credit
risks associated with loan defaults, because the risk of loss on
loans is transferred to the loan purchasers, subject to standard
representations and warranties made by Pacific Thrift to the loan
purchasers at the time of sale for which Pacific Thrift remains
liable.
- INCREASE VOLUME OF LOANS ORIGINATED FOR SALE IN STATES IN WHICH
PACIFIC THRIFT HAS RECENTLY COMMENCED LENDING OPERATIONS. In 1994,
management of Pacific Thrift began to implement a geographic
expansion strategy to increase the volume of loans originated for
sale. Pacific Thrift first expanded operations into the western
states of Washington, Oregon and Nevada, where certain officers had
previous experience with mortgage lending operations. Pacific Thrift
later expanded lending operations into Colorado, Arizona and Utah,
and began exploring other regions for possible lending operations.
As of December 31, 1995, Pacific Thrift had loan representatives in
11 states, including the states of Washington, Oregon, California,
Idaho, Nevada, Arizona, Utah, Colorado, New York, Connecticut and
Massachusetts. In addition, as of December 31, 1995, Pacific Thrift
was in the early stages of commencing operations in Minnesota,
Missouri, Illinois, Florida, Georgia, Virginia, Pennsylvania,
Delaware and Maryland.
- EXPAND LOAN OPERATIONS INTO NEW STATES. Now that Pacific Thrift has
developed policies and
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procedures for expanding the origination of loans for sale in new
states, management believes that it may continue its expansion into
new geographic areas in a manner consistent with safe and sound
banking practices. As of December 31, 1995, management was preparing
to commence operations in Texas, New Mexico, North Carolina and
South Carolina. Management has targeted the states of West Virginia,
Kentucky, Tennessee, Hawaii, Ohio, Indiana, Wisconsin, Michigan,
Vermont, New Hampshire, Kansas, Oklahoma, Louisiana, Iowa, New
Jersey, Rhode Island and the District of Columbia for commencing
loan origination activity within the next 12 months.
- MINIMIZE OVERHEAD COSTS BY OPERATING WITHOUT OFFICES IN MOST AREAS.
Management of Pacific Thrift has developed an operating system which
allows it to expand lending operations in new areas without opening
loan production offices. Whenever possible, a senior loan officer
with experience in an existing Pacific Thrift office is transferred
to a new region to hire local loan representatives on a
commission-only basis. The senior loan officer supervises and trains
the local representatives, all of whom operate independently without
office space. Local loan representatives typically have contacts
with local mortgage loan brokers, which provide sources of loan
referrals. All loan applications and supporting documentation are
delivered to Pacific Thrift's California loan review office for all
processing and underwriting. As operations expand in one or more
locations, Pacific Thrift may consider renting small offices as
necessary to facilitate business operations. However, management
believes that Pacific Thrift may effectively conduct business
without the expense and risk of undertaking long-term lease and
other overhead obligations in most locations.
- CONTINUE TO EVALUATE POSSIBLE SECURITIZATION PROGRAMS. Although
management does not believe that historical loan volume levels
support securitization programs by Pacific Thrift directly,
management will continue to evaluate possible programs to securitize
loans to the extent that future lending volume permits. Management
believes that such programs could further enhance revenues of
Pacific Thrift because, as sponsor of securitization programs,
Pacific Thrift would earn more by retaining the interest spread and
servicing fees which it currently releases for a premium as a seller
of loans. In addition, Pacific Thrift would then
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consider the purchase of loan production from other originators to enhance loan
volume.
- - GRADUALLY REBUILD PACIFIC THRIFT'S LOAN PORTFOLIO BALANCE. Although management
intends to emphasize loans originated for sale, it also intends to gradually
rebuild Pacific Thrift's loan portfolio balance with residential and
commercial mortgage loans. Moreover, management believes that some
diversification of revenue sources is a prudent business policy which allows
for adaptation to changing economic and business conditions.
- - CONTINUE TO IMPROVE ASSET QUALITY. In 1994, management of Pacific Thrift
began an ongoing effort to improve loan underwriting policies and procedures.
Lending criteria were revised to place a greater emphasis on the borrower's
ability to repay, and appraisal standards for real property collateral were
strengthened. These changes have substantially improved asset quality. While
loan delinquencies over 60 days on loans originated prior to January 1, 1994
were approximately 9.23% of all such loans at December 31, 1995, loan
delinquencies over 60 days on loans originated after January 1, 1994 were only
.93% of all of those loans as of December 31, 1995. There can be no assurance
that the level of delinquencies experienced with respect to loans originated
after January 1, 1994 will not increase as the pool of loans continues to age.
- - CONTINUE TO EXPAND THE BUSINESS OF CRC, CRC WASHINGTON AND LPPC. The trust
deed foreclosure services and posting and publishing services businesses of
CRC, CRC Washington and LPPC provide a secondary source of fee income that
capitalizes on management's expertise in servicing mortgage loans. CRC, CRC
Washington and LPPC offer their services to over 300 banks, thrifts, mortgages
banks, life insurance companies and federal regulatory agencies with trust
deeds on real property located in California, Nevada and Washington. In
addition, insofar as foreclosures increase during periods of a weakening
economy, these businesses provide a counter-cyclical source of revenues that
can partially offset reduced revenues or losses in the lending business which
may occur during these periods.
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LENDING ACTIVITIES
For the past three years, all new lending activity has been conducted
exclusively by Pacific Thrift pursuant to its lending guidelines. Under an
arrangement between Presidential and Pacific Thrift effective January 1, 1994,
Pacific Thrift provides loan servicing for all of Presidential's outstanding
loans for a loan servicing fee of 1.5% per annum of the principal amount of each
loan serviced.
Management's strategy for the Partnership's lending business has been
to focus on the B and C credit lending market. Accordingly, substantially all of
the Partnership's loans are made to borrowers whose credit histories or other
factors limit their ability to qualify for low-rate financing at larger
financial institutions. For the past two years, competition in this market has
increased as larger mortgage lenders have sought to expand their markets to
include B and C loans to replace some of the volume lost at the end of the home
loan refinancing boom of the early 1990's. However, management believes that
senior management's over 20 years of experience in the B and C credit market
provide it with competitive advantages over new entrants to this lending market,
and that this experience has enabled Pacific Thrift to substantially increase
new loan originations notwithstanding the increase in competition.
Over the years that the Partnership and Pacific Thrift have been in
business, they have developed relationships with over 1500 independent mortgage
brokers, who provide the substantial majority of new lending opportunities.
Management has developed policies and procedures with these brokers which
emphasize timely decision making and funding and a competitive fee structure,
which provide incentives for brokers to continue bringing new loans to Pacific
Thrift. Following is a brief description of the types of loans originated by
Pacific Thrift.
LOANS ORIGINATED FOR SALE.
Pacific Thrift originates nonconforming first and second trust deed
residential loans for sale in the secondary loan market. Loans originated for
sale generally have loan-to-value ratios of from 60% to 85% and meet the credit
criteria established in advance by the loan purchasers. Pacific Thrift
originated and sold the following amounts of loans during each of the months of
1994 and 1995:
<TABLE>
<CAPTION>
Originated Sold
----------- -----------
<S> <C> <C>
1995
- ----
January $ 1,088,000 -0-
February $ 239,000 -0-
March $ 1,609,000 -0-
April $ 734,000 -0-
May $ 1,319,000 -0-
June $ 3,526,000 $ 3,969,000
July $ 981,000 $ 1,210,000
August $ 4,218,000 $ 4,561,000
September $ 3,598,000 $ 5,272,000
October $ 4,853,000 $ 3,560,000
November $ 4,594,000 $ 6,897,000
December $ 8,023,000 $ 4,130,000
1995
- ----
January $ 8,621,000 $ 8,917,000
February $ 6,953,000 $ 9,133,000
March $10,358,000 $11,425,000
April $11,294,000 $11,575,000
May $10,708,000 $ 9,299,000
June $12,711,000 $12,672,000
July $10,587,000 $12,040,000
August $10,235,000 $ 9,707,000
September $14,312,000 $13,225,000
</TABLE>
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<TABLE>
<CAPTION>
Originated Sold
----------- -----------
<S> <C> <C>
1995
- ----
October $17,080,000 $15,728,000
November $15,694,000 $14,346,000
December $22,135,000 $16,915,000
</TABLE>
Pacific Thrift and Presidential each entered agreements with Aames
Capital Corporation ("Aames") as of December 1, 1993, pursuant to which Pacific
Thrift and the Partnership agreed to sell to Aames an aggregate of up to $75
million of loans secured by residential property over a period of up to 18
months. Pacific Thrift had sold $75 million of loans under that agreement as of
May 26, 1995. All loans sold by Pacific Thrift were included in pools of loans
securitized by Aames. Credit enhancement was provided for each securitization
through private credit insurance, and each pool was rated AAA by one or more
rating services. Aames acts as loan servicer for each of the pools. All loans
were sold nonrecourse except for the obligation to repurchase any loan which
does not meet certain customary representations and warranties or to repurchase
loans adversely affected by any breach of general representations and
warranties. As of December 31, 1995, five loans ($275,000 aggregate principal
amount) had been repurchased by Pacific Thrift and no loans additional loans
have been requested to be repurchased. Pacific Thrift does not expect to incur a
loss on the five loans repurchased. Except for an initial sale of approximately
$3.9 million in loans, all loans sold by Pacific Thrift to Aames were sold for a
premium above face value of the loans sold. Pacific Thrift received a servicing
release fee payable quarterly on the principal amount of each loan sold from
September 19, 1994 to January 1995. Effective February 1, 1995, the servicing
release fee was increased on the principal amount of each loan sold, including
the loans sold from September 1994 to May 26, 1995, until each loan is paid off.
Pacific Thrift retains an interest in the net spread (i.e. all interest and fees
paid on the loans less servicing and other costs) in $3.9 million in loans sold
to Aames in December 1993, which management estimates will represent a return of
approximately 3.3% on the principal amount of the $3.9 million of loans sold.
Pacific Thrift entered into a new agreement with Aames Capital
Corporation effective June 21, 1995, pursuant to which it will continue to sell
pre-approved residential loans to Aames. The new agreement provides for Pacific
Thrift to receive a higher cash premium on the face amount of each loan sold
which meets preset interest rate requirements upon date of sale. An additional
premium will be paid for all loans sold during any quarter if at least $22.5
million of loans are sold during that quarter. The premium for all loans sold in
excess of $25 million per calendar quarter will be further increased. In
addition, Pacific receives a servicing release fee on the principal amount of
each loan sold prior to December 31, 1995, payable on a quarterly basis, until
the loan is paid off. Since January 1, 1996 the agreement was revised to
eliminate the servicing release fee and replace it with a higher premium on
sale.
During 1995, Pacific Thrift sold an aggregate of $144.9 million of
pre-approved securitizable loans to Aames and other purchasers. Pacific Thrift
has no commitment to offer or sell any specified amount of loans to any
purchaser, but has entered arrangements whereby other purchasers may pre-approve
loans to be made by Pacific Thrift prior to funding, which are sold within
approximately one month from origination.
To the extent that Pacific Thrift originates loans for sale, it bears
an interest rate risk between the date of origination of each loan and the time
that each loan is sold. However, loans are generally sold on a monthly basis,
which reduces the risk of interest rate fluctuations between the date of
origination and date of sale. Loans which are held for sale during the period
prior to sale are accounted for at the lower of cost or market value of such
loans.
PORTFOLIO LENDING.
Pacific Thrift has historically originated for its own loan portfolio
primarily first and second trust deed real estate loans secured by one-to-four
family residential, multi-family residential, commercial and, to a very minor
extent, undeveloped, property. The characteristics of the combined loan
portfolio of Presidential and Pacific Thrift are described herein under
"BUSINESS -- Lending Policies."
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HOME IMPROVEMENT LOANS.
From 1990 until March 31, 1993, Pacific Thrift operated a home
improvement loan division, which originated three types of home improvement
loans, including (i) loans partially insured by the Federal Housing
Administration ("FHA") under Title I of the National Housing Act ("Title I
Loans"); (ii) loans partially insured by a policy of credit insurance issued by
a private insurer; and (iii) uninsured loans subject to an additional annual fee
paid by the borrower to Pacific Thrift. The program was discontinued on March
31, 1993. All home improvement loans were made under substantially the same loan
underwriting standards and policies set by the U.S. Department of Housing and
Urban Development ("HUD"), including a requirement that each loan be secured by
a first or second priority lien on residential property having a value of at
least 100% of the loan amount plus all prior encumbrances. Home improvement
loans were made in amounts not in excess of $25,000 on loans secured by single
family residences and not in excess of $60,000 on loans secured by multi-family
residences.
Pacific Thrift held $1.7 million of home improvement loans and loan
participations at December 31, 1995, compared with $3.4 million and $7.4 million
at December 31, 1994 and 1993, respectively. Due to claims made on Title I Loans
and privately insured loans for the four years ended December 31, 1994, there is
no material amount of insurance coverage remaining on any of the outstanding
home improvement loans. Pacific Thrift has continued to service all outstanding
home improvement loans in the manner that is required pursuant to its contracts
with the purchasers of loan participations. However, the fact that there is no
material insurance coverage available on any home improvement loans exposes
Pacific Thrift to contingent risks of loss on home improvement loans and loan
participations held by Pacific Thrift.
Pacific Thrift has resumed a Title I Loan origination program, in which
Pacific Thrift acts exclusively as a correspondent lender for one or more larger
mortgage lenders who securitize Title I Loans. Pacific Thrift anticipates that
these loans would be sold without recourse within 30 days of origination, and
would result in additional fee income, which would be received immediately upon
sale of the loans.
No home improvement loans were originated between March 1993 and July,
1995. In August, 1995, Pacific Thrift resumed originating Title I loans for
sale. During 1995, Pacific Thrift sold $1,976,307 of home improvement loans,
including $1,126,307 of seasoned home improvement loans originated prior to
March 1993 at par value and $850,000 in new Title I loans at a premium.
LENDING POLICIES
The following description of lending policies refers to the lending
policies of Pacific Thrift for portfolio loans. Presidential ceased originating
new loans in 1990. The description of the existing loan portfolio as of December
31, 1995, refers to the combined loan portfolio of both Presidential and Pacific
Thrift.
GEOGRAPHIC CONCENTRATION. At December 31, 1995, the combined loan
portfolio of Presidential and Pacific Thrift included loans geographically
distributed approximately 74% in Southern California (south of San Luis Obispo),
20% in Northern California, 5% in Washington and 1% in Oregon, based on
principal loan balances. Pacific Thrift's loan policy limits the total dollar
amount of loans and total number of loans made in each zip code area to no more
than 5% of its total outstanding loans.
Although Pacific Thrift originates loans in states outside California,
substantially all of such loans (by dollar volume) are pre-approved loans for
sale. At the present time, Pacific Thrift intends to limit the origination of
loans for retention in its loan portfolio to loans secured by California real
estate, and, to a minor extent to loans secured by real estate located in the
various other states in which it does business.
COLLATERAL REQUIREMENTS. Although substantially all of the loans
originated by Pacific Thrift for sale are residential loans, changes in the
pricing structure for residential loans due to increased competition have caused
management to redirect Pacific Thrift's portfolio lending over the past year to
loans secured by commercial property. Commercial properties accepted by Pacific
Thrift as collateral include primarily retail, multi-unit residential and light
industrial properties. No more than 30% of Pacific Thrift's total loan portfolio
may be secured by multi-unit residential
77
<PAGE> 90
property, and no more than 3% by unimproved land. Loans secured by commercial
property are generally made at 65% or less loan to value ratios.
At December 31, 1995, approximately 33% of the aggregate principal
amount of loans comprising the combined loan portfolio of Presidential and
Pacific Thrift were secured by one-to-four family residential property, 21% by
multi-family residential property, 42% by commercial property, and 4% by
undeveloped property.
At each of the dates set forth below the combined gross loan portfolio
of Presidential and Pacific Thrift (which does not reflect reserves for loan
losses) was collateralized by the following types of real property:
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<PAGE> 91
<TABLE>
<CAPTION>
Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1994 Dec. 31 1993 Dec. 31, 1993
Principal Loan Percentage of Principal Loan Percentage of Principal Loan Percentage of Total
Balances Total Portfolio Balances Total Portfolio Balances Portfolio
<S> <C> <C> <C> <C> <C> <C>
One-to-four family
residential property
1st TDs $ 5,553,762 11.33% $ 6,271,007 10.66% $22,629,958 25.29%
2nd TDs 8,149,818 16.62 11,983,931 20.39 20,454,710 22.86
3rd TDs 968,926 1.98 1,833,001 3.12 3,103,656 3.47
Home Imp. Loans 1,742,976 3.55 2,298,050 3.91 7,699,823 8.60
----------- ------ ----------- ------ ----------- ------
TOTAL 16,415,482 33.48 22,385,989 38.08 53,888,147 60.22
=========== ====== =========== ====== =========== ======
Five and Over
Multi-Family
residential property
1st TDs 8,534,795 17.41 13,531,290 23.02 10,266,956 11.48
2nd TDs 1,811,741 3.70 3,154,197 5.37 4,284,452 4.79
3rd TDs -0- -0- 34,993 .06 35,062 0.04
----------- ------ ----------- ------ ----------- ------
TOTAL 10,346,536 21.11 16,720,480 28.45 14,586,470 16.31
=========== ====== =========== ====== =========== ======
Commercial
Property
1st TDs 18,145,302 37.02 14,184,456 24.13 16,036,924 17.92
2nd TDs 2,172,655 4.43 3,579,936 6.09 2,759,898 3.08
3rd TDs 68,766 .14 104,212 .18 266,523 0.30
----------- ------ ----------- ------ ----------- ------
TOTAL 20,386,723 41.59 17,868,604 30.40 19,063,345 21.30
=========== ====== =========== ====== =========== ======
Undeveloped
Property
1st TDs 1,873,953 3.82 1,805,151 3.07 1,944,519 2.17
2nd TDs -0- -0- -0- 0.00 -0- 0.00
3rd TDs -0- -0- -0- 0.00 -0- 0.00
----------- ------ ----------- ------ ----------- ------
TOTAL 1,873,953 3.82 1,805,151 3.07 1,944,519 2.17
=========== ====== =========== ====== =========== ======
TOTAL
PORTFOLIO
1st TDs 34,107,812 69.58 35,791,904 60.88 50,878,357 56.86
2nd TDs 12,134,214 24.75 18,718,064 31.85 27,499,060 30.73
3rd TDs 1,037,692 2.12 1,972,206 3.36 3,405,241 3.81
Home Imp. Loans 1,742,976 3.55 2,298,050 3.91 7,699,823 8.60
----------- ------ ----------- ------ ----------- ------
TOTAL $49,022,694 100.00% $58,780,224 100.00% $89,482,481 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
LOAN ORIGINATION AND UNDERWRITING. Pacific Thrift's loans are primarily
originated through referrals from mortgage loan brokers and other licensed
referral sources for which the borrower pays a referral fee. As of December 31,
1995 Pacific Thrift employed 60 loan representatives, who maintain contacts with
loan referral sources and provide customer service.
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<PAGE> 92
At December 31, 1995, the maximum amount that Pacific Thrift could loan
to one borrower was $1,227,000. On that date, the largest Presidential loan in
the combined portfolio was $656,939 and the largest Pacific Thrift loan in the
portfolio was $761,094. There were 12 loans in the combined loan portfolio which
exceeded $500,000. The average loan balance at December 31, 1995, not including
Home Improvement Loans, was $168,096 for Pacific Thrift and $96,834 for
Presidential.
For each loan made by Pacific Thrift for its own loan portfolio (other
than "piggyback" loans as described below), Pacific Thrift analyzes each loan
applicant's credit and repayment ability by ordering credit histories from
independent credit reporting companies and requiring proof of income, including
two years of income tax returns, a current paycheck stub or a current profit and
loss statement. The maximum debt to income limit for portfolio loans over
$25,000 is 50%.
Pacific Thrift also makes "piggyback loans," which are real property
secured loans made in tandem with loans originated for sale. Management uses
piggyback loans to enhance the loan products available from its loan purchasers,
and thereby increase production of loans originated for sale. Piggyback loans
meet the same credit and documentation requirements as the companion senior loan
originated for sale, except that the loan to value ratio may be up to 5% higher
than the loan to value ratio allowed by the purchaser of the senior loan. To
compensate for the lower credit standards, Pacific Thrift provides higher
general reserves for piggyback loans. As of December 31, 1995, Pacific Thrift
held 160 piggyback loans with an aggregate principal balance of $1,382,000.
Loans originated by Pacific Thrift for sale are made in accordance with
the guidelines provided in advance by the purchasers of the loans. In general,
purchaser guidelines allow a higher debt to income limit and lower loan to value
ratios than loans originated by Pacific Thrift for its loan portfolio. In
addition, some loan programs offered by loan purchasers do not require
verification of income, as required by Pacific Thrift on all loans originated
for its loan portfolio.
Pacific Thrift obtains independent third party appraisals or
evaluations of all properties securing its loans (other than home improvement
loans originated for sale, which do not require appraisal under the loan
purchaser's origination guidelines) prior to loan origination. Presidential also
requires third party appraisals on all of its outstanding loans at loan
origination. Pacific Thrift maintains an approved appraiser list and specifies
minimum criteria which must be met by every appraisal. These minimum standards
include: (i) all residential appraisal reports must comply with generally
accepted appraisal standards as evidenced by the Uniform Standards of
Professional Appraisal Practice promulgated by the Appraisal Standards Board of
the Appraisal Foundation, unless principles of safe and sound banking require
compliance with stricter standards; (ii) all residential appraisal reports must
be prepared on the most current version of the appropriate Federal National
Mortgage Association ("FNMA")/Federal Home Loan Mortgage Corporation ("FHLMC")
form or on a comparable standardized appraisal form; (iii) the zoning of the
site must allow the improvement located on the property; (iv) all plat maps,
location maps and diagrams must be included in the report; (v) all reports must
be based on market value, be written and contain sufficient information and
analysis to support the decision to engage in the transaction; (vi) an analysis
and report must be made of all appropriate deductions and discounts for proposed
construction or renovation, partially leased buildings, non-market lease terms
and tract developments with unsold units; (vii) all appraisals must be performed
by state licensed or certified appraisers; (viii) photos must be provided of the
subject property, including a front view, rear view, street scenes, interior and
any extraordinary amenities; (ix) any known hazardous condition on the subject
property or any site within the vicinity of the property must be disclosed;
(vii) any major code violations discovered must be reported and analyzed for the
impact on value and an estimate of cost to correct; (viii) a list of all
significant deferred maintenance must be noted, with an estimate of the cost to
cure; (ix) any agreements of sale, option or listing of the property within the
last 12 months must be disclosed; (x) any information required or deemed
pertinent to completion of the report which was not available must be disclosed;
(xi) a statement of the final appraised value of the property on an "as is"
basis must be disclosed, together with a statement of the value of the proposed
improvements or additions, subject to re-inspection upon completion, along with
an estimate of the cost to complete; and
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<PAGE> 93
(xii) all reports must contain the licensed/certified appraiser signature,
designation and license number and, if signed by a co-signing appraiser, must
contain the appropriate co-signing appraisal certification.
Following an analysis of a loan applicant's credit, repayment ability
and the collateral appraisal, every loan must be approved by one of four senior
officers. Any loan in excess of $150,000 must be approved by (i) the President
or the Chief Executive Officer; (ii) either the Executive Vice President - New
Products or the Vice President - Credit; and (iii) two non-officers directors of
Pacific Thrift. Loan rewrites, extensions and troubled debt restructurings
require the approval of the Vice President of the Debt Restructuring Department
or the President or Chief Executive Officer of Pacific Thrift.
Pacific Thrift's loan policies, in conformity with FDIC regulations,
require that maximum loan to value ratios be limited as follows with respect to
the following types of properties (except for home improvement loans described
below): 90% for owner-occupied one-to-four family residential property with
mortgage insurance or readily marketable collateral; 85% for all other improved
property; 85% for construction of one-to-four family residential property; 80%
for construction of commercial, multi-family and non-residential property; 75%
for land development and 65% for unimproved land. Pacific Thrift generally seeks
to originate portfolio loans with loan to value ratios which are generally 5% or
more lower than these maximum ratios. Loans to facilitate sale of properties
acquired in settlement of loans (also known as "other real estate owned, or
"OREO") may be higher than the maximum loan to value ratios allowed for new
loans. Due to the significant decline in Southern California real estate values
over the past five years, management believes that the current values of
properties securing loans made prior to 1994 do not meet the original loan to
value ratios.
It is anticipated by management that Pacific Thrift's Board of
Directors will periodically adjust and modify its collateral requirements and
underwriting criteria in response to economic conditions and business
opportunities.
The following table sets forth the combined loan originations by
category and purchases, sales and repayments for 1995:
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<PAGE> 94
<TABLE>
<CAPTION>
AT OR FOR THE YEARS
ENDED DECEMBER 31,
1995
(Dollars in Thousands)
<S> <C>
Beginning Balance(1) ..................................... $ 65,256
Loans Originated for Sale ................. 151,538
Portfolio Loans originated:
Real estate:
One- to four-family ....................... 3,067
Multi-family .............................. 4,521
Commercial ................................ 11,585
Construction and land ..................... 150
Home improvement .......................... -0-
---------
Total loans originated .................... 19,323
Loans purchased .......................................... -0-
---------
Total ..................................... 235,917
Less:
Principal repayments ................................... (12,905)
Sales of loans originated for sale ..................... (145,832)
Sales of portfolio loans ............................... (13,371)
Transfers of OREO net of reserves ...................... (7,944)
Other net changes(2) ................................... 620
---------
Total loans(1) ............................ $ 56,485
=========
</TABLE>
(1) Includes loans held for sale.
(2) Other net changes includes changes in allowance for loan losses,
deferred loan fees, loans in process and unamortized premiums and
discounts.
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<PAGE> 95
MATURITIES AND RATE SENSITIVITIES OF LOAN PORTFOLIO
Loan Maturity. The following table sets forth the contractual
maturities of the combined gross loans at December 31, 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------------------------------------------
MORE MORE
MORE THAN MORE THAN THAN 5 THAN 10 MORE
ONE YEAR 1 YEAR TO 3 YEARS YEARS TO YEARS TO THAN 20 TOTAL
OR LESS 3 YEARS TO 5 YEARS 10 YEARS 20 YEARS YEARS LOANS
--------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . $6,122 $1,293 $1,820 $ 1,084 $1,352 $3,002 $14,673
Multi-family ........ 1,185 939 3,329 2,708 1,133 1,052 10,306
Commercial .......... 1,732 1,092 2,505 10,170 2,827 2,061 20,387
Construction and land 124 1,227 274 0 0 249 1,874
Home improvement .... 0 0 0 1,743 0 0 1,743
------ ------ ------ ------- ------ ------ -------
Total amount due .... $9,163 $4,551 $7,928 $15,705 $5,312 $6,364 $49,023
====== ====== ====== ======= ====== ====== =======
</TABLE>
The following table sets forth, as of December 31, 1995, the dollar
amounts of gross loans receivable that are contractually due after December 31,
1996, and whether such loans have fixed or adjustable interest rates:
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1996
------------------------------
FIXED ADJUSTABLE(1) TOTAL
------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family .... $2,465 $ 6,086 $ 8,551
Multi-family ........... 571 8,590 9,161
Commercial ............. 2,707 15,948 18,655
Construction and land .. 630 1,120 1,750
Home improvement ....... 1,743 0 1,743
------ ------- -------
Total loans receivable $8,116 $31,744 $39,860
====== ======= =======
</TABLE>
(1) Includes approximately $1.2 million in loans to facilitate the sale of
real estate held in foreclosure.
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<PAGE> 96
Pacific Thrift generally rewrites loans at maturity if the borrower
makes a new loan application. In cases where the loan to value ratio has
declined on an existing loan and no longer meets Pacific Thrift's loan to value
guidelines, Pacific Thrift's policy is to make an exception and rewrite the
loan. Presidential followed the same policies with respect to its policies, and
Unified intends to follow the same policies.
A substantial portion of the combined loan portfolio is repriced, pays
off or matures approximately every two years. Of the 24% of all loans bearing
fixed rates at December 31, 1995, 52% were due in two years or less. Based upon
these facts, over 89% of the combined loan portfolio (exclusive of home
improvement loans) at December 31, 1995, consisted of either variable rate loans
or fixed rate loans which mature within two years. Management therefore expects
that within two years, approximately 89% of the combined loan portfolio
(excluding home improvement loans) will reprice at the rate in effect on the
existing loan at the time the loan is repriced or the then applicable rate for
new or refinanced loans.
The initial interest rate on variable rate loans is set as of the date
of origination of each loan based upon the then prevailing reference rate
established by Bank of America, which initial rate may increase by not less than
.125% in any three-month period, but may not increase by more than five (10 in
some cases) percentage points in the aggregate. Such increases (or decreases, as
the case may be) occur at three-month intervals as the result of changes in the
Bank of America reference rate. Although the interest rate may decrease, it
cannot decrease below the original interest rate set for each loan.
CLASSIFIED ASSETS AND LOAN LOSSES
The general policy of Pacific Thrift is to discontinue accrual of
interest and make a provision for anticipated loss on a loan when: (i) it is
more than two payments contractually past due and the current estimated
loan-to-value ratio is 90% or more; or (ii) the loan exhibits the
characteristics of an in-substance foreclosure, generally including any loan as
to which the borrower does not have the ability, willingness or motivation to
repay the loan. The current estimated loan-to-value ratio of substantially all
delinquent loans are determined by a new independent appraisal, unless an
independent appraisal was obtained no more than twelve months prior to review,
in which case the current estimated loan-to-value ratio is determined by
in-house review. When a loan is reclassified from accrual to nonaccrual status,
all previously accrued interest is reversed at Pacific Thrift in accordance with
regulatory requirements. During 1995, Presidential's policy for determination of
nonaccrual status was the same as Pacific Thrift's, and United intends to follow
the sale policy. Interest income on nonaccrual loans is subsequently recognized
when the loan resumes payment or becomes contractually current as appropriate.
Accounts which are deemed fully or partially uncollectible by management are
generally fully reserved or charged off for the amount that exceeds the
estimated net realizable value (net of selling costs) of the underlying real
estate collateral. Gains on the sale of OREO are not recognized until the close
of escrow upon sale. Home improvement loans are classified nonaccrual when they
are two or more payments past due, and are charged off when they become five
payments delinquent.
Unless an extension, modification or rewritten loan is obtained,
Pacific Thrift's policy is to commence procedures for a non-judicial trustee's
sale within 30 to 60 days of a payment delinquency on a loan under the power of
sale provisions of the trust deed securing such loan, as regulated by applicable
law. Pacific Thrift's policy is to extend or rewrite a delinquent loan only if
it can be determined that the borrower has the ability to repay the loan on the
modified terms.
The determination of the adequacy of the allowance for loan losses is
based on a variety of factors, including loan classifications and underlying
loan collateral values, and the level of nonaccrual loans. See "BUSINESS --
Classified Assets and Nonperforming Assets -- Allowance for Loan Losses."
Therefore, changes in the amount of nonaccrual loans will not necessarily result
in increases in the allowance for loan losses. The ratio of nonaccrual loans
past due 90 days or more to total loans was 1.62% at December 31, 1995 and 5.35%
and 5.98% at December 31, 1994 and 1993, respectively. The ratio of the
allowance for loan losses to nonaccrual loans past due 90 days or more was
533.29% at December 31, 1995 and 136.94% and 58.74% at December 31, 1994 and
1993, respectively.
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<PAGE> 97
The following table sets forth the number and remaining gross balances
of all loans in the combined loan portfolio (net of specific reserves for loan
losses) that were more than 30 days delinquent at December 31, 1995 and 1994.
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRESIDENTIAL PACIFIC COMBINED
Loan Principal Amount Principal Amount Principal Amount Percent of
Delinquencies Loans Delinquent Loans Delinquent Loans Delinquent Total Loans
------------- ---------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
30 to 59 days $ 180,216 $ 29,673 $ 209,979 .43%
60 to 89 days 525,674 1,586 527,260 1.08%
90 days or more 718,182 1,391,318 2,110,500 4.30%
---------- ---------- ---------- -----
TOTAL $1,425,072 $1,422,667 $2,847,739 5.81%
========== ========== ========== =====
</TABLE>
AT DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRESIDENTIAL PACIFIC COMBINED
Loan Principal Amount Principal Amount Principal Amount Percent of
Delinquencies Loans Delinquent Loans Delinquent Loans Delinquent Total Loans
------------- ---------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
30 to 59 days $ 0 $ 513,191 $ 513,191 .87%
60 to 89 days 342,239 790,677 1,132,916 1.93%
90 days or more 3,053,613 2,695,109 5,748,722 9.78%
---------- ---------- ---------- -----
TOTAL $3,395,852 $3,998,977 $7,394,829 12.58%
========== ========== ========== ======
</TABLE>
NONACCRUAL AND RESTRUCTURED LOANS. The following table sets forth the
aggregate amount of loans at December 31, 1995, 1994 and 1993 which were (i)
accounted for on a nonaccrual basis; (ii) accruing loans which are contractually
past due 90 days or more as to principal and interest payments; and (iii)
troubled debt restructurings. Presidential and Pacific Thrift follow a practice
of extending or modifying loans in certain circumstances. Loans modified to
reduce interest rates below market rates, to reduce amounts due at maturity to
reduce accrued interest or to loan additional funds are considered "troubled
debt restructurings" as defined in SFAS 15.
<TABLE>
<CAPTION>
Accruing Loans Nonaccruing Loans
Past Due Past Due 90 Days Troubled Debt
90 Days or More or More Restructurings Total
--------------- ----------------- -------------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
At December 31, 1995
Presidential $ 331 $ 388 $360 $ 1,079
Pacific 986 405 588 1,979
------ ------ ---- -------
Combined $1,317 $ 793 $948 $ 3,058
====== ====== ==== =======
At December 31, 1994
Presidential $1,612 $1,442 $ 0 $ 3,054
Pacific 991 1,709 0 2,695
------ ------ ---- -------
Combined $2,603 $3,146 $ 0 $ 5,749
====== ====== ==== =======
At December 31, 1993
Presidential $2,626 4,229 $ 0 $ 6,856
Pacific 2,137 1,087 0 3,224
------ ------ ---- -------
Combined $4,764 $5,316 $ 0 $10,080
====== ====== ==== =======
</TABLE>
85
<PAGE> 98
The following table sets forth information concerning interest accruals
and interest on nonaccrual loans past due 90 days as of December 31, 1995, 1994
and 1993.
<TABLE>
<CAPTION>
Interest Interest Not
Contractually Recognized on
Due on Loans Interest Accrued Nonaccrual
Past Due on Loans Past Due Loans Past Due
90 Days or More 90 Days or More 90 Days or More
--------------- ----------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
At December 31, 1995
Presidential $ 96 $ 22 $ 74
Pacific 577 103 474
------ ---- ------
Combined $ 673 $125 $ 548
====== ==== ======
At December 31, 1994
Presidential $ 962 $187 $ 775
Pacific 562 75 487
------ ---- ------
Combined $1,524 $262 $1,262
====== ==== ======
At December 31, 1993
Presidential $1,377 617 760
Pacific 429 188 241
------ ---- ------
Combined $1,806 $805 $1,001
====== ==== ======
</TABLE>
Upon request of a borrower, Presidential or Pacific Thrift has
generally granted one to two months extensions of payments during the term of a
loan. In 1995, Presidential and Pacific extended 14 loans with an aggregate
principal balance of $1.6 million. In 1994, Presidential and Pacific Thrift
extended 37 loans with an aggregate principal balance of $5.5 million. No loan
was extended for a term of more than six months. In addition, Presidential or
Pacific Thrift may modify a loan by allowing temporary reductions in the amount
of principal or interest payable on a loan for up to twelve months. In 1995,
Presidential and Pacific modified 10 loans with an aggregate principal balance
of $1.3 million and rewrote four delinquent loans with an aggregate principal
balance of $.4 million. In 1994, Presidential and Pacific Thrift modified 37
loans with aggregate principal balances of $3.4 million; and rewrote 37
delinquent loans with an aggregate principal balance of $3.3 million.
Presidential and Pacific Thrift apply the same documentation standards on a
rewritten loan as on an original loan. Presidential and Pacific Thrift make
these accommodations only if it can be determined that the borrower has the
ability to repay the loan on the modified terms. In general, this determination
is made based upon a review of the borrowers current income, current debt to
income ratio, or anticipated sale of the collateral. Management believes that
these accommodations are a reasonable and necessary response to the increased
level of delinquencies experienced during the past three years. Presidential and
Pacific Thrift have had generally favorable experience with repayment of loans
extended, modified or rewritten on this basis.
Procedures upon delinquency of home improvement loans vary from the
foreclosure procedures ordinarily used to collect other loans. Upon 10 days'
delinquency, the borrower is contacted and an attempt to schedule payments is
made; if this is not possible, a determination is made whether the proceeds of a
foreclosure sale would result in a recovery of all or part of the loan amount,
after costs of foreclosure. In almost every case, there is insufficient equity
to foreclose on a home improvement loan, and the loan is charged off if it
becomes five payments delinquent. In addition to losses on its retained interest
in home improvement loans, Pacific Thrift may be required to repurchase
participation interests sold in Title I Loans if Pacific Thrift is found to have
breached its warranties that such loans complied with insurance requirements.
Pacific Thrift has never been required to repurchase any loan participation
interests.
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<PAGE> 99
However, no assurance can be given that Pacific Thrift will not be required to
repurchase any loan participation interests in the future.
The initiation of foreclosure proceedings against a borrower does not
suggest that the recovery of the loan is dependent solely on the underlying
collateral. In fact, many borrowers will bring payments current or undertake
other remedies so that foreclosure is not required.
At December 31, 1995, Presidential and Pacific Thrift held OREO (net of
specific reserves) of $3.2 million (inclusive of senior liens of $.6 million).
In accordance with the policy for recognizing losses upon acquisition of OREO,
Presidential and Pacific Thrift charge off or post specific reserves for those
portions of the loans with respect to which OREO has been acquired to the extent
of the difference between the loan amount and the estimated fair value of the
OREO. Included in OREO at December 31, 1995 are nine single family residences
with an aggregate net book value of $1.2 million (inclusive of $.6 million
senior liens); three multi-family units with an aggregate net book value of $.4
million (with no senior liens) 12 commercial properties with an aggregate net
book value of $1.5 million (with no senior liens); and two undeveloped
properties with an aggregate net book value of $.1 million (with no senior
liens). For the year ended December 31, 1995, total expenses on operation,
including valuation allowances, and losses on sale of OREO were $2.3 million and
gains on sale of OREO and OREO income were $1.1 million for a total expense of
$1.2 million. There can be no assurance that net losses on the sale of OREO will
not be experienced in the future.
ALLOWANCE FOR LOAN LOSSES. The following is a summary of the changes in
the consolidated allowance for loan losses of Presidential and Pacific Thrift
for each of the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
(IN THOUSANDS)
--------------------------------------
<S> <C> <C> <C>
Balance at beginning of period ....... $ 4,307 $ 3,123 $ 2,646
Provision for loan losses ............ 3,289 6,096 4,655
Chargeoffs: .......................... (3,369) (4,912) (4,179)
Recoveries ........................... 2 -- --
------- ------- -------
Balance at end of period ............. $ 4,229 $ 4,307 $ 3,123
======= ======= =======
</TABLE>
Management performed an extensive review and analysis of the entire
combined loan portfolio at year end 1992, including performing and nonperforming
loans. Over 300 new independent or in-house appraisals were performed at that
time, resulting in a significant adjustment to the allowance for loan losses in
the fourth quarter of 1992. In 1993, new management of Pacific Thrift
implemented new policies and procedures for determining the allowance for loan
losses. In connection with the implementation of these new policies and
procedures, new outside appraisals were ordered for almost every loan delinquent
60 days or more with a balance of $75,000 or more as to which an outside
appraisal had not been performed for at least six months. As a result of that
review and analysis, additional charge offs and reserves were taken by Pacific
Thrift during the fourth quarter of 1993.
In December 1993, Pacific Thrift engaged an independent consulting firm
to assist Pacific Thrift in devising a comprehensive asset classification system
for the purpose of analyzing the allowance on a monthly basis. Effective in
March 1994, the Board of Directors adopted an asset classification system
pursuant to which every delinquent loan and every performing loan which exhibits
certain risk characteristics is graded monthly, and a general reserve percentage
is assigned to each classification level. Management also reviews every
delinquent loan on a monthly basis and reviews the current estimated fair
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<PAGE> 100
market value of the property securing that loan. To the extent that the amount
of the delinquent loan exceeds the estimated fair market value of the property,
an additional reserve is made for that loan.
At year end 1994, due to the continuing declines in California real
estate values which occurred in 1994, management of the Partnership determined
that additional reserves were necessary. Accordingly, management analyzed the
amount of loans charged off throughout 1993 and 1994, and obtained broker price
opinions on a substantial number of loans. As a result of this analysis, the
Partnership determined to make a significant adjustment to the provision for
loan losses for the forth quarter of 1994.
Pacific Thrift's current policy is to maintain an allowance for loan
losses equal to the amount determined necessary based upon Pacific Thrift's
asset classification policy, which is written to conform with generally accepted
accounting principles and FDIC requirements. The Partnership's current policy is
to maintain an allowance for loan losses determined in accordance with generally
accepted accounting principles.
Management utilizes its best judgment in providing for possible loan
losses and establishing the allowance for loan losses. However, the allowance is
an estimate which is inherently uncertain and depends on the outcome of future
events. In addition, regulatory agencies, as an integral part of their
examination process, periodically review Pacific Thrift's allowance for loan
losses. Such agencies may require Pacific Thrift to recognize additions to the
allowance based upon their judgment of the information available to them at the
time of their examination.
Implicit in lending activities is the fact that losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the portfolio. The allowance for loan
losses is increased by the provision for loan losses charged to expense. The
conclusion that a loan may become uncollectible, in whole or in part, is a
matter of judgment.
Adverse economic conditions and a declining real estate market in
California have adversely affected certain borrowers' ability to repay loans. A
continuation of these conditions or a further decline in the California economy
could result in further deterioration in the quality of the loan portfolio and
continuing high levels of nonperforming assets and charge-offs, which would
adversely effect the financial condition and results of operations of the
Partnership and Pacific Thrift.
INVESTMENT ACTIVITIES
Except for Pacific Thrift, neither Presidential nor any of its
operating subsidiaries maintains an investment portfolio. Pacific Thrift's
investment portfolio is used primarily for liquidity purposes and secondarily
for investment income. Effective January 1, 1994, Pacific Thrift's policy is to
invest cash in short-term U.S. government securities or federal funds sold due
in less than 30 days. Overnight federal funds sold are limited to no more than
100% of total capital at any single financial institution that is either
adequately or well capitalized. If the financial institution is neither
adequately nor well capitalized, then the limit is $100,000. As of December 31,
1995 and 1994, Pacific Thrift held investments in federal funds totaling $7.7
million and $12.5 million, respectively. As of December 31, 1993 and 1992,
Pacific Thrift held excess cash in interest-earning bank accounts and there were
no investments.
SOURCES OF FUNDS
DEPOSITS. Pacific Thrift's major source of funds is FDIC-insured
deposits, including passbook savings accounts, money market accounts and
investment certificates (similar to certificates of deposit). Pacific Thrift
attracts customers for its deposits by offering rates that are slightly higher
than rates offered by large commercial banks and savings and loans. Pacific
Thrift has no brokered deposits as of the date hereof. Management believes its
deposits are a stable and reliable funding source. At December 31, 1995, Pacific
Thrift had outstanding 1,486 deposit accounts of approximately $60.2 million.
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<PAGE> 101
The following table sets forth the average balances and average rates
paid on each category of Pacific Thrift's deposits for the nine months ended
December 31, 1995 and the three years ended December 31, 1994.
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
Averages for 1995 Averages for 1994 Averages for 1993
----------------- ----------------- -----------------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Passbook/Money Market $13,322 5.39% $23,868 3.79% $ 4,451 3.59%
Investment Certificates $49,931 6.20% $43,828 4.59% $46,609 5.92%
under $100,000
Investment Certificates $ 100 7.02% $ 415 6.68% $ 4,621 6.58%
over $100,000 ------- ---- ------- ---- ------- ----
Total $63,353 6.03% $68,111 4.32% $55,681 5.78%
======= ==== ======= ==== ======= ====
</TABLE>
The following schedule sets forth the time remaining until maturity for
all certificates at December 31, 1995, 1994 and 1993.
DEPOSIT MATURITIES
<TABLE>
<CAPTION>
At At As of As of
December 31, December 31, December 31, December 31,
1995 1994 1993 1992
(Dollars in (Dollars in (Dollars in (Dollars in
Thousands) Thousands) Thousands) Thousands)
<S> <C> <C> <C> <C>
Passbook/Money Market $24,275 $11,443 $21,004 $ 3,170
------- ------- ------- -------
Accounts under $100,000
3 months or less $12,723 $25,522 $ 5,886 $ 6,173
Over 3 months through 6 months 13,439 17,201 7,663 4,663
Over 6 months through 12 months 9,084 10,654 12,634 7,330
Over 12 months 635 4,579 13,441 24,699
------- ------- ------- -------
Total $35,881 $57,956 $39,624 $42,865
------- ------- ------- -------
Accounts over $100,000
3 months or less -0- $ 102 $ 300 $ 300
Over 3 months through 6 months -0- -0- 100 600
Over 6 months through 12 months -0- -0- 1,092 200
Over 12 months -0- -0- 300 3,426
------- ------- ------- -------
Total -0- $ 102 $ 1,792 $ 4,526
------- ------- ------- -------
TOTAL DEPOSITS $60,156 $69,501 $62,420 $50,561
======= ======= ======= =======
</TABLE>
89
<PAGE> 102
OTHER BORROWINGS. Presidential made use of substantial lines of credit
from major banks to fund its loan portfolio growth from 1984 through 1989. The
original Bank Loan provided by NatWest in 1990 was a revolving credit line of
$105 million, under which Presidential borrowed a maximum of $82 million during
1990 (the "Bank Loan"). The credit line was reduced by mutual agreement in 1991
to $48 million with an $18 million interim loan, which interim loan was fully
repaid by April 1992. In March 1992, Presidential was informed that NatWest's
management had determined to reduce its exposure to California real estate
secured lending due to the general decline in California real estate values and
increasing delinquency rates. Accordingly, the Bank Loan provided for continuing
monthly pay downs of from $1 million to $1.5 million, which reduced the
available credit line to $30.3 million by March 31, 1993. Further paydowns of $1
million per month were required from April 30 to June 30, 1993, and $300,000 per
month from July 1, 1993 through June 30, 1994. At December 31, 1995,
Presidential owed a total balance of $6.8 million on the Bank Loan.
Presidential exceeded the scheduled monthly pay down requirements
through December 31, 1994, from a combination of cash flow from operations and
loan sales, including sales of approximately $3.8 million, $6.4 million and
$12.6 million of loans during 1994, 1993 and 1992, respectively. However, due to
an increase in loan delinquencies, management determined that Presidential was
not in compliance with loan eligibility requirements in December 1993. This
required Presidential to make additional prepayments, which it was unable to
make. Presidential informed NatWest of this event of default on December 8,
1993. All events of default identified by Presidential to NatWest, including the
failure to meet certain financial ratios and the failure to make prepayments
required as a result, were automatically waived when Bank Loan was amended and
restated on December 31, 1994.
The Bank Loan was further amended as of November 29, 1995 to extend the
maturity date by one year. Under the current terms of the Bank Loan,
Presidential has until June 30, 1997, to fully repay the outstanding balance
owed to NatWest. Presidential is required to utilize 100% of its net cash flow
to pay down the Bank Loan. Net cash flow is defined as total cash receipts less
collection costs, loan servicing expenses and general and administrative
expenses, subject to certain maximum levels based upon projected expenses
prepared by Presidential. The loan balance bears interest at prime plus 1.5%.
Mandatory pay down levels require reduction of the loan balance by approximately
$1 million per quarter through June 30, 1997. Presidential is further required
to maintain a collateral coverage ratio of performing loans relative to its loan
balance equal to 1.1:1, increasing to 1.2:1 after June 30, 1995 and a total
collateral coverage ratio of total loans receivable and net OREO relative to its
loan balance equal to 1.6:1.
As of December 31, 1995, Presidential was in compliance with all
requirements under the Bank Loan, except that it had not met a technical
covenant relating to a limit on monthly cash expenses. Due to expenses in
connection with the Restructuring Plan, cash expenses exceeded the budgeted
expenses by $177,000. NatWest agreed to waive this technical violation of the
Bank Loan on February 12, 1996. As of the date hereof, management believes that
Presidential is in compliance with all requirements under the Bank Loan.
Cash distributions by Presidential to the General Partner are
restricted to the General Partner's overhead expenses, and all distributions and
withdrawal payments are and will remain restricted for the full term of the Bank
Loan. The General Partner and the three managing officers of Presidential
reaffirmed their personal guarantees of the Bank Loan in connection with the
amendment of the Bank Loan dated as of September 28, 1994. These guarantees have
been reaffirmed in connection with all subsequent amended and restated versions
of the Bank Loan.
Borrowings under the Bank Loan are secured by Presidential's loans
receivable and other assets. As additional security for the Bank Loan, the
General Partner has pledged its Class A and B Units in Presidential. Further,
the General Partner made an unsecured loan to Presidential of $600,000 on May
15, 1992, which accrues interest at the Bank's prime rate (8.25% as of February
1, 1996), but which will not be repaid as to principal or interest without
consent of the Bank.
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<PAGE> 103
Upon the Closing Date of the Restructuring Plan, Presidential will pay
to the General Partner $385,000 of the net $564,582 amount owed to the General
Partner under the $600,000 note, along with other debts owed to the General
Partner of $280,838 at December 31, 1995, less a balance of $316,256 owed by the
General Partner to Presidential. The remaining net debt owed to the General
Partner will be paid to the extent permitted by NatWest, with any remaining
balance paid after the Bank Loan has been repaid in full.
In addition, upon the Closing Date of the Restructuring Plan, the Bank
will receive a five-year warrant to purchase up to 2% of the total outstanding
Common Stock of the Corporation, exercisable at a price equal to 25% of the
tangible book value of the Corporation as of December 31, 1995, as adjusted for
the additional shares sold in the Rights Offering and the Public Offering. The
Corporation will have the right to redeem the warrant at any time for one year
from the date of issuance for $200,000.
COMPETITION
Pacific Thrift has significant competition in California for the
origination of mortgage loans from banks, savings and loans, other thrift and
loans and mortgage companies. Some of the these companies are headquartered in
California, and have extensive branch systems and advertising programs which
Pacific Thrift does not have. Pacific Thrift compensates for these competitive
disadvantages by seeking niche lending markets underserved by other lenders and
by providing a higher level of personal service to borrowers.
Pacific Thrift faces competition for depositors' funds from other
thrift and loans, banks, savings and loans, credit unions and, increasingly,
from mutual funds and life insurance annuity products. Pacific Thrift does not
offer checking accounts, travelers' checks or safe deposit boxes and thus has a
competitive disadvantage to commercial banks and savings associations in
attracting depositors. Pacific Thrift compensates for the lack of a full array
of services by offering slightly higher interest rates for deposits than most
large banks and savings and loans, while remaining interest rate competitive
with smaller banks, savings and loan associations and thrift and loans.
EMPLOYEES
As of December 31, 1995, Presidential had no employees, but received
full time services from four full-time employees of the General Partner. CRC and
LPPC received the services of 37 full time and 1 part time employees on the
payroll of the General Partner. As of the same date, Pacific Thrift had 171 of
its own full time employees, including 60 commission-based loan representatives
and 2 part-time employees.
PROPERTIES
Presidential, Pacific Thrift, Unified, CRC and LPPC do business at
their main office in Woodland Hills, California. Pacific Thrift also does
business at five loan production offices in Costa Mesa, West Covina, Walnut
Creek and San Jose, California and, as of June 27, 1994, Bellevue, Washington.
CRC Washington leases office space from Pacific Thrift at its Bellevue,
Washington office.
All of the offices at which Presidential and its subsidiaries conduct
business are leased. Information with respect to each of the offices as of
December 31, 1995 is as follows:
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<PAGE> 104
<TABLE>
<CAPTION>
Floor Space Annual Expiration
Location in Square Ft. Rental(1) Date
- -------- ------------- --------- ----------
<S> <C> <C> <C>
Woodland Hills, CA(2)(3) 19,600 $487,570 07/31/03
Costa Mesa, CA 6,331 150,728 11/14/96
West Covina, CA 3,877 67,460 05/30/99
Walnut Creek, CA(4) 9,037 132,956 03/14/00
San Jose, CA 1,483 24,914 02/28/97
Bellevue, WA 2,224 36,696 08/31/98
</TABLE>
(1) Subject to annual adjustment in accordance with customary escalation
clauses, except as provided in footnote 2 below with respect to the
Woodland Hills lease, which only provides for escalation of expense
sharing obligations.
(2) Pursuant to a lease entered January 11, 1993, annual rental increases
to $505,680 from March 1, 1996 to July 31, 1998, to $517,440 from
August 1, 1998 through January 31, 2001, and to $529,200 from February
1, 2001 through July 31, 2003. The lease is accounted for on the
straight line average method of accounting, in accordance with
generally accepted accounting principles.
(3) Does not include a month-to-month lease for an additional 1295 square
feet in the same building, at an annualized rental rate of $26,412.
(4) Includes three separate leases for 4,682 square feet entered in March
1995, 2,418 square feet entered in October 1995 and 1,937 square feet
entered in December 1995 at rental rates between $1.85 and $2.00 per
square foot. The lease entered in March 1995 provides for annualized
rent set at $101,131 through September 1995, increasing to $103,944
through September 1997, and to $106,752 through March 2000. The other
two leases provide for annual rent of $58,032 and $45,325,
respectively.
LEGAL PROCEEDINGS
Presidential and its subsidiaries are parties to certain legal
proceedings incidental to its lending and trust deed foreclosure service
businesses, some of which seek unspecified damages or substantial monetary
damages in the form of punitive damages. The ultimate outcome of such litigation
cannot presently be determined. Management, after review and consultation with
counsel, and based upon historical experience with prior collection actions, has
determined that the outcome of such proceedings would not have a material
adverse impact on the Partnership's business, financial condition or results of
operations.
In addition to actions incidental to its lending business, Presidential
and/or its subsidiaries are parties to the following actions.
Environmental Actions. Presidential and Pacific Thrift acquired two
properties in foreclosure which were used by borrowers unaffiliated with the
Partnership for metal plating operations involving hazardous materials. After
acquisition of the two properties, the Partnership and Pacific Thrift each
received notices from local government authorities requiring removal of
hazardous materials left by the prior owners of each of the properties and
remediation of soil contamination.
Presidential and Pacific Thrift engaged an independent environmental
consulting firm to determine the extent of soil contamination of each of the
properties, and to prepare proposed remediation plans for each site. The
proposed remediation plans, which were completed in September 1994, had an
estimated cost of $674,000 to Presidential and $820,000 to Pacific Thrift,
including consulting and special counsel fees. These amounts were accrued at
December 31, 1993 and reserved for payment as expenses were incurred.
In April 1995, Pacific Thrift obtained a revised estimate for the cost
of environmental remediation of the Whittier property it acquired in
foreclosure. The new estimated cost is significantly lower than the
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<PAGE> 105
original estimate. Therefore, in April and May, 1995, Pacific Thrift reversed
$403,000 of the reserve which had been set aside to pay for remediation.
Remediation was completed as of July 1995, and the property is now listed for
sale.
Presidential obtained a revised bid of $500,000 to complete
environmental remediation of the San Bernardino property it acquired in
foreclosure. Remediation was completed in December 1995, and Presidential is now
awaiting approval of the closure plan from the government agency overseeing the
remediation process. When this approval is obtained, the property will be listed
for sale.
On January 2, 1994, Presidential and Pacific Thrift implemented a
comprehensive environmental policy which requires environmental risk assessment
by appraisers of every new loan made by Presidential or Pacific Thrift and a
full environmental risk report on any commercial or industrial property used as
collateral for a loan of $250,000 or more. The policy provides that no loan will
be made in the event an environmental risk assessment or report indicates the
possible presence of environmental contamination. In addition, the policy
provides that no property will be acquired in foreclosure if facts are
discovered indicating the existence of significant environmental contamination.
If Presidential or Pacific Thrift determines not to foreclose on a secured
property due to environmental contamination, the collectability of a loan could
be substantially reduced.
Foreclosure Publication Fees Action. On June 6, 1995, CRC and LPPC were
served with a complaint by Consumer Action and two consumers suing both
individually and on behalf of the general public in a purported class action
filed in the Superior Court of Contra Costa County, California. The complaint
named CRC and LPPC, along with thirteen other foreclosure service and
foreclosure publishing companies, and alleges that all named defendants charge
fees in excess of the statutorily permitted amount for publication of notices of
trustee sales. The complaint seeks restitution of all excess charges, an
injunction against the charging of excessive fees in the future and attorneys
fees. In January 1996, LPPC and two other posting and publishing companies were
dismissed from the action without prejudice. The case is still in the pleading
stage, discovery has not yet commenced and the purported class of plaintiffs has
not yet been certified.
Management believes that CRC has charged foreclosure and publication
fees in compliance with applicable law. However, if the above described action
was decided against CRC, management estimates that CRC's aggregate potential
liability would not exceed $1 million, which would have a material adverse
effect on annual earnings of the Corporation, but would not have a material
adverse effect on the financial condition or longer term earnings of the
Corporation.
DIVIDEND POLICY
The Partnership paid regularly quarterly distributions to the Partners
in accordance with the provisions of the Partnership Agreement until June 1993.
The total amount of distributions was based upon the Partnership Agreement,
which provided for distributions based upon the Net Profits of the Partnership,
defined as net profits calculated in accordance with generally accepted
accounting principles, except that loan origination fees are allowed to be
treated as income in the year in which loans are originated, whereas generally
accepted accounting principles require that such income be deferred over the
life of the loan. To the extent that distributions paid out between 1981 and
1993 exceed net profits under generally accepted accounting principles, such
distributions represented a return of capital under generally accepted
accounting principles.
For the year ended December 31, 1992, the Partnership distributed
$1,730,385 to the Partners in excess of Net Profits as determined under the
Partnership Agreement. Such distributions constituted a return of capital.
For the year ended December 31, 1993, the Partnership distributed
$916,309, all of which was determined at year end to be in excess of Net
Profits as determined under the Partnership Agreement.
No distributions were made by the Partnership in 1994 or 1995.
Information respecting the payment of distributions to the Limited
Partners of the Partnership for the past five years is as follows:
93
<PAGE> 106
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter
------------------------- ------------------------- --------------------------
Class of Quarterly Quarterly Quarterly
Limited Distribu- Quarterly Distribu- Quarterly Distribu- Quarterly
Partners tions Returns tions Returns tions Returns
- -------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1995
Class A -- -- -- -- -- --
Class B -- -- -- -- -- --
Class C -- -- -- -- -- --
Class D -- -- -- -- -- --
Class E -- -- -- -- -- --
DRP Units -- -- -- -- -- --
1994
Class A -- -- -- -- -- --
Class B -- -- -- -- -- --
Class C -- -- -- -- -- --
Class D -- -- -- -- -- --
Class E -- -- -- -- -- --
DRP Units -- -- -- -- -- --
1993
Class A 51,725 2,959 -- -- -- --
Class B 73,603 2,517 -- -- -- --
Class C 298,289 2,244 -- -- -- --
Class D 279,867 2,244 -- -- -- --
Class E 197,583 1,866 -- -- -- --
DRP Units 3,404 1,376 -- -- -- --
1992
Class A $ 54,330 3.125% $ 54,330 3.125% $ 54,927 3.125%
Class B 82,447 2.625% 80,571 2.625% 80,539 2.625%
Class C 352,009 2.500% 348,356 2.500% 344,269 2.500%
Class D 337,460 2.500% 330,490 2.500% 325,920 2.500%
Class E 222,171 2.020% 209,099 1.916% 210,119 1.937%
DRP Units 2,536 1.625% 2,886 1.625% 3,199 1.625%
1991
Class A $ 64,657 3.750% $ 65.375 3.750% $ 66,094 3.750%
Class B 107,556 3.250% 106,204 3.250% 105,987 3.250%
Class C 473,573 3.000% 469,951 3.000% 466,953 3.000%
Class D 448,578 3.000% 448,211 3.000% 447,982 3.000%
Class E 245,602 2.708% 264,268 2.708% 287,387 2.636%
DRP Units 1,496 2.250% 2,024 2.250% 2,547 2.250%
1990
Class A $ 75,497 4.000% $ 74,556 4.000% $ 72,214 4.000%
Class B 121,298 3.500% 121,660 3.500% 122,512 3.500%
Class C 561,713 3.250% 559,802 3.250% 551,322 3.250%
Class D 524,226 3.250% 519,480 3.250% 509,832 3.250%
Class E 99,456 3.120% 173,168 3.120% 230,747 3.120%
DRP Units 59 2.500% 320 2.500% 729 2.500%
</TABLE>
<TABLE>
<CAPTION>
Fourth Quarter
------------------------- Fifth Total
Class of Quarterly Level Fifth Annual
Limited Distribu- Quarterly Distribu- Level Distribu- Annual
Partners tions Returns tions Returns tions Returns
- -------- --------- --------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
1995
Class A -- -- -- -- -- --
Class B -- -- -- -- -- --
Class C -- -- -- -- -- --
Class D -- -- -- -- -- --
Class E -- -- -- -- -- --
DRP Units -- -- -- -- -- --
1994
Class A -- -- -- -- -- --
Class B -- -- -- -- -- --
Class C -- -- -- -- -- --
Class D -- -- -- -- -- --
Class E -- -- -- -- -- --
DRP Units -- -- -- -- -- --
1993
Class A -- -- -- -- 51,725 2.959
Class B -- -- -- -- 73,603 2.517
Class C -- -- -- -- 298,289 2.244
Class D -- -- -- -- 279,867 2.244
Class E -- -- -- -- 197,583 1.866
DRP Units -- -- -- -- 3,404 1.376
1992
Class A $ 54,927 3.125% $ 1,092 0.063% $ 219,606 12.5625%
Class B 78,784 2.625% 1,919 0.063% 324,260 10.5625%
Class C 329,694 2.375% 9,043 0.063% 1,383,371 9.5625%
Class D 310,862 2.375% 9,491 0.063% 1,314,223 9.5625%
Class E 209,003 1.937% 6,691 0.063% 857,083 7.8113%
DRP Units 3,481 1.625% 116 0.063% 12,218 6.5625%
1991
Class A $ 66,094 3.750% $ 2,185 .125% $ 264,406 15.125%
Class B 105,044 3.250% 4,088 .125% 428,879 13.125%
Class C 456,281 3.000% 19,960 .125% 1,886,718 12.125%
Class D 439,004 3.000% 18,596 .125% 1,802,371 12.125%
Class E 273,833 2.466% 15,175 .125% 1,086,265 10.643%
DRP Units 3,027 2.250% 127 .125% 9,220 9.125%
1990
Class A $ 71,040 4.000% $ 2,289 .125% $ 295,595 16.125%
Class B 120,479 3.500% 4,332 .125% 490,281 14.125%
Class C 537,064 3.250% 21,218 .125% 2,231,119 13.125%
Class D 500,933 3.250% 19,726 .125% 2,074,196 13.125%
Class E 268,688 3.120% 8,007 .125% 780,066 12.635%
DRP Units 1,186 2.500% 27 .125% 2,320
Initial Return(1)
</TABLE>
(1) Represents the lower initial investment return on Class E Units paid on new
subscriptions for Class E units monthly in excess of $2 million per month,
at a rate equal to 0.125% above the Merrill Lynch Ready Asset Trust
annualized average rate of return after expenses for the past 30 days.
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<PAGE> 107
The following table illustrates the total amount of distributions
received per $1,000 invested for each class of Partners, beginning in the year
in which each class invested and assuming that the $1,000 investment was made
on the first date that each class of partners was admitted. The table compares
the total amount of distributions to the total amount invested for each class
of Partners.
<TABLE>
<CAPTION>
CLASS CLASS CLASS CLASS CLASS CLASS
A B C D E R TOTAL
<S> <C> <C> <C> <C> <C> <C>
DISTRIBUTION ON $1,000
1991 Distribution $ 260.40
1982 Distribution 260.50
1983 Distribution 246.70 $ 176.70
1984 Distribution 193.00 173.00
1985 Distribution 168.20 148.20 $ 140.70
1986 Distribution 156.50 136.50 126.50
1987 Distribution 145.30 125.30 115.30 $115.30
1988 Distribution 146.30 126.30 116.30 116.30
1989 Distribution 171.25 151.25 141.25 141.25 $135.00
1990 Distribution 161.25 141.25 131.25 131.25 126.35 $101.25
1991 Distribution 151.25 131.25 121.25 121.25 106.43 91.25
1992 Distribution 125.62 105.63 95.63 95.63 78.11 65.00
1993 Distribution 29.59 24.66 22.19 22.19 18.49 14.79
Total $2,215.86 $1,440.04 $1,010.37 $743.17 $464.38 $272.00
Percent of
Investment 221.59% 144.00% 101.04% 74.32% 46.44% 27.23%
</TABLE>
The Corporation, which was recently organized, has never paid a cash
dividend on its Common Stock and does not intend to consider the payment of
dividends until at least the fourth quarter of 1997. The Corporation's ability
to pay dividends is subject to restrictions set forth in the Delaware General
Corporation law. The Delaware General Corporation Law provides that a Delaware
corporation may pay dividends either (i) out of the corporation's surplus (as
defined in Delaware law), or (ii) if there is no surplus, out of the
corporation's net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. However, pursuant to Section 2115 of the
California General Corporation Law, under certain circumstances, certain
provisions of the California General Corporation Law may be applied to foreign
corporations qualified to do business in California, which may reduce the
amount of dividends payable by the Corporation. See "DESCRIPTION OF CAPITAL
STOCK -- Effect of Quasi-California Corporation Law."
The Corporation's ability to pay cash dividends in the future will
depend in large part on the ability of its operating subsidiaries to pay
dividends to the Corporation. The ability of Pacific Thrift to pay dividends to
the Corporation is subject to restrictions set forth in the California
Industrial Loan Law and the provisions of the California General Corporation
Law, and the Regulations of the FDIC and the DOC. In addition, the provisions
of the
95
<PAGE> 108
1995 Order require the consent of the FDIC for the payment of any dividends by
Pacific Thrift. See "SUPERVISION AND REGULATION -- Federal Law -- Restrictions
on Transfers of Funds to the Partnership or the Corporation by Pacific Thrift."
MARKET FOR LIMITED PARTNERSHIP UNITS
AND COMMON STOCK OF THE CORPORATION
LIMITED PARTNERSHIP UNITS
There is no public trading market for the Limited Partnership Units of
the Partnership and there are restrictions on the transferability of such
interests. For the first nine months of 1995, management has knowledge of five
sales of Limited Partnership units. Management has no information concerning the
sale price with respect to three of the five sales. Management is informed that
Class C Units originally purchased for $30,000 sold for $4,500 and that Class E
Units originally purchased for $9,500 sold for $3,800. Management has no
information concerning the circumstances of each sale or the basis used to
establish the purchase price of any of the Units sold and management does not
believe that these sales are representative of the market value of limited
Partnership Units.
COMMON STOCK
There has been no public market for the Common Stock. The Common Stock
has been conditionally approved for listing on the Nasdaq National Market under
the symbol "PUGG." Friedman, Billings, Ramsey & Co., Inc., has indicated its
intention to make a market in the Common Stock. This firm is not obligated,
however, to make a market in the Common Stock and any market making may be
discontinued at any time.
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<PAGE> 109
SUPERVISION AND REGULATION
Financial and lending institutions are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of Presidential and Pacific Thrift. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
CONSUMER PROTECTION LAWS
Presidential and Pacific Thrift are subject to numerous federal and
state consumer protection laws, including the Federal Truth-In-Lending Act, the
Federal Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Federal
Fair Debt Collection Practices Act and the Federal Reserve Board's Regulations B
and Z. These laws and regulations, among other things, limit the finance
charges, fees and other charges on loans, require certain disclosures be made to
borrowers, regulate the credit application and evaluation process and regulate
certain servicing and collection practices. These laws and regulations impose
specific liability upon lenders who fail to comply with their provisions, and
may give rise to defense to payment of a borrower's obligation in the event of a
failure to comply with certain applicable laws. Presidential and Pacific Thrift
believe they are currently in compliance in all material respects with
applicable laws, but there can be no assurance that they will be able to
maintain such compliance. The failure to comply with such laws, or a
determination by a court that their interpretation of law was erroneous, could
have a material adverse effect on Presidential, Unified or Pacific Thrift, or
upon the Corporation as a whole following the Restructuring.
STATE LAW
PRESIDENTIAL
Presidential is subject to regulation, supervision and examination by
the DOC under their California Finance Lender Licenses. The California Finance
Lender Law and regulations of the DOC promulgated thereunder provide maximum
charges and fees (although most limitations apply only to loans under $5,000 or
$10,000), provide certain maximum repayment terms for loans under $5,000,
provide certain required disclosure documents to borrowers, limit sales of loans
to certain purchasers, and provide certain penalties for violations of
applicable laws and regulations. Presidential does not accept deposits or issue
investment certificates and are not, under current law and applicable
regulations, directly regulated or supervised by the FDIC, the Federal Reserve
Board or any other bank regulatory authority. However, Presidential is subject
to the general regulatory and enforcement authority of the DOC and the FDIC over
transactions and dealings between Pacific Thrift and its affiliates, and except
with respect to both the specific limitations regarding ownership of the capital
stock of the parent corporation of any thrift and loan, and the specific
limitations regarding the payment of dividends from Pacific Thrift.
PACIFIC THRIFT
Pacific Thrift is subject to regulation, supervision and examination by
the DOC under its California Thrift and Loan License. The thrift and loan
business conducted by Pacific Thrift is governed by the California Industrial
Loan Law and the rules and regulations of the DOC which, among other things,
regulate collateral requirements and maximum maturities of the various types of
loans that are permitted to be made by California-licensed industrial loan
companies, better known as thrift and loan companies.
Subject to restrictions imposed by applicable California law, Pacific
Thrift is permitted to make secured and unsecured consumer and non-consumer
loans. The maximum term of repayment of loans made by thrift and loan companies
ranges up to 40 years and 30 days depending upon collateral and priority of the
secured position, except that loans with repayment terms in excess of 30 years
and 30 days may not in the aggregate exceed 5% of the total outstanding loans
and obligations of the company. Although secured
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loans may generally be repayable in unequal periodic payments during their
respective terms, consumer loans secured by real property with terms in excess
of three years must be repayable in substantially equal periodic payments unless
such loans are covered under the Garn-St. Germain Depository Institutions Act of
1982 (primarily one-to-four family residential mortgage loans).
California law limits loans by thrift and loan companies to persons who
do not reside in California to no more than 20% of total assets, or up to 30% of
total assets with approval of the DOC. California law contains extensive
requirements for the diversification of the loan portfolio of thrift and loan
companies. A thrift and loan with outstanding investment certificates may not,
among other things, have more than 25% of its loans or other obligations in
loans or obligations which are secured only partially, but not primarily, by
real property; may not make any one loan secured primarily by improved property
which exceeds 20% of its paid-up and unimpaired capital stock and surplus not
available for dividends; may not lend an amount in excess of 5% of its paid-up
and unimpaired capital stock and surplus not available for dividends upon the
security of the stock of any one corporation; may not make loans to, or hold the
obligations of, any one person or control group as primary obligor in an
aggregate principal amount exceeding 20% of its paid-up and unimpaired capital
stock and surplus not available for dividends; and may have no more than 70% of
its total assets in loans which have remaining terms to maturity in excess of
seven years and are secured solely or primarily by real property.
A thrift and loan generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the DOC. A thrift and loan may not make any loan to, or hold an
obligation of, any of its shareholders or any shareholder or its holding company
or affiliates, except that this prohibition does not apply to persons who own
less than 10% of the stock of a holding company or affiliate which is listed on
a national securities exchange. There are currently no outstanding loans made by
either the Partnership or Pacific Thrift to any officers or directors of the
Partnership or any of its affiliates. Any person who wishes to acquire 10% or
more of the capital stock of a California thrift and loan company or 10% or more
of the voting capital stock or other securities giving control over management
of its parent company must obtain the prior written approval of the DOC.
A thrift and loan is subject to certain leverage limitations which are
not generally applicable to commercial banks or savings and loan associations.
In particular, thrift and loans may not have outstanding at any time investment
certificates that exceed 20 times paid-up and unimpaired capital and surplus.
Under California law, thrift and loans that desire to increase their leverage
must meet specified minimum standards for liquidity reserves in cash, loan loss
reserves, minimum capital stock levels and minimum unimpaired paid-in surplus
levels. As approved by the DOC, Pacific Thrift can currently operate with a
ratio of deposits to unimpaired capital and unimpaired surplus of 15:1.
At December 31, 1994, Pacific Thrift's total deposits were 22.3 times
its paid-up and unimpaired capital and unimpaired surplus not available for
dividends, which was in violation of its authorized thrift ratio, due to a
reduction in capital. Pacific Thrift returned to compliance with the 15:1 thrift
ratio as of April 30, 1995. As of December 31, 1995, Pacific Thrift had a 9.8:1
thrift ratio.
Under provisions of the FDIC Improvement Act and regulations issued by
the FDIC, additional limitations have been imposed with respect to depository
institutions' authority to accept, renew or rollover brokered deposits. Pacific
Thrift does not have any brokered deposits as of the date hereof.
Thrift and loan companies are not permitted to borrow, except by the
sale of investment or thrift certificates, in an amount exceeding 300% of
tangible net worth, surplus and undivided profits, without the DOC's prior
consent. All sums borrowed in excess of 150% of tangible net worth, surplus and
undivided profits must be unsecured borrowings or, if secured, approved in
advance by the DOC, and be included as investment or thrift certificates for
purposes of computing the maximum amount of certificates a thrift and loan may
issue. However, collateralized Federal Home Loan Bank advances are excluded for
this test
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of secured borrowings and are not specifically limited by California law.
Pacific Thrift had no borrowed funds other than deposits at December 31, 1995.
Under California law, thrift and loan companies are generally limited
to investments, other than loans, that are legal investments for commercial
banks. California commercial banks are prohibited from investing an amount
exceeding 15% of shareholders' equity in the securities of any one issuer,
except for specified obligations of the United States, California and local
governments and agencies. A thrift and loan company may acquire real property
only in satisfaction of debts previously contracted, pursuant to certain
foreclosure transactions or as may be necessary for the transaction of its
business, in which case such investment, combined with all investments in
personal property, is limited to one-third of a thrift and loan's paid-in
capital stock and surplus not available for dividends. For the period between
December 31, 1994 and February 28, 1995, Pacific Thrift was not in compliance
with these restrictions due to the reduction in its capital. However, by March
31, 1995 Pacific Thrift had returned to compliance with the restrictions.
Although investment authority and other activities that may be engaged
in by Pacific Thrift generally are prescribed under the California Industrial
Loan Law, certain provisions of FDIC Improvement Act may limit Pacific Thrift's
ability to engage in certain activities that otherwise are authorized under the
California Industrial Loan Law.
FEDERAL LAW
Pacific Thrift's deposits are insured by the FDIC to the full extent
permissible by law. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and generally supervises
the operations of institutions for which it provides deposit insurance. Among
the numerous applicable regulations are those issued under the Community
Reinvestment Act of 1977 ("CRA") to encourage insured state nonmember banks,
such as Pacific Thrift, to meet the credit needs of local communities, including
low and moderate income neighborhoods consistent with safety and soundness, and
a rating system to measure performance. Inadequacies of performance may result
in regulatory action by the FDIC. Pacific Thrift received a satisfactory rating
with respect to its CRA compliance in its most recent FDIC compliance
examination completed in March 1994.
Pacific Thrift is subject to the rules and regulations of the FDIC to
the same extent as all other state banks that are not members of the Federal
Reserve System. The approval of the FDIC is required prior to any merger,
consolidation or change in control, or the establishment or relocation of any
branch office of Pacific Thrift. This supervision and regulation is intended
primarily for the protection of the deposit insurance funds.
Pacific Thrift is subject to certain capital adequacy guidelines issued
by the FDIC. See "Federal Law -- Capital Standards" under this
heading.
REGULATORY ACTIONS
As a result of an FDIC examination conducted as of June 15, 1993, the
FDIC and the DOC requested Pacific Thrift to enter into a stipulated Cease and
Desist Order (the "1993 Order") issued November 10, 1993. The Order primarily
required Pacific Thrift to (i) adopt a written policy acceptable to the FDIC and
the DOC governing Pacific Thrift's relationships with its affiliates; (ii)
reduce its volatile liability deposits to specified maximum levels; (iii)
increase its liquidity to specified minimum levels; and (iv) develop a
comprehensive asset/liability management policy. The Order did not require any
increase in capital or loan loss reserves, or a decrease in adversely classified
assets. In order to comply with the Order, Pacific Thrift terminated its
personnel services and facilities arrangements with the Partnership.
Substantially all of the requirements of the Order were met by January 31, 1994,
well in advance of the required dates for compliance specified in the Order.
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At the end of August 1994, the FDIC requested Pacific Thrift to enter
into a supplemental stipulated Cease and Desist Order (the "Supplemental Order")
issued October 13, 1994. The Supplemental Order required Pacific Thrift to
obtain the prior consent of the FDIC before opening any new offices and to
design, file and implement plans to increase its net earnings. The Supplemental
Order did not require any increase in capital or loan loss reserves. The
Supplemental Order also required that detailed budgets and comparisons of
budgets with actual results of operations be filed with the FDIC and DOC.
In December 1994, the FDIC notified Pacific Thrift that it was
classified as "critically undercapitalized" as of October 31, 1994. Pacific
Thrift had sufficiently restored its regulatory capital ratios from net
operating profits and capital contributions as of April 30, 1995 to be
classified as "adequately capitalized" under FDIC regulations. The FDIC
confirmed Pacific Thrift's adequate capitalization by letter dated May 8, 1995.
On May 18, 1995, the FDIC issued a new cease and desist order (the
"1995 Order") replacing the 1993 Order and Supplemental Order. The terms of the
1995 Order require Pacific Thrift to: have and retain qualified management; by
December 31, 1995, increase and maintain Tier 1 capital (consisting of
shareholders' equity) at 8% of its total assets; eliminate assets classified
"loss" as of September 26, 1994; reduce the level of adversely classified
assets; in certain instances, refrain from extending additional credit to
borrowers whose prior credits have been adversely classified; maintain a fully
funded allowance for loan losses; implement Pacific Thrift's capital restoration
and business/profitability plans; correct a past violation of the thrift ratio
requirement and comply with all applicable laws and regulations; file reports of
condition and income which accurately reflect its financial condition; obtain
FDIC approval prior to payment of any cash dividends; continue to comply with
its Policy for Transactions and Relationships Between Affiliates; obtain FDIC
approval before opening additional offices; and furnish written quarterly
progress reports to the FDIC detailing actions taken to comply with the 1995
Order.
Management of Pacific Thrift believes that it is in full compliance
with the terms of the 1995 Order. As of December 31, 1995, Pacific Thrift has
increased its capital ratios to the levels which meet the regulatory definition
of "well capitalized." However, since the 1995 Order contains a provision
requiring the maintenance of a certain capital level (which it currently meets),
Pacific Thrift would be classified as "adequately capitalized" under the
regulations.
RESTRICTIONS ON TRANSFERS OF FUNDS TO AFFILIATES BY PACIFIC THRIFT
There are statutory and regulatory limitations on the amount of
dividends which may be paid to Presidential (and the Corporation after the
Restructuring) by Pacific Thrift. Under California law, a thrift and loan is not
permitted to declare dividends on its capital stock unless it has at least
$750,000 of unimpaired capital plus additional capital of $50,000 for each
branch office maintained. In addition, no distribution of dividends is permitted
unless: (i) such distribution would not exceed a thrift's retained earnings; or,
(ii) in the alternative, after giving effect to the distribution, (a) the sum of
a thrift's assets (net of goodwill, capitalized research and development
expenses and deferred charges) would be not less than 125% of its liabilities
(net of deferred taxes, income and other credits), or (b) current assets would
be not less than current liabilities (except that if a thrift's average earnings
before taxes for the last two years had been less than average interest
expenses, current assets must not be less than 125% of current liabilities).
In addition, a thrift and loan is prohibited from paying dividends from
that portion of capital which its board of directors has declared restricted for
dividend payment purposes. The amount of restricted capital maintained by a
thrift and loan provides the basis of establishing the maximum amount that a
thrift may lend to a single borrower and determines the amount of capital that
may be counted by the thrift for purposes of calculating the thrift to capital
ratio. Pacific Thrift has, in the past, restricted as much capital as necessary
to achieve its maximum thrift ratio limit. The board of directors of Pacific
Thrift may unrestrict all or any portion of its equity in the future for
dividends to the Partnership, provided that Pacific Thrift remains adequately
capitalized.
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The FDIC also has authority to prohibit Pacific Thrift from engaging in
what, in the FDIC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FDIC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the FDIC has established guidelines with
respect to the maintenance of appropriate levels of capital by banks under their
jurisdiction. Compliance with the standards set forth in such guidelines and the
restrictions that are or may be imposed under the prompt corrective action
provisions of the FDIC Improvement Act could limit the amount of dividends which
Pacific Thrift may pay to the Partnership. See "Capital Standards" and "Prompt
Corrective Action and Other Enforcement Mechanisms" under this heading for
a discussion of these additional restrictions on capital distributions.
Pacific Thrift is subject to certain restrictions imposed by federal
law on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, the Partnership or other affiliates, the purchase of or
investments in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of the Partnership or other
affiliates. Such restrictions prevent the Partnership and other affiliates from
borrowing from Pacific Thrift unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by Pacific Thrift to or in the Partnership or to or in any other affiliate is
limited to 10% of Pacific Thrift's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of Pacific Thrift's capital and surplus (as defined by federal
regulations). In addition, any transaction with an affiliate of Pacific Thrift
must be on terms and under circumstances that are substantially the same as a
comparable transaction with a non-affiliate. Additional restrictions on
transactions with affiliates may be imposed on Pacific Thrift under the prompt
corrective action provisions of the FDIC Improvement Act. See "Prompt Corrective
Action and Other Enforcement Mechanisms" under this heading.
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a depository institution's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A depository institution's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require depository institutions to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a depository institution
rated in the highest of the five categories used by regulators to rate
depository
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institutions, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all depository institutions not rated in the highest category, the
minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines
and leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a depository
institution's capital adequacy, an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a depository institution's exposure to interest rate risk, which is the
subject of a proposed policy statement issued by the federal banking agencies
concurrently with the final regulations. The proposal would measure interest
rate risk in relation to the effect of a 200 basis point change in market
interest rates on the economic value of a depository institution. Banks with
high levels of measured exposure or weak management systems generally will be
required to hold additional capital for interest rate risk. The specific amount
of capital that may be needed would be determined on a case-by-case basis by the
examiner and the appropriate federal banking agency. Because this proposal has
only recently been issued, Pacific Thrift currently is unable to predict the
impact of the proposal on Pacific Thrift if the policy statement is adopted as
proposed.
In January 1995, the federal banking agencies issued a final rule
relating to capital standards and the risks arising from the concentration of
credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for determining
when these risks are significant, but have identified these issues as important
factors they will review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by such policy statement is the sum of (a)
assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15
percent of assets classified substandard; and (d) estimated credit losses on
other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. The
federal banking agencies recently issued final rules, effective April 1, 1995,
which limit the amount of deferred tax assets that are allowable in computing an
institution's regulatory capital. The standard has been in effect on an interim
basis since March 1993. Deferred tax assets that can be realized for taxes paid
in prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year of
the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 Capital and
total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of Pacific Thrift to grow and could restrict the amount
of profits, if any, available for the payment of dividends.
The following table presents the amounts of regulatory capital and the
capital ratios for Pacific Thrift, compared to the regulatory capital
requirements for well capitalized institutions as of December 31, 1995.
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<TABLE>
<CAPTION>
December 31, 1995
----------------------
Actual Well
Capitalized
Ratio Requirement
----- -----------
<S> <C> <C>
Leverage ratio.................. 9.09% 8.0%
Tier 1 risk-based ratio......... 11.17% 6.0%
Total risk-based ratio.......... 12.42% 10.0%
</TABLE>
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured depository institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The law required each federal banking agency to
promulgate regulations defining the following five categories in which an
insured depository institution will be placed, based on the level of its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"Well capitalized"
------------------
Total risk-based capital of 10%;
Tier 1 risk-based capital of 6%; and
Leverage ratio of 5%.
"Adequately capitalized"
------------------------
Total risk-based capital of 8%;
Tier 1 risk-based capital of 4%; and
Leverage ratio of 4% (3% if the institution receives the highest
rating from its primary regulator)
"Undercapitalized"
------------------
Total risk-based capital less than 8%;
Tier 1 risk-based capital less than 4%; or
Leverage ratio less than 4% (3% if the institution receives the
highest rating from its primary regulator)
"Significantly undercapitalized"
--------------------------------
Total risk-based capital less than 6%;
or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 3%.
"Critically undercapitalized"
-----------------------------
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to
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the appropriate federal banking agency 45 days after becoming undercapitalized.
The appropriate federal banking agency cannot accept a capital plan unless,
among other things, it determines that the plan (i) specifies the steps the
institution will take to become adequately capitalized, (ii) is based on
realistic assumptions and (iii) is likely to succeed in restoring the depository
institution's capital. In addition, each company controlling an undercapitalized
depository institution must guarantee that the institution will comply with the
capital plan until the depository institution has been adequately capitalized on
an average basis during each of four consecutive calendar quarters and must
otherwise provide adequate assurances of performance. The aggregate liability of
such guarantee is limited to the lesser of (a) an amount equal to 5% of the
depository institution's total assets at the time the institution became
undercapitalized or (b) the amount which is necessary to bring the institution
into compliance with all capital standards applicable to such institution as of
the time the institution fails to comply with its capital restoration plan.
Finally, the appropriate federal banking agency may impose any of the additional
restrictions or sanctions that it may impose on significantly undercapitalized
institutions if it determines that such action will further the purpose of the
prompt correction action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage; (v)
modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be prohibited
from engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial depository institutions may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties
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and the enforcement of such actions through injunctions or restraining orders
based upon a judicial determination that the agency would be harmed if such
equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to
protect deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required
by FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were .023% of deposits. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
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<PAGE> 118
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such
as Pacific Thrift is categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and one of three
categories based on supervisory evaluations by its primary federal regulator (in
Pacific Thrift's case, the FDIC). The three supervisory categories are:
financially sound with only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration (Group B), and poses a
substantial probability of loss (Group C). The capital ratios used by the FDIC
to define well-capitalized, adequately capitalized and undercapitalized are the
same in the FDIC's prompt corrective action regulations. The BIF assessment
rates are summarized below; assessment figures are expressed in terms of cents
per $100 in deposits.
Assessment Rates Effective Through the First Half of 1995
<TABLE>
<CAPTION>
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized........... 23 26 29
Adequately Capitalized..... 26 29 30
Undercapitalized........... 29 30 31
</TABLE>
Assessment Rates Effective through the Second Half of 1995
<TABLE>
<CAPTION>
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized........... 4 7 21
Adequately Capitalized..... 7 14 28
Undercapitalized........... 14 28 31
</TABLE>
Assessment Rates Effective January 1, 1996
<TABLE>
<CAPTION>
Group A Group B Group C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized........... 0* 3 17
Adequately Capitalized..... 3 10 24
Undercapitalized........... 10 24 27
</TABLE>
*Subject to a statutory minimum assessment of $1,000 per semi-annual
period (which also applies to all other assessment risk
classifications).
At December 31, 1995, Pacific Thrift paid $.24 per $100 in deposits.
Supervisory subgroups are set once every six months, based upon a depository
institution's last supervisory and capital classification.
A number of proposals have recently been introduced in Congress to
address the disparity in bank and thrift deposit insurance premiums. On
September 19, 1995, legislation was introduced and referred to the House Banking
Committee that would, among other things: (i) impose a requirement on all SAIF
member institutions to fully recapitalize the SAIF by paying a one-time special
assessment of approximately 85 basis points on all assessable deposits as of
March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread
the responsibility for FICO interest payments across all FDIC-insured
institutions on a pro-rata basis, subject to certain exceptions; (iii) require
that deposit insurance premium assessment rates
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<PAGE> 119
applicable to SAIF member institutions be no less than deposit insurance premium
assessment rates applicable to BIF member institutions; (iv) provide for a
merger of the BIF and the SAIF as of January 1, 1998; (v) require savings
associations to convert to state or national bank charters by January 1, 1998;
(vi) require savings associations to divest any activities not permissible for
commercial banks within five years; (vii) eliminate the bad-debt reserve
deduction for savings associations, although savings associations would not be
required to recapture into income their accumulated bad-debt reserves; (viii)
provide for the conversion of savings and loan holding companies into bank
holding companies as of January 1, 1998, although unitary savings and loan
holding companies authorized to engage in activities as of September 13, 1995
would have such authority grandfathered (subject to certain limitations); and
(ix) abolish the Office of Thrift Supervision ("OTS") and transfer the OTS'
regulatory authority to the other federal banking agencies. The legislation
would also provide that any savings association that would become
undercapitalized under the prompt corrective action regulations as a result of
the special deposit premium assessment could be exempted from payment of the
assessment, provided that the institution would continue to be subject to the
payment of semiannual assessments under the current rate schedule following the
recapitalization of the SAIF. The legislation was considered and passed by the
House Banking Committee's Subcommittee on Financial Institutions on September
27, 1995, and has not yet been acted on by the full House Banking Committee.
On September 20, 1995, similar legislation was introduced in the
Senate, although the Senate bill does not include a comprehensive approach for
merging the savings association and commercial bank charters. The Senate bill
remains pending before the Senate Banking Committee.
The future of both these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill,
which was passed by both the House and Senate on November 17, 1995 and vetoed by
the President on December 6, 1995, would: (i) recapitalize the SAIF through a
special assessment of between 70 and 80 basis points on deposits held by
institutions as of March 31, 1995; (ii) provide an exemption to this rule for
weak institutions, and a 20% reduction in the SAIF-assessable deposits of
so-called "Oakar banks;" (iii) expand the assessment base for FICO payments to
include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1,
1998, only if no insured depository institution is a savings association on that
date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi)
prohibit the FDIC from setting semiannual assessments in excess of the amount
needed to maintain the reserve ratio of any fund at the designated reserve
ratio. The bill does not include a provision to merge the charters of savings
associations and commercial banks.
In light of ongoing debate over the content and fate of the budget
bill, the different proposals currently under consideration and the uncertainty
of the Congressional budget and legislative processes in general, management
cannot predict whether any or all of the proposed legislation will be passed, or
in what form. Accordingly, the effect of any such legislation on Pacific Thrift
cannot be determined.
INTERSTATE BANKING AND BRANCHING
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval under the BHCA to
acquire an existing bank located in another state without regard to state law. A
bank holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.
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<PAGE> 120
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which Pacific Thrift operates, although it is difficult
to assess the impact that such increased competition may have on Pacific
Thrift's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Pacific Thrift is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. The FDIC has rated Pacific Thrift
"satisfactory" in complying with its CRA obligations.
In May 1995, the federal banking agencies issued final regulations
which change the manner in which they measure a depository institution's
compliance with its CRA obligations. The final regulations adopt a
performance-based evaluation system which bases CRA ratings on an institution's
actual lending service and investment performance rather than the extent to
which the institution conducts needs assessments, documents community outreach
or complies with other procedural requirements. In March 1994, the Federal
Interagency Task Force on Fair Lending issued a policy statement on
discrimination in lending. The policy statement describes the three methods that
federal agencies will use to prove discrimination: (i) overt evidence of
discrimination; (ii) evidence of disparate treatment and (iii) evidence of
disparate impact.
POTENTIAL ENFORCEMENT ACTIONS.
Insured depository institutions, such as Pacific Thrift, and their
institution-affiliated parties, which include the Partnership and the
Corporation after the Restructuring, may be subject to potential enforcement
actions by the FDIC and the DOC for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits and with respect to Pacific Thrift and the
Partnership, could also include the imposition of civil money penalties, the
issuance of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the imposition of restrictions and sanctions
under the PCA provisions of the FDIC Improvement Act. Management knows of no
pending or threatened enforcement actions against Pacific Thrift; however,
Pacific Thrift is currently operating under the 1995 Order. See "Supervision and
Regulation -- Federal Law -- Regulatory Actions" above.
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<PAGE> 121
BENEFICIAL OWNERSHIP OF COMMON STOCK
The only stockholder of the Corporation as of the date hereof is the
Partnership, which owns 3,000 shares of the Common Stock. After the
Distribution, the Partnership will own no shares of Common Stock. The
Corporation is unaware of any person or group that will control the Corporation
following the Closing Date of the Restructuring Plan. Based upon the ownership
of the Partnership at December 31, 1995, Joel R. Schultz would be the only
Stockholder to beneficially own more than 5% of the Common Stock after the
Restructuring.
Upon the Closing Date of the Restructuring, Limited Partners of the
Partnership, the General Partner and the purchasers in the Public Offering will
be the Stockholders of the Corporation. As of December 31, 1995, there were
2,493 Limited Partners of the Partnership.
The following tables sets forth the anticipated ownership of Common
Stock after the completion of the Restructuring Plan by (i) the four directors
of the Corporation, (ii) the Chief Executive Officer and the six other executive
officers of the Corporation whose total annual compensation after the completion
of the Restructuring Plan will exceed $100,000 (the "Named Executives"), and
(iii) all executive officers and directors of the Corporation, as a group, based
upon the Limited Partnership Units and interests in the General Partner
beneficially owned by each such person at December 31, 1995.
The information provided below assumes that (i) 830,000 shares are
issued by the Corporation in exchange for the assets and liabilities of the
Partnership; (ii) 820,000 additional shares are issued in the Rights Offering
and the Public Offering; (iii) 40,000 Subscriber Warrants are issued in
connection with the Rights Offering; and (iv) 563,333 General Partner Warrants
are issued;
<TABLE>
<CAPTION>
Common
Stock Percent
Name and Address of Beneficially of
Beneficial Owner Owned(1) Class
- ------------------- ------------ -------
<S> <C> <C>
Joel R. Schultz
21031 Ventura Boulevard _______(2) _____%
Woodland Hills, CA 91364
Richard D. Young
21031 Ventura Boulevard * *
Woodland Hills, CA 91364
Kenneth A. Carmona
21031 Ventura Boulevard ___(3) *
Woodland Hills, CA 91364
Richard B. Fremed
21031 Ventura Boulevard _____(4) *
Woodland Hills, CA 91364
Norman A. Markiewicz
21031 Ventura Boulevard _____(5) *
Woodland Hills, CA 91364
</TABLE>
109
<PAGE> 122
<TABLE>
<CAPTION>
Common
Stock Percent
Name and Address of Beneficially of
Beneficial Owner Owned(1) Class
- ------------------- ------------ -------
<S> <C> <C>
Charles J. Siegel
21031 Ventura Boulevard * *
Woodland Hills, CA 91364
Frank Landini
500 Ygnacio Road * *
Walnut Creek, CA
Russell A. Allison
4409 Via Valmonte * *
Palos Verdes Estates, CA 90274
Ermyas Amelga
21031 Ventura Boulevard * *
Woodland Hills, CA 91364
All Directors, Proposed Directors and Executive Officers,
as a group (9 persons)(6) _______ _____%
</TABLE>
- ---------------------
* Less than 1%.
(1) This includes shares of Common Stock which the named individuals have
indicated the intention to acquire through the exercise of Basic
Subscription Rights, but does not include (i) Shares which each
individual may purchase through the exercise of Oversubscription
Rights; and (ii) Common Stock issuable upon exercise of stock options
to be granted to the named individuals, which are not exercisable for
six months after the effectiveness of the Restructuring Plan, as
described herein under the heading "MANAGEMENT -- Plans and
Arrangements -- Stock Option Plan." Except as otherwise noted and
except as required by applicable community property laws, each person
will have sole voting and disposition powers with respect to the
shares.
(2) In addition to the _____ shares Mr. Schultz intends to purchase through
the exercise of Basic Subscription Rights as a partner of the General
Partner, this amount includes (i) all of the ______ shares of Common
Stock issuable to the General Partner by the Partnership and (ii) all
of the General Partner Warrants for 563,333 shares, as to which Mr.
Schultz, as the controlling shareholder of Presidential Services
Corporation, holds sole voting and investment power. However, the
General Partner intends, at some time in the near future, to distribute
out substantially all of the Common Stock and Warrants it receives from
the Partnership pro rata to its partners in accordance with their
percentage interests in the Partnership. Mr. Schultz holds a 20.25%
beneficial interest in the General Partner. Accordingly, at such time
as the General Partner distributes the Common Stock and General Partner
Warrants received by it to its partners, Mr. Schultz expects to
receive: (i) _____ shares of Common Stock, and (ii) General Partner
Warrants to purchase a maximum of ______ shares, which would result in
Mr. Schultz' beneficial ownership of 109,595 shares of Common Stock, or
____% of the total shares outstanding if all of the maximum General
Partner Warrants were exercised. This amount does not include the
following shares which the adult daughter and son-in-law of Mr. Schultz
would receive from the General Partner, as to which he has no voting or
investment power: (i) ___ shares of Common Stock issuable to the
General Partner by the Partnership; (ii) __ shares purchasable
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<PAGE> 123
through Basic Subscription Rights; or (iii) General Partner Warrants to
purchase a maximum of _____ shares.
(3) This amount includes only the ___ shares that Mr. Carmona intends to
purchase through the exercise of Basic Subscription Rights as a partner
of the General Partner, and does not include: (i) 1,635 shares of
Common Stock issuable to the General Partner by the Partnership and
(ii) General Partner Warrants to purchase a maximum of ______ shares,
which Mr. Carmona would receive from the General Partner, which would
increase his total ownership to ______ shares, representing ____% of
the total outstanding Common Stock if all of the maximum General
Partner Warrants were exercised.
(4) This amount includes only _____ shares that Mr. Fremed intends to
purchase through the exercise of Basic Subscription Rights as a partner
of the General Partner, and does not include (i) _____ shares of Common
Stock issuable to the General Partner by the Partnership and (ii)
General Partner Warrants to purchase a maximum of ______ shares, which
Mr. Fremed would receive from the General Partner, which would increase
his total ownership to ______ shares, representing ____% of the total
outstanding Common Stock if all of the maximum General Partner Warrants
were exercised. This amount also does not include the following shares
which two adult sons of Mr. Fremed would receive from the General
Partner, as to which he has no voting or investment power: ___ shares
of Common Stock issuable to the General Partner by the Partnership;
(ii) ___ shares purchasable through Basic Subscription Rights; and
(iii) General Partner Warrants to purchase _____ shares.
(5) This amount includes only _____ shares that Mr. Markiewicz intends to
purchase through the exercise of Basic Subscription Rights as a partner
of the General Partner, and does not include (i) _____ shares of Common
Stock issuable to the General Partner by the Partnership and (ii)
General Partner Warrants to purchase ______ shares, which Mr.
Markiewicz would receive from the General Partner, which would increase
his total ownership to ______ shares, representing 2.92% of the total
outstanding Common Stock if all of the General Partner Warrants were
exercised.
(6) This amount includes (i) all of the ________ shares issuable to the
General Partner by the Partnership, (ii) all of the Basic Subscription
Rights of the named directors and officers and (iii) all of the General
Partner Warrants to purchase _______ shares. At such time as the
General Partner distributes the Common Stock and General Partner
Warrants to its partners, the actual amounts of Common Stock and
General Partner Warrants that would be owned by the directors and
officers (without including any shares that may be purchased by them
through the Oversubscription Privilege) would be _______, representing
_____% of the total outstanding shares if all of the maximum General
Partner Warrants were exercised.
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<PAGE> 124
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Corporation. The Corporation's Restated
Certificate of Incorporation states that the Board of Directors shall be divided
into three classes of directors, with the directors in each class elected for
three-year staggered terms except for the initial directors. The terms of the
initial Board will expire at the annual meetings of stockholders in 1997, 1998
and 1999. Officers will serve at the pleasure of the Board of Directors, subject
to restrictions set forth in employment agreements. See "MANAGEMENT --
Employment Agreements.
<TABLE>
<CAPTION>
Principal Occupation or Employment and
Name Age Occupation for the Past Five Years
---- --- --------------------------------------
<S> <C> <C>
Joel R. Schultz(3) 59 Chairman of the Board, President, Chief Executive Officer and
Chief Operating Officer of the Corporation; Chief Managing
Officer of Presidential from 1981 to the present; Chairman of the
Board and Chief Executive Officer of Pacific Thrift since 1988
and President of Pacific Thrift from 1988 to December 1993;
director of CRC Washington since November 1995; Proposed
Chairman of the Board of CRC and LPPC; proposed Chairman
of the Board, President, Chief Executive Officer and Chief
Operating Officer of Unified.
Richard D. Young(1) 56 Director and Senior Executive Vice President of the Corporation
and Unified; President and Chief Operating Officer of Pacific
Thrift from November 1993 to present; director of Pacific Thrift
from November 1993 to present; President and Chief Executive
Officer of Topa Thrift and Loan from 1983 to 1993; President of
Thrift Guaranty Corporation from 1984 to 1988; director of
Thrift Guaranty Corporation from 1983 to 1988 and from 1989 to
1995, when the Thrift Guaranty Corporation was liquidated;
member, Mortgage Bankers Association Secondary and Capital
Markets Committee; member, California Association of Thrift
and Loans Companies ("CATL") Regulatory Committee;
chairman, CATL Executive Committee; former chairman, CATL
Legislative Committee; Vice President of CATL (1995-present).
Kenneth A. Carmona 39 Executive Vice President of the Corporation; President and Chief
Executive Officer of CRC from inception in 1985 to present and
of LPPC from inception in 1990 to the present; Senior Vice
President of Pacific Thrift from 1989 to the present; President
and director of CRC Washington since November 1995; proposed
director of CRC, LPPC and Unified.
</TABLE>
112
<PAGE> 125
<TABLE>
<S> <C> <C>
Norman A. Markiewicz 49 Executive Vice President of the Corporation; Chief Operating
Officer of Presidential since 1981; Chief Operating Officer of
Pacific Thrift from 1988 to September 1993; Executive Vice
President of Pacific Thrift from 1993 to present; director of
Pacific Thrift from 1988 to present; proposed Executive Vice
President of Unified and proposed director of CRC, LPPC and
Unified.
Richard B. Fremed 53 Executive Vice President and Secretary of the Corporation; Chief
Financial Officer of Presidential from 1981 to April 1994; Chief
Financial Officer of Pacific Thrift from 1988 to December 1993;
Secretary of Pacific Thrift from December 1988 to present;
Treasurer of Pacific Thrift from December 1993 to present;
director of Pacific Thrift from 1988 to present; Chief Financial
Officer of CRC from inception in 1985 to present and of LPPC
from inception in 1990 to present; Chief Financial Officer of
CRC Washington since November 1995; proposed Chief
Financial Officer of Unified and proposed director of CRC,
LPPC and Unified; certified management accountant.
Frank Landini 44 Executive Vice President of Pacific Thrift since December 1994;
Senior Vice President of Pacific Thrift from October 1993 to
December 1994; Senior Vice President of Topa Thrift and Loan
from 1983 to 1993.
Charles J. Siegel 45 Chief Financial Officer and Assistant Secretary of the
Corporation; Chief Financial Officer of Pacific Thrift from
December 1993 to present; Chief Financial Officer of
Presidential from May 1994 to present; Chief Financial Officer
of Topa Thrift and Loan from 1983 to 1993; certified public
accountant.
Russell G. Allison(1) 38 Proposed director of the Corporation; director of Pacific Thrift
from June 1992 to present; Vice President of Smith Barney from
October 1994 to present; Vice President of Kidder, Peabody &
Co., Inc. from January 1994 to October 1994; Assistant Vice
President of Kidder, Peabody & Co., Inc. from 1983 to 1993.
Ermyas Amelga(2) 40 Proposed director of the Corporation; director of Pacific Thrift
from June 1992 to present; co-owner and managing director of
AMRAY Capital Advisors from 1992 to present; Vice President
of Kidder, Peabody & Co., Inc. from 1988 to 1992.
</TABLE>
- ------------
(1) Terms of office will expire in 1997.
(2) Term of office will expire in 1998.
(3) Term of office will expire in 1999.
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<PAGE> 126
BOARD OF DIRECTORS AND COMMITTEES
The business of the Corporation's Board of Directors will be conducted
through its meetings, as well as through meetings of its committees. Set forth
below is a description of the committees of the Board.
The Audit Committee will review and report to the Board on various
auditing and accounting matters, including the annual audit report from the
Corporation's independent public accountants. The Audit Committee consists of
Ermyas Amelga and Russell G. Allison. Mr. Amelga is its Chairman.
The Employee Compensation Committee will determine the salary and bonus
structure for the Corporation's employees who are not employed under written
contracts and will also determine the annual bonuses of Messrs. Markiewicz and
Fremed. The Employee Compensation Committee consists of Joel R. Schultz and
Richard D. Young. Mr. Schultz is its Chairman.
The Executive Compensation and Stock Option Committee will determine
the salary and performance-based bonuses of the Corporation's executive
officers, appropriate awards under the Corporation's 1995 Stock Option Plan and
administer the Corporation's Retirement Plans. See "MANAGEMENT -- 1995 Stock
Option Plan" and " -- Retirement Plan." The Executive Compensation and Stock
Option Committee consists of Ermyas Amelga and Russell G. Allison. Mr. Amelga is
its Chairman.
The Executive Committee will have the authority to act on behalf of the
full Board of Directors in between meetings of the Board, except that the
Executive Committee will not have the authority to amend the Certificate of
Incorporation or the Bylaws of the Corporation, adopt an agreement of merger or
consolidation, recommend to the stockholders a dissolution of the Corporation or
a revocation of dissolution or remove or indemnify a director. To the extent
authorized by the Board of Directors, the Executive Committee will also be
authorized to declare dividends of the Corporation and to issue shares of
authorized and unissued Common Stock or any series of Preferred Stock of the
Corporation. The Executive Committee will also act as the Nominating Committee
that nominates officers and directors of the Corporation for election. The
Executive Committee consists of Joel R. Schultz and Ermyas Amelga. Mr. Schultz
is its Chairman.
COMPENSATION OF BOARD OF DIRECTORS
It is the Corporation's intention to pay fees to its officer and
non-officer directors for serving on the Board of Directors and for their
attendance at Board and committee meetings. The Corporation will pay each
employee director an annual fee of $500, plus $200 per board or committee
meeting attended. The Corporation will pay each non-employee director an annual
fee of $2,500, plus $750 for each board meeting attended, plus $300 for each
telephonic meeting of over 30 minutes in length, plus $350 per committee meeting
for committee chairman and $250 per committee meeting for other committee
members. Only one meeting fee will be paid for meetings of the Boards of
Directors of the Corporation and one or more of its subsidiaries on the same day
and for meetings of two or more committees of the Board of Directors of the
Corporation or any of its subsidiaries on the same day. The Assistant Corporate
Secretary will receive a fee of $200 per meeting attended.
Each of Pacific Thrift, CRC, CRC Washington, Common LPPC and Unified
will also pay fees to its officer and non-officer directors for serving on the
Board of Directors and for their attendance at Board and committee meetings.
Pacific Thrift will pay the same fees as the Corporation pays to its officer and
non-officer directors. CRC, LPPC and Unified will pay each employee director an
annual fee of $250 plus $200 for each meeting attended. CRC, CRC Washington,
LPPC and Unified will pay each non-employee director an annual fee of $1,000,
plus $500 for each board meeting attended, plus $200 for each telephonic meeting
of over 30 minutes in length, plus $350 per committee meeting for committee
chairman or $250 per committee meeting for other committee members. Only one
meeting fee will be paid for meetings of the Boards of Directors of the
Corporation and one or more of its subsidiaries on the same day and for meetings
of two or more committees of the Board of Directors of the Corporation or any of
its subsidiaries
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<PAGE> 127
on the same day. It is the intention of the Board of Directors to have as many
board and committee meetings on the same day as possible. The Assistant
Corporate Secretary will receive a fee of $200 per meeting attended.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table sets
forth certain summary information concerning compensation paid or accrued by the
General Partner, the Partnership, Pacific Thrift, CRC or LPPC to or on behalf of
the five most highly compensated executive officers who earned at least $100,000
in 1995. Also shown in the table is the amount of compensation that would have
been earned by each of the named executive officers under the employment
agreements that each of them has entered with the Corporation.
<TABLE>
<CAPTION>
Actual Annual Compensation Pro Forma Annual
-------------------------- Compensation
----------------
Name and Principal Position Year Salary($)(1) Bonus($) Salary(s)(1) Bonus
- --------------------------- ---- ------------ -------- ------------ -----
<S> <C> <C> <C> <C> <C>
Joel R. Schultz,(2) 1995 $400,466 -0- 237,900 -0-
Chief Executive Officer, 1994 214,200 -0- 237,900 -0-
Presidential and Pacific Thrift 1993 285,530 -0- 237,900 -0-
Richard D. Young, President 1995 $214,273 237,900 -0-
and Chief Operating Officer, 1994 161,600 237,900 -0-
Pacific Thrift 1993 51,012(3) 86,100 -0-
Norman Markiewicz, 1995 $141,062 -0- 137,900 -0-
Senior Managing Officer, 1994 158,534 -0- 137,900 -0-
Presidential and 1993 186,838 -0- 137,900 -0-
Executive Vice President,
Pacific Thrift
Kenneth Carmona, 1995 $150,000 -0- 152,650 13,050
President, 1994 150,150 -0- 152,650 17,074
CRC and LPPC 1993 196,745(4) 0- 152,650 36,324
Charles J. Siegel,(5) 1995 $144,400 -0- 138,000 -0-
Chief Financial Officer, 1994 125,967 -0- 138,000 -0-
Presidential and Pacific Thrift 1993 9,133 -0- 9,133 -0-
</TABLE>
- -----------------------
(1) The amounts specified above include automobile allowances and directors'
fees, but do not include life insurance or medical insurance premiums for
benefits in excess of group benefits provided to employees, the aggregate amount
of which do not exceed the lesser of either $50,000 or 1 % of the total annual
salary and bonus reported for each of the above named executives in each
reported year.
(2) Includes amounts paid to Mr. Schultz for legal fees of $100 per loan paid by
borrowers in connection with legal services related to loan origination. See
"CERTAIN TRANSACTIONS - Payments to Managing Officers."
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(3) Mr. Young commenced employment with Pacific Thrift in September 1993, and he
received compensation for only four months in 1993.
(4) Includes amounts paid to a wholly owned corporation of Mr. Carmona.
(5) Mr. Siegel commenced employment with Pacific Thrift in December 1993, and he
received compensation for only one month in 1993.
EMPLOYMENT AGREEMENTS
The Corporation has entered into employment agreements with Messrs.
Joel R. Schultz, Richard D. Young, Kenneth A. Carmona, Norman A. Markiewicz and
Richard B. Fremed, subject to completion of the Restructuring Plan. In addition,
Pacific Thrift has entered into an employment agreement with Mr. Frank Landini.
If the Restructuring Plan is completed, all of the employment agreements would
be deemed to take effect as of January 1, 1996. The Board of Directors believes
that this will provide an incentive to all of the executive officers to maximize
the earnings potential of the Corporation as soon as possible.
Mr. Schultz will be employed for an initial term of three years, which
will be automatically extended for additional one year terms thereafter unless
either party gives at least six months written notice of its or his intention
not to renew the agreement. Mr. Schultz will be employed as the President and
Chief Executive Officer of the Corporation, Chief Executive Officer of Pacific
Thrift, and President and Chief Executive Officer of Unified. Mr. Schultz'
annual salary will equal $225,000 per year, as adjusted annually for increases
in the cost of living index, plus an annual bonus of 2-1/2% of the net pre-tax
profits of the Corporation if the Corporation earns net after tax profits (after
payment of annual bonuses) equal to a minimum return on equity (as determined on
the Closing Date of the Restructuring with respect to 1996 and on January 1 of
each succeeding calendar year) of 20% (reduced to 10% for each year after the
Corporation reaches equity of at least $20 million). The bonus will increase to
5% of the net pre-tax profits of the Corporation if the Corporation earns net
after tax profits equal to a minimum return on equity of 30% or more (reduced to
20% for each year after the Corporation reaches equity of at least $20 million).
For 1996, the bonus will include only net profits of the Corporation from the
Closing Date of the Restructuring through December 31, 1996. The bonus will be
reduced to the extent necessary to allow the Corporation to retain the
applicable minimum return on equity. Up to 50% of each year's annual bonus will
be payable in quarterly installments during the applicable year for which the
bonus is earned, determined by annualizing the quarterly return on equity for
each of the first three quarters of the year. Mr. Schultz is not eligible to
participate in the employee cash bonus pool of the Corporation.
Mr. Young will be employed for an initial term of two years, which will
be automatically extended for additional one year terms thereafter unless either
party gives at least six months written notice of its or his intention not to
renew the agreement. Mr. Young will be employed as the President of Pacific
Thrift and Senior Executive Vice President of the Corporation and Unified. Mr.
Young's annual salary will equal $225,000 per year, as adjusted annually for
increases in the cost of living index, plus an annual bonus of 2-1/2% of the net
pre-tax profits of the Corporation if the Corporation earns net after tax
profits (after payment of annual bonuses) equal to a minimum return on equity
(as determined on the Closing Date of the Restructuring with respect to 1996 and
on January 1 of each succeeding calendar year) of 20% (reduced to 10% for each
year after the Corporation reaches equity of at least $20 million). The bonus
will increase to 5% of the net pre-tax profits of the Corporation if the
Corporation earns net after tax profits equal to a minimum return on equity of
30% or more (reduced to 20% for each year after the Corporation reaches equity
of at least $20 million). For 1996, the bonus will include only net profits of
the Corporation from the Closing Date of the Restructuring through December 31,
1996. The bonus will be reduced to the extent necessary to allow the Corporation
to retain the applicable minimum return on equity. Up to 50% of each year's
annual bonus will be payable in quarterly installments during the applicable
year for which the bonus is earned, determined by annualizing the quarterly
return on equity for each of the first three quarters of the year. Mr. Young is
not eligible to participate in the employee cash bonus pool of the Corporation.
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Mr. Carmona will be employed for an initial term of two years, which
will be automatically extended for additional one year terms thereafter unless
either party gives at least six months written notice of its or his intention
not to renew the agreement. Mr. Carmona will be employed as the President and
Chief Executive Officer of CRC and LPPC, Senior Vice President of Pacific Thrift
and Executive Vice President of the Corporation. Mr. Carmona's annual salary
will equal $150,000 per year, as adjusted annually for increases in the cost of
living index, plus an annual bonus of up to 5% of the net pretax profits of CRC
and LPPC on a combined basis, if they earn a combined net after tax profit
(after payment of all annual bonuses based upon this same formula) in excess of
$600,000 for the year. Mr. Carmona will also be eligible to participate in the
employee cash bonus pool of the Corporation.
Mr. Markiewicz will be employed for a term of one year, which will be
automatically extended for additional one year terms thereafter unless either
party gives at least six months written notice of its or his intention not to
renew the agreement. Mr. Markiewicz will be employed as Executive Vice President
of the Corporation, Unified and Pacific Thrift. Mr. Markiewicz' annual salary
will equal $135,000 per year, as adjusted annually for increases in the cost of
living index, and Mr. Markiewicz will also be eligible to participate in the
employee cash bonus pool of the Corporation.
Mr. Fremed will be employed for a term of one year, which will be
automatically extended for additional one year terms thereafter unless either
party gives at least six months written notice of its or his intention not to
renew the agreement. Mr. Fremed will be employed as Executive Vice President and
Secretary of the Corporation, Chief Financial Officer of Unified, CRC, CRC
Washington and LPPC, and Secretary and Treasurer of Pacific Thrift. Mr. Fremed's
annual salary will equal $125,000 per year, as adjusted annually for increases
in the cost of living index, and Mr. Fremed will also be eligible to participate
in the employee cash bonus pool of the Corporation.
The employment agreements of Messrs. Schultz, Young, Markiewicz and
Fremed will provide that an executive may voluntarily terminate his employment
with the Corporation upon the occurrence of a corporate change, as defined in
the employment agreement. In that event, the employee will be entitled to
continuation of certain benefits, and severance pay equal to his salary and
bonus for either six months, one year, or one and one-half years, as provided in
his agreement. Corporate changes under the employment agreements shall include
any one (or more) of the following events: (i) any person, including a group as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended,
becomes the beneficial owner of shares of the Corporation with respect to which
twenty percent (20%) or more of the total number of votes for the election of
the Board may be cast; (ii) as a result of, or in connection with, any cash
tender offer, exchange offer, merger or other business combination, sale of
assets, or contested election for the Board, or combination of the foregoing,
persons who were directors of the Corporation just prior to such event(s) shall
cease to constitute a majority of the Board; (iii) a transaction in which the
Corporation will cease to be an independent publicly owned corporation that is
required to file quarterly and annual reports under the Securities Exchange Act
of 1934, or a sale or other disposition of all or substantially all the assets
of the Corporation (including but not limited to the assets or stock of
Corporation's subsidiaries that results in all or substantially all of the
assets or stock of Corporation on a consolidated basis being sold); (iv) a
tender offer or exchange offer is made for shares of the Corporation's Common
Stock (other than one made by the Corporation) and shares of Common Stock are
acquired thereunder; (v) the stockholders of the Corporation cause a change in
the majority of the members of the Board within a twelve (12) month period;
provided, however, that the election of one or more new directors shall not be
deemed to be a change in the membership of the Board if the nomination of the
newly elected directors was approved by the vote of three-fourths of the
directors then still in office who were directors at the beginning of such
twelve (12) month period; or (vi) with respect to Joel Schultz only, a change in
his duties or a reduction in compensation.
The Corporation will retain the right to terminate the employment
agreement in the event of an employee's physical or mental disability which will
render him unable to perform under the agreement for any period of one hundred
and twenty consecutive days or for an aggregate period of one hundred and twenty
or more days during any twelve-month period. In the event of termination due to
disability, an
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employee would be entitled to receive as disability compensation a lump sum
payment equal to the annual bonus earned by employee during the fiscal year
preceding the year of termination, one year's annual salary, payable not less
frequently than monthly and continuation of certain benefits for the greater of
one year or the remainder of the term under the agreement. In the event of
death, an employee's personal representative will be entitled to receive as a
death benefit, in addition to any other payments which he may be entitled to
receive under any of the Corporation's benefit plans, payment of one year's
salary, payable not less frequently than monthly. In addition, the personal
representative of Mr. Schultz, Young, Carmona or Landini would also be entitled
to receive a lump sum payment equal to the annual bonus earned by the employee
for the prior fiscal year or, in the case of Mr. Schultz or Mr. Young, the
higher of the bonus earned in the prior year or the bonus that would have been
earned in the current year had the employee continued his employment for the
full year.
The Corporation will have the right to terminate the employee for
cause, which is defined in the agreement as conviction of a felony or any crime
involving moral turpitude, commission of an act of fraud, theft or embezzlement
against the Corporation, or conduct materially injurious to the Corporation's
business or reputation. In the event of termination of the agreement without
cause, the employee would be entitled to the continuation of certain benefits
and severance pay for either six months or one year, as provided in his
agreement.
Mr. Landini is employed as Executive Vice President of Pacific Thrift
for a term of two years by Pacific Thrift, which will be automatically extended
for additional one year terms thereafter unless either party gives at least six
months written notice of its or his intention not to renew the agreement. Mr.
Landini receives an annual base salary of $150,000, as adjusted annually for
increases in the cost of living index. Mr. Landini will also receive an annual
bonus based upon net profits earned from wholesale loans originated by Pacific
Thrift for sale (the "Securitizable Loan Division"), over which Mr. Landini has
primary responsibility. Net profits from the Securitizable Loan Division
consists of revenues earned from premiums on loan sales, net interest earned on
securitizable loans prior to sale, and net fees charged to borrowers (less fees
paid to brokers and other referral sources) less employee related and overhead
expenses of the Securitizable Loan Division. For the 1996 fiscal year, up to
$100,000 of Mr. Landini's bonus plus one-half of any bonus earned in excess of
$200,000 will be paid in January 1997, and any bonus earned between $100,000 and
$200,000, plus one-half of the bonus earned in excess of $200,000, will be
payable 36 months later unless Mr. Landini's employment is terminated
voluntarily by him or by Pacific Thrift "for cause." For fiscal years after
1996, one-half of the bonus earned for each year is payable in January of the
following year, and the remaining half is payable 36 months later unless Mr.
Landini's employment is terminated voluntarily by him or by Pacific Thrift for
cause. If Mr. Landini's employment agreement continues for a total of ten years
or more, the provision delaying one-half of his bonus for 36 months will
terminate. Events which are deemed termination "for cause" include conviction of
a felony or any crime involving moral turpitude, commission of an act of fraud,
theft or embezzlement against Pacific Thrift or conduct materially injurious to
Pacific Thrift's business or reputation. Mr. Landini is not eligible for the
employee bonus pool.
1995 STOCK OPTION PLAN
The 1995 Pacific United Group, Inc. Stock Option Plan (the "1995 Plan")
is designed to promote and advance the interests of the Corporation and its
stockholders by (1) enabling the Corporation to attract, retain, and reward
managerial and other key employees and non-employee directors, and (2)
strengthening the mutuality of interests between participants and the
Stockholders of the Corporation in its long term growth, profitability and
financial success by offering stock options.
SUMMARY OF THE 1995 PLAN. The 1995 Plan will empower the Corporation to
award or grant from time to time until December 31, 2003, when the 1995 Plan
expires except with respect to options then outstanding, to officers, directors
and key employees of the Corporation and its subsidiaries, Incentive and
Non-Qualified Stock Options ("Options") authorized by the Committee which will
administer the 1995 Plan.
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ADMINISTRATION. The 1995 Plan will be administered by the Stock Option
and Retirement Plans Committee of the Board of Directors (the "Committee"). The
1995 Plan provides that the Committee must consist of at least two directors of
the Corporation who are both "disinterested directors" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and "outside directors" within the meaning of proposed Treasury
Regulations sec. 1.162-27(c)(3). The Committee has the sole authority to
construe and interpret the 1995 Plan, to make rules and procedures relating to
the implementation of the 1995 Plan, to select participants, to establish the
terms and conditions of Options and to grant Options, with broad authority to
delegate its responsibilities to others, except with respect to the selection
for participation of, and the granting of Options to, persons subject to
Sections 16(a) and 16(b) of the Exchange Act. Members of the Stock Option and
Retirement Plans Committee will not be eligible to receive discretionary
Options under the 1995 Plan.
ELIGIBILITY CONDITIONS. Managerial employees, including all officers of
the Corporation, and other key employees of the Corporation and its subsidiaries
who hold positions of significant responsibility and non-employee directors will
be eligible to receive Options under the 1995 Plan. Non-employee directors are
only eligible to receive Non-Qualified Stock Options under the 1995 Plan. Except
for Non-Qualified Stock Options granted to non-employee directors, the selection
of recipients of, and the nature and size of, Options granted under the 1995
Plan will be wholly within the discretion of the Committee. The 1995 Plan is
subject to specific formula provisions relating to the grant of options to
non-employee directors, the exercisability of Incentive Stock Options and the
total shares available for option grants. In addition, there is a 50,000 share
limit on the number of shares of Common Stock in respect of which any type of
Options may be granted to any person in each calendar year.
SHARES SUBJECT TO 1995 PLAN. The maximum number of shares of Common
Stock in respect of which Options may be granted under the Plan (the "Plan
Maximum") shall be 170,000 with an increase of two percent (2%) of the total
issued and outstanding shares of the Common Stock on the first day of each
subsequent calendar year, up to a maximum 250,000 shares, commencing January 1,
1997.
For the purpose of computing the total number of shares of Common Stock
available for Options under the 1995 Plan, the above limitations shall be
reduced by the number of shares of Common Stock subject to issuance upon
exercise or settlement of Options, determined at the date of the grant of such
Options. However, if any Options are forfeited, terminated, settled in cash or
exchanged for other Options or expire unexercised, the shares of Common Stock
previously subject to such Options shall again be available for further Option
grants. The shares of Common Stock which may be issued to participants in the
1995 Plan may be either authorized and unissued Common Stock or issued Common
Stock reacquired by the Corporation. No fractional shares may be issued under
the 1995 Plan.
The maximum numbers of shares of Common Stock in payment of Options
granted or which may be subject to Options, as applied to the 1995 Plan and its
several components, are subject to appropriate equitable adjustment in the event
of a reorganization, stock split, stock dividend, combination of shares, merger,
consolidation or other recapitalization of the Corporation.
TRANSFERABILITY. No Option granted under the 1995 Plan, and no right or
interest therein, shall be assignable or transferable by a participant except by
will or the laws of descent and distribution.
TERM, AMENDMENT AND TERMINATION. The 1995 Plan will terminate on
December 31, 2003, except with respect to Options then outstanding. The Board or
Directors may amend or terminate the 1995 Plan at any time, except that, (i) to
the extent restricted by Rule 16b-3 promulgated under the Exchange Act, as
amended and in effect from time to time (or any successor rule), the Board of
Directors may not, without approval of the Stockholders of the Corporation, make
any amendment that would (1) increase the total number of shares available for
issuance (except as permitted by the 1995 Plan to reflect changes in capital
structure), (2) materially change the eligibility requirements, or (3)
materially increase the benefits accruing to participants under the 1995 Plan,
and (ii) the provisions of the 1995 Plan governing the award
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of options to Non-Employee Directors may not be amended more than once every six
months other than to comport with changes to the Code, the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or the regulations promulgated
thereunder.
CHANGE OF CONTROL. The 1995 Plan provides that the exercisability of
outstanding Options shall be accelerated upon any of the following events: (i)
any person, including a group as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, becomes the beneficial owner of shares of the
Corporation with respect to which twenty percent (20%) or more of the total
number of votes for the election of the Board may be cast; (ii) as a result of,
or in connection with, any cash tender offer, exchange offer, merger or other
business combination, sale of assets, or contested election for the Board, or
combination of the foregoing, persons who were directors of the Corporation just
prior to such event(s) shall cease to constitute a majority of the Board; (iii)
a transaction in which the Corporation will cease to be an independent publicly
owned corporation that is required to file quarterly and annual reports under
the Securities Exchange Act of 1934, or a sale or other disposition of all or
substantially all the assets of the Corporation (including but not limited to
the assets or stock of Corporation's subsidiaries that results in all or
substantially all of the assets or stock of Corporation on a consolidated basis
being sold); (iv) a tender offer or exchange offer is made for shares of the
Corporation's Common Stock (other than one made by the Corporation ) and shares
of Common Stock are acquired thereunder; or (v) the stockholders of the
Corporation cause a change in the majority of the members of the Board within a
twelve (12) month period; provided, however, that the election of one or more
new directors shall not be deemed to be a change in the membership of the Board
if the nomination of the newly elected directors was approved by the vote of
three-fourths of the directors then still in office who were directors at the
beginning of such twelve (12) month period.
INCENTIVE STOCK OPTIONS. Options designated as Incentive Stock Options,
within the meaning of Section 422 of the Code, in respect of up to the Plan
Maximum may be granted under the 1995 Plan. The number of shares of Common Stock
in respect of which Incentive Stock Options are first exercisable by any
optionee during any calendar year shall not have a fair market value (determined
at the date of grant) in excess of $100,000 (or such other limit as may be
imposed by the Code). To the extent the fair market value of the shares for
which options are designated as Incentive Stock Options that are first
exercisable by any optionee during any calendar year exceed $100,000, the excess
amount shall be treated as Non-Qualified Stock Options. Incentive Stock Options
shall be exercisable for such period or periods, not in excess of ten years
after the date of grant, as shall be determined by the Committee.
GRANT OF INCENTIVE STOCK OPTIONS. The Board of Directors of the
Corporation intends to grant Incentive Stock Options to acquire a total of
155,000 shares of Common Stock to certain key employees, including the executive
officers, of the Corporation, at an exercise price equal to the Public Offering
Price. For employees who have been employed by the Partnership for five years or
more, options will become exercisable 20% after the first six months following
the grant, and an additional 20% on the first, second, third and fourth
anniversary dates of the grant thereafter. For employees who have been employed
by the Partnership for less than five years, options will become exercisable 25%
on each of the first, second, third and fourth anniversary dates of the grant.
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The following executive officers of the Corporation will receive
Incentive Stock Options for the following amounts of shares of Common Stock if
the Restructuring Plan is completed.
<TABLE>
<CAPTION>
Name Dollar Value Number of Shares
- ---- ------------ ----------------
<S> <C> <C>
Joel R. Schultz * 40,000
Richard D. Young * 40,000
Kenneth A. Carmona * 8,000
Frank Landini * 12,000
Norman A. Markiewicz * 8,000
Richard B. Fremed * 8,000
Charles J. Siegel * 8,000
Non-officer directors as a group 4,000
Executive Officers and directors as a group (9 persons) 124,000
</TABLE>
- --------------------
* Not yet determinable.
NON-QUALIFIED STOCK OPTIONS. Non-Qualified Stock Options may be granted
for such number of shares of Common Stock and will be exercisable for such
period or periods as the Committee shall determine, up to a maximum term of ten
years.
OPTIONS TO NON-EMPLOYEE DIRECTORS. The 1995 Plan also provides for the
grant of options to Non-Employee Directors of the Corporation or any of its
subsidiaries, without any action on the part of the Board or the Committee, only
upon the terms and conditions set forth in the 1995 Plan. Subject to completion
of the Restructuring Plan, each eligible non-employee director of the
Corporation or any of its subsidiaries on the Effective Date of the 1995 Plan
shall automatically receive, for each directorship held by such person,
Non-Qualified Options to acquire (i) 1,000 shares of Common Stock and (ii) 100
shares of Common Stock after each 12 month period of continuous service as a
director of the Corporation thereafter for up to a maximum of five such periods.
In no event, however, shall any person receive options upon becoming a director
for more than 1,000 shares or options for any subsequent year in excess of 200
shares per year. Each person who thereafter becomes a Non-Employee Director
shall automatically receive Non-Qualified Options to acquire (i) 1,000 shares of
Common Stock for each directorship held by such person on the date such person
becomes a Non-Employee Director and (ii) 100 shares of Common Stock after each
12 month period of continuous service as a director of the Corporation
thereafter for up to a maximum of five such periods. In no event, however, shall
any person receive options upon becoming a director for more than 1,000 shares
or options for any subsequent year in excess of 200 shares per year. Each option
shall become exercisable as to 50% of the shares of Common Stock subject to the
option on each of the first anniversary date of the grant and 50% on the second
anniversary date of the grant, and will expire ten years from the date the
option was granted. The exercise price of such options shall be equal to 100% of
the fair market value of the Common Stock subject to the option on the date on
which such options are granted. Each option shall be subject to the other
provisions of the 1995 Plan.
Subject to the completion of the Restructuring Plan, the Non-Employee
Directors of the Corporation will be granted pursuant to the formula provisions
of the 1995 Plan Non-Qualified Options to acquire a maximum of 5,000 shares of
Common Stock, at an exercise price equal to the Public Offering Price.
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OPTION EXERCISE PRICES. The exercise price of an Incentive Stock Option
shall be at least 100% of the fair market value of the Common Stock on the date
of grant. Except for Options to Non-Employee Directors, Non-Qualified Stock
Options may be issued at such option exercise price as the Committee shall
determine, but not less than par value per share. The fair market value of all
Options granted on the Closing Date will be determined as the Public Offering
Price.
EXERCISE OF OPTIONS. No Stock Option may be exercised, except as
provided below, unless the holder thereof remains in the continuous employ or
service of the Corporation or one of its subsidiaries.
Stock Options shall be exercisable only upon the payment in full of the
applicable option exercise price in cash or, if approved by the Committee, in
shares of the Common Stock (at the fair market value thereof at exercise date)
or, if approved by the Committee, by surrendering outstanding Options
denominated as to which the participant is vested. No Incentive or Non-Qualified
Stock Option may be exercised within six months following the date of grant.
RETIREMENT PLAN
The General Partner, on behalf of the Partnership, Pacific Thrift and
CRC, established a 401(k) Plan in 1994 in which executive officers and other
employees participate. The Pacific United Group Retirement Plan will constitute
an amendment of the existing 401(k) Plan (the "Retirement Plan"). Following the
completion of the Restructuring Plan, the Corporation will adopt the Retirement
Plan as sponsor.
All employees (including officers) of the Corporation and its
subsidiaries on the Distribution Date will be eligible to participate in the
Retirement Plan and future employees will be eligible following the completion
of 1,000 hours of service and their first year of employment. Subject to certain
limitations, participants in the Retirement Plan may make contributions from 2%
to 15% of their pretax compensation, up to a maximum of $9,240 per year (in
1995), subject to certain limitations and annual adjustments for inflation. The
Corporation may, in its discretion, make a matching contribution equal to a
percentage of compensation contributed by each participant, not to exceed 6% of
compensation. The Retirement Plan is designed to qualify under Section 401(k) of
the Code and therefore contributions by the Corporation and the participants are
deductible by the Corporation and not includible in the income of the
participants for federal income tax purposes. Participants will always be fully
vested in all of their individual contributions to the Retirement Plan (and in
earnings on such contributions). Participants will be fully vested in employer
contributions (and earnings on such contributions) to the Retirement Plan,
regardless of years of service, upon the attainment of normal retirement age
(age 65), such participant's death or permanent and total disability while
employed by the Corporation or the termination or complete discontinuance of the
Retirement Plan. If a participant terminates employment with the Corporation for
any other reason other than retirement, then such participant's interest in
employer contributions to the Retirement Plan shall vest 20% after one year of
service, 20% for each year of service thereafter, so they will be vested 100%
after five or more years of service. An employee's service with the Partnership,
the General Partner, and former affiliates is counted for purposes of vesting
under the Retirement Plan.
STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan")
provides for eligible employees of the Corporation and its subsidiaries to
participate in the ownership of the Corporation by acquiring the right to
purchase shares of the Corporation's Common Stock. The Stock Purchase Plan will
cover a total of 50,000 shares of Common Stock, which may be purchased by the
Plan in the open market or issued by the Corporation from authorized and
unissued treasury stock. The purpose of the Stock Purchase Plan is to promote
the interests of the Corporation by providing a method whereby employees of the
Corporation may participate in the ownership of the Corporation by acquiring an
interest in the Corporation's growth and productivity.
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THE OPTIONS. The Stock Purchase Plan provides that, during each
specified period ("Option Period"), the Corporation may grant options to
participants to purchase, at the termination of that Option Period, shares of
Common Stock under the Stock Purchase Plan. The Option Periods coincide with the
Corporation's calendar year.
The price at which each share covered by an option under the Stock
Purchase Plan may be purchased is in all instances the lower of (i) 100% of the
fair market value of a share of Common Stock on the first day of the applicable
Option Period, and (ii) 90% of the fair market value of a share of Common Stock
on the last day of that Option Period. Accordingly, in no event does an
employee's purchase price exceed 90% of the fair market value of a share of
Common Stock on the last day of the Option Period.
Unless terminated, options granted at the commencement of an Option
Period are exercised automatically on the last day of that Option Period. An
option terminates upon a voluntary withdrawal from participation in the Stock
Purchase Plan by a participant, which may be effected any time prior to the last
day of the Option Period by completing a notice of termination form. An option
also terminates automatically if the participant holding the option ceases to be
employed by the Corporation or a subsidiary of the Corporation for any reason
(including death, disability or retirement) prior to the last day of the Option
Period.
An option may not be sold, pledged, assigned, hypothecated, transferred
or disposed of in any manner other than by will or by the laws of descent or
distribution, and may be exercised, during the lifetime of the optionee, only by
such optionee. Optionees do not have rights as Stockholders with respect to
option shares until they exercise their options.
ELIGIBILITY AND PARTICIPATION. All full-time employees of the
Corporation and its subsidiaries who have been employed continuously for at
least 30 days and who work more than 20 hours per week are eligible to
participate in the Stock Purchase Plan at their election. However, no employee
may be granted an option if such employee would immediately thereafter own,
directly or indirectly, 5% or more of the combined voting power of all classes
of stock, of the Corporation, as determined pursuant to Section 424(d) of the
Code.
Eligible employees may enroll as participants in the Stock Purchase
Plan by executing a form provided by the Corporation prior to the commencement
of each Option Period on which they may designate the stated maximum set forth
on the form, to (1) the portion of their compensation, in any amount up to the
stated maximum set forth on the form, to be deducted semi-monthly, and
accumulated for the purchase of shares of Common Stock, and/or (2) the amount of
funds, if any, which they will deposit at the beginning of the Option Period for
the purchase of shares of Common Stock. Once chosen, the semi-monthly
contribution for that Option Period cannot be decreased or increased without
terminating the option. The aggregate maximum dollar amount which may be
designated by a participant to be applied to the purchase of shares under the
Stock Purchase Plan may not exceed the lesser of 15% of base compensation or
$25,000 per year.
ADMINISTRATION AND AMENDMENT. The Stock Purchase Plan will be
administered by the Stock option and Retirement Plans Committee of the Board of
Directors. That Committee will be empowered to interpret and construe any
provision of the Stock Purchase Plan and may adopt such rules and regulations
for administering the Stock Purchase Plan as it deems necessary.
The Board of Directors of the Corporation may at any time, insofar as
is permitted by law, alter, amend, suspend or discontinue the Stock Purchase
Plan with respect to any shares not already subject to options; provided,
however, that without the approval of the Stockholders no modification or
amendment may increase the number of shares subject to the Stock Purchase Plan,
extend the term of the Stock Purchase Plan, alter the option price formula,
otherwise materially increase the benefits accruing to participants, materially
modify the requirements as to eligibility for participation, or amend the Stock
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Purchase Plan in any manner that will cause it to fail to meet the requirements
of an "Employee Stock Purchase Plan" as defined in Section 423 of the Code.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Pacific United Group Supplemental Executive Retirement Plan (the
"Supplemental Plan"), an unfunded retirement plan, is designed to provide
benefits to certain long-term executive officers of the Corporation and its
predecessors. Participants' years of service with the General Partner,
Presidential (and its former affiliate, Pacific Thrift and Loan Association)
CRC, LPPC and Pacific Thrift prior to the completion of the Restructuring Plan
will carry forward for vesting and benefit accrual purposes. The Supplemental
Plan will initially cover the following seven employees: Joel R. Schultz,
Richard B. Fremed, Norman A. Markiewicz, Richard D. Young, Kenneth A. Carmona,
Charles J. Siegel and Frank Landini. Future participants, if any, will be
determined by the Board of Directors. Administration of the Supplemental Plan
will be the responsibility of the Executive Compensation and Stock Option
Committee. Participants in the Supplemental Plan will not be permitted to make
contributions to the Supplemental Plan.
Under the Supplemental Plan, a participant's 65th birthday is deemed
his or her normal retirement date ("Normal Retirement Date"). The yearly benefit
that a participant will receive at his or her Normal Retirement Date will be
1-2/3% of his or her average compensation (whether paid by the General Partner,
the Partnership or the Corporation) for his or her highest 3 consecutive years,
multiplied by the actual number of his or her years of service. However, in no
event will any years of service in excess of 30 be taken into account. The
participant's benefits are reduced by his estimated Social Security Benefit and
by his estimated Section 401(k) Plan Benefit. The estimated 401(k) Plan Benefit
is determined as a straight life annuity that is the actuarial equivalent of the
sum of the elective deferral and company matching contributions made to the
Retirement Plan, based on the assumption that the maximum elective deferrals and
company match are contributed to the Retirement Plan on behalf of the
participant each year and the participant's account yields an assumed earnings
rate. Benefits are payable monthly upon the participant's retirement.
A participant is entitled to elect early retirement before his or her
Normal Retirement Date, and still receive retirement benefits, at any time after
(a) he or she has completed 15 years of service and (b) the sum of his or her
age and years of service equals or exceeds 75 ("Early Retirement Date"). The
dollar amount of a participant's early retirement benefit equals the normal
retirement benefit reduced 1/4% for each month prior to his or her 65th
birthday.
If a participant dies while employed by the Corporation at any time
when he or she is eligible for early or normal retirement, his or her surviving
spouse will receive the survivor portion of a benefit determined as if the
participant had retired on the day before his or her death, and had elected to
receive his or her benefit in the form of a 50% joint and survivor annuity.
Participants' benefits will become fully vested upon the attainment of
their Early Retirement Date or Normal Retirement Date; however, participants
will forfeit all of their benefits in the event they are terminated for cause,
or they engage in competition with the Corporation without express written
consent of the Corporation, either before or after retirement.
Special rules apply following a Change of Control of the Corporation.
If a participant's employment is terminated within 5 years following a Change of
Control:
(a) the participant will be entitled to receive a benefit even if he
or she voluntarily terminates employment prior to eligibility for retirement,
provided it is for "Good Reason," which includes, among other circumstances,
reduction in the participant's annual base salary, the failure to pay within 7
days of the due date any portion of the participant's compensation, and the
Corporation's failure to continue in effect any material compensation plan in
which the participant participated immediately before the Change of Control;
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(b) the participant will be credited with an additional 5 years of
service and entitled to receive a lump sum distribution of the present value of
his or her accrued benefit; and
(c) the participant's benefit can be forfeited because he or she is
terminated for cause only if (i) the termination is because of the willful and
continued failure by the participant to substantially perform his or her duties
with the Corporation after a written demand for substantial performance is
delivered to the participant by the Board of Directors, or (ii) the
participant's theft or embezzlement from the Corporation, fraud or other acts of
dishonesty in the conduct of the Corporation's business, conviction or plea of
nolo contendere to any felony or any crime involving moral turpitude, or willful
and knowing action which is materially injurious to the business or reputation
of the Corporation.
A participant shall have the right to appeal a dismissal for cause to
the Board of Directors. Such participant shall not be deemed to have been
terminated for cause within 5 years following a Change of Control unless and
until he or she receives a copy of a resolution stating that the participant had
committed an act described in clause (i) or (ii) of paragraph (c) above, duly
adopted by the affirmative vote of not less than 75% of the entire membership of
the Board of Directors.
A participant also will have the right to receive a lump sum benefit
under the Plan in the event of a voluntary termination of employment within one
year following a Change of Control, based on his actual Years of Service.
The Board of Directors of the Corporation may amend or terminate the
Supplemental Plan at any time, provided that neither the accrual or vesting
rights of any participant at the time of amendment or termination may be
adversely affected without the consent of that participant. Plan termination
will not result in immediate vesting of accrued benefits.
The following table shows the estimated annual retirement benefits,
before any applicable offset for estimated Social Security benefits or estimated
401(k) benefits under the Retirement Plan. Such benefits would be payable to
participants in the Supplemental Plan on their Normal Retirement Date on a
straight life annuity basis. Offsets for social security and 401(k)
contributions made under the Retirement Plan may be substantial for certain
participants.
<TABLE>
<CAPTION>
Average Annual
Eligible Annual Compensation
Compensation Years of Service at Retirement
------------ ------------------------------
15 20 25 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
$100,000 $25,005 $33,340 $41,675 $50,010
$200,000 $50,010 $66,680 $83,350 $100,020
$300,000 $75,015 $100,020 $125,025 $150,030
$400,000 $100,020 $133,360 $166,700 $200,040
$500,000 $125,025 $166,700 $208,375 $250,050
</TABLE>
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
The Corporation's Certificate of Incorporation provides that a director
of the Corporation will have no personal liability to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director
except (i) for any breach of the director's duty of loyalty to the Corporation
or its shareholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) as provided
under Section 174 of the Delaware General Corporation Law (the
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"Delaware GCL") for the payment of certain unlawful dividends and the making of
certain stock purchases or redemptions or (iv) for any transaction from which
the director derived an improper personal benefit. This provision would absolve
directors of personal liability for negligence in the performance of their
duties, including gross negligence. It would not permit a director to be
exculpated, however, for liability for actions involving conflicts of interest
or breaches of the traditional "duty of loyalty" to the Corporation and its
shareholders, and it would not affect the availability of injunctive or other
equitable relief as a remedy.
The provision does not eliminate or alter the duty of the Corporation's
directors; it merely limits personal liability for monetary damages to the
maximum extent now permitted by the Delaware GCL. Moreover, it applies only to
claims against a director arising out of his role as a director; it does not
apply to claims arising out of his role as an officer (if he is also an officer)
or arising out of any other capacity in which he serves. While this provision
does not affect the availability of injunctive or other equitable relief as a
remedy for breach of duty by directors, it does limit the remedies available to
a Stockholder who has an otherwise valid claim that a director acted in
violation of his duties, if the action is among those as to which liability is
limited. Because of this provision, Stockholders will not have a claim for
monetary damages based on breach of the directors' duty, even if the directors'
conduct involved gross negligence (including a grossly negligent business
decision involving a takeover proposal for the Corporation), unless the conduct
is of a type for which the Delaware GCL does not permit limitation of liability.
If the Stockholders do not have a claim for monetary damages, their only remedy
may be a suit to enjoin completion of the Board's action or to rescind completed
action. The Stockholders may not be aware of a proposed transaction that might
otherwise give rise to a claim until the transaction is completed or until it is
too late to prevent its completion by injunction. In such a case, the
Corporation and its Stockholders may have no effective remedy for an injury
resulting from the Board's action.
This provision may reduce the likelihood of Stockholder derivative
litigation against directors and may discourage or deter Stockholders or
management from bringing a lawsuit against directors for breach of their duties,
even though such action, if successful, might otherwise have benefited the
Corporation and its Stockholders. The Securities and Exchange Commission has
taken the position that similar provisions added to other corporations'
certificates of incorporation would not protect those corporations' directors
from liability for violations of the federal securities laws.
The Corporation included this exculpation provision in its Certificate
of Incorporation to provide its directors with the maximum protection from
personal liability made available by the Delaware GCL. It is believed that this
provision will help the Corporation to attract and retain as directors the
persons most qualified for those positions.
DIRECTOR AND OFFICER INDEMNIFICATION
The Corporation's Bylaws generally require the Company to indemnify and
advance expenses to its directors, officers, employees and other agents to the
fullest extent permitted by Delaware law. The Corporation also has entered into
indemnification agreements with each of its directors and executive officers
whereby the Corporation will indemnify each such person against certain claims
arising out of certain past, present or future acts, omissions or breaches of
duty committed by an indemnitee while serving as a director of the Corporation
or any of its subsidiaries. Such indemnification does not apply to acts or
omissions which are knowingly fraudulent, deliberately dishonest or arise from
willful misconduct. Indemnification will only be provided to the extent that the
indemnitee has not already received payments in respect of a claim from the
Corporation or from an insurance company. Under certain circumstances, such
indemnification (including reimbursement of expenses incurred) will be allowed
for liability arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or person controlling the
Corporation pursuant to the foregoing provisions, the Corporation has
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been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Corporation may purchase a directors' and officers' liability
policy insuring directors and officers of the Corporation upon the completion of
the Restructuring Plan.
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CERTAIN TRANSACTIONS
MANAGEMENT AND OTHER FEES AND REIMBURSEMENTS PAID TO THE GENERAL PARTNER
Pursuant to the Partnership Agreement, the General Partner received
various fees and reimbursements from the Partnership, all of which will be
terminated effective upon the Closing Date of the Restructuring Plan. The
following paragraphs describe the various fees and reimbursements paid to the
General Partner for the three years ended December 31, 1995.
In 1993, the General Partner received management fees of $440,530 in
the first and second calendar quarters, which was required to be repaid as a
result of the Partnership's net loss for 1993. As a result, the General Partner
delivered a promissory note to the Partnership for the balance owed, payable in
four equal quarterly principal installments commencing December 20, 1994. As of
September 30, 1995, the General Partner owed $220,000 on this note. No interest
was paid or accrued for 1993. However, interest at the NatWest prime rate plus
1% has been accrued from January 1, 1994. All accrued interest owed on this
amount has been paid through September 30, 1995.
The General Partner received no management fees in 1994 or 1995.
For the years ended December 31, 1995, 1994 and 1993, the General
Partner received supervision fees of $1,012,000, $805,000 and $845,508 from the
Partnership.
The Partnership reimbursed the General Partner for the employee
salaries and related expenses of 135 full time employees and one part time
employee of the General Partner in 1993, for which the Partnership reimbursed
the General Partner a total of $5,183,922. Effective January 1, 1994, in
response to the demand of the FDIC, the General Partner transferred all of its
employees who worked for Pacific Thrift directly to Pacific Thrift's payroll.
The General Partner still provides employees to the Partnership, CRC and LPPC.
For the years ended December 31, 1995 and 1994, the Partnership, CRC and LPPC
reimbursed the General Partner $82,000 and $90,000, respectively.
PAYMENTS TO GENERAL PARTNER RELATED TO PURCHASE OF CRC AND LPPC
Effective July 1, 1990, the Partnership purchased CRC and LPPC from the
General Partner, for a total purchase price of $908,000. In addition, the
Partnership agreed to pay to the General Partner an additional amount annually
for five years, to be calculated as 50% of the total annual net profits earned
by CRC in excess of $465,396 (the "Base Profit Amount"). In 1995, 1994 and 1993
the Partnership paid the General Partner $198,000, $224,000 and $465,551
pursuant to this provision. No further payments are payable to the General
Partner under this provision.
PAYMENTS FOR PURCHASE OF EQUIPMENT
Effective December 31, 1993, Pacific Thrift purchased certain computer
equipment, software and office furniture and equipment from the General Partner
and the Partnership. Pacific Thrift paid $547,500 to the General Partner and
$497,000 to the Partnership in connection with these purchases. As a result of a
revaluation and reallocation of the software purchased by Pacific, the purchase
price of the software was reduced by a total of $349,407, of which the General
Partner repaid $176,793 and the Partnership repaid $172,614 to Pacific Thrift.
GENERAL PARTNER CAPITAL NOTE
To make up for an unintended distribution of capital of the Partnership
in 1992, the General Partner voluntarily contributed a note (the "Capital Note")
to the Partnership, dated May 15, 1993, bearing interest at 1% above the NatWest
prime rate. As of September 30, 1995, the General Partner had made payments
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of $266,213 plus accrued interest under the Capital Note. Based upon the terms
and conditions of the Capital Note, the General Partner will have no further
obligation to make any payments under the Capital Note after the completion of
the Restructuring Plan.
AMOUNTS OWED FROM AND TO THE GENERAL PARTNER AND THE PARTNERSHIP
In order to facilitate an extension of the Bank Loan, the General
Partner made an unsecured loan to the Partnership of $600,000 on May 15, 1992,
which accrues interest at the Bank's prime rate. The loan may not be repaid
without the consent of the Bank. As of December 31, 1995, $69,140 had been
accrued in interest on the loan. In addition, the Partnership owed $133,897 in
management fees and $77,801 for profits earned by CRC and LPPC in 1995, for a
total of $880,838 owed by the Partnership to the General Partner at December 31,
1995.
Offsetting these obligations are debts owed by the General Partner to
Presidential for salaries, rent and overhead paid by Presidential and overpaid
management fees in 1994 and 1995, which totalled $316,256 at December 31, 1995.
Of the net of $564,582 owed to the General Partner, $385,000 will be paid by
Presidential to the General Partner on the Closing Date. Also on the Closing
Date, the General Partner will pay the Corporation $385,000 to purchase the
General Partner Warrants, which management believes represents the fair market
value of the General Partner Warrants. The remaining debt owed to the General
Partner will be paid to the extent permitted by NatWest with any remaining
balance paid after the Bank Loan has been repaid in full.
PAYMENTS TO MANAGING OFFICERS
Two of the Managing Officers, Joel R. Schultz and Norman A. Markiewicz,
have employment agreements providing incentive payments based upon net operating
profits of the Partnership. For the two years ended December 31, 1995 and 1994,
no compensation was paid under these agreements. For the year ended December 31,
1993 Mr. Schultz received $20,000 and Mr. Markiewicz received $10,000 under
these agreements. Upon the completion of the Restructuring Plan Mr. Schultz and
Mr. Markiewicz will receive any amounts earned under these employment contracts
based on net operating profits of the Partnership from January 1, 1996 through
the Closing Date, provided that the maximum that may be earned under these
agreements is $20,000 by Mr. Schultz and $10,000 by Mr. Markiewicz. These
employment agreements will then be terminated.
Joel R. Schultz also receives payments for providing legal services in
connection with the Partnership's loan accounts (excluding home improvement
loans), for which he receives $100 from the fees paid by each borrower. Total
fees of $167,100, $62,000 and $56,400 were paid to Mr. Schultz for the years
ended December 31, 1995, 1994 and 1993 Upon completion of the Restructuring
Plan, these amounts will no longer be paid.
PERSONAL GUARANTY OF PARTNERSHIP DEBT BY MANAGING OFFICERS
Messrs. Joel R. Schultz, Norman A. Markiewicz and Richard B. Fremed
have personally guaranteed the collectability of the Partnership's bank debt.
CONSULTING AGREEMENT WITH DIRECTOR OF PACIFIC THRIFT
Effective August 31, 1992, Pacific Thrift and the Partnership entered
into an advisory agreement with Ermyas Amelga, a director of the Corporation and
Pacific Thrift. Mr. Amelga was retained to provide financial advisory services
in connection with: (i) the establishment of a $75 million securitization
program with Aames Capital Corporation; and (ii) an offering of debt or equity
securities. The agreement terminated on June 30, 1994. Mr. Amelga received
compensation of $125 per hour, provided that monthly billings relating to any
transaction other than the Aames securitization were limited to no more than
$7,500 per
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month. In addition, Mr. Amelga received incentive fees equal to the following
amounts: for the Aames securitization, .50% of the first $5 million of loans
sold, .25% of the next $10 million loans sold; .30% of the next $35 million
loans sold; and .35% of the next $25 million loans sold. In addition, Mr. Amelga
was entitled to reimbursement for all reasonable out-of-pocket expenses incurred
in connection with the performance of his services under the agreement. Mr.
Amelga received $165,130, $111,000, $84,148 in compensation under the Advisory
Agreement in 1995, 1994 and 1993, respectively. No further payments are payable
to Mr. Amelga under the agreement.
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DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of certain terms and provisions of the
Corporation's capital stock, which is qualified in its entirety by reference to
the Corporation's Certificate of Incorporation. A copy of the Certificate of
Incorporation has been filed as an exhibit to the Registration Statement of
which this Proxy Statement/Prospectus forms a part.
Under the Certificate of Incorporation. the authorized but unissued and
unreserved shares of the Corporation's capital stock will be available for
issuance for general corporate purposes, including, but not limited to, possible
stock dividends, future mergers or acquisitions, or public or private offerings.
Except as may otherwise be required, stockholder approval will not be required
for the issuance of those shares.
COMMON STOCK
The Corporation's Certificate of Incorporation authorizes the issuance
of up to 8,000,000 shares of Common Stock. The Partnership currently owns all of
the 3,000 outstanding shares of Common Stock. If the Restructuring Plan is
approved, shares equal to the Net Tangible Equity of the Partnership on the last
day of the month preceding the Closing Date, but not less than 830,000 shares,
will be issued to the Partnership for distribution to the General Partner and
the Limited Partners for their interests in the Partnership. An additional
820,000 shares of Common Stock will be offered in the Rights Offering. Following
the Solicitation Period Expiration Date, additional shares of Common Stock will
be offered in the Public Offering in an amount necessary to achieve the Minimum
Market Capitalization of $16.5 million. The number of shares required to be
issued to reach the Minimum Market Capitalization will depend upon the Public
Offering Price, and may be between 2,062,500 shares if the Public Offering Price
is $8 per share, and 1,650,000 shares, if the Public Offering Price is $10 per
share. An additional 170,000 shares of Common Stock have been reserved for
issuance under the Corporation's 1995 Stock Option Plan and 50,000 shares have
been reserved for issuance under the Stock Purchase Plan. See "MANAGEMENT --
1995 Stock Option Plan" and " -- Stock Purchase Plan."
The holders of Common Stock will be entitled to dividends when, as, and
if declared by the Corporation's Board of Directors out of funds legally
available therefor. The payment of dividends by the Corporation will depend on
the Corporation's net income, financial condition, regulatory capital
requirements and other factors deemed relevant by the Board of Directors. In
addition, a substantial source of funds for the payment of cash dividends will
be dividends paid by Pacific Thrift, the payment of which is limited by the
provisions of California law, FDIC regulation and the 1995 Order. See
"SUPERVISION AND REGULATION -- Federal Law -- Restrictions on Transfers of
Funds to the Partnership by Pacific Thrift." Each share of Common Stock will
entitle the holder to one vote on all matters upon which Stockholders have the
right to vote. The Common Stock will not have cumulative voting rights in the
election of directors.
In the event of liquidation, dissolution or winding up of the
Corporation, the holders of shares of Common Stock will be entitled to share
equally after payment of all debts and liabilities of the Corporation, and
subject to the prior rights of holders of any shares of the Corporation's
Preferred Stock, if issued in the future, in the remaining assets of the
Corporation.
Holders of shares of Common Stock are not entitled to preemptive rights
with respect to any shares of Stock of the Corporation that may be subsequently
issued. The Common Stock is not subject to call or redemption and, as to shares
of Common Stock currently outstanding, are fully paid and nonassessable.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors of
the Corporation to issue up to 2,000,000 shares of Preferred Stock of the
Corporation, in one or more series, having such rights and preferences as the
Board of Directors may determine, in its sole discretion. No consent of the
Common
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Stockholders is required to authorize the issuance of any class of Preferred
Stock. The rights of the holders of the Preferred Stock may be senior to the
holders of the Common Stock. The Board of Directors currently has no plans to
issue any class of Preferred Stock.
TRANSFER AGENT
The transfer agent for the Common Stock will be U.S. Stock Transfer
Corporation.
CERTAIN ANTI-TAKEOVER PROVISIONS
There has been a recent trend towards the accumulation of substantial
stock positions in public companies by third parties as a prelude to proposing a
takeover or a restructuring or sale of all or part of the company or other
similar extraordinary corporate action. Such actions are often undertaken by the
third party without advance notice to or consultation with management of the
company. In many cases, the purchaser seeks representation on the company's
board of directors in order to increase the likelihood that his proposal will be
implemented by the company. If the company resists the efforts of the purchaser
to obtain representation on the company's board, he may commence a proxy contest
to have himself or his nominees elected to the board in place of certain
directors, or the entire Board.
The Board of Directors of the Corporation believes that an imminent
threat of removal of the Corporation's management severely curtails its ability
to negotiate effectively with such purchasers. Management is deprived of the
time and information necessary to evaluate the takeover proposal, to study
alternative proposals and to help ensure that the best price is obtained in any
transaction involving the Corporation which may ultimately be undertaken.
Takeovers or changes in management of a corporation which are proposed and
effected without prior consultation and negotiation with the Corporation's
management are not necessarily detrimental to the Corporation and its
stockholders. However, the Board feels that the benefits of seeking to protect
its ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to take over or restructure the Corporation outweigh the disadvantages
of discouraging such proposals.
The provisions of the Certificate of Incorporation and Bylaws described
herein would make more difficult or discourage a proxy contest or the assumption
of control by a holder of a substantial block of the Corporation's Common Stock
or the removal of the incumbent Board, and could thus have the effect of
entrenching incumbent management. At the same time, the provisions would help
ensure that the Board, if confronted by a surprise proposal from a third party
who has recently acquired a block of the Corporation's stock, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to seek a premium price for the Stockholders. These provisions are
thus intended to encourage persons seeking to acquire control of the Corporation
to initiate such an acquisition through arms'-length negotiations with the
Corporation's management and Board of Directors. The provisions are permitted
under Delaware law and are consistent with the rules of the Nasdaq National
Market.
These provisions are not in response to any efforts of which the
Corporation is aware to accumulate the Corporation's stock or to obtain control
of the Corporation. The Board of Directors does not presently contemplate
recommending to the stockholders for their approval any further measures which
would affect the ability of third parties to change control of the Corporation.
The following discussion is a general summary of material provisions of
the Corporation's Certificate of Incorporation and Bylaws, as currently in
effect, and certain other regulatory provisions, which may be deemed to have an
"anti-takeover" effect. The following description of certain of these provisions
is necessarily general and, with respect to provisions contained in the
Corporation's Certificate of Incorporation and Bylaws, as currently in effect,
reference should be made in each case to the document in question, each of which
is part of the Registration Statement filed with the Commission. See "ADDITIONAL
INFORMATION."
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DIRECTORS. Certain provisions of the Certificate of Incorporation and
Bylaws will impede changes in majority control of the Board of Directors. The
Corporation's Certificate of Incorporation provides that the Board of Directors
of the Corporation, other than those who may be elected pursuant to the terms of
any series of Preferred Stock or any other securities of the Corporation having
a preference to the Common Stock, be divided into three classes, with directors
in each class elected for three-year staggered terms except for the initial
directors. The Corporation's Bylaws provide that, except as may be provided by
the terms of any series of Preferred Stock or any other securities of the
Corporation having a preference to the Common Stock, the size of the Board of
Directors may be increased or decreased only by a majority vote of the whole
Board. The Bylaws also provide that, except as may be provided by the terms of
any series of Preferred Stock or any other securities of the Corporation having
a preference over the Common Stock, any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. The number of directors constituting the
Board will initially be five and, therefore, a majority of the Board may not be
replaced at one annual election. The Certificate of Incorporation provides that,
except as otherwise provided by the terms of any series of Preferred Stock or
any other securities of the Corporation having preference over the Common Stock,
that a director may only be removed for cause by the affirmative vote of 66-1/2%
of the shares eligible to vote.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The Certificate of
Incorporation provides that, subject to the terms of any series of Preferred
Stock or any other securities of the Corporation having a preference over the
Common Stock, that a special meeting of stockholders may be called only by the
Board of Directors, the Chairman of the Board or the President and for only such
business as directed by the Board. Common Stockholders are not authorized to
call a special meeting.
ACTION WITHOUT A MEETING OF STOCKHOLDERS; SPECIAL MEETINGS. The
Certificate of Incorporation provides that, except as may be provided by the
terms of any series of Preferred Stock or any other securities of the
Corporation having a preference over the Common Stock, stockholders may not
consent in writing, without a meeting, to the taking of any action unless such
action is first approved by a majority of the "Disinterested Directors" of the
Corporation. Special meetings may only be called by a majority of the Board of
Directors, the Chairman of the Board or the President.
ABSENCE OF CUMULATIVE VOTING. The Certificate of Incorporation does not
provide for cumulative voting rights in the election of directors.
AUTHORIZATION OF PREFERRED STOCK. The Certificate of Incorporation
authorizes 2,000,000 shares of Preferred Stock. The Corporation is authorized to
issue Preferred Stock from time to time in one or more series subject to
applicable provisions of law, and the Board of Directors is authorized to fix
the designations, powers, preferences and relative, participating, optional and
other special rights of such shares, including voting rights (which could be
multiple or as a separate class) and conversion rights. In the event of a
proposed merger, tender offer or other attempt to gain control of the
Corporation that the Board of Directors does not approve, it might be possible
for the Board of Directors to authorize the issuance of a series of Preferred
Stock with rights and preferences that would impede the completion of such a
transaction. An effect of the possible issuance of Preferred Stock, therefore,
may be to deter a future takeover attempt. The Board of Directors has no present
plans or understandings for the issuance of any Preferred Stock, and does not
intend to issue any Preferred Stock except on terms which the Board deems to be
in the best interests of the Corporation and its stockholders.
PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. The Certificate of
Incorporation requires that certain business combinations (including
transactions initiated by management) between the Corporation (or any
majority-owned subsidiary thereof) and a 10% or more stockholder either (i) be
approved by a vote of 66-2/3% of all of outstanding voting shares, voting as a
single class, of the Corporation and by a majority of the voting shares held by
other than the interested stockholder and its affiliates, (ii) be approved by a
majority of the disinterested Board of Directors (i.e., persons other than the
interested stockholder and its
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affiliates and the affirmative vote of the stockholders, as required by law,) or
(iii) involve consideration per share generally equal to that paid by such 10%
stockholder when it acquired its block of stock and be approved by a majority of
the outstanding voting shares, voting as a single class.
AMENDMENT TO CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Certificate of Incorporation requires the approval of a majority vote of the
Corporation's Board of Directors and also by a majority of the outstanding
shares of the Corporation's voting stock, provided, however, that approval by at
least 66-2/3% of the outstanding voting stock is generally required for certain
provisions (i.e., provisions relating to number, classification, election and
removal of directors; amendment of bylaws; call of special stockholder meetings;
offers to acquire and acquisitions of control; director liability; certain
business combinations; power of indemnification; and amendments to provisions
relating to the foregoing in the Certificate of Incorporation).
The Bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of a majority of the total votes eligible to be voted at
a duly constituted meeting of stockholders.
DELAWARE ANTI-TAKEOVER STATUTE. The Delaware General Corporation Law
provides that buyers who acquire more than 15% of the outstanding stock of a
Delaware corporation, such as the Corporation, are prohibited from completing a
hostile takeover of such corporation for three years. However, the takeover can
be completed if (i) the buyer, while acquiring the 15% interest, acquires at
least 85% of the corporation's outstanding stock (the 85% requirement excludes
shares held by directors who are also officers and certain shares held under
employee stock plans), or (ii) the takeover is approved by the target
corporation's board of directors and two-thirds of the shares of outstanding
stock of the corporation (excluding shares held by the bidder). The foregoing
provisions of the Delaware General Corporation Law do not apply to Delaware
corporations which do not have a class of voting stock listed on a national
exchange, authorized for quotation on an inter-dealer quotation system of a
registered national securities association or held of record by more than 2,000
stockholders. The Corporation may exempt itself from the requirements of the
statute by adopting an amendment to its Certificate of Incorporation or Bylaws
electing not to be governed by this provision. At the present time, the Board of
Directors does not intend to propose any such amendment.
EFFECT OF QUASI-CALIFORNIA CORPORATION LAW
Section 2115 of the California GCL provides that quasi-California
corporations will be subject to certain substantive provisions in the California
GCL notwithstanding comparable provisions in the law of the jurisdiction where
the corporation is incorporated. Section 2115 is applicable to foreign
corporations which have more than half of their shareholders residing in
California and more than half of their business deriving from California. The
determination of whether a corporation is a quasi-California corporation is
based upon information contained in a certificate required to be filed within
three months and fifteen days after the end of the corporation's fiscal year or
within 30 days after the filing of its franchise tax return, if an extension of
time to file such return was granted. Quasi-California corporations that are
Large Public Corporations (i.e., that have securities listed on the New York or
American stock exchanges, or securities designated for trading on the Nasdaq
National Market, if the corporation has at least 800 holders of its equity
securities as of the record date for its most recent annual meeting), are exempt
from the application of Section 2115.
The Corporation has qualified to do business in the State of
California. The Corporation's subsidiaries will each have substantially all of
their property, employees and operations in California. Therefore, absent an
exemption, the Corporation would be deemed to be a quasi-California corporation.
Management believes that, immediately following the Distribution, the
Corporation would constitute a Large Public Corporation and would thereby be
exempt from the application of Section 2115. The Corporation's Common Stock has
been conditionally approved for listing on the Nasdaq National Market.
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Furthermore, as of the September 30, 1995, there were more than 800 holders of
record of the Limited Partnership Units and more than 2,493 beneficial owners of
such Limited Partnership Units. However, there can be no assurance that the
Common Stock will continue to be listed on the Nasdaq National Market or that
the Corporation's equity securities will continue to be held by at least 800
persons. If the Corporation's equity securities were ever to be held by fewer
than 800 persons, or the Common Stock was no longer listed on the NASDAQ
National Market for any reason the Corporation could become subject to the
provisions of the California law as a result of the application of Section 2115.
If the Corporation were determined to be a quasi-California corporation, certain
of the provisions of the Corporation's Certificate of Incorporation and Bylaws
would not be authorized by California law, including the Corporation's
classified board of directors and the supermajority voting provisions. In
addition, under California law cumulative voting for the election of directors
is mandatory unless a corporation that is a Large Public Corporation has
expressly eliminated cumulative voting in its articles of incorporation. The
Corporation has eliminated cumulative voting in its Articles of Incorporation.
Furthermore, California law with respect to the payment of dividends is more
restrictive than Delaware law. Since the Corporation is expected to derive a
substantial amount of its revenues from Pacific Thrift, a California
corporation, California law and FDIC regulations with respect to dividends will
have a substantial effect on the Corporation's ability to pay dividends. Under
California law, a corporation is prohibited from paying dividends unless (i) the
retained earnings of the corporation immediately prior to the distribution
exceeds the amount of the distribution; (ii) the assets of the corporation
exceed 1-1/4 times its liabilities; or (iii) the current assets of the
corporation exceed its current liabilities, but if the average pretax net
earnings of the corporation before interest expense for the two years preceding
the distribution was less than the average interest expense of the corporation
for those years, the current assets of the corporation must exceed 1-1/4 times
its current liabilities.
MARKET FOR COMMON STOCK
There has been no public market for the Common Stock. The Common Stock
has been conditionally approved for listing on the Nasdaq National Market under
the symbol "PUGG." An investment banking firm has indicated its intention to
make a market in the Common Stock. This firm is not obligated, however, to make
a market in the Common Stock and any market making may be discontinued at any
time.
SUBSCRIBER WARRANTS
For every five shares of Common Stock purchased in the Rights Offering
by Partners, partners of the General Partner or officers or employees of the
Partnership or its subsidiaries, the Corporation will issue a transferable
warrant for one additional share of Common Stock, exercisable at any time after
issuance for a period of two years, at a price equal to 125% of the Public
Offering Price. Although the Subscriber Warrants are freely transferable, they
will not be listed for trading on the Nasdaq National Market, and there can be
no assurance that a market will develop for the Subscriber Warrants.
The Common Stock issuable upon exercise of the Subscriber Warrants
("Subscriber Warrant Stock") has been registered concurrently with the
registration of the Additional Shares, and the Corporation will commit to
maintain the effectiveness of such registration until the earlier of the sale of
all the Subscriber Warrant Stock or five years after the date of issuance. In
addition, under certain circumstances, the holders of the Subscriber Warrants
will have one demand registration right and unlimited "piggyback" registration
rights for a period of five years following the Initial Exercise Date, for the
purpose of resale of the Subscriber Warrant Stock.
Holders of Subscriber Warrants will not be entitled, by virtue of being
such holders, to receive dividends or subscription rights, vote, consent, or
receive notice as Stockholders of the Corporation in respect of any meeting of
Stockholders for the election of directors of the Company or any other matter,
or exercise any other rights whatsoever as Stockholders of the Corporation.
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GENERAL PARTNER WARRANTS
The General Partner of Partnership will purchase warrants from the
Corporation ("General Partner Warrants") exercisable for up to 25% of the Common
Stock outstanding on the Closing Date, on a fully diluted basis assuming the
exercise of all outstanding Subscriber Warrants and General Partner Warrants,
exercisable at any time for a period of 18 months after the Closing Date, at an
exercise price equal to 150% of the Public Offering Price per share. The General
Partner will pay the Corporation $385,000 to purchase the General Partner
Warrants, which management believes represents the fair market value of the
General Partner Warrants.
Holders of General Partner Warrants will not be entitled, by virtue of
being such holders, to receive dividends or subscription rights, vote, consent,
or receive notice as Stockholders of the Corporation in respect of any meeting
of Stockholders for the election of directors of the Company or any other
matter, or exercise any other rights whatsoever as Stockholders of the
Corporation.
BANK WARRANT
In connection with the extension of the Loan Agreement, if the
Restructuring Plan is completed, the Corporation has agreed to issue the Bank
Warrant to NatWest. The Bank Warrant is non-transferable, and entitles NatWest
to purchase up to 2% of the total outstanding Common Stock of the Corporation on
the Closing Date, at an exercise price equal to 25% of the net book value of the
Corporation on the Closing Date. The Bank Warrant is exercisable for a period of
five years following the completion date of the Restructuring Plan. The
Corporation may redeem the Bank Warrant at any time within one year for
$200,000.
The Bank Warrant will be non-transferable. The Common Stock issuable
upon exercise of the Bank Warrant ("Bank Warrant Stock") has been registered
concurrently with the registration of the Additional Shares, and the Corporation
will commit to maintain the effectiveness of such registration until the earlier
of the sale of all the Bank Warrant Stock or five years after the issuance of
the Bank Warrant. In addition, under certain circumstances, the holder of the
Bank Warrant will have one demand registration right and unlimited "piggyback"
registration rights for a period of five years following the issuance date, for
the purpose of resale of the Bank Warrant Stock.
The Bank will not be entitled by virtue of the Bank Warrant to receive
dividends or subscription rights, vote, consent, or receive notice as
Stockholders of the Corporation in respect of any meeting of Stockholders for
the election of directors of the Company or any other matter, or exercise any
other rights whatsoever as Stockholders of the Corporation.
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SHARES ELIGIBLE FOR FUTURE SALE
The offering made by this Prospectus is the initial registered public
offering of the Common Stock. There is no public trading market for any of the
Corporation's securities at the present time. There can be no assurance that a
public trading market will ever develop or, if a market develops, that it will
be sustained.
Upon the consummation of this offering, a maximum of approximately
2,062,500 shares of Common Stock may be outstanding, excluding (a) an aggregate
of 155,000 shares of Common Stock underlying options granted pursuant to the
Company's 1995 Stock Option Plan; (b) an aggregate of 15,000 additional shares
reserved for issuance pursuant to the Company's 1995 Stock Option Plan; (c) an
aggregate of 563,333 shares of Common Stock issuable under the General Partner
Warrants; (d) an aggregate of 41,250 shares of Common Stock issuable under the
Bank Warrant; or (e) an unknown number of shares of Common Stock issuable under
Subscriber Warrants (based on one warrant for every five shares subscribed for
in the Rights Offering).
All of the shares of Common Stock that will be issued and outstanding
upon the consummation of this offering (subject to the assumptions in the
preceding paragraph), will be freely tradeable without further registration
under the Securities Act. Although shares of Common Stock purchased by an
"affiliate" of the Corporation are not freely tradeable in the absence of a
registration statement, the Company has committed to maintain effective the
Registration Statement of which this Proxy Statement/Prospectus is a part for a
period of five years from the Closing Date. For so long as the Registration
Statement is in effect, affiliates of the Corporation may sell shares without
restriction.
The Corporation will issue General Partner Warrants equal to 25% of the
outstanding Common Stock on the Closing Date, on a fully diluted basis assuming
the exercise of all Subscriber Warrants and General Partner Warrants. The
General Partner Warrants are exercisable at any time for a period of 18 months
following the Closing Date. The Company is required to maintain a registration
statement in effect for a period of five years following the Closing Date, or
until all Common Stock underlying the General Partner Warrants is sold or may be
sold without limitation. Sales of warrant stock, or even the existence of the
right to exercise the General Partner Warrants, may depress the price of the
Common Stock.
The Company has granted options for the purchase of 155,000 shares of
Common Stock to certain key employees, officers, directors and employees
pursuant to the Company's 1995 Stock Option Plan. None of the options are
presently exercisable. All Common Stock issuable upon exercise of such options
will be "restricted stock" and will be subject to resale pursuant to Rule 144 as
described above. Following completion of this offering, however, the Company
intends to take action to register all such options and the underlying Common
Stock under the Securities Act. Upon the effectiveness of such registration, the
Common Stock issuable upon exercise of the options will be freely tradeable. See
"Management -- 1995 Stock Option Plan."
UNDERWRITING OF PUBLIC OFFERING
Pursuant to the terms of an engagement letter dated December 28, 1995,
and subject to the terms and conditions set forth therein, Friedman, Billings,
Ramsey & Co., Inc. (the "Representative") has agreed to enter an Underwriting
Agreement (the form of which has been filed as an exhibit to the registration
statement of which this Proxy Statement/Prospectus is a part) pursuant to which
it will agree to sell on a firm underwriting basis, all of the shares to be
offered in the Public Offering. The Underwriting Agreement will provide that the
obligations of the Representative are subject to certain conditions precedent.
In consideration of the Representative's services in connection with
the Restructuring Plan, the Corporation will agree to pay to the Representative
(i) an advisory fee equal to 1.0% of the gross cash
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proceeds of the Rights Offering and the Public Offering and (ii) a selling
commission equal to 6.5% of the aggregate public offering price of Common Stock
sold in the Public Offering, provided that no advisory fee or selling
commissions shall be paid on purchases of Common Stock made by officers or
directors of the Corporation or its subsidiaries. The Partnership has paid the
Representative an initial fee of $25,000, which will be applied against the
advisory fee and selling commissions upon the closing of the Public Offering.
The advisory fee and selling commissions are payable in cash if, as and when the
closing of the Public Offering occurs. In addition, the Partnership has agreed
to reimburse the Representative, from time to time upon demand, for its
reasonable out-of-pocket expenses in connection with the performance of its
activities as Representative, including fees and expenses of the
Representative's outside legal counsel and any other advisors, accountants or
appraisers, not to exceed $85,000 without written permission of the Partnership.
Following the completion of the Public Offering, the Corporation has
agreed to retain the Representative, on a non-exclusive basis, to provide
ongoing financial advisory and investment banking services. Fees for performing
such services are to be negotiated separately.
The Partnership has agreed to indemnify the Representative against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Representative may be required to make in respect
thereof.
The initial Public Offering Price per share will be determined
following the Solicitation Period Expiration Date and immediately prior to the
Public Offering, by negotiations between the Corporation and the Representative.
There has never been an established public market for the Common Stock of the
Corporation. The major factors which will be considered in determining the
Public Offering Price will be the prevailing market conditions at the time of
pricing, the market prices relative to earnings, cash flow and assets for
publicly traded common stocks of comparable companies, the loan volume and
earnings of the Corporation (and the Partnership, as its predecessor) and
comparable companies in recent periods, the Corporation's earnings potential,
the experience of its management and the position of the Corporation in the
lending industry.
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SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
OF THE RESTRUCTURING PLAN
INTRODUCTION
The discussion below summarizes the principal Federal income tax
consequences to the Limited Partners as a result of the Restructuring Plan.
Jeffer, Mangels, Butler and Marmaro LLP, tax counsel to the Partnership, has
reviewed the following summary of Federal income tax consequences and believes
it to be a reasonable summary of the matters discussed. The discussion is based
upon current Federal income tax law, including provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated
thereunder, legislative history, published rulings, judicial decisions, and
other interpretations of the Federal income tax law as well as the assumption
that the Partnership is a partnership for Federal income tax purposes and that
the transactions constituting the Restructuring Plan will be carried out in the
manner described in this Proxy Statement/Prospectus.
No rulings have been or will be requested from the Internal Revenue
Service ("IRS") concerning any of the matters described in the Proxy
Statement/Prospectus, and there can be no assurance that the IRS will concur
with the views expressed herein. Existing authorities are subject to change by
future legislation, regulations, interpretations by the IRS and court decisions,
and such changes could be retroactively applied to the Restructuring Plan and
alter the tax consequences described below. The discussion below is a general
one and does not describe every tax consequence of the Restructuring Plan, nor
does it take into account the particular tax situation of, or particular tax
consequences to, any of the Limited Partners.
IT IS IMPORTANT THAT EACH LIMITED PARTNER CONFER WITH HIS OR HER
INDIVIDUAL TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF THE RESTRUCTURING PLAN.
THE PARTNERSHIP, THE CORPORATION AND THEIR ADVISORS ASSUME NO RESPONSIBILITY FOR
THE TAX CONSEQUENCES OF THE RESTRUCTURING PLAN TO A LIMITED PARTNER AND NOTHING
HEREIN SHOULD BE CONSIDERED AS TAX ADVICE TO ANY INDIVIDUAL OR ENTITY.
SUMMARY OF TAX CONSEQUENCES
The Restructuring Plan will most likely qualify as a tax-free
transaction under the provisions of Code Section 351, resulting in the following
income tax consequences to the Limited Partners:
- No gain or loss will be recognized by a Limited Partner receiving
Common Stock in exchange for such Limited Partner's Units.
- A Limited Partner's tax basis in Common Stock received pursuant
to the Restructuring Plan (other than Common Stock acquired
pursuant to Basic Subscription Rights, the Oversubscription
Privilege or the exercise of the Subscriber Warrants) will equal
the adjusted tax basis of such Limited Partner's Units
immediately prior to the Restructuring Plan.
- Each share of Common Stock received by a Limited Partner pursuant
to the Restructuring Plan (other than Common Stock acquired
pursuant to Basic Subscription Rights, the Oversubscription
Privilege or the exercise of the Subscriber Warrants) will have
several holding periods, depending on the nature and holding
period of assets transferred by the Partnership to the
Corporation. Approximately thirty (30) days after the effective
date of the Restructuring Plan, the Corporation anticipates
providing Limited Partners with the information necessary to
determine the various holding periods associated with the Common
Stock. The holding period of the Common Stock will determine
whether any gain realized upon disposition of the Common Stock is
taxed as short-term or long-term capital gain (assuming a Limited
Partner holds Common Stock as a capital asset). Because a holding
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period of more than one year is required for long-term capital
gains treatment, any gains from a subsequent sale of Common Stock
by a Limited Partner will result in 100% long-term capital gains
only after the expiration of the one year period immediately
following the date of completion of the Restructuring Plan.
- A Limited Partner's tax basis in Common Stock and Subscriber
Warrants purchased pursuant to Basic Subscription Rights or the
Oversubscription Privilege will equal the cash purchase price of
such Common Stock and Subscriber Warrants. Such tax basis will be
allocated between the Common Stock Subscriber Warrants based on
their relative fair market value. A Limited Partner's holding
period with respect to the Common Stock purchased through the
exercise of Basic Subscription Rights, the Oversubscription
Privilege or the exercise of Subscriber Warrants will commence as
of the date of its acquisition.
- A Limited Partner's tax basis in Common Stock acquired through
exercise of Subscriber Warrants will equal the sum of the tax
basis of the Subscriber Warrants (which will equal the fair
market value of the Subscriber Warrants as of the effective date
of the Restructuring Plan) and the amount of cash paid to acquire
the Common Stock through the exercise of the Subscriber Warrants.
A Limited Partner's holding period with respect to the Common
Stock acquired through the exercise of Subscriber Warrants will
commence as of the date of acquisition of the Common Stock.
QUALIFICATION OF RESTRUCTURING PLAN UNDER CODE SECTION 351
Section 351(a) of the Code sets forth the general rule that no gain or
loss will be recognized by one or more persons transferring assets to a
corporation solely in exchange for the corporation's stock if, immediately after
the exchange, the transferors are "in control" of the transferee corporation. As
explained below, tax counsel for the Partnership has opined that it is more
likely than not that Section 351(a) of the Code will apply to the Restructuring
Plan. If, for any reason, Section 351(a) did not apply, each Limited Partner
could recognize gain or loss upon completion of the Restructuring Plan. Counsel
for the Partnership has been informed, and has therefore assumed for purposes of
this discussion, that the Partnership would recognize a taxable loss with
respect to each asset transferred to the Corporation if the Restructuring Plan
did not qualify under the provisions of Section 351 of the Code. Accordingly,
Limited Partners would recognize their allocated share of such taxable loss.
However, if, as counsel has opined, Section 351(a) does apply, Limited Partners
generally will not recognize any taxable loss as a result of the Restructuring
Plan.
CONTROL. In order for a transaction to qualify under Code Section 351,
the persons (including entities) transferring property to a corporation issuing
the stock must be in "control" of such issuing corporation immediately after the
exchange transaction. For this purpose, "control" is defined as the ownership of
stock possessing at least 80% of the total combined voting power of all classes
entitled to vote and at least 80% of the total number of shares outstanding of
all other classes of stock of the issuing corporation (the "Control Test").
If the Restructuring Plan is completed, the Partners and the purchasers
in the Public Offering will receive all of the shares of Common Stock of the
Corporation, which will be the only outstanding stock of the Corporation
immediately following the Restructuring Plan. Although the Partnership plans to
liquidate as part of the Restructuring Plan, the distribution by the Partnership
of Common Stock to its Partners will not likely be considered a transfer or part
of a group of transfers which would cause the Partnership to fail the Control
Test, because the Partners would be treated as part of the control group for
purposes of Code Section 351. See Rev. Rul. 84-111, 1984-2 C.B. 88.
In addition, the Public Offering will be conducted pursuant to a "firm
commitment" underwriting. Pursuant to Revenue Ruling 78-294, 1978-2 C.B. 141,
the IRS ruled that the underwriter was a transferror
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for purposes of Code Section 351 when there was a firm commitment underwriting.
The Treasury has proposed regulations under Section 351 which would render the
ruling in Revenue Ruling 78-294 obsolete. Under the proposed regulation, a
person who acquires stock from an underwriter in a qualified underwriting
transaction is treated as transferring cash directly to the corporation in
exchange for the stock. Accordingly, the person is treated as a transferror for
purposes of the Control Test. A "qualified underwriting transaction" is a
transaction in which a corporation issues stock for cash in an underwriting in
which either the underwriter is an agent of the corporation or the underwriter's
ownership of the stock is transitory. Counsel believes that the Underwriters'
ownership of Common Stock pursuant to the Public Offering will be transitory.
Accordingly, under the proposed regulations, purchasers in the Public Offering
will be considered a part of the transferor group. Although the proposed
regulations have not been finalized, the preamble to the regulations provides
that both the IRS and the Treasury Department believe that Revenue Ruling 78-294
does not reflect current underwriting practices. Accordingly, counsel believes
that the Partners and the purchasers in the Public Offering will both be treated
as transferors collectively owning 100% of the Common Stock, thereby satisfying
the Control Test.
EFFECT OF SUBSEQUENT EVENTS ON CONTROL TEST. As described above, the
persons comprising the control group must meet the Control Test "immediately
after the exchange." If, following a transfer of property to the issuing
corporation, the transferring parties have a plan to sell or otherwise dispose
of control of the Corporation, and more than 20% of the Common Stock is sold
immediately following the completion of the Restructuring Plan, the exchange may
be deemed to fail the Control Test.
Subsequent to the Restructuring Plan and the Public Offering, the
Common Stock will be publicly traded. However, it is unlikely that, in the event
that more than 20% of the Common Stock is sold immediately following the
completion of the Restructuring Plan and the Public Offering, the Restructuring
Plan and the Public Offering would fail to qualify pursuant to the provisions of
Code Section 351, since such subsequent sales of Common Stock generally should
not be considered an integrated part of the Restructuring Plan and the Public
Offering. Accordingly, Limited Partners should not anticipate the recognition of
tax losses in the event more than 20% of the Common Stock is sold in the Nasdaq
National Market immediately following the Restructuring Plan and the Public
Offering.
BASIS OF ASSETS ACQUIRED BY THE CORPORATION. Code Section 362 provides
that the tax basis of assets received by a corporation in connection with a
transaction described in Code Section 351 will equal the tax basis of the assets
in the hands of the transferor, increased by any gain recognized by the
transferor. Accordingly, since it is not anticipated that any gain will be
recognized, the Corporation's tax basis in the assets received from the
Partnership will equal the Partnership's adjusted tax basis in those assets
immediately prior to the Restructuring Plan.
ASSUMPTION OF LIABILITIES. Section 357(a) of the Code provides
generally that if, pursuant to a Section 351 exchange, the issuing corporation
assumes the liability of a person or entity transferring property to such
corporation, or if the issuing corporation acquires from such transferor
property subject to a liability, the transfer of such liability to the issuing
corporation will not prevent the exchange from qualifying under the provisions
of Section 351. However, even though an exchange qualifies under Section 351,
Section 357(c) provides that a transfer of a liability to the issuing
corporation will result in the recognition of gain or other income to a
particular transferor if and to the extent that the aggregate amount of
liabilities transferred to the issuing corporation by that transferor exceeds
the total of the adjusted bases of assets transferred to the issuing corporation
by such transferor pursuant to the Section 351 exchange.
The Partnership has advised Counsel that the aggregate amount of
liabilities transferred to the Corporation by the Partnership will not exceed
the total of the adjusted bases of property transferred to the Corporation by
the Partnership. Thus, it is unlikely that there will be gain to the Partnership
or the Limited Partners under Code Section 357(c) as a result of the
Restructuring Plan.
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Additionally, even if Section 357(c) does not apply, the transfer of a
liability to the issuing corporation will, in certain instances, result in the
recognition of gain or other income by the transferor in an amount equal to the
amount of the liability transferred. For example, Section 357(b) of the Code
provides that if the transferor's principal purpose in transferring a liability
to the issuing corporation is either (i) to avoid federal income tax or (ii) not
a bona fide business purpose, the amount of such liability is considered to be
money received by the transferor in the Section 351 exchange, thereby possibly
resulting in the recognition of gain or other income by the transferor. Counsel
does not believe it is likely that the IRS would determine that the principal
purpose for the transfer of the Partnerships' liabilities was to avoid federal
income tax or was not a bona fide business purpose. Therefore, it is unlikely
that there will be gain to the Partnership or the Limited Partners as a result
of the application of Code Section 357(b).
TAX CONSEQUENCES TO THE LIMITED PARTNERS
Each Limited Partner will receive Common Stock in exchange for such
Limited Partner's Units. No gain or loss will be recognized by such Limited
Partner as a result of the distribution of Common Stock in exchange for his, her
or its interest in the Partnership. A Limited Partner's basis in the Common
Stock will equal the adjusted basis of the Limited Partner's Units immediately
before the effective date of the Restructuring Plan. Because Counsel has been
informed by the General Partner that the Partnership's liabilities are all
recourse liabilities as to the General Partner, the transfer of Partnership
liabilities to the Corporation should not affect the Limited Partners' bases in
the Common Stock. A Limited Partner's holding period (and the tax basis
allocated to such holding period) of the Common Stock will be a fragmented
holding period as described below. Limited Partners should not anticipate the
use of any suspended passive losses attributable to such Limited Partners'
Units.
A Limited Partner's tax basis in Common Stock and Subscriber Warrants
acquired pursuant to Basic Subscription Rights or the Oversubscription Privilege
will be equal to the amount of cash paid for such Common Stock and Subscriber
Warrants. Such tax basis will be allocated between such Common Stock and
Subscriber Warrants based on their relative fair market values. Common Stock
acquired pursuant to the exercise of the Subscriber Warrants will have a basis
equal to the amount originally allocated to the Subscriber Warrants plus the
amount paid for the Common Stock pursuant to the exercise of the Subscriber
Warrants. The holding period for such Common Stock acquired pursuant to the
Basic Subscription Rights, the Oversubscription Privilege and the Subscriber
Warrants will commence as of the date of acquisition of such shares.
DETERMINATION OF HOLDING PERIOD OF COMMON STOCK RECEIVED IN EXCHANGE
FOR UNITS. The following discussion assumes that a Limited Partner holds his,
her or its Units as a capital asset. (Generally, a Limited Partner's interest in
the Partnership will be considered a capital asset unless the Limited Partner is
a "dealer" in partnership interests and/or other securities).
Following the Restructuring Plan, the holding period for which a
Limited Partner will be treated as having held the shares of Common Stock (other
than Common Stock received pursuant to Basic Subscription Rights or the
Oversubscription Privilege) will include (i.e. have "tacked-on") the
Partnership's holding period for the assets transferred to the Corporation
pursuant to the Restructuring Plan, to the extent such assets were capital
assets or "Section 1231 assets" (the "capital gain assets") in the possession of
the Partnership. However, to the extent that the assets transferred by the
Partnership to the Corporation are not capital gain assets (for example, loans
held for sale) in the possession of the Partnership, then a Limited Partner's
holding period for the Common Stock will not include the Partnership's holding
period for such assets. For this purpose, capital gain assets do not include
cash, accounts receivable, property of a kind which would be properly included
in inventory or property held primarily for sale to customers in the ordinary
course of business (the "ordinary income assets"). Thus, to the extent that the
assets transferred to the Corporation by the Partnership consist of ordinary
income assets, shares of Common Stock attributable to such assets will have a
holding period which begins on the day following the Closing Date of the
Restructuring Plan. Management of the Partnership has advised Counsel that it
understands the assets
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to be transferred by the Partnership to the Corporation will consist of a
combination of both ordinary income assets and capital gain assets. Accordingly,
a portion of each share of Common Stock received by a Limited Partner (other
than Common Stock received pursuant to Basic Subscription Rights or the
Oversubscription Privilege) will not qualify for a tacked-on holding period.
Additionally, the Partnership's holding periods with respect to its
various capital gain assets vary from asset to asset. Accordingly, the portion
of each Limited Partner's shares of Common Stock attributable to capital gains
assets will likewise have various holding period components. Tax basis allocated
to each component of a share of Common Stock will be determined in accordance
with the relative fair market values of the assets transferred by the
Partnership to the Corporation.
Approximately thirty (30) days after the Closing Date of the
Restructuring Plan, the Corporation shall provide Limited Partners with the
information necessary to calculate the various holding periods and basis
allocated to each holding period for Common Stock received pursuant to the
Restructuring Plan (other than Common Stock and Subscriber Warrants acquired
pursuant to Basic Subscription Rights or the Oversubscription Privilege).
ALLOCATION OF FINAL ITEMS
In addition to the foregoing, each Limited Partner will be required to
report his, her or its distributive share of all income, gains, losses,
deductions and credits of the Partnership for the taxable period prior to the
close of the Partnership's taxable year (which will end as of the date of the
final liquidation of the Partnership) even though there will be no operating
cash distributions from the Partnership. The at-risk rules under Code Section
465, the passive activity rules under Code Section 469 or the basis rules under
Code Section 704 may prevent or may have prevented some Limited Partners from
deducting a portion of their distributive shares of losses of the Partnership.
Such previously disallowed losses may not be deductible by the Limited Partners
following the consummation of the Restructuring Plan. Each Limited Partner is
urged to consult his, her or its own tax adviser concerning these issues.
NET OPERATING LOSSES
Pacific Thrift, which will be a subsidiary of the Corporation, has net
operating loss carryforwards of approximately $4.0 million as of December 31,
1995. Under Section 382 of the Code, the ability of Pacific Thrift to carry
forward its net operating losses is limited if Pacific Thrift experiences an
"ownership change" as a consequence of the Restructuring Plan and the Public
Offering. Section 382 defines an "ownership change" as an increase of more than
fifty (50) percentage points in ownership of stock owned by one or more five
percent (5%) shareholders over the lowest percentage of stock owned by such
shareholders during the preceding three year period.
In connection with the Restructuring Plan, the purchasers in the Public
Offering will also become Stockholders of the Corporation. Assuming none of
these purchasers individually will own five percent (5%) or more of the
Corporation, the purchasers in the Public Offering as a group will be deemed to
be a five percent (5%) shareholder. In the event the purchasers in the Public
Offering purchase fifty percent (50%) or more of the outstanding stock of the
Corporation, there will be an ownership change within the meaning of Section
382.
If there is an "ownership change" within the meaning of Code Section
382, the utilization of any remaining carryforwards would be limited under
Section 382. These limitations would be determined as follows: First, the fair
market value of Pacific Thrift would have to be determined. Then, a percentage
equal to the long-term tax exempt-rate determined by the Treasury Department
(currently 5.46%) of the value of Pacific Thrift would equal the amount of the
net operating loss carryforwards of Pacific Thrift which could be used in any
given year to offset taxable income of the Corporation (subject to certain
exemptions for built-in gain items).
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<PAGE> 156
POTENTIAL APPLICATION OF SECTION 304 TO TRANSFER OF STOCK OF SUBSIDIARY.
Code Section 304 provides that, notwithstanding the nonrecognition
provisions of Code Section 351, the transfer by a transferor of stock in a
controlled corporation to a corporation also controlled by such transferor (the
"acquiring corporation") is treated as a distribution from the acquiring
corporation to the extent of property received by the transferor. For these
purposes, "property" does not include stock or stock rights, but it does include
relief of liabilities. Although the Partnership will receive property in the
form of the relief of liabilities (since the Corporation will assume the
Partnership's liabilities), the Partnership will not be transferring the stock
of any controlled corporation pursuant to the Restructuring. Accordingly,
Section 304 should not apply to the Restructuring.
In March 1996, Presidential transferred all of the stock of its
corporate subsidiaries, Pacific Thrift, CRC Washington and Unified, to the
Corporation, which is currently a wholly owned subsidiary of the Partnership.
This transfer was made in order to allow all of the corporate subsidiaries to
file consolidated tax returns, which is beneficial to the Partnership as a whole
regardless of whether the Restructuring is approved. Nevertheless, if the
transfer of stock in its corporate subsidiaries by Presidential were integrated
with the Restructuring, Section 304 might be applied since the transfer of stock
would take place concurrently with the transfer of the liabilities of
Presidential to the Corporation. In that event, Section 304 would recharacterize
the Restructuring as dividend income to the Partnership, and therefore to the
Partners, equal to the current or accumulated earnings and profits of the
subsidiaries whose stock was transferred to the Corporation in 1996. In
addition, deemed distributions in excess of such earnings and profits could
reduce the tax basis of a Limited Partner's Common Stock and cause a recognition
of capital gains.
Counsel for the Partnership does not believe that the prior transfer of
stock of its corporate subsidiaries by Presidential to the Corporation should be
integrated with the Restructuring, since it had a valid business purpose, and
was not contingent on whether the Restructuring is completed or subject to any
other condition. Accordingly, counsel has opined that it is more likely than not
that Section 304 will not be applied to the Restructuring.
TREATMENT OF STOCKHOLDERS OF CORPORATION
As part of the Restructuring Plan, the Limited Partners of the
Partnership will become the Stockholders of the Corporation and will no longer
be partners of a partnership. Distributions of the Corporation's earnings and
profits to the Stockholders in the form of dividends will be subject to tax as
ordinary income if the Corporation has current or accumulated earnings and
profits. To the extent that there is no current or accumulated earnings and
profits, any distribution would be treated as a return of capital and would
reduce each Stockholder's basis in his, her or its Common Stock. Distributions
in excess of each Stockholder's basis in shares will be taxed as capital gains
assuming the Common Stock is a capital asset in the hands of the Stockholders.
If a Stockholder disposes of shares of Common Stock in the Corporation,
the difference between the Stockholder's basis in the shares and the
consideration received in exchange for the shares would be subject to tax as
either a capital gain or loss or ordinary income, depending on the holding
period of the shares. See "Tax Consequences to the Partnership and the Limited
Partners--Determination of Holding Period of Common Stock." If a Stockholder
transfers shares to the Corporation, such transfer may, under some
circumstances, be treated as a dividend rather than a taxable exchange.
In addition, if the Corporation sells appreciated property (including
in liquidation of the Corporation), the gain will be taxable as ordinary income
or capital gain to the Corporation, depending on the character of the asset in
the hands of the Corporation. The Corporation, unlike the Partnership, will
itself be subject to corporate income tax. The top corporate income tax rate
currently is 35%. The Corporation's taxable income will not be reduced by the
amount of any dividends paid to Stockholders, as dividends are not deductible to
the Corporation. The additional tax burden to the Corporation will increase the
expenses of
144
<PAGE> 157
the Corporation and reduce its net income. However, since a substantial majority
of the Corporation's income is expected to be derived from the earnings of
Pacific Thrift, which is already a corporation subject to corporate income tax,
the tax burden to the Corporation is not expected to be materially different
from the tax burden on the Partnership, insofar as a substantial portion of its
income would also be expected to be derived from Pacific Thrift.
COLLAPSIBLE CORPORATION RULES
Section 341 of the Code provides that the gain from the sale of stock
of a "collapsible corporation" shall be considered as ordinary income. A
"collapsible corporation" is defined as a corporation that is formed or availed
of principally for the manufacture, construction or production of property, for
the purchase of "Section 341 assets," or for the holding of stock in a
corporation so formed or availed of, with a view to the sale of stock by its
shareholders before the realization by the corporation of two-thirds of the
taxable income to be derived from such property, and the realization by such
shareholders of gain attributable to such property. Although Counsel believes it
is unlikely, it is possible that the IRS could view the transfer of assets by
the Partnership to the Corporation as a transfer of Section 341 assets.
If Section 341 of the Code were to apply, any gain from the sale of
Common Stock would be subject to tax as ordinary income. There is no clear rule
or regulation that would provide guidance as to whether any of the Partnership's
assets would be deemed Section 341 assets, and it is therefore not possible to
conclude whether the Corporation could be characterized by the IRS as a
"collapsible corporation." However, for the reasons explained below, an
exception will apply to every Stockholder who does not own more than 5% of the
Common Stock, which will prevent the application of the collapsible corporation
rule to those stockholders.
If the Corporation is found to be a collapsible corporation, gain
realized by a Stockholder from the sale of Common Stock will not be subject to
the collapsible corporation provisions if any one of the following four
exceptions applies: (i) the selling stockholder does not own, directly or
indirectly, more than 5% in value of the Common Stock outstanding, (ii) gain
recognized by the selling Stockholder during the taxable year is not more than
70% attributable to "Section 341 assets," (iii) gain is realized after the
expiration of three years following the completion of the applicable
manufacture, construction, production or purchase, or (iv) less than 15% of the
net worth of the Corporation is attributable to the net unrealized appreciation
of certain ordinary income assets.
Based on the first of these exceptions, the collapsible corporation
provisions would not apply to Stockholders of the Corporation that were
considered to own, directly and by attribution from related parties (including
other partners in a partnership), less than or equal to 5% of the outstanding
Common Stock of the Corporation. The Partnership has informed Counsel that no
Limited Partner will directly or indirectly own more than 5% of the outstanding
Common Stock. In the event a Stockholder were to acquire more than 5% of the
outstanding Common Stock, any gain recognized from the sale of shares of Common
Stock could be treated as ordinary income under the collapsible corporation
provisions if the Corporation was found to be a collapsible corporation and
provided none of the other exceptions listed above applied at the time of the
sale of such shares.
STATE, LOCAL AND OTHER TAXATION
The Partnership, its Partners and the Corporation may, as a result of
the Restructuring Plan, be subject to state, local or other tax in their states
or countries of residence, and possibly in states where the properties
transferred to the Corporation are located. It is impractical to discuss general
principles which may be applicable to a particular Partner as such state, local
and other tax effects depend on each set of facts or circumstances. Accordingly,
each Partner should consult with his or her own tax adviser with respect to
state, local, or other taxes which may be applicable.
145
<PAGE> 158
LEGAL MATTERS
Certain legal matters in connection with the Restructuring Plan, the
Rights Offering and the Public Offering will be passed upon for the Corporation
by Jeffer, Mangels, Butler & Marmaro LLP, Los Angeles, California. Bruce P.
Jeffer, Esq., a partner of Jeffer, Mangels, Butler & Marmaro LLP, owns a 2.23%
interest in the General Partner. Certain legal matters in connection with the
Public Offering will be passed upon for the Underwriters by Manatt, Phelps &
Phillips LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Partnership and its
subsidiaries at and for the years ended December 31, 1994 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing. The consolidated financial statements of the Partnership and its
subsidiaries at and for the nine months ended December 31, 1995 appearing in
this Prospectus and Registration Statement have been audited by BDO Seidman LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
146
<PAGE> 159
GLOSSARY
The capitalized terms appearing in this Prospectus have the meanings
specified below:
Bank Loan. The existing loan owed by the Partnership to NatWest, which had
an outstanding balance of $6.8 million at December 31, 1995.
Bank or NatWest. NatWest Bank, N.A., the lender of the Partnership's
outstanding bank debt.
Bank Warrant. The Warrant to be issued by the Corporation to NatWest to
purchase up to 2% of the outstanding Common Stock of the Corporation.
Basic Subscription Rights. The right of each Partner to subscribe for a pro
rata share of 820,000 shares of Common Stock in the Rights Offering.
BIF. Bank Insurance Fund administered by the FDIC to protect deposits.
Board of Directors. The board of directors of the Corporation.
California Industrial Loan Law. Laws regulating investment authority and
other activities of the thrift and loan business conducted by Pacific Thrift.
CAMEL. Standard rating given to financial institutions by federal banking
regulators consisting of a composite of five critical categories of banking
strength: capital, assets, management, earnings and liquidity. Ratings range
from 1 to 5, with 1 denoting outstanding strength and 5 characterizing
insolvency.
Capital Contribution. Each Partner's original capital contribution, and
additional capital contributions if any, less any withdrawals of capital by such
Partner or distributions of capital to such Partner.
Capital Note. The $1,730,135 promissory note to the Partnership which was
voluntarily contributed by the General Partner in 1993 to increase the capital
of the Partnership by an amount equal to the excess distributions to Partners
made in 1992 in excess of Net Profits.
Closing Date. The closing date of the Restructuring Plan.
Code. The Internal Revenue Code of 1986, as amended.
Common Stock. The common stock of the Corporation.
Corporation. Pacific United Group, Inc., a Delaware corporation.
CRA. Community Reinvestment Act of 1977.
CRC. Consolidated Reconveyance Company, a California limited partnership.
Fairness Opinion. The fairness opinion issued by Houlihan Lokey in
connection with the Restructuring Plan.
FDIC. Federal Deposit Insurance Corporation.
147
<PAGE> 160
FDICIA. Federal Deposit Insurance Corporation Improvement Act of 1991.
General Partner Warrants. The warrants to be issued to the General Partner
to purchase up to 25% of the total outstanding Common Stock of the Corporation
on the Closing Date, on a fully diluted basis assuming the exercise of all
Subscriber Warrants and General Partner Warrants, at an exercise price equal to
150% of the Public Offering Price.
Houlihan Lokey. Houlihan Lokey Howard & Zukin, the independent valuation
firm which has issued the Fairness Opinion.
LPPC. Lenders Posting and Publishing Corporation, a California limited
partnership.
Loan Agreement. Loan Agreement between the Partnership and NatWest.
Minimum Market Capitalization. The $16.5 million minimum market value of
the total shares to be issued by the Corporation as a condition to closing the
Restructuring Plan, calculated as total outstanding shares times Public Offering
Price per share.
Net Contributed Capital. Each Partner's original capital contribution plus
additional capital contributions to the Partnership, less capital withdrawals
and amounts distributed as a return of capital by the Partnership.
Net Tangible Equity. Total assets minus total liabilities, goodwill and
capitalized reorganization costs, other than costs of the Rights Offering and
the Public Offering, as adjusted for the increase in capital due to the General
Partner's purchase of General Partner Warrants for $385,000.
OREO. Other real estate owned by the Partnership or Pacific Thrift,
consisting of real estate acquired in settlement of loans.
Oversubscription Privilege. The rights offered to Partners to purchase
shares not subscribed for by Partners entitled to purchase pursuant to their
Basic Subscription Rights.
PCA. Prompt corrective action required to be taken by FDICIA to resolve the
problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios.
Pacific Thrift. Pacific Thrift and Loan Company, a California corporation.
Preferred Stock. The 2,000,000 authorized shares of Preferred Stock which
may be issued by the Corporation under its Certificate of Incorporation.
Public Offering. The offering of shares to the public immediately following
the Solicitation Period Expiration Date, the closing of which is a condition to
closing of the Restructuring Plan.
Public Offering Price. The offering price per share at which shares of
Common Stock will be sold in the Public Offering.
Public Offering Shares. The shares to be offered by the Corporation in the
Public Offering, the amount of which will be determined as the number of shares
necessary to achieve the Minimum Market Capitalization.
Record Date. The date as of which the identity of the Partners of the
Partnership and the amount of the Partner's Capital Account shall be determined
for purposes of voting rights of the Partners with respect to the Restructuring
Plan.
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<PAGE> 161
Restructuring Plan. The plan proposed for the vote of the Limited Partners
whereby the Partnership will transfer all of its assets and liabilities to the
Corporation in exchange for Common Stock of the Corporation.
Rights Offering. The rights offered to the Partners of the Partnership, the
partners of the General Partner and the officers, directors and employees of the
Partnership and its subsidiaries to purchase additional shares of Common Stock.
Solicitation Period. The period during which the Limited Partners may vote
to approve the Restructuring Plan.
Solicitation Period Expiration Date. The expiration date of the
Solicitation Period, which is April __, 1996, or such later date as the General
Partner determines in its sole discretion, not to exceed May __, 1996.
Specified Annual Return Rates. The specified annual return rates payable
from the Net Profits, if any, of the Partnership, to each class of Partners
under the Partnership Agreement.
Stockholders. The record holders of the Common Stock following the
Restructuring Plan.
Unified. Pacific Unified Mortgage, Inc., a Delaware corporation.
149
<PAGE> 162
PACIFIC UNITED GROUP, INC.
(A WHOLLY OWNED SUBSIDIARY OF
PRESIDENTIAL MORTGAGE COMPANY)
BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1995
- ------------------------------------------------------------------------
<S> <C>
(Unaudited)
ASSETS
Deferred offering costs (Note 2) $104,000
- ------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Due to Presidential Mortgage Company $101,000
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDER'S EQUITY
Common stock, $.01 par value; authorized
8,000,000 shares; issued and outstanding 3,000 30
Preferred stock, $.01 par value; authorized
2,000,000 shares; none issued and outstanding --
Additional paid-in capital 2,970
- ------------------------------------------------------------------------
Total stockholder's equity 3,000
- ------------------------------------------------------------------------
$104,000
- ------------------------------------------------------------------------
</TABLE>
See accompanying notes to the balance sheet.
150
<PAGE> 163
PACIFIC UNITED GROUP, INC.
(A WHOLLY OWNED SUBSIDIARY OF
PRESIDENTIAL MORTGAGE COMPANY)
NOTES TO BALANCE SHEET (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION Pacific United Group, Inc. (the "Corporation") a
Delaware corporation is a financial institution holding
company that was formed in February 1994 and has not yet
commenced operations. The Corporation is a wholly owned
subsidiary of Presidential Mortgage Company (the
"Partnership"), a California limited partnership.
In March 1996, the Partnership intends to transfer all
of the outstanding capital stock of its subsidiaries
Pacific Thrift and Loan Company, a California
corporation, Consolidated Reconveyance Corporation, a
Washington corporation, and Pacific Unified Mortgage,
Inc., a Delaware corporation, to the Corporation, in
order to allow those entities to file consolidated tax
returns.
In connection with a proposed restructuring plan of the
Partnership, the Partnership intends to transfer all of
its assets and liabilities to the Corporation in
exchange for common stock of the Corporation, which the
Partnership would transfer to its general and limited
partners on the basis of their respective net
contributed capital in the Partnership. The completion
of the restructuring plan is subject to the vote of the
limited partners of the Partnership, as well as certain
other terms and conditions.
2. DEFERRED These are costs that have been incurred for the proposed
OFFERING COSTS offering and will be off-set against the proposed
offering proceeds.
3. COMMITMENTS Under a 1995 Stock Option Plan the Corporation may award
AND or grant from time to time until December 31, 2003 stock
CONTINGENCIES options to management, key employees and non-employee
directors.
Under a 1995 Employee Stock Purchase Plan, the
Corporation may grant stock options to eligible
employees of the Corporation.
151
<PAGE> 164
PACIFIC UNITED GROUP, INC.
(A WHOLLY OWNED SUBSIDIARY OF
PRESIDENTIAL MORTGAGE COMPANY)
NOTES TO BALANCE SHEET (UNAUDITED)
- --------------------------------------------------------------------------------
3. COMMITMENTS Under a Supplemental Executive Retirement Plan,
AND participants who are determined by the Compensation
CONTINGENCIES Committee will receive 1-2/3% of their average
(CONTINUED) compensation for their highest three consecutive years,
multiplied by the actual number of years of service.
Any years of service in excess of 30 will not be taken
into account. The amount of benefit is further reduced
by estimated social security benefits and estimated
section 401(k) plan benefits.
The Corporation has entered into employment agreements
with five officers, subject to completion of the
Restructuring Plan.
152
<PAGE> 165
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
================================================================================
PRESIDENTIAL MORTGAGE COMPANY AND SUBSIDIARIES
<TABLE>
<S> <C>
Successor Independent Auditors' Report (to be filed by amendment) F-1
Predecessor Independent Auditors' Report (to be filed by amendment) F-3
Consolidated Balance Sheets as of
December 31, 1995 (unaudited) and 1994 F-5
Consolidated Statements of Operations for the
years ended December 31, 1995 (unaudited), 1994 and 1993 F-7
Consolidated Statements of Changes in Partners'
Capital for the years ended December 31, 1995 (unaudited),
1994 and 1993 F-9
Consolidated Statements of Cash Flows for the
years ended December 31, 1995 (unaudited), 1994 and 1993 F-10
Notes to Consolidated Financial Statements
for the years ended December 31, 1995 (unaudited), 1994 and 1993 F-13
Supplemental material
Schedule I - Consolidating Schedule - Financial Position -
December 31, 1994 F-67
Schedule II - Consolidating Schedule - Operations -
year ended December 31, 1994 F-69
Schedule III - Consolidating Schedule - Financial Position -
December 31, 1995 (unaudited) F-70
Schedule IV - Consolidating Schedule - Operations -
year ended December 31, 1995 (unaudited) F-72
</TABLE>
153
<PAGE> 166
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1995 1994
(Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS (Note 2C) $10,489,000 $ 19,628,000
ACCOUNTS RECEIVABLE 3,337,000 5,071,000
ACCRUED INTEREST RECEIVABLE 903,000 1,125,000
LOANS RECEIVABLE (Notes 2D, 2E, 3, and 7) 43,908,000 53,045,000
LOANS HELD FOR SALE (Notes 2F and 3) 12,577,000 12,011,000
RECEIVABLE FROM RELATED PARTY
(Notes 9 and 10) 347,000 478,000
EXCESS YIELD RECEIVABLE
(Notes 2G and 3) 2,725,000 888,000
OTHER REAL ESTATE (Notes 2H and 4) 3,156,000 7,621,000
PROPERTY AND EQUIPMENT (Notes 2I and 5) 1,398,000 1,322,000
GOODWILL (Notes 2J and 11) 1,808,000 1,749,000
OTHER ASSETS (Note 8) 1,909,000 809,000
- --------------------------------------------------------------------------------
$82,557,000 $103,747,000
================================================================================
</TABLE>
F-5
<PAGE> 167
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1995 1994
(Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
THRIFT CERTIFICATES PAYABLE (Note 6)
Full-paid certificates $35,881,000 $ 58,058,000
Installment certificates 24,275,000 11,443,000
- --------------------------------------------------------------------------------
Total thrift certificates payable 60,156,000 69,501,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 4,018,000 4,471,000
ACCRUED INTEREST PAYABLE 273,000 405,000
PAYABLE TO RELATED PARTY (Note 10) 281,000 134,000
MORTGAGE NOTES PAYABLE (Note 4) 611,000 2,313,000
NOTE PAYABLE (Note 7) 6,771,000 14,778,000
NOTE PAYABLE TO RELATED PARTY (Note 7) 600,000 600,000
PARTNERSHIP WITHDRAWALS PAYABLE (Note 15) 1,120,000 1,120,000
- --------------------------------------------------------------------------------
Total liabilities 73,830,000 93,322,000
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Notes 12, 13, 14, 19, 20 and 21
- --------------------------------------------------------------------------------
PARTNERS' CAPITAL 8,727,000 10,425,000
- --------------------------------------------------------------------------------
$82,557,000 $103,747,000
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 168
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
(Unaudited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable (Notes 2D, 2E and 3) $ 8,885,000 $11,003,000 $14,209,000
Deposits with financial institutions 692,000 401,000 3,000
- -------------------------------------------------------------------------------------------------
Total interest income 9,577,000 11,404,000 14,212,000
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 7,000 28,000 304,000
Other thrift certificates 3,813,000 2,917,000 2,917,000
Notes payable 1,379,000 1,982,000 2,497,000
- -------------------------------------------------------------------------------------------------
Total interest expense 5,199,000 4,927,000 5,718,000
- -------------------------------------------------------------------------------------------------
Net interest income 4,378,000 6,477,000 8,494,000
PROVISION FOR LOAN LOSSES
(Notes 2D, 2E and 3) 3,289,000 6,096,000 4,655,000
- -------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,089,000 381,000 3,839,000
- -------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trustee and reconveyance fees 3,248,000 3,344,000 3,781,000
Other income 1,122,000 1,712,000 1,381,000
Gain on sale of loans 8,895,000 946,000 143,000
- -------------------------------------------------------------------------------------------------
Total noninterest income 13,265,000 6,002,000 5,305,000
- -------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 169
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
NONINTEREST EXPENSE
Salaries and employee benefits
(Notes 10 and 14)) 7,858,000 6,493,000 5,064,000
General and administrative (Note 10) 6,273,000 7,090,000 5,491,000
Related party fees (Notes 9 and 10) 1,012,000 805,000 847,000
Operations of other real estate (Note 4) 1,212,000 732,000 3,307,000
Depreciation and amortization 919,000 776,000 303,000
- -------------------------------------------------------------------------------------------------
Total noninterest expense 17,274,000 15,896,000 15,012,000
- -------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (BENEFIT) (2,920,000) (9,513,000) (5,868,000)
INCOME TAXES (BENEFIT) (Notes 2K and 8) (1,222,000) 1,000 1,000
- -------------------------------------------------------------------------------------------------
Net loss $(1,698,000) $(9,514,000) $(5,869,000)
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 170
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
================================================================================
Years Ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CAPITAL, January 1, 1993 $28,830,000
Contributions 301,000
Distributions (1,943,000)
Withdrawals (1,380,000)
Net loss - 1993 (5,869,000)
- --------------------------------------------------------------------------------
CAPITAL, December 31, 1993 19,939,000
Net loss - 1994 (9,514,000)
- --------------------------------------------------------------------------------
CAPITAL, December 31, 1994 10,425,000
Net loss - 1995 (unaudited) (1,698,000)
- --------------------------------------------------------------------------------
CAPITAL, December 31, 1995 (unaudited) $ 8,727,000
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 171
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,698,000) $ (9,514,000) $(5,869,000)
Adjustments to reconcile net loss to
net cash used in operating activities
Provision for loan losses 3,289,000 6,096,000 4,655,000
Provision for losses on other
real estate 1,188,000 202,000 1,069,000
Net gain on sale of other
real estate (469,000) (625,000) (345,000)
Proceeds from sale of loans 145,266,000 29,315,000 4,252,000
Originations of loans held for sale (151,538,000) (41,055,000) (6,320,000)
Depreciation and amortization 919,000 776,000 303,000
Net change in assets and liabilities
Accounts receivable 1,734,000 (1,731,000) (359,000)
Accrued interest receivable 222,000 966,000 122,000
Receivable from related party 131,000 316,000 (411,000)
Excess yield receivable (1,837,000) 7,000 117,000
Goodwill (172,000) (127,000) (309,000)
Other assets (1,500,000) (420,000) (79,000)
Payable to related party 147,000 (442,000) 576,000
Accounts payable, accrued expenses,
and accrued interest payable (584,000) 186,000 2,200,000
- --------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,902,000) (16,050,000) (398,000)
- --------------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE> 172
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of loans 13,371,000 28,402,000 25,884,000
Increase in loans receivable (12,325,000) (10,249,000) (16,069,000)
Proceeds from sale of other real estate 14,253,000 5,994,000 7,001,000
Mortgage assumed (repaid) in connection
with other real estate (1,702,000) 536,000 (730,000)
Purchase of property and equipment (482,000) (883,000) (853,000)
- --------------------------------------------------------------------------------------------------
Net cash provided by investing activities 13,115,000 23,800,000 15,233,000
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in thrift
certificates (9,345,000) 7,080,000 11,860,000
Paydowns of note payable (8,007,000) (8,422,000) (10,200,000)
Proceeds from issuance of partner-
ship shares - - 35,000
Capital contributions from general
partner - - 266,000
Distributions to partners - - (1,943,000)
Withdrawals of partnership shares - - (2,086,000)
- --------------------------------------------------------------------------------------------------
Net cash used in financing activities (17,352,000) (1,342,000) (2,068,000)
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (9,139,000) 6,408,000 12,767,000
CASH AND CASH EQUIVALENTS,
at beginning 19,628,000 13,220,000 453,000
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
at end $ 10,489,000 $ 19,628,000 $ 13,220,000
==================================================================================================
</TABLE>
F-11
<PAGE> 173
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for
Interest $ 5,331,000 $4,704,000 $5,838,000
State franchise taxes 2,000 1,000 1,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Loans transferred to other real estate $10,489,000 $7,542,000 $7,270,000
Mortgage payable assumed in
connection with other real estate 1,545,000 2,499,000 3,289,000
Loans to facilitate sales of other
real estate 2,406,000 898,000 3,344,000
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 174
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
1. GENERAL
ORGANIZATION
Presidential Mortgage Company is a California limited partnership whose
principal purpose is to make loans secured by real estate. In these financial
statements, "the Partnership" refers to Presidential Mortgage Company itself
and "the Company" refers to Presidential Mortgage Company and its subsidiaries.
The Partnership's general partner, Presidential Management Company, is a
California limited partnership. Presidential Management Company's general
partner, Presidential Services Corporation, is a California corporation owned
by Joel R. Schultz and John A. DeRosa.
The Partnership's limited partners consist of approximately 2,500 individuals
and entities in classes A, B, C, D, and E. The differences between the various
classes primarily relate to the different offering dates and unit prices as
well as profit priorities and percentages. In addition, certain partners have
elected to reinvest their distributions in Distribution Reinvestment Plan (DRP)
Units.
In 1988, Pacific Thrift and Loan Company (Pacific Thrift), a California
corporation, was formed as a wholly owned subsidiary of the Partnership.
Pacific Thrift conducts business under the California Industrial Loan Law and
originates, purchases and sells loans secured by real estate. In addition,
Pacific Thrift originates loans through loan representatives who reside in
other states, but Pacific Thrift does not maintain any offices for such
representatives, with the exception of Bellevue, Washington.
Pacific Thrift issues certificates to investors that are redeemable at maturity
at the option of investors, although penalties for early withdrawal may be
assessed. The California Industrial Loan Law maintains provisions governing
the amount of thrift certificates that may be issued, the amount of funds that
may be borrowed, and the types of loans that may be made. During 1988, the
Federal Deposit Insurance Corporation approved Pacific Thrift for deposit
insurance coverage. Accordingly, Pacific Thrift is subject to annual
assessments by the FDIC.
F-13
<PAGE> 175
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
1. GENERAL (CONTINUED)
ORGANIZATION (CONTINUED)
In 1990, the Partnership purchased 100% of the limited partnership interests
(which constitutes 99% of all partnership interests) of Consolidated
Reconveyance Company (CRC) and Lenders Posting and Publishing Company (LPPC).
These entities provide trustee and related foreclosure services to the
Partnership, Pacific Thrift, and unaffiliated lenders. Both CRC and LPPC were
purchased from the Partnership's general partner.
In October 1995, the Partnership incorporated a new wholly-owned subsidiary,
Consolidated Reconveyance Corporation, a Washington corporation ("CRC
Washington"). CRC Washington will provide foreclosure related services on real
estate trust deeds secured by property located in the State of Washington. CRC
Washington will reimburse Pacific Thrift for office space used by CRC
Washington at the office of Pacific Thrift in Bellevue, Washington.
Pacific United Group, Inc. (the Corporation) is a financial institution holding
company that was formed by the Partnership in February 1994, in preparation for
a possible Restructuring Plan. (See Note 21). At December 31, 1995, the
Corporation has no results of operations. A stock option plan has been set up
and is contingent on the completion of the Company's Restructuring Plan. In
addition, the Partnership recently formed Pacific Unified Mortgage, Inc.
(Unified). Unified has no business operations. If the proposed Restructuring
Plan is completed, the Corporation will assign all of the loan receivables
transferred to it by the Partnership to Unified. The loans will continue to be
serviced by Pacific Thrift for a servicing fee of 1.5% per year of the
principal balance of each loan serviced.
F-14
<PAGE> 176
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
1. GENERAL (CONTINUED)
PARTNERSHIP AGREEMENT
The Partnership is governed by the Fifth Amended and Restated Certificate and
Agreement of Limited Partnership entered into as of September 1989, as amended
by the First Amendment, dated as of May 1993, and the Second Amendment, dated
as of January 1, 1994. The First Amendment provides for a special allocation
of loss to the general partner and income to the limited partners based on
certain Scapital contributions by the general partner from 1993 through 1996
(the "Capital Plan"). The Second Amendment provides that Pacific Thrift will
directly hire its own employees and directly pay its own overhead and that the
Partnership will continue to pay the general partner for fees in connection
with loans of Pacific Thrift and the Partnership. The agreement and amendments
are collectively referred to as the "Partnership Agreement."
In accordance with the Partnership Agreement, the net profits of the
Partnership (after deduction of the management fee) are allocated to the
partners, based on specified annual percentage rates for each class of partners
and the average daily balance of each partner's capital contributions. Net
losses are allocated to all partners in proportion to their average daily
capital contributions. In addition, there is a special allocation based on
the Capital Plan.
The Partnership Agreement provides certain rights to the partners to withdraw
the balance in their capital accounts. Such withdrawal rights are restricted
by certain percentage limitations and a determination by the general partner
that such withdrawal will not impair the capital or operations of the
Partnership. Since July 1993, no distributions have been made and no
withdrawals have been permitted.
Upon dissolution of the Partnership, the Partnership Agreement provides that
the net assets will be distributed to the partners in proportion to their
capital accounts and that the general partner will fund any deficit balance in
its capital account as defined in the Partnership Agreement.
F-15
<PAGE> 177
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
1. GENERAL (CONTINUED)
OPERATING RESULTS AND BUSINESS PLAN
The Company has suffered losses from operations of the Partnership and Pacific
Thrift from 1992 through 1994, and the Company continued to sustain operating
losses for the year ended December 31, 1995. These losses have resulted
primarily from significant amounts of nonperforming loans, large provisions for
loan losses, and relatively high levels of overhead and have caused a
substantial reduction in the capital of the Company. While this portion of the
losses attributable to Pacific Thrift had caused it to become
"undercapitalized" and subject to certain regulatory mandates at the end of
1994, Pacific Thrift had net profit of $3,155,000 for the year ended December
31, 1995 and was classified as "adequately capitalized" by the FDIC as of March
31, 1995. See Notes 19 and 20. CRC and LPPC had net profits of $582,000 and
$279,000 for the year ended December 31, 1995.
Management expects that stabilizing real estate values and general economic
conditions will result in reduced loan losses for 1996. In connection with the
Partnership, management is in the process of evaluating alternative business
strategies. In connection with Pacific Thrift, management has taken certain
steps to return the operations to profitability and improve the financial
condition. These steps include an emphasis on originating residential real
estate loans for sale in order to generate fee and loan sale income, achieving
and maintaining targeted capital ratios, and controlling overhead expenses.
Management expects that Pacific Thrift, CRC, and LPPC will continue to be
profitable for 1996 and believes that Pacific Thrift is in total compliance
with all regulatory mandates. Management also expects that, although the
Partnership incurred a loss, the Company will be profitable in 1996. In
connection with the note payable to its lender (see Note 7), management expects
that the Partnership will be able to generate sufficient cash flow from
operations (including real estate and loan sales), and its proposed
restructuring plan to satisfy its debt service requirements. See Notes 7, 20,
and 21.
F-16
<PAGE> 178
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
1. GENERAL (CONTINUED)
OPERATING RESULTS AND BUSINESS PLAN (CONTINUED)
There is no assurance that the Company will be successful. These consolidated
financial statements do not include any provisions or adjustments that might
result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF ACCOUNTING
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles.
B. CONSOLIDATION
The consolidated financial statements include the accounts of the Partnership,
Pacific Thrift, CRC, and LPPC. While the Corporation and Unified had been
organized prior to September 30, 1995, they have no operations or accounts to
be included in consolidation. All significant intercompany balances and
transactions have been eliminated. Consolidating information is presented in
Schedules I, II, III and IV.
C. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
D. LOANS RECEIVABLE
Loans receivable are stated at the principal amount outstanding, less
unamortized deferred fees and costs and the allowance for loan losses (ALL).
Loans receivable are primarily secured by first and second trust deeds.
Interest income is accrued as earned and is based on the principal balance
outstanding. The Company's policy is to cease accruing interest on loans that
are more than two monthly payments past due and for which there appears to be
insufficient collateral to support collectibility. In many cases,
F-17
<PAGE> 179
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. LOANS RECEIVABLE (CONTINUED)
interest, late fees, and other charges continue to accrue until the time
management deems that such amounts are not collectible. When a loan is placed
on a nonaccrual status, the Company reverses all accrual income that is
uncollected income.
Nonrefundable loan fees and direct costs associated with the origination of
loans are deferred and netted against outstanding loan balances. The net
deferred fees and costs are recognized in interest income over the loan term as
an adjustment to the yield, using a method that approximates the effective
interest (level yield) method.
E. ALLOWANCE FOR LOAN LOSSES
Loan losses are charged to the ALL; recoveries are credited to the allowance.
The provision for loan losses charged to expense and added to the ALL is based
upon management's judgment and evaluation of the known and inherent risks in
the loan portfolio. Management's judgment takes into consideration such
factors as changes in the nature and volume of the portfolio, continuing review
of delinquent loans, current economic conditions, risk characteristics of the
various categories of loans, and other pertinent factors that may affect the
borrower's ability to repay. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of
a Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures). The effect of adopting this new
accounting standard was immaterial to the operating results of the Company for
the nine months ended September 30, 1995. Prior financial statements are
prohibited from restatement to apply the new accounting standard.
F-18
<PAGE> 180
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Company will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. The
ALL related to loans identified as impaired is primarily based on the excess of
the loan's current outstanding principal balance over the estimated fair market
value of the related collateral. For a loan that is not collateral-dependent,
the allowance is recorded at the amount by which the outstanding principal
balance exceeds the current best estimate of the future cash flows on the loan
discounted at the loan's effective interest rate. Prior to 1995, the ALL for
all loans which would have qualified as impaired under the new accounting
standard was primarily based upon the estimated fair market value of the
related collateral.
For impaired loans that are on non-accrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or
portion of a cash payment received on a non-accrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance of the loan.
F. LOANS HELD FOR SALE
The Company has designated certain of its loans receivable as being held for
sale. In determining the level of loans held for sale, the Company considers
the extent to which loans will be required to be sold in response to liquidity
needs, regulatory capital needs, asset/liability management requirements, and
other factors.
Loans held for sale are recorded at the lower of cost or market value. Any
unrealized losses are recorded as a reduction in income. Realized gains and
losses from the sale of loans receivable are based on the specific
identification method.
F-19
<PAGE> 181
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. EXCESS YIELD RECEIVABLE
Excess yield receivable represents the excess of the estimated present value of
net amounts to be received over normal servicing fees for loan sales for which
the Company continues to service the loans. Excess yield receivable also
represents the estimated present value of the excess interest income to be
received over the yield acquired by the investor for loan sales for which the
Company does not continue to service the loans. The receivable is amortized to
operations based on a method which approximates the effective interest method.
H. OTHER REAL ESTATE
Other real estate is comprised of formally foreclosed property and in-substance
foreclosed property to which the Company does not have legal title. These
assets are recorded at the lower of the net investment in the loan or the fair
value of the property less selling costs. At the time of foreclosure, any
excess of the net investment in the loan over its fair value is charged to the
allowance for loan losses. Any subsequent declines in value are charged to
operations. Prior to 1995, loans were classified as in- substance foreclosures
when they exhibited characteristics more closely associated with the risk of
real estate ownership than with loans. Collateral that has been classified as
an in-substance foreclosure was reported in the same manner as collateral that
has been formally foreclosed. Effective January 1, 1995, with the adoption
date of SFAS No. 114, the category of loan classified as in-substance
foreclosures was eliminated resulting in such loans being reflected as loan
receivable rather than as foreclosed real estate.
I. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation of property and equipment is based on the asset's estimated useful
life, ranging from two to eight years, and is computed using the straight-line
method. Expenditures that improve or extend the service lives of assets are
capitalized. Repairs and maintenance are charged to expense as incurred.
F-20
<PAGE> 182
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. GOODWILL
Goodwill represents the excess of the total purchase price (consisting of the
initial consideration and subsequent consideration) of CRC and LPPC over the
fair value of purchased net assets. Goodwill is being amortized using the
straight-line method over approximately 20 years. The Company routinely
reviews recoverability using estimated future cash flows attributable to the
goodwill.
K. INCOME TAXES
Partnerships are generally not subject to income taxes, accordingly, the
Partnership income or loss is reported in the individual partners' tax returns.
However, Pacific Thrift, the Partnership's wholly owned corporate subsidiary,
is subject to federal income and state franchise taxes.
Pacific Thrift follows the "asset and liability" method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are
recognized for tax consequences of "temporary differences" by applying enacted
statutory tax rates to differences between the financial statement carrying
amount and the tax basis of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. All tax benefits are recorded and then
reduced by a valuation allowance when it is more likely than not that the
benefit is not fully realizable.
L. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (SFAS 107), requires that the Bank disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Company's financial
instruments. The estimated fair values of financial instruments are disclosed
as of December 31, 1995. SFAS No. 107 defines fair value as the amount which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. Where possible, the
Company has utilized quoted market prices to estimate fair value. Since quoted
market prices were not available for a significant portion of the financial
instruments, the fair values were approximated using discounted cash flow
techniques.
F-21
<PAGE> 183
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value estimates are made at a specific point in time, based on judgments
regarding future expected loss experience, current economic conditions, risk
conditions, risk characteristics of various financial instruments and other
factors. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates were based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
The following presents the carrying value and estimated fair value of the
various classes of financial instruments held by the Company at December 31,
1995. This information is presented solely for compliance with SFAS No. 107
and is subject to change over time based on a variety of factors. Because no
market exists for a significant portion of the financial instruments presented
below and the inherent imprecision involved in the estimation process,
management does not believe the information presented reflects the amounts that
would be received if the Company's assets and liabilities were sold.
F-22
<PAGE> 184
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------
Carrying Estimated
Value Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $10,489,000 $10,489,000
Loans receivable 48,137,000 48,060,000
Allowance for loan losses (4,229,000) (4,229,000)
- --------------------------------------------------------------------------------
Total loans 43,908,000 43,831,000
- --------------------------------------------------------------------------------
Loans held for sale 12,577,000 13,295,000
Excess yield receivable 2,725,000 2,725,000
LIABILITIES
Installment certificates 24,275,000 24,275,000
Fully-paid certificates 35,881,000 35,800,000
Notes payable 6,771,000 6,771,000
</TABLE>
Cash, Short Term-Investments, Trade Receivables, and Trade Payables
The carrying amount approximates fair value because of the short maturity of
these instruments.
Loans
Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type such as commercial, commercial
real estate, residential mortgage, and other consumer. Each loan category was
further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
F-23
<PAGE> 185
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair value for performing fixed rate commercial and commercial real estate
loans was estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings. The fair values for performing commercial and commercial real estate
loans indexed to a market lending rate with normal credit risk were assumed to
approximate their carrying value. For residential mortgage loans, fair value
was estimated by using quoted market prices for loans with similar credit and
interest rate risk characteristics.
Fair value for significant nonperforming loans was based on recent external
appraisals or broker opinions adjusted for anticipated credit loss risk,
estimated time for resolution, valuation of the underlying collateral and other
related resolution costs. If appraisals or recent broker opinions are not
available, estimated cash flows are discounted using a rate commensurate with
the risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally determined using
available market information and specific borrower information.
Loans Held for Sale
The fair values were estimated by using current institutional purchaser yield
requirements.
Excess Yield Receivable
The fair value was determined by using estimated discounted future cash flows
taking into consideration current prepayment rates and default experience. The
carrying amount is considered to be a reasonable estimate of fair market value.
Thrift Certificates Payable
Under SFAS 107, the fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, and NOW accounts, and money
market and checking accounts, is equal to the amount payable on demand as of
December 31, 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining maturities.
F-24
<PAGE> 186
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
At December 31, 1995
-------------------------------
Carrying Estimated
Value Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Installment certificates $24,275,000 $24,275,000
================================================================================
Fully-paid certificates:
Maturing in six months or
less 26,162,000 26,162,000
Maturing between six months
and one year 9,084,000 9,053,000
Maturing between one and
three years 635,000 635,000
- --------------------------------------------------------------------------------
Total fully-paid certificates $35,881,000 $35,850,000
================================================================================
</TABLE>
Notes Payable
The fair values for long-term debt are based on quoted market prices where
available. If quoted market prices are not available, fair values are
estimated using discounted cash flow analyses based on the Company's borrowing
rates at December 31, 1995 for comparable types of borrowing arrangements.
The remaining assets and liabilities of Presidential are not considered
financial instruments and have not been valued differently than is customary
under historical cost accounting. Since assets and liabilities that are not
financial instruments are excluded below, the difference between total
financial assets and financial liabilities does not, nor is it intended to,
represent the market value of Presidential. Furthermore, the estimated fair
value information may not be comparable between financial institutions due to
the wide range of valuation techniques permitted, and assumptions necessitated,
in the absence of an available trading market.
F-25
<PAGE> 187
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
M. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS.
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 amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
N. RECLASSIFICATIONS
Certain reclassifications to balances from prior years have been made to
conform to the current year's reporting format.
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
LOANS RECEIVABLE
Loans receivable at December 31, 1995 and December 31, 1994 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Residential real estate loans $35,173,000 $ 55,235,000
Participations sold (8,411,000) (16,129,000)
- --------------------------------------------------------------------------------
Residential real estate
loans - net 26,762,000 39,106,000
- --------------------------------------------------------------------------------
Commercial real estate loans 31,786,000 30,153,000
Participations sold (9,525,000) (10,479,000)
- --------------------------------------------------------------------------------
Commercial real estate
loans - net 22,261,000 19,674,000
- --------------------------------------------------------------------------------
Total loans receivable $49,023,000 $ 58,780,000
================================================================================
Loans receivable held for
investment $49,023,000 $ 58,780,000
Net deferred loan fees and costs (886,000) (1,428,000)
Allowance for loan losses (4,229,000) (4,307,000)
- --------------------------------------------------------------------------------
$43,908,000 $ 53,045,000
================================================================================
</TABLE>
F-26
<PAGE> 188
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
LOANS RECEIVABLE (CONTINUED)
The components of the loan portfolio at December 31, 1995 and December 31, 1994
were as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
One-to-four family residential $14,672,000 $20,088,000
Five-or-more family residential 10,347,000 16,720,000
Home improvement 1,743,000 2,298,000
Commercial 20,387,000 17,869,000
Land and other 1,874,000 1,805,000
- --------------------------------------------------------------------------------
$49,023,000 $58,780,000
================================================================================
</TABLE>
During 1995 and 1994, the Company sold, without recourse to the Company,
approximately $13,371,000 and $25,632,000, respectively, of real estate loans
to various outside parties.
SIGNIFICANT CONCENTRATIONS OF RISK
The Company makes mortgage loans primarily secured by first or second trust
deeds on Southern California real estate. The loans are secured by
single-family residential and other types of real estate and collateralized by
the equity in the borrowers' real estate. Prior to the fourth quarter of 1993,
these borrowers generally had a credit standing such that the Company relied
heavily on the value of the underlying collateral in its lending practices. In
the fourth quarter of 1993, however, the Company began implementing a revised
policy to place more emphasis on the creditworthiness of the borrower. Loans
are expected to be repaid either by cash from the borrower at maturity or by
borrower refinancing.
F-27
<PAGE> 189
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at beginning $ 4,307,000 $ 3,123,000 $ 2,646,000
Provision charged
to expense 3,289,000 6,096,000 4,655,000
Loan charge-offs (3,367,000) (4,912,000) (4,178,000)
- --------------------------------------------------------------------------------
Balance at end $ 4,229,000 $ 4,307,000 $ 3,123,000
================================================================================
</TABLE>
At December 31, 1995 and 1994, loans with more than two monthly payments past
due and on nonaccrual status totaled $793,000 and $3,408,000, respectively. If
interest on these loans had been accrued, interest income would have increased
by approximately $80,000 and $955,000 in 1995 and 1994, respectively. At
December 31, 1995 and 1994, loans with more than two monthly payments past due
and on accrual status totaled $1,843,000 and $3,474,000, respectively.
Interest income recognized on these loans totaled approximately $130,000 and
$298,000 in 1995 and 1994, respectively.
F-28
<PAGE> 190
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following information relates to the Company's impaired loans as of and for
the year ended December 31, 1995:
<TABLE>
<CAPTION>
December 31,
1995
- --------------------------------------------------------------------------------
<S> <C>
Impaired loans with a specific allowance $2,175,000
Impaired loans with no specific allowance 619,000
- --------------------------------------------------------------------------------
Total impaired loans $2,794,000
Total allowance related to impaired loans $ 430,000
Average balance of impaired loans for
the period $3,579,000
Interest income on impaired loans for
the period recorded on a cash basis $ 163,000
</TABLE>
PLEDGING OF PARTNERSHIP LOANS RECEIVABLE
In connection with the origination of the line of credit, the Partnership
pledged all of its loans receivable as security to its lender.
LOANS HELD FOR SALE
Loans held for sale at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate loans $12,577,000 $10,885,000
Title I loans - 1,126,000
- --------------------------------------------------------------------------------
$12,577,000 $12,011,000
================================================================================
</TABLE>
Accounts receivable of $-0- and $1,713,000 at December 31, 1995 and 1994
consisted of proceeds from loan sales. These proceeds were received in early
January, 1995.
F-29
<PAGE> 191
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
LOANS HELD FOR SALE (CONTINUED)
In December 1993, management developed a loan securitization program under
which the Partnership or Pacific Thrift may sell certain loans receivable to a
primary buyer (the Purchaser). The securitization agreements provided that the
Partnership or Pacific Thrift would offer to sell all newly originated
qualifying loans, up to $75,000,000, to the Purchaser through June 1995. The
agreement, as amended, also provided that the Partnership or Pacific Thrift
would earn a premium and retain a portion of the interest-income cash flows
from the loans.
Pacific Thrift had sold $75 million of loans under that agreement as of May 26,
1995. All loans sold by Pacific Thrift were included in pools of loans
securitized by the Purchaser. Credit enhancement was provided for each
securitization through private credit insurance, and each pool was rated AAA by
one or more rating services. The Purchaser acts as loan servicer for each of
the pools. All loans were sold nonrecourse except for the obligation to
repurchase any loan which does not meet certain customary representations and
warranties or to repurchase loans adversely affected by any breach of general
representations and warranties. As of December 31, 1995, three loans ($57,000
aggregate principal amount) from the original sale of $3.9 million to the
Purchaser have been repurchased by Pacific Thrift and no additional loans
related to this sale have been requested to be repurchased. Pacific Thrift
does not expect to incur a loss on the three loans repurchased. Except for an
initial sale of approximately $3.9 million in loans, all loans sold by Pacific
Thrift to the Purchaser were sold for a premium above face value of the loans
sold. Pacific Thrift received a servicing released fee payable quarterly on
the principal amount of each loan sold from September 19, 1994 to January 1995.
Effective February 1, 1995, the servicing released fee was increased on the
principal amount of each loan sold, including the loans sold from September
1994 to May 26, 1995, until each loan is paid off. Pacific Thrift retains an
interest in the net spread (i.e. all interest and fees paid on the loans less
servicing and other costs) in the $3.9 million of loans sold to Purchaser in
December 1993, which management estimates will represent an additional return
of approximately 3.3% on the principal amount of the $3.9 million of loans
sold.
F-30
<PAGE> 192
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
LOANS HELD FOR SALE (CONTINUED)
Pacific Thrift entered into a new agreement with the Purchaser effective June
21, 1995, pursuant to which it will continue to sell pre-approved residential
loans to the Purchaser. As of December 31, 1995 two loans under the new
agreement ($218,000 aggregate principal amount) have been repurchased by
Pacific Thrift and no additional loans have been requested to be repurchased.
Pacific Thrift does not expect to incur a loss on these two loans repurchased.
The new agreement provides for Pacific Thrift to receive a higher premium on
the face amount of each loan sold which meets preset interest rate requirements
upon date of sale. An additional premium will be paid for all loans sold
during any quarter if at least $22.5 million of loans are sold during that
quarter. The premium for all loans sold in excess of $25 million per calendar
quarter will be further increased. In addition, Pacific Thrift will receive a
servicing released fee on the principal amount of each loan sold, payable on a
quarterly basis, until the loan is paid off.
As a result of changes in the lending market, Pacific Thrift's primary source
of revenues has changed from interest income on portfolio loans to fee and
premium income from the origination and sale of real estate loans. During the
year ended December 31, 1995, Pacific Thrift has sold an aggregate of $132.5
million of pre-approved securitizable loans to the Purchaser and $12.5 million
pre-approved securitizable loans to other purchasers. Pacific Thrift has no
commitment to offer or sell any specified amount of loans to any purchaser, but
has entered arrangements whereby other purchasers may pre-approve loans to be
made by Pacific Thrift prior to funding, which are sold within approximately
one month from origination.
To the extent that Pacific Thrift originates loans for sale, it bears an
interest rate risk between the date of origination of each loan and the time
that each loan is sold. However, loans are generally sold on a monthly basis,
which reduces the risk of interest rate fluctuations between the date of
origination and date of sale.
F-31
<PAGE> 193
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
LOANS HELD FOR SALE (CONTINUED)
Prior to March 31, 1993, Pacific Thrift originated Title I home improvement
loans that were 90% insured by the Federal Housing Administration, provided
that the total amount of claims did not exceed 10% of the amount of all Title I
loans. During 1995 and 1994, Pacific Thrift sold $1,126,000 and $2,770,000,
respectively, of these loans and recorded losses totaling $-0- and $39,000,
respectively. As of March 31, 1993, Pacific Thrift discontinued the
origination and sale of Title I and other similar loans.
However, in August 1995 Pacific Thrift resumed a Title I Loan origination
program, in which Pacific Thrift acts exclusively as a correspondent lender for
one or more larger mortgage lenders who securitize Title I Loans. Pacific
Thrift anticipates that these loans would be sold without recourse within 30
days of origination.
During 1995, Pacific Thrift has sold $1,976,000 of home improvement loans,
including $1,126,000 of seasoned home improvement loans originated prior to
March 1993 at par value and $850,000 in new Title I loans at a premium.
4. OTHER REAL ESTATE
Other real estate consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Foreclosed real estate $ 5,590,000 $7,478,000
In-substance foreclosures - 545,000
Allowance for losses on
other real estate (2,434,000) (402,000)
- --------------------------------------------------------------------------------
$ 3,156,000 $7,621,000
================================================================================
</TABLE>
F-32
<PAGE> 194
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
4. OTHER REAL ESTATE (CONTINUED)
Changes in the allowance for losses on other real estate for the years ended
December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning $ 402,000 $ 783,000 $ 867,000
Provisions for losses 1,188,000 202,000 1,069,000
Net (charge-offs) recoveries 844,000 (583,000) (1,153,000)
- ------------------------------------------------------------------------------
Balance at end $2,434,000 $ 402,000 $ 783,000
==============================================================================
</TABLE>
Operations of other real estate for the years ended December 31, 1995, 1994 and
1993 consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for losses $1,188,000 $ 202,000 $1,069,000
Net (gain) on sales (469,000) (625,000) (345,000)
Other expenses 493,000 1,155,000 2,583,000
- --------------------------------------------------------------------------------
$1,212,000 $ 732,000 $3,307,000
================================================================================
</TABLE>
Other expenses in 1993 included $1,494,000 of estimated costs for remediation
of toxic substances on other real estate. See Note 13.
Upon foreclosure of a junior lien, the Company takes title to the real estate,
subject to existing senior liens. These mortgage notes payable totaled
$611,000 and $2,313,000 at December 31, 1995 and 1994, respectively.
F-33
<PAGE> 195
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 1994:
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment and software $ 1,211,000 $1,078,000
Furniture and fixtures 745,000 583,000
Leasehold improvements 519,000 455,000
- --------------------------------------------------------------------------------
2,475,000 2,116,000
Accumulated depreciation and
amortization (1,077,000) (794,000)
- --------------------------------------------------------------------------------
$ 1,398,000 $1,322,000
================================================================================
</TABLE>
6. THRIFT CERTIFICATES PAYABLE
Thrift certificates are comprised of full-paid certificates and installment
certificates. The approximate weighted average interest rate of full-paid and
installment certificate accounts at December 31, 1995 was 6.08% and 5.66%,
respectively. The interest payable on the thrift certificates totaled $104,000
and $171,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, full-paid thrift certificates consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Certificates greater than
$100,000 $ - $ 102,000
Certificates less than
$100,000 35,881,000 57,956,000
- --------------------------------------------------------------------------------
$35,881,000 $58,058,000
================================================================================
</TABLE>
F-34
<PAGE> 196
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
6. THRIFT CERTIFICATES PAYABLE (CONTINUED)
At December 31, 1995, scheduled maturities of full-paid thrift certificates
were as follows:
<TABLE>
<CAPTION>
Amount
- --------------------------------------------------------------------------------
<S> <C>
Less than 3 months $12,723,000
3 to 6 months 13,439,000
6 to 12 months 9,084,000
1 to 5 years 635,000
- --------------------------------------------------------------------------------
$35,881,000
================================================================================
</TABLE>
7. NOTE PAYABLE
In 1990, the Partnership obtained financing under a $105,000,000 line of credit
agreement with National Westminster Bank (NatWest), as agent for a group of
banks, which was modified on September 30, 1991 to $56,000,000 and subsequently
modified further. The amounts advanced under the agreement were based upon a
specified percentage of the amount of eligible loans assigned as security.
Under the agreement that existed at December 31, 1991, the Partnership could
elect any of three interest rates: (i) 0.50% above NatWest's prime rate, (ii)
2.0% above the certificate of deposit rate, or (iii) 1.875% above LIBOR. At
December 31, 1991, the Partnership had $56,250,000 outstanding on the line of
credit.
In April 1992, NatWest delivered a commitment letter to the Partnership,
followed by a formal amendment of the loan agreement, to continue to provide a
revolving loan of $48,000,000, decreasing to $44,000,000 by May 15, 1992, and
decreasing by $1,500,000 each month to a new maximum of $36,500,000 by
September 30, 1992.
In connection with the amendment, the general partner loaned the Partnership
$600,000 in subordinated debt, which bears interest at the prime rate and may
only be repaid upon consent by NatWest or at such time as the Partnership
repays all of its outstanding indebtedness to NatWest. In addition, the
general partner and the three managing officers of the general partner
personally guaranteed the performance by the Partnership of all terms of the
line of credit agreement.
F-35
<PAGE> 197
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
7. NOTE PAYABLE
(CONTINUED)
On September 30, 1992, NatWest amended and extended the term of the revolving
loan through March 31, 1993, requiring further paydowns of $1,000,000 per month
for four of the months and $1,100,000 for two of the months during the six-
month extension period.
Under the terms of the September 30, 1992 amendment, the Partnership could
borrow, on a revolving credit basis, up to the lesser of (i) a specified
borrowing base equal to 93.75% of the aggregate principal balance of all
eligible mortgage loans secured by first or second trust deeds on single-family
residences, and 85% of the aggregate principal balance of all eligible mortgage
loans secured by first or second trust deeds on multifamily residences or
commercial properties; or (ii) $36,500,000 as of September 30, 1992, reduced by
required reductions through March 31, 1993. Total loans secured by trust deeds
on multifamily residences and commercial properties that could be included as
eligible loans could not exceed 35% of all eligible loans.
Under the September 30, 1992 amendment, the interest rate charged on new
advances was based on (i) 1% above NatWest's prime rate; (ii) 3.125% over
NatWest's certificate of deposit rate; or (iii) 3% over the LIBOR rate. In
addition, the Partnership paid a commitment fee equal to 0.50% per annum of the
average daily unused portion of the aggregate commitment. During 1993, the
Partnership elected an interest rate of 1% above the NatWest prime rate.
On April 1, 1993, the line of credit agreement was further amended and extended
to June 30, 1993. The amendment required paydowns of $1,000,000 per month to a
new maximum of $27,300,000 as of June 30, 1993.
In June 1993, the line of credit was further amended and extended until June
30, 1994. Under the terms of the extension, the Partnership was required to
make monthly payments of $300,000, plus the amount by which 80% of the
Partnership's monthly net operating cash flow (after payment of rent, salaries
and employee benefits, interest under the line of credit agreement, senior
liens on mortgage loans and other real estate, and up to $50,000 per month of
office expenses) exceeded $300,000. In addition, the Partnership was not
allowed to make distribution or withdrawal payments to the partners.
F-36
<PAGE> 198
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
7. NOTE PAYABLE
(CONTINUED)
The line of credit agreement, as amended in June 1993, could terminate upon
certain customary events of default. Events of default included failure to
meet the following financial standards: (i) minimum excess tangible financial
assets not less than $15,000,000; (ii) a maximum ratio of total liabilities to
excess tangible financial assets not greater than 3.25-to-1; and (iii) a
minimum interest coverage ratio of net income plus interest expense to interest
expense of 1.5-to-1. Upon the occurrence of an event of default under the
agreement, NatWest had the right, among other remedies, to declare all advances
due immediately, cease making any further advances, and sell the collateral
assigned as security. NatWest also had the right to charge a higher interest
rate (3% above prime) on amounts due and unpaid.
In December 1993, the Partnership notified NatWest that certain loans in the
borrowing base had become ineligible loans. Such reduction in the eligible
loans caused a payment of approximately $2,100,000 to become immediately due.
Subsequently, the Partnership notified NatWest that other loans had become
ineligible loans, resulting in a total payment in excess of $6,000,000 being
immediately due.
In May 1994, the Partnership notified NatWest of additional defaults on the
line of credit, including those pertaining to the financial standards for
excess tangible financial assets and interest coverage as well as material
litigation, environmental liabilities, and defaults under other provisions.
During the period April 1994 through September 1994, the Partnership and
NatWest negotiated to restructure and renew the line of credit. In September
1994, the line of credit was amended and extended through June 30, 1996 under
the following primary terms:
(1) the Partnership is required to make mandatory quarterly principal
payments sufficient to reduce the outstanding balance to $15,410,000 by
December 31, 1994; $13,222,000 by March 31, 1995; $10,978,000 by June 30,
1995; $8,878,000 by September 30, 1995; $6,883,000 by December 31, 1995,
$4,993,000 by March 31, 1996; and $0 by June 30, 1996;
F-37
<PAGE> 199
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
7. NOTE PAYABLE
(CONTINUED)
(2) the Partnership will incur interest on the line of credit at the rate of
prime plus 1%;
(3) the Partnership is required to pay 100% of its net cash flow to NatWest;
(4) the Partnership is required to maintain a ratio, based on the outstanding
principal balance of performing loans compared to the outstanding
principal balance of the line of credit, greater than or equal to 1.10 to
June 30, 1995 and 1.20 from July 1, 1995 to June 30, 1996;
(5) the Partnership is required to maintain a ratio, based on the outstanding
principal balance of all loans and the estimated fair value of other real
estate compared to the outstanding principal balance of the line of
credit, greater than or equal to 1.60 to June 30, 1995 and 1.80 from July
1, 1995 to June 30, 1996;
(6) the Partnership is allowed to make actual cash disbursements equal to
110% of budgeted cash disbursements for general and administrative
expenses;
(7) the Partnership is allowed to make actual cash disbursements equal to
120% of budgeted cash disbursements for loan and real estate expenses,
other than specified environmental remediation costs;
(8) the Partnership is allowed to pay specified environmental remediation
costs up to $1,465,000;
(9) CRC and LPPC are required to pay cash balances in excess of $250,000 as
of January 31, 1995 and January 31, 1996 to the Partnership;
(10) the Partnership is not allowed to pay any amounts to the general partner,
including fees, reimbursements, or distributions, except to the extent of
110% of the budgeted overhead of the general partner;
(11) the Partnership is not allowed to pay any distributions or withdrawals to
the limited partners;
F-38
<PAGE> 200
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
7. NOTE PAYABLE
(CONTINUED)
(12) the Partnership is not allowed to make capital contributions to Pacific
Thrift, except for specified environmental remediation costs of Pacific
Thrift and other limited purposes; and
(13) in the event that the Partnership does not reduce the outstanding
principal balance of the line of credit to $10,455,000 by June 30, 1995,
$8,455,000 by September 30, 1995, $6,555,000 by December 31, 1995,
$4,755,000 by March 31, 1996, and $0 by June 30, 1996, the Partnership
will incur a nonperformance fee of $1,000,000 for each target, up to a
maximum of $5,000,000, payable on June 30, 1996; however, if the
partnership incurs one or more nonperformance fees and subsequently
repays the entire line of credit by June 30, 1996, the nonperformance
fees are reduced to the greater of 25% of the nonperformance fees or
$500,000.
In addition, the general partner and three managing officers reaffirmed their
guarantees.
As consideration for the September 1994 amended and restated loan agreement,
NatWest waived the defaults which existed under the previous agreement. In
addition, certain financial standards under the previous agreement are no
longer required, including the borrowing base and eligible loan restrictions, a
minimum amount of excess tangible financial assets, a maximum ratio of total
liabilities to excess tangible financial assets, and a minimum interest
coverage ratio.
Upon the occurrence of an event of default under the line of credit, NatWest
has the right, among other remedies, to charge prime plus 3% on amounts due and
unpaid. In addition, NatWest has the right to declare all advances due
immediately and sell the collateral assigned as security.
As of December 31, 1994, the Partnership reduced the outstanding balance of the
note payable to $14,778,000 and was in compliance with the principal reduction
requirement of the new agreement. However, the Partnership was not in
compliance with certain technical conditions of such agreement.
F-39
<PAGE> 201
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
7. NOTE PAYABLE
(CONTINUED)
At December 31, 1995, the Partnership owed a total balance of $6,771,000 under
the Loan Agreement. As of December 31, 1995, the Partnership was in compliance
with all paydown requirements under the amended and restated Loan Agreement but
certain technical conditions relating to expenses had not been met. The Bank
agreed to waive this technical violation of the Loan Agreement in February,
1996.
On December 22, 1995 the line of credit was further amended, effective November
29, 1995 to allow Presidential until June 30, 1997, to fully repay the
outstanding balance owed to the Bank. The Loan Agreement requires the
Partnership to utilize 100% of its net cash flow to pay down the loan. Net
cash flow is defined as total cash receipts less collection costs, loan
servicing expenses and general and administrative expenses, subject to certain
maximum levels based upon projected expenses prepared by the Partnership. The
loan balance would bear interest at prime plus 1.5%. Mandatory pay down levels
require that the principal balance be paid down to: $4,755,000 by March 31,
1996; $3,755,000 by June 30, 1996; $2,755,000 by September 30, 1996; $1,755,000
by December 31, 1996; $755,000 by March 31, 1997; and to zero by June 30, 1997.
The Partnership is further required to maintain a collateral coverage ratio of
performing loans relative to its loan balance equal to 1.2:1 and a total
collateral coverage ratio of total loans receivable and net OREO relative to
its loan balance equal to 1.6:1. In addition, under the modifications,
commencing December 31, 1995 the non-performance fee note penalties are
eliminated.
8. INCOME TAXES
The Partnership is not subject to income taxes. However, the Partnership is
still required to file partnership returns in order to report its income or
loss in total as well as the distributable share of income or loss of each of
the partners. These partnership returns, as all tax returns, are potentially
subject to examination by the taxing authorities.
F-40
<PAGE> 202
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
8. INCOME TAXES
(CONTINUED)
The cumulative differences between the total capital of the Partnership for
financial reporting purposes and the total capital reported for federal income
tax purposes at December 31, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Total partners' capital for
financial reporting purposes $ 8,780,000 $10,614,000
Investment in Pacific Thrift,
syndication costs, bad debt and
real estate reserves, and various
other differences 14,030,000 17,336,000
- ------------------------------------------------------------------------------
Total partners' capital for
federal income tax purposes $22,810,000 $27,950,000
==============================================================================
</TABLE>
Pacific Thrift is subject to federal income and California franchise taxes but
has incurred net operating losses. Accordingly, the provision for income taxes
(benefit) consists of the minimum California franchise taxes for 1994 and 1993.
Significant components of the provision for income taxes (benefits) included in
the consolidated statements of operations are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 1,135,000 $1,000 $1,000
Utilization of net
operating loss (1,135,000) - -
Deferred (1,222,000) - -
- ----------------------------------------------------------------------------
$(1,222,000) $1,000 $1,000
==============================================================================
</TABLE>
Pacific Thrift adopted Statement No. 109 as of January 1, 1993. The adoption
of the statement had no significant effect on the financial position or results
of operations.
F-41
<PAGE> 203
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
8. INCOME TAXES
(CONTINUED)
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities on Pacific Thrift's books at December 31, 1995 and 1994,
which is included with other assets on the consolidated balance sheets, are as
follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward $1,361,000 $2,457,000
Loan loss reserves 179,000 477,000
Interest reserves 233,000 226,000
Write-down of other real estate 365,000 39,000
Loans held for sale 220,000 78,000
Deferred rent 106,000 59,000
Environmental remediation - 270,000
Other 5,000 3,000
- ------------------------------------------------------------------------------
Total deferred tax assets 2,469,000 3,609,000
- ------------------------------------------------------------------------------
Less valuation allowance 857,000 2,946,000
- ------------------------------------------------------------------------------
1,612,000 663,000
- ------------------------------------------------------------------------------
Deferred tax liabilities
Depreciation 34,000 28,000
Deferred loan costs 225,000 433,000
Excess yield 128,000 202,000
- ------------------------------------------------------------------------------
Total deferred tax liabilities 387,000 663,000
- ------------------------------------------------------------------------------
Total net deferred tax asset $1,225,000 $ -
==============================================================================
</TABLE>
F-42
<PAGE> 204
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
8. INCOME TAXES
(CONTINUED)
A valuation allowance has been established to reduce the deferred tax assets to
the amount considered realizable at December 31, 1995 and 1994. The valuation
allowance reserves the amount of income tax benefit recognized that is
dependent on future taxable income to be realizable. During 1995, $1,225,000
of the valuation allowance was reversed to reflect the expected utilization of
the net operating loss over the next twelve months. However should there occur
a 50% ownership change of the Company as defined under Section 382 of the
Internal Revenue Code of 1986, the Company's ability to use the net operating
losses would be restricted to a prescribed annual amount.
At December 31, 1995, Pacific Thrift has net operating loss carryforwards for
federal income tax purposes of approximately $3,979,000 that are available to
offset future federal taxable income. These federal net operating losses
expire in the years 2007 through 2009. Pacific Thrift has net operating loss
carryforwards for California franchise tax purposes of approximately $142,000.
These California carryforwards expire in the year 1999.
The following summarizes the difference between the 1995, 1994 and 1993
provision for income taxes (benefit) and the federal statutory tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory
tax rate 34% (34)% (34)%
Nonrecognition of
net operating
loss carryforward - 34 34
Utilization of net
operating loss (34) - -
Reversal of valuation
allowance (42) - -
- ------------------------------------------------------------------------------
Effective tax rate
(benefit) (42)% 0% 0%
==============================================================================
</TABLE>
F-43
<PAGE> 205
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
9. ANNUAL
MANAGEMENT
FEE
The general partner receives an annual management fee based on the proportion
that net profits, before the effects of the management fee, bear to the total
Fee capital contributions as defined in the Partnership Agreement.
The Partnership Agreement permits the general partner to calculate the
management fee based on annual net income that includes loan origination fees
generated. During 1992, the annual management fee was calculated on such
basis. During 1995, 1994 and 1993, there was no management fee because the
Partnership incurred net losses in excess of loan origination fees generated.
During 1993, the general partner received payments of $441,000 on the
anticipated annual management fees. Since the general partner ultimately did
not earn such fees, the general partner agreed to repay these amounts to the
Partnership under a promissory note. No interest was paid or accrued for 1993.
However, quarterly principal payments of approximately $110,000 commenced in
December 1994 and interest at prime plus 1% will be accrued from January 1994
through December 1995 (Note 10).
10. RELATED PARTIES
AND AFFILIATES
Accounts receivable from the general partner consisted of the following at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
December 31, 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Unearned annual management fees $220,000 $330,000
Amounts due for salaries, rent and
overhead 127,000 148,000
- ------------------------------------------------------------------------------
$347,000 $478,000
==============================================================================
Accounts payable to the general partner consisted of the following at December
31, 1995 and 1994:
December 31, 1995 1994
- ------------------------------------------------------------------------------
Base fee and loan servicing fees $ 203,000 $ 86,000
Contingent consideration in connection
with the purchase of CRC and LPPC 78,000 48,000
- ------------------------------------------------------------------------------
$ 281,000 $ 134,000
==============================================================================
</TABLE>
F-44
<PAGE> 206
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
10. RELATED PARTIES
AND AFFILIATES (CONTINUED)
The Partnership had various related party transactions with the following
entities:
- - PRESIDENTIAL MANAGEMENT COMPANY - The general partner received specified fees
for services performed and reimbursements of certain expenses. Under the
Partnership Agreement, the general partner receives a base fee of up to 35% of
the loan origination fees paid by borrowers to the Company. The base fee was
35% of loan origination fees for the Company in 1995 and 35% in 1994. The
general partner also received a loan servicing fee of 3/8 of 1% per annum on
loans with terms over three years.
Amounts charged by the general partner for services performed and overhead-
related expenses for the years ended December 31, 1995, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1995 1994 1993
---------------------------------------------------------------------------
<S> <C> <C> <C>
Base fee $ 767,000 $ 589,000 $ 669,000
Loan servicing fee 245,000 216,000 178,000
---------------------------------------------------------------------------
Total fees $ 1,012,000 $ 805,000 $ 847,000
===========================================================================
Salaries and overhead
reimbursements $ 82,000 $ 90,000 $ 5,184,000
===========================================================================
</TABLE>
During 1992, the general partner absorbed certain expenses (data processing,
legal, and business promotion) related to the Company. During 1995, 1994 and
1993, however, the general partner did not absorb any such expenses for the
Company.
F-45
<PAGE> 207
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
10. RELATED PARTIES
AND AFFILIATES
(CONTINUED)
Effective January 1, 1994, in order for Pacific Thrift to comply with a
section of a regulatory agreement covering payments to affiliates, Pacific
Thrift commenced directly employing personnel for loan origination,
processing, and servicing. In addition, Pacific Thrift revised its policies
for payment of rent and other overhead expenses. As a result, Pacific
Thrift terminated reimbursements to the Partnership and general partner for
such services and expenses. However, the Partnership is continuing to pay
the general partner for base fees and loan servicing fees of Pacific Thrift
and the Partnership in accordance with the Partnership Agreement.
During 1994, Pacific Thrift paid and allocated certain salaries and overhead
for the Partnership, CRC, and general partner totaling $495,000, $220,000 and
$356,000, respectively, and was reimbursed on a monthly basis.
During 1995, Pacific Thrift paid and allocated certain salaries and overhead
for the Partnership, CRC, LPPC and the general partner totaling $386,000,
$251,000, $8,000 and $597,000, respectively, and was reimbursed on a monthly
basis.
The Company incurs salary and employee-related expenses for individuals who
perform services for the Partnership and Pacific Thrift and do not own more
than a 1% interest in the general partner. The Company also incurs these
expenses for all individuals who perform services for CRC and LPPC,
regardless of their ownership interest in the general partner. The general
partner, however, incurs salary and employee-related expenses for three
managing officers who perform services for the Partnership and Pacific
Thrift and own more than a 1% interest in the general partner.
- - CONSOLIDATED RECONVEYANCE COMPANY - (CRC) serves as a trustee on all trust
deeds obtained by the Company as security for portfolio loans originated or
purchased by the Company. Fees paid to CRC are paid by the borrowers.
F-46
<PAGE> 208
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
10. RELATED PARTIES
AND AFFILIATES
(CONTINUED)
A managing officer of the Partnership and general partner provides legal
services in connection with the Company's loan accounts, for which he receives
$100 from the fees paid by each borrower for legal services related to each
loan origination. Total fees of $167,000, $62,000 and $56,000 were paid by the
Partnership to the managing officer for the years ended December 31, 1995, 1994
and 1993, respectively.
A limited partner of the Partnership and of the general partner is a partner
with a law firm that provides legal services to the Company. Total fees for
the services provided to the Company by the law firm were approximately
$629,000, $716,000 and $432,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
A member of the Board of Directors of Pacific Thrift was paid hourly and
contingent fees for services related to the sale of loans under the loan
securitization agreement entered into in December 1993. Total fees for the
services provided by the board member were approximately $165,000, $111,000 and
$84,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Former officers of the Partnership have loans payable to the Partnership,
secured by real estate, totaling approximately $249,000 and $271,000 as of
December 31, 1995 and 1994, respectively. These loans are included in loans
receivable.
Thrift certificates purchased by members of management totaled approximately
$63,000 and $236,000 at December 31, 1995 and 1994, respectively, on terms
slightly more favorable than the terms for unrelated parties. Interest expense
on these certificates totaled approximately $2,000, $11,000 and $8,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
F-47
<PAGE> 209
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
10. RELATED PARTIES
AND AFFILIATES
(CONTINUED)
As of December 31, 1993, Pacific Thrift purchased various furniture and office
equipment from the Partnership. The replacement value was determined by an
experienced interior design consultant (a related party) who obtained
information from used furniture dealers, and the purchase price of $223,000,
10% under the replacement value, was approved by the Board of Directors of
Pacific Thrift. The Partnership realized a gain, including depreciation
recapture, of $135,000 on the sale of the furniture and office equipment;
however, such gain was eliminated upon consolidation.
The Partnership and general partner sold computer equipment and software to
Pacific Thrift as of December 31, 1993. Subsequently, management obtained
additional information about the value of the software and the need to
reallocate the price. As a result of the additional information, management
determined that Pacific Thrift had overpaid for the software. To correct the
situation, the general partner repaid $177,000. In addition, the Partnership
agreed to repay $173,000 by causing CRC to issue an interest-bearing promissory
note, secured by CRC's accounts receivable, payable in monthly installments
through June 1995. As of December 31, 1993, the Partnership and the general
partner realized gains on the sale of $54,000 and $333,000 respectively,
including depreciation recapture and adjustment for the subsequent refunds.
During 1995 and 1994, the Partnership paid to Pacific Thrift a loan servicing
fee at the rate of 1.5% of the outstanding balances of the Partnership's loans
and other real estate. Such fees totaled $351,000 and $545,000 in 1995 and
1994 and were eliminated in the consolidation.
Also, during 1994, the Partnership had loans receivable, with balances totaling
$464,000, that were refinanced into two loans: one a Pacific Thrift loan in
first position and the remainder a Partnership loan in second position. In
order to satisfy regulatory requirements applicable to affiliate transactions,
such refinances were subject to certain underwriting and performance
requirements.
F-48
<PAGE> 210
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
11. PURCHASE OF
CRC AND LPPC
Effective, July 1, 1990, the Partnership purchased 100% of the limited
partnership interests in CRC and LPPC from the general partner for their
combined estimated fair market value of $908,000 as determined by an
independent appraiser. CRC serves as trustee on all trust deeds obtained by
the Company as security for portfolio loans originated or purchased by the
Company, as well as trust deeds for many unaffiliated lenders. LPPC publishes
information regarding sales of foreclosed properties. The transaction was
treated as a purchase and resulted in goodwill of approximately $651,000.
The Partnership also agreed to pay the general partner an additional amount
(contingent consideration) annually for five years beginning January 1, 1991.
The contingent consideration, based on an amended agreement, is calculated as
50% of the total annual net profits earned by CRC and LPPC in excess of a base
profit amount of $465,000. The contingent consideration totaled $172,000,
$224,000 and $466,000 for the years ended December 31, 1995, 1994 and 1993,
respectively, and was treated as an addition to goodwill. Accumulated
amortization relating to the goodwill totaled $400,000 and $253,000 December
31, 1995 and 1994, respectively.
12. LITIGATION AND
UNASSERTED
CLAIMS
Although they were never been served, the Partnership and its Chief Executive
Officer (CEO) received a complaint in October 1993 that named them as
defendants, along with four other unaffiliated defendants. The complaint
contained allegations of securities fraud and breach of fiduciary duty in
connection with companies affiliated with Alexander Spitzer (who, until ten
years ago but not thereafter, was an affiliate of the Partnership and CEO). The
complaint was filed by two long-time business associates of Spitzer, including
one individual who was a general partner of a Spitzer-affiliated entity and one
individual who owned another Spitzer-affiliated entity.
F-49
<PAGE> 211
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
12. LITIGATION AND UNASSERTED CLAIMS (CONTINUED)
The complaint charges all defendants with participation in securities fraud in
connection with the sale of securities of the Spitzer entities (although there
are no allegations that either the Partnership or CEO participated in the sale
of such securities) and charges the Partnership and CEO with aiding and
abetting other defendants in a violation of their fiduciary duties to the
Spitzer-affiliated entities. The primary facts alleged against the
Partnership and CEO are alleged to have occurred in 1984. The Partnership and
CEO denied the merits of all allegations stated against them in the complaint.
Counsel for both the Partnership and CEO, in a letter dated October 20, 1993,
advised counsel for the plaintiffs that the complaint appeared to state no
claim on the merits against the Partnership or CEO and that no claims could be
stated because of statute of limitations problems. The only response of
plaintiffs' counsel, by letter dated November 16, 1993, was to notify all
defendants that they had an open extension of time to answer.
An earlier class action involving Spitzer-affiliated entities was filed in
March 1990 by investors and certain lenders in the bankrupt Spitzer-affiliated
entities. Although the Partnership and CEO are discussed in the complaint,
neither the Partnership nor CEO has ever been named as a defendant in that
class action.
The allegations involving the Partnership and CEO in both complaints concern
the May 1984 sales of the general partnership interests in the Partnership
(which were owned at that time by entities owned by the CEO and a relative of
Spitzer) and of the stock of a former affiliated thrift and loan company to a
large, unaffiliated mortgage banking group headquartered in the state of New
York (the Buyer). The complaints allege that, in connection with the sales to
the Buyer, the CEO and Spitzer agreed for the former affiliated thrift and loan
company to sell certain allegedly poor-quality loans to other
Spitzer-affiliated entities. The complaints further allege that Spitzer and
his affiliates engaged in a continuing scheme, both before and after the sales
to the Buyer, to lend money and sell real estate to nominees (which did not
include the Partnership or CEO), who assertedly purchased the real estate at
inflated prices and were guaranteed against loss.
F-50
<PAGE> 212
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
12. LITIGATION AND UNASSERTED CLAIMS (CONTINUED)
Although not mentioned in either of the two complaints, but based on hearsay
contained in a document prepared in 1985, Spitzer allegedly stated that in 1984
the CEO reimbursed Spitzer for the CEO's share of funding such guarantees
involving one Spitzer-affiliated entity in 1982 through 1984. The CEO
acknowledges that he made payments to Spitzer but has stated that they were for
proper purposes.
Neither the Partnership nor CEO had any ownership interest in any
Spitzer-affiliated entity after the sales to the Buyer in May 1984. However,
as a result of loans made to Spitzer-affiliated entities prior to the sales to
the Buyer, the Partnership continued to be a creditor to these entities. These
loans were substantially performing in accordance with their terms and were
considered by management to be well secured until 1989, shortly before certain
Spitzer-affiliated entities declared bankruptcy in November 1989. Ultimately,
as previously reported, the Partnership wrote off the loans not secured by real
estate, disposed of real estate collateral securing one of the loans to the
Spitzer-affiliated entities, and recorded losses on these loans in 1990 and
1991 in excess of $3.7 million.
The Partnership and CEO denied the merits of the allegations stated against
them in the complaints. Management does not believe that any of these matters
will result in any material additional losses to the Partnership or any
material adjustments to these financial statements.
On October 31, 1995 plaintiff's counsel, in the October 1993 complaint which
had named the Partnership and its CEO alleging securities fraud and breach of
fiduciary duty, as discussed above, filed a request for dismissal without
prejudice. The clerk of the Court entered the dismissal as requested on
November 2, 1995.
13. COMMITMENTS AND CONTINGENCIES
In January and February 1993, the Partnership and Pacific Thrift foreclosed on
two loans secured by real estate that contained toxic substances. The real
estate was used by the former owners for metal-plating purposes. Management
commenced the process of obtaining environmental studies.
F-51
<PAGE> 213
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the activities of the former owner of the Partnerships
property, the District Attorney's office filed a civil complaint against the
Partnership alleging violations of hazardous waste control laws. In September
1994, the Partnership entered into a consent agreement requiring the
Partnership to pay a civil compromise of $115,000 and to develop and implement
a remedial action plan. Legal counsel has stated that the likelihood of
further civil or any criminal action is remote if the Partnership complies with
the terms of the consent agreement. Management states that the Partnership
intends to comply with the consent agreement.
In July and September 1994, management obtained soil investigation studies for
the foreclosed properties to determine the extent of the toxic substances.
Management was completing proposed remediation plans for approval by local
government agencies. Based on the proposed remediation plans, management
estimated that the cost of remediation, including consulting and legal
expenses, would be approximately $1,494,000. Accordingly, the Company recorded
a provision for the liability of $1,494,000 in the financial statements for
1993.
Management does not expect the extent of the liability to exceed $1,494,000;
however, such estimate is based on the assumption that the appropriate
authorities will approve the remediation plans and that no additional toxic
substances will be discovered during the remediation. The accrued remediation
liability was reduced by $377,000 during the year ended December 31, 1995 based
on receiving a lower bid for completion of the remediation work.
F-52
<PAGE> 214
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company conducts its operations from leased facilities. Rental expenses of
approximately $905,000, $926,000 and $908,000 have been charged to general and
administrative expenses in the consolidated statements of operations for the
years ended December 31, 1995, 1994 and 1993, respectively. At December 31,
1995, the approximate minimum rental commitments under all noncancelable
operating leases (which are subject to annual escalations based on the consumer
price index) are as follows:
<TABLE>
<CAPTION>
Year Amount
- --------------------------------------------------------------------------------
<S> <C>
1996 $ 969,000
1997 807,000
1998 736,000
1999 701,000
2000 701,000
Thereafter 1,393,000
- --------------------------------------------------------------------------------
$5,307,000
================================================================================
</TABLE>
At December 31, 1995 and 1994, the Company was servicing Title I loans for
others totaling approximately $10,744,000 and $12,545,000, respectively. In
addition, the Company has filed claims with the Federal Housing Administration
that depleted the insurance on these loans during 1994.
In connection with certain real estate loan sales by Pacific Thrift in 1994,
the Partnership guaranteed one buyer against losses up to $1,800,000. As
security for the guarantee, the Partnership deposited $180,000 with the buyer.
F-53
<PAGE> 215
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The California Franchise Tax Board is examining the California corporate tax
returns for Pacific Thrift for 1990, 1991, and 1992. Although management does
not expect that the examination will result in any significant tax liability,
the ultimate outcome cannot be determined at the present time.
On June 6, 1995, Consolidated and Lenders were served with a complaint by
Consumer Action and two consumers suing both individually and on behalf of the
general public in a purported class action filed in the Superior Court of
Contra Costa County, California. The complaint names Consolidated and Lenders,
along with thirteen other foreclosure service and foreclosure publishing
companies, and alleges that all named defendants charge fees in excess of the
statutorily permitted amount for publication of notices of trustee sales. The
complaint seeks restitution of all excess charges, an injunction against the
charging of excessive fees in the future and attorneys fees. In January 1996,
Lenders and two other posting and publishing companies were dismissed from the
action without prejudice. The case is still in the pleading stage, discovery
has not yet commenced and the purported class of plaintiffs has not yet been
certified. Management believes that Consolidated had charged publication fees
in compliance with applicable law. Consolidated denies the merits of the
allegations stated against it in the complaint. Management does not believe
that any of these matters will result in any material additional losses to the
Partnership or any material adjustments to these financial statements.
The Partnership, Pacific Thrift, CRC, and LPPC are involved in certain lawsuits
and there are claims pending against these entities which management considers
incidental to normal operations. The legal responsibility and financial impact
with respect to such litigation and claims cannot presently be determined.
However, management considers that any ultimate liability which would likely
arise from these lawsuits and claims would not materially affect the financial
position or results of operations of the Company.
F-54
<PAGE> 216
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
14. RETIREMENT SAVINGS PLAN
The Company implemented a retirement savings plan (defined contribution plan)
in 1994. All full-time employees who have completed six months of service and
reached age 21 are eligible to participate in the plan. Contributions are made
from employee-elected salary deferrals. The Company matched the first 6% of
employee contributions to the plan at the rate of $.50 on the dollar. During
the years ended December 31, 1995 and December 31, 1994, the Company's
contribution to the plan totaled $92,000 and $111,000, respectively.
15. DISTRIBUTIONS AND WITHDRAWALS
During 1993 and 1992, primarily as a result of significant fourth quarter
adjustments, the Partnership determined that distributions were made
significantly in excess of the net income and distributable net profits under
the Partnership Agreement. Distributions relating to 1993 were made to
partners in the amount of $916,000, although there was a net loss and no
distributable profits for 1993. Distributions relating to 1992 were made to
limited partners in the amount of $4,111,000, which exceeded distributable
profits for 1992 by approximately $1,730,000. The excess distributions
represent a return of capital to the limited partners. However, under the
Capital Plan, the general partner agreed to contribute, over a three-year
period, additional capital up to $1,730,000 if the Company generates certain
levels of loan origination fees. Pursuant to the agreement, the general
partner contributed $266,000 of the $1,730,000 in late 1993 and early 1994, but
does not expect to contribute any additional amounts based on the current level
of loan origination fees.
Partnership withdrawals payable of $1,120,000 at December 31, 1995 and December
31, 1994 represent the capital withdrawals by limited partners that were
approved by the general partner but not paid by the Partnership. At December
31, 1995 and December 31, 1994, respectively, other limited partners with
original capital contributions totaling $9,400,000 and $9,103,000 have
requested withdrawals; however, these requests have not been approved.
Withdrawals were not paid or approved after July 1993 due to limitations on
withdrawals in the Partnership Agreement and the restriction on such
withdrawals in the amendments to the line of credit agreement with NatWest.
F-55
<PAGE> 217
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
16. CHANGES IN GENERAL AND LIMITED PARTNER'S CAPITAL (UNAUDITED)
The changes in general and limited partnership interests for 1995, 1994 and
1993 are as follows:
<TABLE>
<CAPTION>
General Limited
Partnership Partnership
Interest Interests Total
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Capital (deficit) -
December 31, 1992 $(131,000) $28,961,000 $28,830,000
Contributions 266,000 35,000 301,000
Distributions (25,000) (1,918,000) (1,943,000)
Withdrawals - (1,380,000) (1,380,000)
Net loss - 1993 (62,000) (5,807,000) (5,869,000)
Special allocation - 1993 (266,000) 266,000 -
- --------------------------------------------------------------------------------
Capital (deficit) -
December 31, 1993 218,000 20,157,000 19,939,000
Contributions - - -
Distributions - - -
Withdrawals - - -
Net loss - 1994 (105,000) (9,409,000) (9,514,000)
- --------------------------------------------------------------------------------
Capital (deficit) -
December 31, 1994 (323,000) 10,748,000 10,425,000
================================================================================
</TABLE>
The changes in general and limited partnership interests for 1995 are as
follows:
<TABLE>
<CAPTION>
General Limited
Partnership Partnership
Interest Interests Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital (deficit) -
January 1, 1995 $ (323,000) $10,748,000 $10,425,000
Net loss - 1995 (18,000) (1,680,000) (1,698,000)
- --------------------------------------------------------------------------------
Capital (deficit) -
December 31, 1995 $ (341,000) $ 9,068,000 $ 8,727,000
================================================================================
</TABLE>
Presidential Management Company holds the entire general partnership interest
in the Partnership. In addition, Presidential Management Company holds
approximately 4.5% of the limited partnership interests.
F-56
<PAGE> 218
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Quarter Ended
- --------------------------------------------------------------------------------
Mar 31, Jun 30, Sept 30, Dec 31,
1995 1995 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $2,612,000 $2,424,000 $2,368,000 $ 2,173,000
Interest expense 1,405,000 1,426,000 1,248,000 1,120,000
- --------------------------------------------------------------------------------
Net interest income 1,207,000 998,000 1,120,000 1,053,000
Provision for loan losses 446,000 554,000 861,000 1,428,000*
Other income 2,608,000 2,841,000 3,366,000 4,450,000
Other expense 3,592,000 3,905,000 4,494,000 5,283,000
Income tax benefit 430,000 84,000 664,000 44,000
- --------------------------------------------------------------------------------
Net income (loss) $ 207,000 $ (536,000) $(205,000) $(1,164,000)
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
- --------------------------------------------------------------------------------
Mar 31, Jun 30, Sept 30, Dec 31,
1994 1994 1994 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 2,915,000 $ 3,514,000 $ 3,414,000 $ 1,561,000
Interest expense 1,185,00 1,200,000 1,182,000 1,360,000
- --------------------------------------------------------------------------------
Net interest income 1,730,000 2,314,000 2,232,000 201,000
Provision for loan losses 217,000 468,000 2,064,000 3,347,000**
Other income 1,143,000 1,091,000 1,149,000 2,619,000
Other expense 3,684,000 4,738,000 4,139,000 3,336,000
- --------------------------------------------------------------------------------
Net loss $(1,028,000) $(1,801,000) $(2,822,000) $(3,863,000)
================================================================================
</TABLE>
* The increase in the provision for loan losses is primarily a result of
an increased general reserve. Management represents that it was not
practical to determine whether or not a portion of these additional
provisions should have been recorded in earlier quarters.
** The substantial increase in the provision for loan losses is due to an
increase in the level of nonperforming loans and the high level of
charge-offs. Management represents that it was not practical to
determine whether or not a portion of these substantial additional
provisions should have been recorded in earlier quarters.
F-57
<PAGE> 219
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
18. SEGMENT FINANCIAL REPORTING
The Company operates principally in two industries, real estate secured lending
(including the origination and sale of loans) and trustee and foreclosure
services. A summary of selected financial information by industry segment is
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Interest and other
income from real
estate secured lending $19,016,000 $ 13,475,000 $ 15,210,000
Fees from trustee 3,826,000 3,931,000 4,307,000
- --------------------------------------------------------------------------------
Total revenues $22,842,000 $ 17,406,000 $ 19,517,000
- --------------------------------------------------------------------------------
Operating profit (loss)
Real estate secured
lending $(3,148,000) $ (9,741,000) $ (6,737,000)
Trustee and foreclosure
services 747,000 811,000 1,319,000
General expenses (519,000) (583,000) (450,000)
- --------------------------------------------------------------------------------
Loss before income taxes $(2,920,000) $ (9,513,000) $ (5,868,000)
- --------------------------------------------------------------------------------
Identifiable assets
Real estate secured
lending $76,896,000 $ 97,930,000 $108,966,000
Trustee and foreclosure
services 5,532,000 5,564,000 5,201,000
General assets 129,000 253,000 157,000
- --------------------------------------------------------------------------------
Total assets $82,557,000 $103,747,000 $114,324,000
================================================================================
</TABLE>
F-58
<PAGE> 220
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY
MEMORANDUM OF UNDERSTANDING AND INITIAL ORDERS TO CEASE AND DESIST WITH THE
FEDERAL DEPOSIT INSURANCE CORPORATION AND CALIFORNIA DEPARTMENT OF CORPORATIONS
In February 1993, Pacific Thrift, the FDIC, and the California Department of
Corporations (DOC) entered into a Memorandum of Understanding (MOU). In
connection with the MOU, Pacific Thrift was required to maintain primary
capital in an amount that equals or exceeds 7.5% of its total assets; obtain
and retain qualified management; notify and obtain approval from the FDIC and
the DOC prior to adding any individual to the Board of Directors or employing
any individual as a senior executive officer of Pacific Thrift; eliminate loans
classified loss and reduce loans classified substandard to specified levels
within a specified period of time; revise, adopt, and implement policies to
provide effective guidance and control over Pacific Thrift's lending function;
develop, adopt, and implement written policies governing relationships between
Pacific Thrift, the Partnership, and other affiliated companies; establish and
maintain an adequate reserve for loan losses and develop, adopt, and implement
a policy and methodology for determining the adequacy of the reserve for loan
losses; formulate and implement a budget for all categories of income and
expense; revise, adopt, and implement a written liquidity and funds management
policy; maintain assets within certain limits; obtain written consent from the
FDIC and DOC prior to paying any cash dividends; refrain from extending
additional credit to any borrower who has a loan from Pacific Thrift that has
been adversely classified, unless the loan is classified as substandard or
doubtful and the proper approval has been obtained; and take certain other
actions.
F-59
<PAGE> 221
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
As of March 31, 1993, Pacific Thrift's total assets had moderately exceeded the
limitation provided in the MOU. In addition, Pacific Thrift made certain
payments in 1993 to the Partnership in excess of the amounts authorized under
the Personnel Services Agreement between Pacific Thrift and the Partnership.
The overpayment amount was repaid by the Partnership in April 1993. The Audit
Committee of the Board of Directors of Pacific Thrift performed an
investigation of the circumstances that allowed the overpayments to occur and
determined that such overpayments reflected a weakness in the internal control
procedures of Pacific Thrift with respect to intercompany payments.
Accordingly, new control procedures were adopted by the Board of Directors of
Pacific Thrift to prevent overpayments of any kind by Pacific Thrift to the
Partnership in the future.
In November 1993, the FDIC and DOC terminated the MOU and issued an Order to
Cease and Desist (C&D) with the consent of Pacific Thrift. The C&D prohibits
Pacific Thrift from paying excessive fees to affiliates in such a manner as to
produce operating losses; prohibits Pacific Thrift from including accrued
interest in the carrying amount of a property acquired by foreclosure on a
loan; prohibits Pacific Thrift from accepting or renewing brokered deposits
unless it is adequately capitalized and a waiver is obtained; requires Pacific
Thrift to disclose any extensions of credit to executive officers or principal
shareholders from a correspondent bank; requires Pacific Thrift to prepare and
display minimum information in its disclosure statement; requires Pacific
Thrift to comply with the limits specified in the California Industrial Loan
Company regulations on the amount of outstanding thrift certificates, based on
its unimpaired capital and surplus; requires Pacific Thrift to develop a
comprehensive asset/liability dependency policy, including establishing a range
for, and reducing, the volatile liability dependency ratio; requires Pacific
Thrift to adopt and implement a written policy to increase its liquidity; and
requires Pacific Thrift to adopt and implement a satisfactory policy governing
the relationship between Pacific Thrift and its affiliates and to reduce the
payment of management, consulting, and other fees to the affiliates to amounts
that are reasonable and necessary for the services. See Note 20.
F-60
<PAGE> 222
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
In September 1994, the FDIC issued a second C&D with the consent of Pacific
Thrift. The second C&D prohibits Pacific Thrift from operating in such a
manner as to produce low earnings; requires Pacific Thrift to refrain from
opening any additional offices without the prior written approval of the FDIC;
requires Pacific Thrift to formulate and implement a written profit plan; and
requires Pacific Thrift to provide the FDIC with a study of the operations and
profitability of its loan production office opened in June 1994. See Note 20.
CAPITAL ADEQUACY
Pacific Thrift is subject to various regulatory capital requirements
administered by the FDIC. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly discretionary - actions by the FDIC
that, if undertaken, could have a direct material effect on Pacific Thrift's
financial statements. The regulations require Pacific Thrift to meet specific
capital adequacy guidelines that involve quantitative measures under of Pacific
Thrift's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. Pacific Thrift's capital classification
is also subject to qualitative judgements by the regulators about components,
risk weightings, and other factors.
F-61
<PAGE> 223
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require Pacific Thrift to maintain minimum amounts and ratios of Tier 1 capital
(as defined in the regulations) to total average assets (as defined), and
minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets
(as defined). To be considered adequately capitalized as defined under the
Prompt Corrective Action (PCA) provisions of the Federal Deposit Insurance
Corporation Improvement Act of 1991, Pacific Thrift must maintain the minimum
Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios presented in
the table. Pacific Thrift's actual unaudited capital amounts and ratios as of
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Capital Adequacy
as of December 31, 1993
(Unaudited)
------------------------------------------
Required Actual
Amount (Ratio) Amount (Ratio)
------------------ ------------------
<S> <C> <C> <C> <C>
Tier 1 capital
(to average assets) $2,646,000 (4.0%) $4,654,000 (7.0%)
Tier 1 capital
(to risk-weighted assets) 2,161,000 (4.0%) 4,654,000 (8.6%)
Total capital
(to risk-weighted assets) 4,322,000 (8.0%) 5,330,000 (9.9%)
</TABLE>
Pacific Thrift incurred losses in 1994 and, in December 1994, Pacific Thrift
was notified by the FDIC that its tangible capital ratio (tangible capital
compared to average total assets) as of October 31, 1994 was less than 2%.
Based on the tangible and other capital ratios, Pacific Thrift was considered
to be "critically undercapitalized" as defined under the PCA provisions. The
PCA notice also stated that the FDIC may be required to place Pacific Thrift in
receivership in March 1995. See Subsequent Events, Note 20.
F-62
<PAGE> 224
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
19. REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
As a result of such PCA designation, Pacific Thrift became subject to mandatory
requirements as of October 31, 1994, including, but not limited to, a
requirement to submit a capital restoration plan to the FDIC and various
restrictions on asset growth, acquisitions, new activities and branches,
dividend payments, management fees, and executive compensation.
Subsequent to October 31, 1994, Pacific Thrift improved its capital position
from "critically undercapitalized" to "undercapitalized" as a result of certain
capital contributions and loan sales prior to December 31, 1994. Pacific
Thrift's actual unaudited capital amounts and ratios as of December 31, 1994
were as follows:
<TABLE>
<CAPTION>
Capital Adequacy
as of December 31, 1994
(Unaudited)
-------------------------------------------
Required Actual
Amount (Ratio) Amount (Ratio)
------------------ -------------------
<S> <C> <C> <C> <C>
Tier 1 capital
(to average assets) $3,216,000 (4.0%) $3,112,000 (3.9%)
Tier 1 capital
(to risk-weighted assets) 2,301,000 (4.0%) 3,112,000 (5.4%)
Total capital
(to risk-weighted assets) 4,602,000 (8.0%) 3,831,000 (6.7%)
</TABLE>
In addition, Pacific Thrift received an Order to Cure Deficiency of Net Worth
(Order) from the DOC in connection with a $1,414,000 deficiency in its capital
as of December 31, 1994. The Order requires that Pacific Thrift increase its
capital to a level where the ratio of its outstanding thrift certificates
compared to capital does not exceed the permitted ratio of 15 to 1. Based on
the applicable section of the California Financial Code, failure to increase
its capital within 120 days would require the DOC to take possession of the
property and business of Pacific Thrift. See Subsequent Events, Note 20.
F-63
<PAGE> 225
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
19. REGULATORY MATTERS AND CAPITAL DELINQUENCY (CONTINUED)
SETTLEMENT WITH DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
In April 1993, Pacific Thrift was notified by the Mortgagee Review Board of the
Department of Housing and Urban Development (HUD) of certain alleged violations
of certain requirements in the origination of 59 loans selected during its
examination of Title I loan origination activities. Pacific Thrift was advised
that HUD intended to seek civil money penalties and was considering an
administrative action. Pacific Thrift filed a response to the allegations
affirming its compliance with HUD requirements. On September 15, 1993, HUD and
Pacific Thrift entered into a settlement agreement in which Pacific Thrift
agreed not to seek claims for insurance on 24 loans that violated the
prohibition against subordinating Title I loans to non-Title I loans, as well
as on three loans in which the proceeds were used for ineligible purposes. HUD
did not impose any penalties or take any other action.
20. EVENTS SUBSEQUENT TO DECEMBER 31, 1994
During February 1995, Pacific Thrift submitted its original capital restoration
plan to the FDIC, but the FDIC denied approval of the plan and required certain
modifications. During March 1995, Pacific Thrift submitted a revised capital
restoration plan, including a guarantee by the Partnership and, in May 1995,
the revised capital restoration plan was incorporated by reference in a new C&D
(see below).
In May 1995, Pacific Thrift was informed by the FDIC that, based on unaudited
financial information in the Consolidated Report of Condition and Income (Call
Report) filed for the first quarter of 1995, Pacific Thrift was "adequately
capitalized" as of March 31, 1995. Based on such Call Report, Pacific Thrift's
unaudited capital ratios as of March 31, 1995 were as follows:
<TABLE>
<CAPTION>
Capital Ratio as of March 31, 1995
(Unaudited)
- --------------------------------------------------------------------------------
Required Actual
-------- ------
<S> <C> <C>
Tier 1 capital (to average assets) 4.0% 5.5%
Tier 1 capital (to risk-weighted assets) 4.0 7.2
Total capital (to risk-weighted assets) 8.0 8.5
</TABLE>
F-64
<PAGE> 226
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
20. EVENTS SUBSEQUENT TO DECEMBER 31, 1994 (CONTINUED)
In addition, Pacific Thrift was informed by the DOC that Pacific Thrift had
cured the deficiency in its net worth as of April 30, 1995 and has complied
with the Order.
Also in May 1995, the FDIC terminated the prior C&Ds, and the FDIC and DOC
issued a new comprehensive Order to Cease and Desist (the new C&D) with the
consent of Pacific Thrift. The new C&D: requires that Pacific Thrift have and
retain qualified management; requires that Pacific Thrift have Tier 1 capital
which equals or exceeds 8% of total assets on or before September 30, 1995;
requires that Pacific Thrift maintain at least the minimum risk-based capital
levels throughout the life of the new C&D; requires Pacific Thrift to eliminate
from its books, through charge-off or collection, all assets classified "loss"
as of September 1994 within 10 days from the effective date of the new C&D;
requires Pacific Thrift to reduce assets classified "substandard" as of
September 1994 to $6.5 million within 180 days and to $5 million within 365
days; prohibits Pacific Thrift from extending any additional credit to any
borrower who has a loan with Pacific Thrift which has been charged off or
classified "loss"; requires Board of Directors or loan committee approval prior
to the extension of additional credit to a borrower who has a loan classified
"substandard"; requires Pacific Thrift to establish within 10 days, and then to
maintain on a quarterly basis, an adequate allowance for loan losses; requires
that Pacific Thrift implement within 60 days the provisions of the capital
restoration and business/profitability plans submitted to the FDIC in order to
control overhead and other expenses and restore profitability; requires that
Pacific Thrift correct the violation of the thrift-to-capital ratio required
under California law within 60 days; requires that Pacific Thrift file with the
FDIC amended Call Reports as of December 31, 1993 and as of the end of the
first three quarters of 1994 which accurately reflect Pacific Thrift's
financial condition as of those dates; requires that throughout the life of the
new C&D, Pacific Thrift shall file Call Reports which accurately reflect
Pacific Thrift's financial condition as of the end of each period; prohibits
Pacific Thrift from paying cash dividends in any amount without the prior
written approval of the FDIC; prohibits Pacific Thrift from opening any
additional offices without the prior written approval of the FDIC; and requires
the Company to submit written progress reports on a quarterly basis until the
Company accomplishes the corrections and is released by the Regional Director
of the FDIC and the Commissioner of the DOC.
F-65
<PAGE> 227
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION AND DATA AT DECEMBER 31, 1995
AND FOR THE YEAR THEN ENDED IS UNAUDITED)
================================================================================
20. EVENTS SUBSEQUENT TO DECEMBER 31, 1994 (CONTINUED)
Noncompliance with the terms of the new C&D could result in various regulatory
actions, including the assessment of civil money penalties, termination of
deposit insurance, and placing Pacific Thrift in conservatorship of
receivership. Although there is no assurance as to the ultimate outcome, these
consolidated financial statements do not include any provisions or adjustments
that might result from the outcome of these uncertainties.
As of December 31, 1995, Pacific Thrift had increased its total risk-based
capital ratio to 9.1%, its Tier 1 risk-based capital ratio to 11.2% and its
leverage capital ratio to 12.4%, which meet the FDIC definition of "well
capitalized." However, since the New C&D contains a provision requiring the
maintenance of a certain capital level, Pacific Thrift would be classified as
"adequately capitalized" under the regulations.
In addition, at December 31, 1995, management of Pacific Thrift believes that
it is in full compliance with the terms of the New C&D. However, if the
conditions of the New C&D were not met, Pacific Thrift could be subject to
civil penalties or other regulatory enforcement actions which could have a
material adverse effect upon its business.
21. POTENTIAL RESTRUCTURING PLAN
The Company is currently in the process of preparing a restructuring proposal
to present for the vote of its limited partners. Pursuant to the proposed
restructuring, the Company would transfer all of its assets and interests in
subsidiaries to a newly formed corporation, and concurrently issue the stock of
the corporation to all of the Partners pro rata in accordance with their
existing Capital Accounts in the Partnership in liquidation of the Company.
The Company plans to concurrently conduct a public offering of additional
common stock to raise additional capital to use in the Company's business.
F-66
<PAGE> 228
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE I
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1994
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders
Presidential Thrift Consolidated Posting and
Mortgage and Loan Reconveyance Publishing
Company Company Company Company
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 655,000 $18,700,000 $ 197,000 $ 76,000
Accounts receivable 1,000 1,713,000 3,348,000 48,000
Accrued interest receivable 478,000 647,000 -- --
Loans receivable 13,064,000 39,981,000 -- --
Loans held for sale 2,605,000 9,406,000 -- --
Receivable from related party 426,000 235,000 -- --
Excess yield receivable -- 888,000 -- --
Other real estate 6,479,000 1,142,000 -- --
Property and equipment 64,000 1,304,000 139,000 4,000
Goodwill 1,749,000 -- -- --
Other assets 379,000 388,000 34,000 8,000
Investment in subsidiaries 4,732,000 -- -- --
- --------------------------------------------------------------------------------------------------
$30,632,000 $74,404,000 $3,718,000 $136,000
==================================================================================================
<CAPTION>
Eliminating Entries
------------------------
Dr Cr Consolidated
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ -- $ -- $ 19,628,000
Accounts receivable -- 39,000 5,071,000
Accrued interest receivable -- -- 1,125,000
Loans receivable -- -- 53,045,000
Loans held for sale -- -- 12,011,000
Receivable from related party -- 183,000 478,000
Excess yield receivable -- -- 888,000
Other real estate -- -- 7,621,000
Property and equipment -- 189,000 1,322,000
Goodwill -- -- 1,749,000
Other assets -- -- 809,000
Investment in subsidiaries 7,640,000 12,372,000 --
- -----------------------------------------------------------------------------------
$7,640,000 $12,783,000 $103,747,000
===================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-67
<PAGE> 229
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE I
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1994
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders
Presidential Thrift Consolidated Posting and
Mortgage and Loan Reconveyance Publishing
Company Company Company Company
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Thrift certificates payable
Full-paid certificates $ -- $58,058,000 $ -- $ --
Installment certificates -- 11,443,000 -- --
- -----------------------------------------------------------------------------------------------------
-- 69,501,000 -- --
Accounts payable and accrued expenses 971,000 1,280,000 2,187,000 89,000
Accrued interest payable 234,000 171,000 -- --
Payable to related party 214,000 -- -- --
Mortgage notes payable 2,101,000 212,000 -- --
Notes payable 14,778,000 -- -- --
Note payable to related party 600,000 -- 86,000 --
Partnership withdrawals payable 1,120,000 -- -- --
- -----------------------------------------------------------------------------------------------------
20,018,000 71,164,000 2,273,000 89,000
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies
- -----------------------------------------------------------------------------------------------------
Partners' capital
Common stock -- 3,000,000 -- --
Additional paid-in capital -- 7,880,000 -- --
Accumulated deficit -- (7,640,000) -- --
Partners' capital 10,614,000 -- 1,445,000 47,000
- -----------------------------------------------------------------------------------------------------
10,614,000 3,240,000 1,445,000 47,000
- -----------------------------------------------------------------------------------------------------
$30,632,000 $74,404,000 $3,718,000 $136,000
=====================================================================================================
<CAPTION>
Eliminating Entries
------------------------
Dr Cr Consolidated
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Thrift certificates payable
Full-paid certificates $ -- $ -- $ 58,058,000
Installment certificates -- -- 11,443,000
- ---------------------------------------------------------------------------------
-- -- 69,501,000
Accounts payable and accrued expenses 56,000 -- 4,471,000
Accrued interest payable -- -- 405,000
Payable to related party 80,000 -- 134,000
Mortgage notes payable -- -- 2,313,000
Notes payable -- -- 14,778,000
Note payable to related party 86,000 -- 600,000
Partnership withdrawals payable -- -- 1,120,000
- ---------------------------------------------------------------------------------
222,000 -- 93,322,000
- ---------------------------------------------------------------------------------
Commitments and contingencies
- ---------------------------------------------------------------------------------
Partners' capital
Common stock 3,000,000 -- --
Additional paid-in capital 7,880,000 -- --
Accumulated deficit -- 7,640,000 --
Partners' capital 1,681,000 -- 10,425,000
- ---------------------------------------------------------------------------------
12,561,000 7,640,000 10,425,000
- ---------------------------------------------------------------------------------
$12,783,000 $7,640,000 $103,747,000
=================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-68
<PAGE> 230
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE II
CONSOLIDATING SCHEDULE - OPERATIONS
YEAR ENDED DECEMBER 31, 1994
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders
Presidential Thrift Consolidated Posting and
Mortgage and Loan Reconveyance Publishing
Company Company Company Company
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 2,969,000 $ 8,034,000 $ -- $ --
Deposits with financial institutions 1,000 400,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 2,970,000 8,434,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 -- 28,000 -- --
Other thrift certificates -- 2,917,000 -- --
Notes payable 1,974,000 8,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 1,974,000 2,953,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 996,000 5,481,000 -- --
PROVISION FOR LOAN LOSSES 4,682,000 1,414,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (3,686,000) 4,067,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and reconveyance fees -- -- 3,344,000 --
Other income 319,000 806,000 -- 587,000
Gain on sale of loans -- 946,000 -- --
Loan servicing fees -- 545,000 -- --
Equity in income (loss) of subsidiaries (2,001,000) -- -- --
- ---------------------------------------------------------------------------------------------------------------------
(1,682,000) 2,297,000 3,344,000 587,000
- ---------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 295,000 4,460,000 1,569,000 169,000
General and administrative 1,752,000 4,081,000 1,168,000 89,000
Related party fees 1,350,000 -- -- --
Operations of other real estate 439,000 293,000 -- --
Depreciation and amortization 310,000 437,000 29,000 --
- ---------------------------------------------------------------------------------------------------------------------
4,146,000 9,271,000 2,766,000 258,000
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (9,514,000) (2,907,000) 578,000 329,000
INCOME TAXES -- 1,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(9,514,000) $(2,908,000) $ 578,000 $329,000
=====================================================================================================================
Eliminating Entries
------------------------
Dr Cr Consolidated
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable $ -- $ -- $11,003,000
Deposits with financial institutions -- -- 401,000
- ----------------------------------------------------------------------------------------------------
Total interest income -- -- 11,404,000
- ----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 -- -- 28,000
Other thrift certificates -- -- 2,917,000
Notes payable -- -- 1,982,000
- ----------------------------------------------------------------------------------------------------
Total interest expense -- -- 4,927,000
- ----------------------------------------------------------------------------------------------------
Net interest income -- -- 6,477,000
PROVISION FOR LOAN LOSSES -- -- 6,096,000
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses -- -- 381,000
- ----------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and reconveyance fees -- -- 3,344,000
Other income -- -- 1,712,000
Gain on sale of loans -- -- 946,000
Loan servicing fees 545,000 -- --
Equity in income (loss) of subsidiaries 907,000 2,908,000 --
- ----------------------------------------------------------------------------------------------------
1,452,000 2,908,000 6,002,000
- ----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits -- -- 6,493,000
General and administrative -- -- 7,090,000
Related party fees -- 545,000 805,000
Operations of other real estate -- -- 732,000
Depreciation and amortization -- -- 776,000
- ----------------------------------------------------------------------------------------------------
-- 545,000 15,896,000
- ----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 1,452,000 3,453,000 (9,513,000)
INCOME TAXES -- -- 1,000
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $1,452,000 $3,453,000 $(9,514,000)
====================================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-69
<PAGE> 231
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE III
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Pacific Lenders Pacific
Presidential Thrift Consolidated Posting and United Eliminating Entries
Mortgage and Loan Reconveyance Publishing Group, -------------------
Company Company Company Company Inc. Dr Cr Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 609,000 $ 9,550,000 $ 283,000 $ 47,000 $ -- $ -- $ -- $10,489,000
Accounts receivable 1,000 126,000 2,925,000 285,000 -- -- -- 3,337,000
Accrued interest receivable 357,000 546,000 -- -- -- -- -- 903,000
Loans receivable 3,332,000 40,576,000 -- -- -- -- -- 43,908,000
Loans held for sale 3,000,000 9,577,000 -- -- -- -- -- 12,577,000
Receivable from related party 417,000 116,000 -- -- -- -- 186,000 347,000
Excess yield receivable -- 2,725,000 -- -- -- -- -- 2,725,000
Other real estate 1,408,000 1,748,000 -- -- -- -- -- 3,156,000
Property and equipment 48,000 1,269,000 115,000 20,000 -- -- 54,000 1,398,000
Goodwill 1,808,000 -- -- -- -- -- -- 1,808,000
Other assets 90,000 1,665,000 44,000 6,000 104,000 -- -- 1,909,000
Investment in subsidiaries 7,970,000 -- -- -- -- 4,485,000 12,445,000 --
- -----------------------------------------------------------------------------------------------------------------------------------
$19,040,000 $67,898,000 $3,367,000 $358,000 $104,000 $4,485,000 $12,695,000 $82,557,000
===================================================================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-70
<PAGE> 232
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE III
CONSOLIDATING SCHEDULE - FINANCIAL POSITION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Pacific Lenders Pacific
Presidential Thrift Consolidated Posting and United Eliminating Entries
Mortgage and Loan Reconveyance Publishing Group, -------------------
Company Company Company Company Inc. Dr Cr Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Thrift certificates payable
Full-paid certificates $ -- $35,881,000 $ -- $ -- $ -- $ -- $ -- $35,881,000
Installment certificates -- 24,275,000 -- -- -- -- -- 24,275,000
- ------------------------------------------------------------------------------------------------------------------------------------
-- 60,156,000 -- -- -- -- -- 60,156,000
Accounts payable and accrued expenses 694,000 769,000 2,444,000 132,000 -- 21,000 -- 4,018,000
Accrued interest payable 170,000 103,000 -- -- -- -- -- 273,000
Payable to related party 345,000 -- -- -- 101,000 165,000 -- 281,000
Mortgage notes payable 560,000 51,000 -- -- -- -- -- 611,000
Notes payable 6,771,000 -- -- -- -- -- -- 6,771,000
Note payable to related party 600,000 -- -- -- -- -- -- 600,000
Partnership withdrawals payable 1,120,000 -- -- -- -- -- -- 1,120,000
- ------------------------------------------------------------------------------------------------------------------------------------
10,260,000 61,079,000 2,444,000 132,000 101,000 186,000 -- 73,830,000
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------------------------------
Partners' capital
Common stock -- 3,000,000 -- -- -- 3,000,000 -- --
Additional paid-in capital -- 8,304,000 -- -- 3,000 8,307,000 -- --
Accumulated deficit -- (4,485,000) -- -- -- -- 4,485,000 --
Partners' capital 8,780,000 -- 923,000 226,000 -- 1,202,000 -- 8,727,000
- ------------------------------------------------------------------------------------------------------------------------------------
8,780,000 6,819,000 923,000 226,000 3,000 12,509,000 4,485,000 8,727,000
- ------------------------------------------------------------------------------------------------------------------------------------
$19,040,000 $67,898,000 $3,367,000 $358,000 $104,000 $12,695,000 $4,485,000 $82,557,000
====================================================================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-71
<PAGE> 233
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE IV
CONSOLIDATING SCHEDULE - OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Pacific Lenders
Presidential Thrift Consolidated Posting and
Mortgage and Loan Reconveyance Publishing
Company Company Company Company
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 1,872,000 $7,013,000 $ -- $ --
Deposits with financial institutions 10,000 682,000 -- --
- -----------------------------------------------------------------------------------------------------
Total interest income 1,882,000 7,695,000 -- --
- -----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 -- 7,000 -- --
Other thrift certificates -- 3,813,000 -- --
Notes payable 1,379,000 -- -- --
- -----------------------------------------------------------------------------------------------------
Total interest expense 1,379,000 3,820,000 -- --
- -----------------------------------------------------------------------------------------------------
Net interest income 503,000 3,875,000 -- --
PROVISION FOR LOAN LOSSES 1,894,000 1,395,000 -- --
- -----------------------------------------------------------------------------------------------------
Net interest income (expense) after provision
for loan losses (1,391,000) 2,480,000 -- --
- -----------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and reconveyance fees -- -- 3,248,000 --
Other income 139,000 353,000 -- 577,000
Gain on sale of loans -- 8,895,000 -- --
Loan servicing fees -- 351,000 -- --
Equity in income of subsidiaries 4,016,000 -- -- --
- -----------------------------------------------------------------------------------------------------
4,155,000 9,599,000 3,248,000 577,000
- -----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 392,000 5,608,000 1,712,000 146,000
General and administrative 1,192,000 4,002,000 927,000 152,000
Related party fees 1,363,000 -- -- --
Operations of other real estate 1,120,000 92,000 -- --
Depreciation and amortization 529,000 446,000 26,000 --
- -----------------------------------------------------------------------------------------------------
4,596,000 10,148,000 2,665,000 298,000
- -----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (1,832,000) 1,931,000 583,000 279,000
INCOME TAXES (BENEFIT) 1,000 (1,224,000) 1,000 --
- -----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(1,833,000) $3,155,000 $ 582,000 $279,000
=====================================================================================================
<CAPTION>
Pacific
United Eliminating Entries
Group, -------------------
Inc. Dr Cr Consolidated
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ -- $ -- $ -- $ 8,885,000
Deposits with financial institutions -- -- -- 692,000
- --------------------------------------------------------------------------------------------
Total interest income -- -- -- 9,577,000
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 -- -- -- 7,000
Other thrift certificates -- -- -- 3,813,000
Notes payable -- -- -- 1,379,000
- --------------------------------------------------------------------------------------------
Total interest expense -- -- -- 5,199,000
- --------------------------------------------------------------------------------------------
Net interest income -- -- -- 4,378,000
PROVISION FOR LOAN LOSSES -- -- -- 3,289,000
- --------------------------------------------------------------------------------------------
Net interest income (expense) after provision
for loan losses -- -- -- 1,089,000
- --------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and reconveyance fees -- -- -- 3,248,000
Other income -- -- 53,000 1,122,000
Gain on sale of loans -- -- -- 8,895,000
Loan servicing fees -- 351,000 -- --
Equity in income of subsidiaries -- 4,016,000 -- --
- --------------------------------------------------------------------------------------------
-- 4,367,000 53,000 13,265,000
- --------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits -- -- -- 7,858,000
General and administrative -- -- -- 6,273,000
Related party fees -- -- 351,000 1,012,000
Operations of other real estate -- -- -- 1,212,000
Depreciation and amortization -- -- 82,000 919,000
- --------------------------------------------------------------------------------------------
-- -- 433,000 17,274,000
- --------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) -- 4,367,000 486,000 (2,920,000)
INCOME TAXES (BENEFIT) -- -- -- (1,222,000)
- --------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ -- $4,367,000 $486,000 $(1,698,000)
============================================================================================
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-72
<PAGE> 234
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Corporation's Certificate of Incorporation provides that the
directors will not be personally liable to the Corporation or to any Stockholder
for the breach of a fiduciary responsibility, to the full extent that such
limitation or elimination of liability is permitted under Delaware law.
The Bylaws provide that the Corporation will indemnify its directors
and officers to the full extent permitted under the Delaware law. Pursuant to
the Bylaws and Delaware law, the Corporation will indemnify each director and
officer against any liability and related expenses (including attorneys' fees)
incurred in connection with any proceeding in which he or she may be involved by
reason of serving in such capacity so long as the director or officer acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interest of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
A director and officer is also entitled to indemnification against
expenses incurred in any action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of serving in such capacity if he or
she acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no such
indemnification will be made if the director or officer is judged to be liable
to the Corporation, unless the applicable court of law determines that despite
the adjudication of liability the director or officer is reasonably entitled to
indemnification for such expenses.
The Bylaws authorize the Corporation to advance funds to a director or
officer for costs and expenses (including attorneys' fees) incurred in a suit or
proceeding upon receipt of an undertaking by such director or officer to repay
such amounts if it is ultimately determined that he or she is not entitled to be
indemnified.
The Corporation will enter into agreements with the Corporation's
directors and executive officers, indemnifying them to the fullest extent
permitted by Delaware law. Stockholders may have more limited recourse against
such persons than would apply absent these provisions.
The Corporation intends to obtain insurance policies indemnifying the
directors and officers against certain civil
1
<PAGE> 235
liabilities, including liabilities under the federal securities laws, which
might be incurred by them in such capacity.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
1.1 Underwriting Agreement
2.1 Restructuring Plan of Presidential Mortgage Company (the
"Partnership")
3.1 Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
3.3 Fifth Amended and Restated Certificate and Agreement of
Limited Partnership of the Registrant (the "Partnership
Agreement"), dated as of September 7, 1989, incorporated by
reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-2, as filed with the Securities and
Exchange Commission August 15, 1989, as amended by Amendment
No. One thereto, as filed with the Securities and Exchange
Commission on October 10, 1989 (Registration No. 33-30517)
(the "1989 Registration Statement").
3.4 Certificate of Limited Partnership of the Registrant on Form
LP-1, as filed with the California Secretary of State and
currently in effect, incorporated by reference to Exhibit 3.2
of the Registration Statement on Form S-11, filed with the
Securities and Exchange Commission on November 13, 1984, as
amended on February 4 and March 1, 1985, and declared
effective on March 6, 1985 (Registration No. 2-94289) (the
"1984 Registration Statement").
3.5 First Amendment to the Partnership Agreement dated as of May
15, 1993, incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, as filed with the Securities and Exchange
Commission on November 27, 1994 (the "1993 Annual Report").
3.6 Second Amendment to the Partnership Agreement dated as of
January 1, 1994, incorporated by reference to Exhibit 3.4 of
the 1993 Annual Report.
4.1 Specimen Common Stock Certificate (to be filed by amendment).
2
<PAGE> 236
4.2 General Partner Warrant Agreement and Warrant.*
5.1 Opinion of Jeffer, Mangels, Butler & Marmaro regarding
validity of securities being registered
8.1 Opinion of Jeffer, Mangels, Butler & Marmaro regarding tax
matters
10.1 Employment Agreement by and between the Registrant and Joel R.
Schultz*
10.2 Employment Agreement by and between the Registrant and Richard
D. Young*
10.3 Employment Agreement by and between the Registrant and Kenneth
A. Carmona*
10.4 Employment Agreement by and between the Registrant and Norman
A. Markiewicz*
10.5 Employment Agreement by and between the Registrant and Richard
B. Fremed*
10.6 Employment Agreement by and between Pacific Thrift and Loan
Company, Inc. and Frank Landini*
10.7 Form of Indemnification Agreement by and between the
Registrant and each of its directors and executive officers*
10.8 Pacific United Group, Inc. Stock Option Plan, dated January 1,
1996, subject to completion of Restructuring Plan*
10.9 Pacific United Group, Inc. Stock Purchase Plan, dated January
1, 1996, subject to completion of Restructuring Plan*
10.10 Pacific United Group, Inc. Supplemental Executive Retirement
Plan, dated January 1, 1996, subject to completion of
Restructuring Plan*
10.11 Employment Agreement, dated May 9, 1984, by and among Pacific
and Loan Association and the Registrant, as employers, and
Joel R. Schultz, as employee, as currently in effect only with
the Registrant, incorporated by reference to Exhibit 10.2 of
the 1984 Registration Statement.
3
<PAGE> 237
10.12 Employment Agreement, dated May 9, 1984, by and among Pacific
and Loan Association and the Registrant, as employers, and
Norman A. Markiewicz, as employee, as currently in effect only
with the Registrant, incorporated by reference to Exhibit 10.3
of the 1984 Registration Statement.
10.13 Loan Agreement (the "Loan Agreement"), dated as of August 28,
1990, as amended and restated May 20, 1992, and as further
amended and restated as of September 28, 1994, by and among
National Westminster Bank USA ("NatWest"), as Agent and a
participating Bank, the banks signatory thereto (the "Banks"),
and the Registrant, incorporated by reference to Exhibit 10.4
of the 1993 Annual Report.
10.14 Letter Agreement to amend Loan Agreement, dated October 26,
1995*
10.15 Agreement for Purchase of Limited Partnership Interests of
Consolidated Reconveyance Company and Lenders Posting and
Publishing Company, dated as of July 1, 1990, incorporated by
reference to Exhibit 10.6 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990, as filed with
the Securities and Exchange Commission on March 31, 1991.
10.16 Master Loan Purchase Agreement dated as of June 21, 1995 by
and between Pacific Thrift and Loan Company and Aames Capital
Corporation, incorporated by reference to Exhibit 10.7 of the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1994, as filed with the Securities and Exchange
Commission on July 26, 1995.
10.17 Amendment to Loan Agreement dated November 28, 1995.
16.1 Letter of KPMG Peat Marwick regarding resignation dated August
4, 1993, incorporated by reference to the Partnership's Report
on Form 8-K dated July 29, 1993, as filed with the Securities
and Exchange Commission on August 5, 1993.
16.2 Letter of Ernst & Young regarding termination dated September
27, 1995, incorporated by reference to the Partnership's
Report on Form 8-K dated September 12, 1995, as filed with the
Securities and Exchange Commission on September 28, 1995.
21.1 Subsidiaries of the Registrant*
23.1 Consent of Attorney (to be filed by amendment).
23.2 Consent of Accountants (to be filed by amendment).
4
<PAGE> 238
23.3 Consent of Accountants (to be filed by amendment).
24.1 Power of attorney, incorporated by reference to Power of
Attorney set forth on page 7 of Part II of the Registration
Statement filed November 24, 1995.
99.1 Fairness Opinion by Houlihan, Lokey, Howard and Zukin.
99.2 Limited Partner Ballot and related Instructions*
99.3 Subscription Agreement
* Indicates previously filed with Registration Statement on Form S-4 on
November 24, 1995.
(b) FINANCIAL STATEMENT SCHEDULES
None.
(c) OPINIONS OR APPRAISALS RELATING TO TRANSACTION
Fairness Opinion by Houlihan, Lokey, Howard and Zukin, filed by
amendment as Exhibit 99.1 of the Registration Statement.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement; (i) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
The undersigned Registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the amount of unsubscribed securities to be
purchased by others, and the terms of any subsequent reoffering thereof. If any
public offering is to be made on terms differing from those set forth on the
cover page of the Prospectus, a post-effective amendment will be filed to set
forth the terms of such offering.
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
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (h) (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 415 will be filed as a part of an
amendment to the
5
<PAGE> 239
Registration Statement 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.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised 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. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
6
<PAGE> 240
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on February 26, 1996.
(Registrant)
PACIFIC UNITED GROUP, INC.
By: /s/JOEL R. SCHULTZ
Joel R. Schultz
President and Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/JOEL R. SCHULTZ President, Chief Executive February 26,
Joel R. Schultz Officer, and Director 1996
/s/CHARLES J. SIEGEL Chief Financial and February 26,
Charles J. Siegel Accounting Officer 1996
/s/RICHARD D. YOUNG Senior Executive Vice February 26,
Richard D. Young President and Director 1996
/s/RUSSELL G. ALLISON Director February 26,
Russell G. Allison 1996
</TABLE>
<PAGE> 241
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
EXHIBIT VOLUME
to
Amendment No. One to
FORM S-4
Registration Statement
Under
The Securities Act of 1933
______________
PACIFIC UNITED GROUP, INC.
(Exact name of registrant as specified in its charter)
<PAGE> 242
EXHIBIT INDEX
<TABLE>
<CAPTION> SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------
<S> <C> <C>
1.1 Underwriting Agreement
2.1 Restructuring Plan of Presidential Mortgage Company (the
"Partnership")
3.1 Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
3.3 Fifth Amended and Restated Certificate and Agreement of
Limited Partnership of the Registrant (the "Partnership
Agreement"), dated as of September 7, 1989, incorporated by
reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-2, as filed with the Securities and
Exchange Commission August 15, 1989, as amended by Amendment
No. One thereto, as filed with the Securities and Exchange
Commission on October 10, 1989 (Registration No. 33-30517)
(the "1989 Registration Statement").
3.4 Certificate of Limited Partnership of the Registrant on Form
LP-1, as filed with the California Secretary of State and
currently in effect, incorporated by reference to Exhibit 3.2
of the Registration Statement on Form S-11, filed with the
Securities and Exchange Commission on November 13, 1984, as
amended on February 4 and March 1, 1985, and declared
effective on March 6, 1985 (Registration No. 2-94289) (the
"1984 Registration Statement").
3.5 First Amendment to the Partnership Agreement dated as of May
15, 1993, incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, as filed with the Securities and Exchange
Commission on November 27, 1994 (the "1993 Annual Report").
3.6 Second Amendment to the Partnership Agreement dated as of
January 1, 1994, incorporated by reference to Exhibit 3.4 of
the 1993 Annual Report.
4.1 Specimen Common Stock Certificate (to be filed by amendment).
</TABLE>
<PAGE> 243
<TABLE>
<CAPTION> SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------
<S> <C> <C>
4.2 General Partner Warrant Agreement and Warrant.*
5.1 Opinion of Jeffer, Mangels, Butler & Marmaro regarding
validity of securities being registered
8.1 Opinion of Jeffer, Mangels, Butler & Marmaro regarding tax
matters
10.1 Employment Agreement by and between the Registrant and Joel R.
Schultz*
10.2 Employment Agreement by and between the Registrant and Richard
D. Young*
10.3 Employment Agreement by and between the Registrant and Kenneth
A. Carmona*
10.4 Employment Agreement by and between the Registrant and Norman
A. Markiewicz*
10.5 Employment Agreement by and between the Registrant and Richard
B. Fremed*
10.6 Employment Agreement by and between Pacific Thrift and Loan
Company, Inc. and Frank Landini*
10.7 Form of Indemnification Agreement by and between the
Registrant and each of its directors and executive officers*
10.8 Pacific United Group, Inc. Stock Option Plan, dated January 1,
1996, subject to completion of Restructuring Plan*
10.9 Pacific United Group, Inc. Stock Purchase Plan, dated January
1, 1996, subject to completion of Restructuring Plan*
10.10 Pacific United Group, Inc. Supplemental Executive Retirement
Plan, dated January 1, 1996, subject to completion of
Restructuring Plan*
10.11 Employment Agreement, dated May 9, 1984, by and among Pacific
and Loan Association and the Registrant, as employers, and
Joel R. Schultz, as employee, as currently in effect only with
the Registrant, incorporated by reference to Exhibit 10.2 of
the 1984 Registration Statement.
</TABLE>
<PAGE> 244
<TABLE>
<CAPTION> SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------
<S> <C> <C>
10.12 Employment Agreement, dated May 9, 1984, by and among Pacific
and Loan Association and the Registrant, as employers, and
Norman A. Markiewicz, as employee, as currently in effect only
with the Registrant, incorporated by reference to Exhibit 10.3
of the 1984 Registration Statement.
10.13 Loan Agreement (the "Loan Agreement"), dated as of August 28,
1990, as amended and restated May 20, 1992, and as further
amended and restated as of September 28, 1994, by and among
National Westminster Bank USA ("NatWest"), as Agent and a
participating Bank, the banks signatory thereto (the "Banks"),
and the Registrant, incorporated by reference to Exhibit 10.4
of the 1993 Annual Report.
10.14 Letter Agreement to amend Loan Agreement, dated October 26,
1995*
10.15 Agreement for Purchase of Limited Partnership Interests of
Consolidated Reconveyance Company and Lenders Posting and
Publishing Company, dated as of July 1, 1990, incorporated by
reference to Exhibit 10.6 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990, as filed with
the Securities and Exchange Commission on March 31, 1991.
10.16 Master Loan Purchase Agreement dated as of June 21, 1995 by
and between Pacific Thrift and Loan Company and Aames Capital
Corporation, incorporated by reference to Exhibit 10.7 of the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1994, as filed with the Securities and Exchange
Commission on July 26, 1995.
10.17 Amendment to Loan Agreement dated November 28, 1995.
16.1 Letter of KPMG Peat Marwick regarding resignation dated August
4, 1993, incorporated by reference to the Partnership's Report
on Form 8-K dated July 29, 1993, as filed with the Securities
and Exchange Commission on August 5, 1993.
16.2 Letter of Ernst & Young regarding termination dated September
27, 1995, incorporated by reference to the Partnership's
Report on Form 8-K dated September 12, 1995, as filed with the
Securities and Exchange Commission on September 28, 1995.
21.1 Subsidiaries of the Registrant*
23.1 Consent of Attorney (to be filed by amendment).
23.2 Consent of Accountants (to be filed by amendment).
</TABLE>
<PAGE> 245
<TABLE>
<CAPTION> SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------ ----------- ------
<S> <C> <C>
23.3 Consent of Accountants (to be filed by amendment).
24.1 Power of attorney, incorporated by reference to Power of
Attorney set forth on page 7 of Part II of the Registration
Statement filed November 24, 1995.
99.1 Fairness Opinion by Houlihan, Lokey, Howard and Zukin.
99.2 Limited Partner Ballot and related Instructions*
99.3 Subscription Agreement
</TABLE>
* Indicates previously filed with Registration Statement on Form S-4 on
November 24, 1995.
<PAGE> 1
EXHIBIT 1.1
___________ Shares
(subject to increase of up to additional ________ shares
in the event of an oversubscription)
PACIFIC UNITED GROUP, INC.
(A DELAWARE CORPORATION)
Common Stock
($____ par value per share)
UNDERWRITING AGREEMENT
_____________, 1996
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
Pacific United Group, Inc., a Delaware corporation (the "Company"),
confirms its agreement with you and the other underwriters named in Schedule A
hereto (collectively, the "Underwriters," which term shall also include any
underwriter substituted as hereinafter provided), for whom you are acting as
representative (the "Representative"), whereby the Company proposes to issue
and sell to you and the Underwriters an aggregate of _________ shares (the
"Firm Common Shares") of its authorized but unissued common stock, $____ par
value per share (the "Common Stock"). In addition, the Company agrees to grant
to you and the Underwriters an option to purchase up to an aggregate of
________ additional shares of Common Stock (the "Optional Common Shares") as
provided in Section 1 hereof. The Firm Common Shares and, to the extent such
option is exercised, the Optional Common Shares are hereinafter collectively
referred to as the "Common Shares."
You have advised the Company that the Underwriters propose to make a
public offering of their respective portions of the Common Shares on the
effective date of the Registration Statement (as hereinafter defined) or as
soon thereafter as in your judgment is advisable (the "Offering").
The Company hereby confirms its agreement with you and the
Underwriters as follows:
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<PAGE> 2
SECTION 1. Purchase, Sale and Delivery of Common Shares. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, (i) the Company agrees to issue
and sell to you and the Underwriters, as the case may be, an aggregate of
________ of the Firm Common Shares and (ii) you and the Underwriters agree,
severally and not jointly, to purchase from the Company such Firm Common Shares.
The purchase price per share to be paid by the Underwriters to the Company shall
be $____ per share.
The closing of the transactions contemplated by this Agreement shall
be held at _____ a.m. at the offices of Jeffer, Mangels, Butler & Marmaro LLP,
Los Angeles, California (or such other place as may be agreed upon by the
Company and the Representative) on the third (or, if the purchase set forth in
the above paragraph is determined after 4:30 p.m., Washington, D.C. time, the
fourth) business day following the first date that any of the Common Shares are
released by you for sale to the public (the "First Closing Date"); provided,
however, that if the Prospectus (as hereinafter defined) is at any time prior
to the First Closing Date recirculated to the public, the First Closing Date
shall occur upon the later of the third (or, if the purchase set forth in the
above paragraph is determined after 4:30 p.m., Washington, D.C. time, the
fourth) business day following the first date that any of the Common Shares are
released by you for sale to the public or the date that is 48 hours after the
date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company to you, for your account or for the respective
accounts of the Underwriters, as the case may be, against payment by you for
your account or for the accounts of the several Underwriters, as the case may
be, of the purchase price therefor by wire transfer or certified or official
bank check payable in next day funds to the order of the Company. The
certificates for the Firm Common Shares shall be registered in such names and
denominations as you shall have requested at least two full business days prior
to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at any office of
U.S. Stock Transfer Corporation designated by you. Time shall be of the
essence, and delivery at the time and place specified in this Agreement is a
further condition to your obligation or the obligations of the Underwriters, as
the case may be.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, any amount up to an aggregate of ________
Optional Common Shares at the purchase price per share to be paid for the Firm
Common Shares, for use solely in covering any over-allotments made for the
account of any of the Underwriters in the sale and distribution of the Firm
Common Shares. The option granted hereunder may be exercised at any time (but
not more than once) within 30 days after the first date that any of the Common
Shares are released by you for sale to the public, upon notice by you to the
Company setting forth the aggregate number of Optional Common Shares as to
which the Underwriters are exercising the option, the names and denominations
in which the certificates for such shares are to be registered and the time and
place at which such certificates will be delivered. Such time of delivery
(which may not be earlier than the First Closing Date), being herein referred
to as the
2
<PAGE> 3
"Second Closing Date," shall be determined by you, but if at any time other
than the First Closing Date shall not be earlier than three nor later than five
full business days after delivery of such notice of exercise. The number of
Optional Common Shares to be purchased by each Underwriter shall be determined
by multiplying the number of Optional Common Shares to be sold by the Company
pursuant to such notice of exercise by a fraction, the numerator of which is
the number of Firm Common Shares to be purchased by such Underwriter as set
forth opposite its name in Schedule A and the denominator of which is ________
(subject to such adjustments to eliminate any fractional share purchases as you
in your discretion may make). Certificates for the Optional Common Shares will
be made available for checking and packaging on the business day preceding the
Second Closing Date at any office of U.S. Stock Transfer Corporation designated
by you. The manner of payment for and delivery of the Optional Common Shares
shall be the same as for the Firm Common Shares purchased from the Company as
specified in the two preceding paragraphs. At any time before lapse of the
option, you may cancel such option by giving written notice of such
cancellation to the Company.
You have advised the Company that each Underwriter has authorized you
to accept delivery of its Common Shares and to make payment and receipt
therefor. You, individually and not as the Representative of the Underwriters,
may (but shall not be obligated to) make payment for any Common Shares to be
purchased by any Underwriter whose funds shall not have been received by you by
the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
Subject to the terms and conditions hereof, the Underwriters agree to
make a public offering of the Common Shares as soon after the effective date of
the Registration Statement (as hereafter defined) as in your judgment is
advisable and at the public offering price set forth on the cover page of, and
on the terms set forth in, the Prospectus.
SECTION 2. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters as of the date hereof as
follows:
(a) A registration statement on Form S-1 (File No. 33-_____) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"),
and the rules and regulations of the Securities and Exchange Commission (the
"Commission") promulgated thereunder (the "Rules and Regulations"), and has
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement an
amendment or amendments to such registration statement, which amendment or
amendments have been or will be similarly prepared. There has been delivered
to you one signed copy of such registration statement and amendments, together
with two copies of each exhibit filed therewith. Conformed copies of such
registration statement and amendments (but without exhibits) and of the related
Preliminary Prospectus (as defined below) have been delivered to you in such
reasonable quantities as you have requested. The Company will also file with
the Commission one of the following: (i) prior to effectiveness of such
3
<PAGE> 4
registration statement, a further amendment thereto, including the form of
final prospectus, or (ii) a final prospectus in accordance with Rules 430A and
424(b) of the Rules and Regulations. As filed, such amendment and form of
final prospectus, or such final prospectus, shall include all Rule 430A
Information (as defined below) and, except to the extent that you shall agree
to a modification, shall be in all substantive respects in the form furnished
to you prior to the date and time that this Agreement was executed and
delivered by the parties hereto or, to the extent not completed at such date
and time, shall contain only such specific additional information and other
changes (beyond that contained in the latest Preliminary Prospectus) as the
Company shall have previously advised you in writing would be included or made
therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date, shall also mean such registration
statement as so amended; provided, however, that such term shall also include
all Rule 430A Information deemed to be included in such registration statement
at the time such registration statement becomes effective as provided by Rule
430A of the Rules and Regulations. The term "Preliminary Prospectus" shall
mean any preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the Common Shares
in the form in which it is first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of
the Rules and Regulations is required, shall mean the form of final prospectus
included in the Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be omitted
from the Registration Statement when it becomes effective, pursuant to Rule
430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and the most recent
Preliminary Prospectus has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its date, has
not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and at the time the
Registration Statement becomes effective, and at all times subsequent thereto
up to and including each Closing Date hereinafter mentioned, the Registration
Statement and the Prospectus, and any amendments or supplements thereto, will
contain all material statements and information required to be included therein
by the Act and the Rules and Regulations and will conform to the requirements
of the Act and the Rules and Regulations, and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, will
include 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 therein,
in the light of the circumstances under which they were made, not misleading;
provided, however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and
4
<PAGE> 5
in conformity with written information furnished to the Company by or on behalf
of you or any Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing in the
State of California and in all other jurisdictions in which such qualification
is required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure to so qualify would not have a
material adverse effect on the financial condition, results of operations or
business of the Company, Pacific Thrift (as defined below) and the other
Subsidiaries (as defined below), taken as a whole.
(d) The only subsidiaries of the Company are Pacific Thrift and
Loan Company, a California corporation ("Pacific Thrift"); Consolidated
Reconveyance Company, a California limited partnership; Consolidated
Reconveyance Corporation, a Washington corporation; Lenders Posting and
Publishing Company, a California limited partnership; and Pacific Unified
Mortgage, Inc., a Delaware corporation (individually, a "Subsidiary" and
collectively, the "Subsidiaries").
(e) Pacific Thrift has been duly incorporated and is validly
existing as an industrial loan company in good standing under the laws of the
State of California, and each of the other Subsidiaries has been duly
incorporated or organized as a limited partnership, as applicable, and is
validly existing as a corporation or limited partnership, as applicable, in
good standing under the laws of the jurisdiction of its respective
incorporation or organization. All of the issued and outstanding capital stock
or limited partnership interests, as applicable, of each of the Subsidiaries
has been duly authorized and validly issued, is fully paid and nonassessable,
and is owned by the Company in each case free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity, except for the
security interest therein held by NatWest Bank, N.A.
(f) Each of the Subsidiaries has full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus; each of the Subsidiaries is in possession of
and is operating in compliance in all material respects with all
authorizations, licenses, permits, consents, certificates, orders and other
governmental authorizations material to or required for the conduct of its
business, all of which are valid and in full force and effect, and has received
no notice of any proceeding or action relating to the revocation or
modification of any such authorization, license, permit, consent, certificate,
order or other governmental authorization; each of the Subsidiaries is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the ownership or leasing of properties or the
conduct of its business requires such qualification, except for jurisdictions
in which the failure to so qualify would not have a material adverse effect on
the financial condition, results of operations or business of the Company and
the Subsidiaries, taken as a whole; and neither the Company nor any of the
Subsidiaries has received notice of any proceeding in any such jurisdiction
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification.
5
<PAGE> 6
(g) The deposits of Pacific Thrift are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to legally applicable limits, and no
proceedings for the termination or revocation of such insurance are pending or,
to the best knowledge of the Company, threatened, and no approvals by or
filings with the California Department of Corporations ("DOC"), FDIC or Board
of Governors of the Federal Reserve System ("Federal Reserve Board"), except
such as have already been obtained and are in effect, are necessary to
consummate the Offering.
(h) The Company has, and upon consummation of the Offering will
have, an authorized capitalization as set forth under the heading "Description
of Capital Stock" in the Prospectus. All of the issued and outstanding shares
of capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable. Except as described in the Prospectus,
no Common Stock is issued and outstanding and no stockholder of the Company or
other person has any right, option or warrant to acquire any Common Stock.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company and the related notes thereto included in the
Prospectus, the Company does not have outstanding any options to purchase, or
any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights to be granted and exercised thereunder set forth in the
Prospectus, accurately and fairly presents the information required to be shown
with respect to such plans, arrangements, options and rights.
(i) The Common Shares to be sold by the Company hereunder have
been duly authorized and, when issued, delivered and paid for in the manner set
forth in this Agreement, will be validly issued, fully paid and nonassessable,
and will conform to the description thereof contained in the Prospectus. No
preemptive rights or other rights to subscribe for or purchase exist with
respect to sale of the Common Shares by the Company pursuant to this Agreement.
The certificates used to evidence shares of Common Stock are in due and proper
form.
(j) No approval, consent or authority of the stockholders of the
Company or the Board of Directors of the Company or any governmental agency or
any other third party will be required for the issuance and sale of the Common
Shares to be sold by the Company as contemplated herein or the entering into of
this Agreement, except such as have already been obtained.
(k) The Company has full legal right, power and authority to enter
into this Agreement and to perform the transactions contemplated hereby. This
Agreement has been duly and validly authorized by the Company and upon due
execution and delivery by the Company and the other parties thereto will
constitute the valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to limitations imposed by
general principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity) and subject to any bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other laws, now
or hereafter in effect, relating to or limiting creditors' rights generally.
The making and performance of this Agreement by the Company and the
consummation of the transactions herein
6
<PAGE> 7
contemplated will not violate any provisions of the Certificate of
Incorporation or Bylaws, or other organizational document of the Company or any
of the Subsidiaries, and will not conflict with, result in the breach or
violation of, or constitute, either by itself or upon notice or the passage of
time or both, a default under any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the Company
or any of the Subsidiaries is a party or by which the Company, any of the
Subsidiaries or any of their respective properties may be bound or affected,
any statute or any authorization, judgment, decree, order, rule or regulation
of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company, any of the Subsidiaries or any of
their respective properties, except where any violation, conflict, breach or
default, whether individually or in the aggregate, would not have a material
adverse effect on the condition (financial or otherwise), business, properties,
result of operations, management or prospects of the Company or the
Subsidiaries, taken as a whole (hereinafter, a "Material Adverse Effect"). No
consent, approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for compliance with the Act, the Blue Sky laws
applicable to the public offering of the Common Shares by the Underwriters and
the clearance of such offering with the National Association of Securities
Dealers, Inc. (the "NASD").
(l) The accountants, BDO Seidman LLP and Ernst & Young LLP, each
of whom certified portions of the financial statements and supporting schedules
included in the Registration Statement, are both independent public accountants
within the meaning of the Code of Ethics of the American Institute of Certified
Public Accountants; and such accountants are, with respect to the Company and
each of the Subsidiaries, independent certified public accountants as required
by the Act and the Rules and Regulations.
(m) The financial statements and schedules of the Company, and the
related notes thereto, included in the Registration Statement and the
Prospectus present fairly the consolidated financial position of the Company as
of the respective dates of such financial statements and schedules, and the
consolidated results of operations and changes in financial position of the
Company for the respective periods covered thereby. Such statements, schedules
and related notes have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis as certified by the
independent accountants named in subsection 2(l). No other financial
statements or schedules are required to be included in the Registration
Statement. The other financial, statistical and pro forma information and
related notes included in the Registration Statement and the Prospectus (i)
present fairly the information shown therein on a basis consistent (except as
otherwise noted therein) with the audited financial statements of the Company
included therein and (ii) are in compliance in all material respects with the
requirements of the Act.
(n) Neither the Company nor any of the Subsidiaries are (i) in
violation or default of any provision of their respective Certificate of
Incorporation or Articles of Incorporation, as the case may be, or Bylaws or
other organizational documents or (ii) except as disclosed in the Prospectus
and except as to defaults which individually or in the aggregate would not have
a Material Adverse
7
<PAGE> 8
Effect, in breach of or default with respect to any provision of any agreement,
judgment, decree, order, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which it is a party or by which it or
any of its properties are bound and, except as to defaults which individually
or in the aggregate would not have a Material Adverse Effect, there does not
exist any state of facts which constitutes an event of default on the part of
the Company as defined in such documents or which, with notice or lapse of time
or both, would constitute such an event of default.
(o) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which have
not been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof; the descriptions
thereof or references thereto are correct in all material respects; and except
as to defaults that individually or in the aggregate would not be material to
the Company, neither the Company, any of the Subsidiaries, nor, to the
knowledge of the Company, any other party is in material breach of or default
under any of such contracts.
(p) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the knowledge of the
Company, threatened to which the Company or any of the Subsidiaries is or may
be a party or of which property owned or leased by the Company or any of the
Subsidiaries is or may be the subject, which actions, suits or proceedings
might, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or are likely to result in a
Material Adverse Effect, and no labor disturbance by any employee of the
Company or any of the Subsidiaries exists or is imminent which might be
expected to affect adversely the Company's condition, properties, business,
results of operations or prospects. Except as disclosed in the Prospectus, no
enforcement proceeding, whether formal or informal, has been commenced against
the Company or any of the Subsidiaries by the FDIC, the DOC or, to the
Company's knowledge, any other governmental authority, nor have any such
proceedings been instituted, threatened or recommended. Except as disclosed in
the Prospectus, neither the Company, any of the Subsidiaries, nor any of their
respective officers or directors is a party or subject to the provisions of any
regulatory action, injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body affecting the
business of the Company or any of the Subsidiaries.
(q) Except as disclosed in the Prospectus, the Company and each of
the Subsidiaries have good and marketable title to all of their respective
properties and assets, free and clear of all liens, charges, encumbrances or
restrictions, except such as would not materially adversely affect the value of
such properties and assets and would not interfere with the use made or
proposed to be made of such properties and assets by the Company or a
Subsidiary; all of the leases and subleases material to the business of the
Company or any of the Subsidiaries or under which the Company or any of the
Subsidiaries holds properties described in the Prospectus are in full force and
effect; and the Company and the Subsidiaries have no notice of any material
claim of any sort which has been asserted by anyone adverse to the rights of
the Company or a Subsidiary as owner or as lessee or sublessee under any of the
leases or subleases mentioned above, or materially affecting or
8
<PAGE> 9
questioning the rights of the Company or a Subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease. Except as disclosed in the Prospectus and other than such leases and
properties as are immaterial in the aggregate, the Company and the Subsidiaries
own or lease all properties as are necessary to their respective operations as
now conducted or as proposed to be conducted.
(r) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) neither the Company nor any
of the Subsidiaries has incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or written
agreement or other transaction whether or not arising in the ordinary course of
business or which could result in a material reduction in the future earnings
of the Company; (ii) there has not been any material increase in the
consolidated long-term debt of the Company or in the aggregate dollar or
principal amount of the assets held by the Company, Unified or Pacific Thrift
which are classified as substandard, doubtful or loss or loans which are 90
days or more past due or real estate acquired by foreclosure; (iii) there has
not been any material adverse change in the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company or any
of the Subsidiaries, other than changes resulting from changes in the economy
generally; (iv) there has not been any material adverse change in the aggregate
dollar amount of the deposits or consolidated net worth or spread of the
Company or Pacific Thrift; (v) there has been no material adverse change in the
relationship between the Company or any of its Subsidiaries and their
respective insurance carriers, including, without limitation, cancellation or
other termination of a fidelity bond or any other type of insurance coverage;
(vi) there has been no material change in the management of the Company or any
of the Subsidiaries compared to the information disclosed in the Prospectus;
(vii) neither the Company nor any of the Subsidiaries have sustained any
material loss or interference with their respective businesses or properties
from fire, flood, windstorm, earthquake, accident or other calamity, whether or
not covered by insurance; (viii) the Company has not paid or declared any
dividends or other distributions with respect to its capital stock and the
Company is not in default in the payment of principal or interest on any
outstanding debt obligations; and (ix) there has not been any change in the
capital stock of the Company (other than upon the sale of the Common Shares
hereunder and pursuant to the Restructuring and the Rights Offering, as
described in the Prospectus).
(s) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and the Subsidiaries have sufficient trademarks, trade
names, patent rights, copyrights, licenses, approvals and governmental
authorizations to conduct their respective businesses as now conducted; the
expiration of any trademarks, trade names, patent rights, copyrights, licenses,
approvals or governmental authorizations would not have a Material Adverse
Effect; and the Company has no knowledge of any material infringement by it of
trademark, trade name rights, patent rights, copyrights, licenses, trade secret
or other similar rights of others, and, to the Company's knowledge, there is no
claim being made against the Company or any of the Subsidiaries regarding
trademark, trade name, patent, copyright, license, trade secret or other
infringement which could have a Material Adverse Effect.
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<PAGE> 10
(t) Neither the Company nor any of the Subsidiaries have been
advised or have any reason to believe that the Company or any of the
Subsidiaries is not conducting business in compliance with all applicable laws,
rules and regulations; except as disclosed in the Prospectus or where failure
to be so in compliance would not have a Material Adverse Effect or where it is
already in the process of complying.
(u) Except as disclosed in the Prospectus, neither the Company nor
any of the Subsidiaries is in violation of any directive from the FDIC, the DOC
or any other governmental authority, including the Cease and Desist Order
issued by the FDIC dated May 18, 1995 (the "Cease and Desist Order"), and the
Company and the Subsidiaries are in compliance with all federal and state laws
and regulations that regulate or relate to its business, including, without
limitation, the Financial Institutions Recovery, Reform and Enforcement Act of
1989 ("FIRREA"), the Federal Deposit Insurance Act (the "FDIA"), the National
Housing Act (the "NHA"), the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), the California Industrial Loan Law and all other
applicable laws and regulations where the failure to comply would have a
Material Adverse Effect.
(v) The Company and the Subsidiaries have filed or caused to be
filed all material federal, state and foreign income and franchise tax returns
and have paid all taxes shown as due thereon; and the Company has no knowledge
of any tax deficiency which has been asserted or threatened in writing against
the Company or any of the Subsidiaries which would have a Material Adverse
Effect on the Company or any of the Subsidiaries.
(w) Neither the Company nor any of the Subsidiaries is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(x) The Company has not distributed any offering material in
connection with the offering and sale of the Common Shares other than the
Preliminary Prospectus, the Prospectus, the Registration Statement and the
other materials permitted by the Act.
(y) The Company and the Subsidiaries maintain insurance of the
types and in the amounts generally deemed adequate for their businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or the Subsidiaries against theft, forgery,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect.
(z) Neither the Company nor any of the Subsidiaries has at any
time during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasipublic
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof, the effect of which would have a Material
Adverse Effect.
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(aa) All material transactions between the Company or the
Subsidiaries and their respective officers and directors and their affiliates
have been accurately disclosed in the Prospectus; and the terms of such
transactions are fair to the Company or the Subsidiaries, as the case may be.
(bb) Except as disclosed in the Prospectus, the Company has not:
(i) placed any securities within the last 18 months; (ii) had any material
dealings with any member of the NASD or any person related to or associated
with such member, other than discussions and meetings relating to the proposed
Offering and routine purchases and sales of U.S. Government and agency
securities and other assets; (iii) entered into a financial or management
consulting agreement except as contemplated hereunder and except for the
engagement letter with the Representative, dated July 12, 1995; or (iv) engaged
any intermediary between the Representative and the Company in connection with
the Offering, and no person is being compensated in any manner for such
service.
(cc) The Company has not taken, directly or indirectly, any action
designed to cause or result in, or which has constituted or which reasonably
might be expected to constitute, the stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Common Stock.
(dd) The Company has not relied upon the Representative or legal
counsel for the Representative for any legal, tax or accounting advice in
connection with the Offering (except with respect to the qualification of the
Shares for offering and sale under the securities laws of certain states).
(ee) To their respective knowledge, none of the Company or any of
the Subsidiaries is in violation of any Federal, state, local or foreign law or
regulation relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products ("Materials of
Environmental Concern"), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern (collectively, "Environmental Laws"), which
violation includes, but is not limited to, noncompliance with any permits or
other governmental authorizations required for the operation, as now conducted
or proposed to be conducted (as described in the Prospectus), of the business
of the Company or any of the Subsidiaries under applicable Environmental Laws,
or noncompliance with the terms and conditions thereof, and none of the Company
or any of the Subsidiaries has received any communication (written or oral),
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that the Company or any of the Subsidiaries is in violation of any
such Environmental Laws, and there are no circumstances known to the Company
that are reasonably likely to lead to such violation in the future. In
addition, except as set forth in the Prospectus, there is no claim, action,
cause of action, investigation or notice (written or oral) by any person or
entity alleging potential liability for investigatory costs, cleanup costs,
governmental responses costs, natural resources damages, property damages,
personal injuries, attorney's fees or
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<PAGE> 12
penalties arising out of, based on or resulting from (a) the presence or
release into the environment of any Material of Environmental Concern at any
location owned, controlled, leased, subject to an option to lease or purchased
or operated by the Company or any of the Subsidiaries, now or in the past, or
(b) circumstances forming the basis of any violation or alleged violation of
any Environmental Law (collectively, "Environmental Claims"), pending or
threatened against the Company or any of the Subsidiaries or, to the best
knowledge of the Company, against any person or entity whose liability for any
Environmental Claim the Company or any of the Subsidiaries has retained or
assumed either contractually or by operation of law, except as set forth in the
Prospectus or as would not result in a Material Adverse Effect. There are no
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that could result in a violation of any
Environmental Law or form the basis of any potential Environmental Claim
against the Company or any of the Subsidiaries or against any person or entity
whose liability for any Environmental Claim the Company or any of the
Subsidiaries has retained or assumed either contractually or by operation of
law.
(ff) None of the Company or any of the Subsidiaries has violated
any Federal, state or local law relating to discrimination in the hiring,
promotion or pay of employees, any applicable wage or hour laws, or any
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), or
the rules and regulations promulgated thereunder. There is (i) no significant
unfair labor practice complaint pending against the Company or any of the
Subsidiaries or, to the best knowledge of the Company, threatened against any
of them, before the National Labor Relations Board or any state or local labor
relations board, and no significant grievance or significant arbitration
proceeding arising out of or under any collective bargaining agreement is so
pending against the Company or any of the Subsidiaries and, to the best
knowledge of the Company, threatened against any of them, (ii) no labor dispute
in which the Company or any of the Subsidiaries is involved nor, to the best
knowledge of the Company, is any labor dispute imminent, other than routine
disciplinary and grievance matters; the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its principal customers
or vendors and (iii) no union representation question existing with respect to
the employees of the Company or any of the Subsidiaries and, to the best
knowledge of the Company, no union organizing activities are taking place,
except (with respect to any matter specified in clause (i), (ii) or (iii)
above, singly or in the aggregate) such as would not have a Material Adverse
Effect.
Any certificate signed by any officer of the Company and delivered to
you or to your counsel shall be deemed a representation and warranty by the
Company to you as to the matters covered thereby. Any certificate delivered by
the Company to its counsel for purposes of enabling such counsel to render the
opinions referred to in Section 6(c) will also be furnished to the Underwriters
and its counsel and shall be deemed to be additional representations and
warranties by the Company to the Underwriters as to the matters covered thereby
and the Underwriters and its counsel are entitled to rely thereon.
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SECTION 3. Representations and Warranties of the Underwriters. You,
for yourselves or on behalf of the Underwriters, as the case may be, represent
and warrant to the Company as of the date hereof that the information set forth
in the Prospectus (i) on the cover page of the Prospectus with respect to price,
underwriting discounts and commissions and terms of the Offering, (ii) on the
inside cover page with respect to stabilization and (iii) under the caption
"Underwriting of Public Offering" in the Prospectus was furnished to the Company
by and on behalf of the Underwriters for use in connection with the preparation
of the Registration Statement and the Prospectus and is complete and correct in
all material respects. The Representative represents and warrants that it has
been authorized by each of the other Underwriters as the Representative to enter
into this Agreement on behalf of the Underwriters and to act for the
Underwriters in the manner herein provided.
SECTION 4. Covenants of the Company. The Company covenants and agrees
that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereto, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto,
to become effective. If the Registration Statement has become or becomes
effective pursuant to Rule 430A of the Rules and Regulations, or the filing of
the Prospectus is otherwise required under Rule 424(b) of the Rules and
Regulations, the Company will file the Prospectus, properly completed, pursuant
to the applicable paragraph of Rule 424(b) of the Rules and Regulations within
the time period prescribed and will provide evidence satisfactory to you of
such timely filing. The Company will promptly advise you in writing (i) of the
receipt of any comments of the Commission, (ii) of any request of the
Commission for amendment of or supplement to the Registration Statement (either
before or after it becomes effective), any Preliminary Prospectus or the
Prospectus or for additional information, (iii) when the Registration Statement
shall have become effective and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or of the
institution of any proceedings for that purpose. If the Commission shall enter
any such stop order at any time, the Company will use its best efforts to
obtain the lifting or such order at the earliest possible moment. The Company
will not file any amendment or supplement to the Registration Statement (either
before or after it becomes effective), any Preliminary Prospectus or the
Prospectus of which you have not first been furnished with a copy a reasonable
time prior to such filing or to which you reasonably object or which is not in
compliance with the Act or the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your reasonable judgment may be necessary
or advisable to enable the Underwriter to continue the distribution of the
Common Shares and will use its best efforts to cause the same to become
effective as promptly as possible. The Company will fully and completely
comply with the provisions of Rule 430A of the Rules and Regulations with
respect to information omitted from the Registration Statement in reliance upon
such Rule.
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(c) The Company will, if requested by the Representative, prepare
a Term Sheet that complies with the requirements of Rule 434 under the Rules
and Regulations, and the Company will provide the Underwriters with copies of
such Term Sheet and the form of Prospectus used in reliance on Rule 434, in
such number as the Representative may reasonably request. The Company will
timely file the Term Sheet, if any, with the Commission pursuant to and in
accordance with subparagraph (7) of Rule 424(b). The Company will advise the
Representative promptly of any such filing pursuant to Rule 424(b) and shall
provide evidence satisfactory to the Representative of such timely filing.
(d) If, at any time during the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the Common
Shares is required to be delivered under the Act, any event occurs, as a result
of which the Prospectus, including any amendments or supplements, would include
an untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances then existing, not misleading, or if it is necessary
at any time to amend the Prospectus, including any amendments or supplements,
to comply with the Act or the Rules and Regulations, the Company will promptly
advise you thereof and will promptly prepare and file with the Commission, at
its own expense, an amendment or supplement which will correct such statement
or omission or an amendment or supplement which will effect such compliance and
will use its best efforts to cause the same to become effective as soon as
possible; and, in case the Underwriters are required to deliver a Prospectus
after such nine-month period, the Company upon request, but at the expense of
the Underwriters, will promptly prepare such amendment or amendments to the
Registration Statement and such Prospectus or Prospectuses as may be necessary
to permit compliance with the requirements of Section 10(a)(3) of the Act.
(e) As soon as practicable, but not later than 45 days after the
end of the first quarter ending after one year following the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
11(a) of the Act.
(f) During such period as a Prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company, at
its expense, but only for the nine-month period referred to in Section 10(a)(3)
of the Act, will furnish to you or mail to your order copies of the
Registration Statement, the Prospectus, the Preliminary Prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such reasonable quantities as you may request, for the
purposes contemplated by the Act.
(g) The Company shall cooperate with you and your counsel to
qualify or register the Common Shares for sale under (or obtain exemptions from
the application of) the Blue Sky laws of such jurisdictions as you designate,
will comply with such laws and will continue such qualifications, registrations
and exemptions in effect so long as reasonably required for the
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<PAGE> 15
distribution of the Common Shares. The Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any such jurisdiction where it is not presently qualified or where
it would be subject to taxation as a foreign corporation. The Company will
advise you promptly of the suspension of the qualification or registration of
(or any such exemption relating to) the Common Shares for offering, sale or
trading in any jurisdiction or any initiation or threat of any proceeding for
any such purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company, with your cooperation,
will use its best efforts to obtain the withdrawal thereof.
(h) The Company shall promptly prepare and file with the
Commission, from time to time, such reports as may be required to be filed by
the Act and the Exchange Act including, without limitation, reports with
respect to the sale of the Common Shares and the application of the proceeds
thereof as may be required in accordance with Rule 463 under the Act.
(i) During the period of five years after the date of this
Agreement, the Company will furnish to you: (i) at the same time as such are
furnished to its stockholders, copies of the Annual Report of the Company
containing the consolidated balance sheet of the Company and Subsidiaries as of
the close of such fiscal year and consolidated statements of income,
stockholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K
or other report filed by the Company with the Commission, the NASD or any
securities exchange; (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its Common Stock;
(iv) as soon as practicable after the filing thereof, of each non-confidential
report or other statement or document filed by the Company with the Commission,
or with any national securities exchange or quotation system on which any
securities of the Company may be listed or quoted; and (v) from time to time,
such other non-confidential information concerning the Company as the
Underwriter may reasonably request.
(j) During the period of 180 days after the first date that any of
the Common Shares are released by you for sale to the public, the Company will
not, without your prior written consent (which consent may be withheld at your
sole discretion), issue, offer, sell, grant options to purchase or otherwise
dispose of any of the Company's equity securities or any other securities
convertible into or exchangeable with its Common Stock or other equity
security, other than options or other awards granted under the Company's 1995
Stock Option Plan.
(k) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements under
the caption "Use of Proceeds" in the Prospectus.
(l) To the extent required by law, or applicable rules and
regulations, the Company will promptly take all steps necessary to register its
Common Stock under Section 12(g) of the Exchange Act.
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<PAGE> 16
(m) The Company will use its best efforts to list, subject to
notice of issuance, the Common Shares as a National Market System security on
the Nasdaq Stock Market.
(n) The Company will use its best efforts to ensure that Pacific
Thrift will maintain a system of internal accounting controls as required under
applicable law and the rules and regulations of the FDIC.
(o) The Company will not, directly or indirectly, distribute prior
to the First Closing Date any offering material in connection with the offering
and sale of the Common Shares other than the Preliminary Prospectus, the
Prospectus, the Registration Statement and the other materials permitted by the
Act.
(p) The Company will not take, directly or indirectly, any action
designed to cause or result in, or which will or might be expected to
constitute, the stabilization or manipulation of the price of the Common Stock
to facilitate the sale or resale of the Common Shares.
(q) The Company will not rely upon the Representative or legal
counsel for the Representative for any legal, tax or accounting advice in
connection with the Offering, except with respect to the qualification of the
Common Shares for offering and sale under the securities laws of certain
states.
You may, in your sole discretion, waive in writing the performance by
the Company of any one or more of the foregoing covenants or extend the time
for their performance.
SECTION 5. Payment of Expenses; Financial Advisory Fee.
(a) Whether or not the transactions contemplated hereunder are
consummated or this Agreement remains effective or is terminated, the Company
agrees to pay all costs, fees and expenses incurred in connection with the
performance of its obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses
of the Company's counsel and the Company's independent accountants, (v) all
costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, (vi) all
filing fees, attorney's fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Blue Sky laws up to a maximum of
$10,000, (vii) the filing fee of the National Association of Securities
Dealers, Inc., (viii) all the costs and expenses incurred by the Company in
making road show presentations with respect to the Offering, (ix) all costs of
preparing,
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<PAGE> 17
printing and distributing bound volumes of the transaction documents for the
Underwriter and its counsel, and (x) all other fees, costs and expenses
referred to in Item 13 of the Registration Statement. Except as provided in
this Section 5, and Section 8 hereof, the Underwriters shall pay all of their
own expenses, including the fees and disbursements of their own counsel
(excluding those relating to qualification, registration or exemption under the
Blue Sky laws and the Blue Sky memorandum referred to above).
(b) Whether or not the transactions contemplated hereunder are
consummated or this Agreement remains effective or is terminated, in addition
to payment of the expenses set forth in Section 5(a), the Company agrees to
reimburse the Representative for the Underwriters' actual accountable
out-of-pocket expenses incurred in connection with the proposed sale of the
Common Stock (including, without limitation, attorneys' fees, printing expenses
and travel expenses) up to a maximum amount of $85,000. The Representative
shall submit a detailed statement of the Underwriters' actual expenses to the
Company at the First Closing Date or from time-to-time before or within 30 days
after the First Closing Date, and the Company shall reimburse the
Representative therefor in full within 14 days of receipt of such statement or
statements. For purposes of this Section 5, the Underwriters shall be deemed
to have incurred expenses when they are billed, regardless of whether such
expenses have been paid.
(c) At the closing time on the First Closing Date and, if
applicable, the Second Closing Date, the Company shall pay to the
Representative a fee (the "Financial Advisory Fee") in consideration of the
financial advisory services provided to the Company and its affiliates by the
Representative in connection with the transactions contemplated in the
Prospectus and this Agreement. The Financial Advisory Fee shall be equal to
1.0% of the gross proceeds from the sale of the Common Shares hereunder.
Payment of the Financial Advisory Fee with respect to the Firm Common Shares
shall be made on the First Closing Date and payment of the Financial Advisory
Fee with respect to the Optional Common Shares shall be made on the Second
Closing Date, if applicable. Payment of the Financial Advisory Fee shall be
made by immediately available funds in the form of one or more federal funds
checks or a wire transfer to an account designated by the Representative.
SECTION 6. Conditions to the Obligations of You and the Underwriters.
The obligations of you and the Underwriters to purchase and pay for the Firm
Common Shares on the First Closing Date and the Optional Common Shares on the
Second Closing Date shall be subject to the accuracy in all material respects of
the representations and warranties on the part of the Company herein set forth
as of the date hereof and as of the First Closing Date or the Second Closing
Date, as the case may be, to the accuracy in all material respects of the
statements of Company officers made pursuant to the provisions hereof, to the
performance in all material respects by the Company of its obligations hereunder
and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., Washington, D.C. Time, on the date of this Agreement, or
at such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant
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<PAGE> 18
to Rule 424(b) of the Rules and Regulations, the Prospectus shall have been
filed in the manner and within the time period required by Rule 424(b) of the
Rules and Regulations; and prior to such closing date, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or,
to the knowledge of the Company or you, shall be contemplated by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to your reasonable satisfaction.
(b) You shall be reasonably satisfied that since the respective
dates as of which information is given in the Registration Statement and
Prospectus, (i) there shall not have been any change in the capital stock of
the Company, except as contemplated in the Prospectus for the Restructuring and
the Rights Offering, or any material change in the consolidated indebtedness
(other than as disclosed in the Prospectus) of the Company, (ii) except as set
forth or contemplated by the Registration Statement or the Prospectus, no
material verbal or written agreement or other transaction shall have been
entered into by the Company, which is not in the ordinary course of business
and which could result in a material reduction in the future earnings of the
Company, (iii) no loss or damage (whether or not insured) to the property of
the Company shall have been sustained which materially and adversely affects
the condition (financial or otherwise), business, results of operations or
prospects of the Company, (iv) no legal or governmental action, suit or
proceeding affecting the Company which is material to the Company or which
affects or may affect the transactions contemplated by this Agreement shall
have been instituted or threatened, (v) no enforcement proceeding, whether
formal or informal, shall have been commenced against the Company or any of the
Subsidiaries by the FDIC, the DOC or any other governmental agency, nor shall
any such proceeding have been instituted, threatened or recommended, except for
the Cease and Desist Order as disclosed in the Prospectus, and (vi) there shall
not have been any material change in the condition (financial or otherwise),
business, management, results of operations or prospects of the Company which
makes it impractical or inadvisable in the judgment of the Underwriter to
proceed with the public offering or purchase the Common Shares as contemplated
hereby.
(c) There shall have been furnished to you, as Representative of
the Underwriters, in form and substance satisfactory to you except as otherwise
expressly provided below:
(i) The favorable opinion of Jeffer, Mangels, Butler &
Marmaro LLP, counsel for the Company, addressed to the Underwriters
and dated as of the First Closing Date or the Second Closing Date, as
the case may be, and in form and substance satisfactory to counsel for
the Underwriters, to the effect that:
(1) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware.
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(2) The Company and each of the Subsidiaries have
full corporate power and authority to own their respective
properties and to conduct their businesses as described in the
Registration Statement and Prospectus, and the Company has
full corporate power and authority to enter into and perform
its obligations under this Agreement.
(3) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in
the State of California and in each jurisdiction in which the
failure to so qualify would have a material adverse effect
upon the financial condition, results of operations or
business of the Company and the Subsidiaries, taken as a
whole.
(4) The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus
under "Capitalization."
(5) The Common Shares have been duly and validly
authorized for issuance and sale and, when issued and
delivered by the Company against payment, will be duly and
validly issued, fully paid and nonassessable.
(6) The issuance of the Common Shares is not
subject to preemptive or other similar rights arising by
operation of law or, to the best of such counsel's knowledge,
otherwise.
(7) (A) Pacific Thrift has been duly chartered,
and at all times since the date hereof and at the First
Closing Date or Second Closing Date, as the case may be,
validly existing and in good standing under the laws of the
State of California as a thrift and loan company with full
corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the
Registration Statement and the Prospectus; and (B) each of the
other Subsidiaries has been duly incorporated (or organized
with respect to the Subsidiaries that are limited
partnerships) and at all times since the date hereof and at
the First Closing Date or Second Closing Date, as the case may
be, validly existing as a corporation or limited partnership,
as applicable, in good standing under the laws of the
jurisdiction of its incorporation or organization, as
applicable, with full corporate or partnership power and
authority to own, lease and operate its properties and to
conduct its business as described in the Registration
Statement and the Prospectus.
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(8) Each of the Subsidiaries is duly qualified as
a foreign corporation to transact business in each
jurisdiction in which the failure to so qualify would have a
material adverse effect upon its financial condition, results
of operations or business.
(9) The deposit accounts of Pacific Thrift are
insured by the FDIC up to the applicable limits.
(10) The activities of Pacific Thrift are
permissable activities of California thrift and loan companies
under California law and the rules, regulations, resolutions
and practices of the DOC.
(11) All of the issued and outstanding capital
stock or limited partnership interests, as applicable, of each
of the Subsidiaries is duly authorized, validly issued and
fully paid and nonassessable, and upon completion of the
Restructuring, all such capital stock will be owned of record,
and to the best of such counsel's knowledge, beneficially, by
the Company free and clear of any security interest, mortgage,
pledge, lien, encumbrance, or legal or equitable claim, except
for the security interest of NatWest Bank, N.A.
(12) The execution and delivery of this Agreement,
the issuance of the Common Shares by the Company and the
consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action
of the Company; the consummation of the transactions described
in the Prospectus as constituting the "Restructuring" have
been duly and validly authorized by all necessary actions of
the general and limited partners of Presidential Mortgage
Company, a California limited partnership; this Agreement
constitutes the legal, valid and binding agreement of the
Company, enforceable in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited
under applicable law (it being understood that such counsel
may avail itself of customary exceptions concerning the effect
of bankruptcy, insolvency or similar laws and the availability
of equitable remedies); and, to the best of such counsel's
knowledge, the execution and delivery of this Agreement, the
incurrence of the obligations herein set forth and the
consummation of the transactions contemplated herein will not
conflict with or constitute a breach of, or default under, and
no event has occurred which, with notice or lapse of time or
both, would constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance
that, individually or in the aggregate, would have a material
adverse effect upon the financial condition, results of
operations or business of the Company pursuant to any
contract, indenture, mortgage, loan
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<PAGE> 21
agreement, note, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which it
may be bound, or to which any of the property or assets of the
Company or any of the Subsidiaries is subject, nor will such
execution or delivery result in any violation of the
provisions of the Certificate of Incorporation, Articles of
Incorporation, Bylaws or Agreement of Limited Partnership, as
the case may be, of the Company or any of the Subsidiaries.
(13) The Registration Statement is effective under
the Act and, to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration
Statement has been issued under the Act or proceedings
therefor initiated or threatened by the Commission.
(14) No further approval, authorization, consent
or other order of any federal or state board or body is
required in connection with the execution and delivery of this
Agreement or the issuance of the Common Shares, except as may
be required under the securities or Blue Sky laws of various
jurisdictions, as to which no opinion need be rendered.
(15) At the time the Registration Statement became
effective, the Registration Statement (other than the
financial statements and statistical and financial data
included therein, as to which no opinion need be rendered)
complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations.
(16) The Common Stock conforms to the description
thereof contained in the Prospectus, and the form of
certificate used to evidence the Common Stock is in due and
proper form and complies with all applicable statutory
requirements.
(17) To the best of such counsel's knowledge,
there are no legal or governmental proceedings pending or
threatened against or affecting the Company or any of the
Subsidiaries which are required, individually or in the
aggregate, to be disclosed in the Registration Statement or
Prospectus, other than those disclosed therein.
(18) The information contained in the Prospectus
under "Risk Factors," "Supervision and Regulation,"
"Description of Capital Stock," "1995 Stock Option Plan,"
"Retirement Plan," "Stock Purchase Plan," "Supplemental
Executive Retirement Plan," "Limitation of Liability and
Indemnification of Directors" and "Director and Officer
Indemnification," to the extent that it constitutes matters of
law, summaries of legal matters,
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<PAGE> 22
documents or proceedings, or legal conclusions, has been
reviewed by such counsel and is correct in all material
respects.
(19) To the best of such counsel's knowledge,
there are no contracts, indentures, mortgages, loan
agreements, notes, leases or other instruments required to be
described or referred to in the Registration Statement or
Prospectus or to be filed as exhibits thereto, other than
those described or referred to therein or filed as exhibits
thereto, and the descriptions thereof or references thereto
are correct in all material respects.
(20) To the best of such counsel's knowledge, the
Company and each of the Subsidiaries hold all licenses,
permits and other governmental authorizations currently
required for the conduct of their respective businesses as
described in the Registration Statement and Prospectus, except
for such licenses, approvals or authorizations the failure of
which to hold would not result in a material adverse change in
the financial condition, results of operations or the business
of the Company and the Subsidiaries, taken as a whole; all
such licenses, permits and other governmental authorizations
are in full force and effect, and the Company and the
Subsidiaries operate their respective businesses in all
material respects in compliance therewith.
(ii) Such opinion of Manatt, Phelps & Phillips LLP,
counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require,
and such counsel shall have received such documents and shall have
exhibited to them such papers and records as they may reasonably
request for the purpose of enabling them to pass upon such matters.
In connection with such opinion, such counsel may also rely as to
certain matters on the opinion of Jeffer, Mangels, Butler & Marmaro
LLP and on representations or certificates of officers of the Company
and governmental officials.
(iii) A certificate of the Company executed by the Chairman
of the Board or President and the Chief Financial or Accounting
Officer, dated the First Closing Date or the Second Closing Date, as
the case may be, to the effect that:
(1) The representations and warranties of the
Company set forth in Section 2 of this Agreement are true and
correct in all material respects and the Company has complied
in all material respects with all the agreements and satisfied
all the conditions on its part to be performed or satisfied on
or prior to such Closing Date.
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<PAGE> 23
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending
the effectiveness of the Registration Statement has been
issued; and to the best of the knowledge of the respective
signers, no proceedings for that purpose have been instituted
or are pending or contemplated under the Act.
(3) Neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any
material fact required to be stated therein, or necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(4) Since the initial date on which the
Registration Statement was filed with the Commission, no
agreement, written or oral, transaction or event has occurred
which should have been set forth in an amendment to the
Registration Statement or in a supplement to or amendment of
any prospectus, which has not been disclosed in such a
supplement or amendment.
(5) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus and except as disclosed in or contemplated by the
Prospectus, the Company has not sustained a material loss or
damage by strike, fire, flood, windstorm, earthquake, accident
or other calamity (whether or not insured).
(iv) At the time of the execution of this Agreement, a
letter dated as of the date hereof from BDO Seidman LLP, independent
accountants, in form and substance satisfactory to you, to the effect
that (1) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the Rules and
Regulations; (2) it is their opinion that the consolidated financial
statements and supporting schedules included in the Registration
Statement and covered by their opinions therein comply as to form in
all material respects with the applicable accounting requirements of
the Act and the Rules and Regulations; (3) based upon limited
procedures as agreed upon by you and BDO Seidman LLP and set forth in
detail in such letter, nothing has come to their attention which
causes them to believe that (A) the unaudited financial statements and
supporting schedules of Presidential Mortgage Company ("Presidential")
and the Subsidiaries included in the Registration Statement, if any,
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or
are not presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of
the audited financial statements included in the Registration
Statement and the Prospectus, (B) at a specified
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<PAGE> 24
date not more than five days prior to the date of this Agreement,
there has been any increase in the consolidated long-term or
short-term debt, or any decrease in consolidated total assets,
allowance for loan losses, total deposits or net worth of the Company
and the Subsidiaries, in each case as compared with the amounts shown
in the financial statements included in the Registration Statement or,
(C) during the period from December 31, 1995 to a date not more than
five days prior to the date of this Agreement, there were any
decreases, as compared with the corresponding period in the preceding
year, in net interest income, net interest income after provision for
loan losses, or net income of Pacific Thrift, except in all instances
for increases or decreases which the Registration Statement and the
Prospectus disclose have occurred or may occur; and (4) in addition to
the examination referred to in their opinions and the limited
procedures referred to in clause (3) above, they have carried out
certain specified procedures, not constituting an audit, with respect
to certain amounts, percentages and financial information which are
included in the Registration Statement and Prospectus and which are
specified by you, and have found such amounts, percentages and
financial information to be in agreement with the relevant accounting,
financial and other records of the Company and the Subsidiaries
identified in such letter.
(v) On the First Closing Date and the Second Closing Date
(in the event of a second closing), a letter addressed to you, from
BDO Seidman LLP, independent accountants, the first one to be dated
the First Closing Date and the second one (in the event of a second
closing) to be dated the Second Closing Date, to the effect that they
reaffirm their statements made in the letter furnished to you pursuant
to Section 6(c)(iv) of this Agreement.
(vi) On or before the First Closing Date, letters from
each director and executive officer of the Company, in form and
substance satisfactory to you, confirming that for a period of ninety
(90) days after the first date that any of the Common Shares are
released by you for sale to the public, such person will not directly
or indirectly sell, offer to sell, contract to sell or otherwise
dispose of any shares of Common Stock or any right to acquire such
shares without the prior written consent of the Representative, which
consent may be withheld at the sole discretion of the Representative.
(d) As of the First Closing Date and the Second Closing Date, as
the case may be, the Common Stock shall have been approved for quotation on the
Nasdaq National Market upon notice of issuance.
(e) As of the First Closing Date and the Second Closing Date, as
the case may be, (i) there shall not have occurred any material adverse change
in the financial markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis the effects of
which, in the judgment of the Representative, are so material and adverse as to
make it impracticable to market the Common Shares or to enforce contracts,
including subscriptions or orders, for the sale of the Common Shares, and (ii)
trading generally on either the American Stock
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<PAGE> 25
Exchange or the New York Stock Exchange shall not have been suspended, and
minimum or maximum prices for trading shall not have been fixed, or maximum
ranges for prices for securities have been required, by either of said
Exchanges or by order of the Commission or any other governmental authority,
and a banking moratorium shall not have been declared by either Federal or New
York State authorities.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Manatt, Phelps & Phillips LLP, counsel for the Representative.
The Company shall furnish you with such manually signed or conformed copies of
such opinions, certificates, letters and documents as you reasonably request.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon written notification by you as
Representative to the Company without liability on the part of any Underwriter
or the Company, except for the expenses to be paid or reimbursed by the Company
pursuant to Section 5 hereof and except to the extent provided in Section 8
hereof.
SECTION 7. Effectiveness of Registration Statement. Each party to
this Agreement will use its best efforts to cause the Registration Statement to
become effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
SECTION 8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls an Underwriter, as the case
may be, within the meaning of the Act against any losses, claims, damages,
liabilities or expenses, joint or several, to which an Underwriter or such
controlling person may become subject, under the Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or other federal or state law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or based upon written
information supplied by the Company filed in any state or jurisdiction to
register or qualify any or all of the Common Shares or to claim an exemption
therefrom, or provided to any state or jurisdiction to exempt the Company as a
broker-dealer or its officers, directors and employees as broker-dealers or
agents under the securities laws thereof (collectively, the "Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state in any of them a material fact required to be stated therein
or necessary to make the statements in any of them not misleading, or arise
from any theory of liability whatsoever relating to or arising from or based
upon the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, or arise out of or are based in whole or
in part upon any inaccuracy in the
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representations and warranties of the Company contained herein or any failure
of the Company to perform its obligations hereunder or under law; and will
reimburse each Underwriter and each such controlling person for any legal and
other expenses as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, liability or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto
in reliance upon and in conformity with the information furnished to the
Company pursuant to Section 3 hereof; provided, further, that the foregoing
indemnity with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such loss, claim,
damage or liability purchased the Common Shares that are the subject thereof if
such person did not receive a copy of the Prospectus (or the Prospectus as
supplemented) at or prior to the confirmation of the sale to such person in any
case where such delivery is required by the Act and the untrue statement or
omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as supplemented). In addition
to its other obligations under this Section 8(a), the Company agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, or any inaccuracy in the
representations and warranties of the Company herein or failure to perform its
obligations hereunder, all as described in this Section 8(a), it will reimburse
each Underwriter (and, to the extent applicable, each controlling person) on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse
each Underwriter (and, to the extent applicable each controlling person) for
such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. To the extent that
any such interim reimbursement payment is so held to have been improper, such
Underwriter (and, to the extent applicable each controlling person) shall
promptly return it to the Company together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by Bank
of America NT&SA, San Francisco, California (the "Prime Rate"). Any such
interim reimbursement payments which are not made to an Underwriter within 30
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) You or each Underwriter, as the case may be, will severally
indemnify and hold harmless the Company, each of its directors, each of its
officers who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of the Act, against any losses, claims,
damages, liabilities or expenses to which the Company or any such director,
officer, or controlling person may become subject, under the Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common law or
otherwise (including in
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<PAGE> 27
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each such case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance
upon and in conformity with the information furnished to the Company pursuant
to Section 3 hereof; and will reimburse the Company or any such director,
officer, or controlling person for any legal and other expense reasonably
incurred by the Company or any such director, officer, or controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action. In addition to the
other obligations under this Section 8(b), you or each Underwriter, as the case
may be, severally agrees that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 8(b) which relates to information furnished to the
Company pursuant to Section 3 hereof, it will reimburse the Company (and, to
the extent applicable, each officer, director, controlling person) on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of your or the Underwriters' obligation to
reimburse the Company (and, to the extent applicable, each officer, director,
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the Company (and, to the extent applicable, each officer,
director or controlling person) shall promptly return it to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the
Company within 30 days of a request for reimbursement, shall bear interest at
the Prime Rate from the date of such request. This indemnity agreement will be
in addition to any liability which you or such Underwriter, as the case may be,
may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
for indemnity, contribution or otherwise except to the extent the indemnifying
party is prejudiced as a proximate result of such failure. In case any such
action is brought against any indemnified party and such indemnified party
seeks or intends to seek indemnity from an indemnifying party, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with all other indemnifying parties similarly notified, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified
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<PAGE> 28
party; provided, however, that if the defendants in any such action include
both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be a conflict between the
positions of the indemnifying party and the indemnified party in conducting the
defense of any such action or that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal defenses
and to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of
such action and approval by the indemnified party of counsel, the indemnifying
party will not be liable to such indemnified party under this Section for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall have
employed such counsel in connection with the assumption of legal defenses in
accordance with the proviso to the next preceding sentence or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the
fees and expenses of counsel shall be at the expense of the indemnifying party
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel representing the indemnified
parties who are parties to such action; provided, however, if an indemnified
party in any such action shall have concluded that there may be legal defenses
or rights available to it which are different from, in actual or potential
conflict with, or additional to those available to other indemnified parties,
such party shall have the right to select an additional law firm to act as its
separate counsel).
(d) If the indemnification provided for in this Section 8 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under subsections
(a), (b) or (c) of this Section 8 in respect of any losses, claims, damages,
liabilities or expenses referred to herein, then each applicable indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of any losses, claims, damages, liabilities or expenses referred to
herein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and you or the Underwriters, as the case may
be, from the offering of the Common Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and you or the
Underwriters, as the case may be, in connection with the statements or
omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company, on the one hand, and the Underwriters, on the other hand, shall be
deemed to be in the same respective proportions as the total proceeds (net of
underwriting commissions, but before deducting expenses) from the offering of
the Common Stock received by the Company and the total underwriting commissions
received by the Underwriters bear to the aggregate public offering price of the
Common Stock. The relative fault of the Company and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact
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<PAGE> 29
or the omission or alleged omission to state a material fact or the inaccurate
or the alleged inaccurate representation and/or warranty relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
subsection (c) of this Section 8, any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any action or claim. The provisions set forth in subsection (c) of this
Section 8 with respect to notice of commencement of any action shall apply if a
claim for contribution is to be made under this subsection (d); provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under subsection (c) for purposes of
indemnification. The Company and you or the Underwriters, as the case may be,
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined solely by pro rata allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to in this paragraph. Notwithstanding the provisions of this Section
8, no Underwriter shall be required to contribute any amount in excess of the
amount of the total underwriting discounts and commissions received by such
Underwriter in connection with the Common Shares underwritten by it and
distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of fraudulent
misrepresentation.
(e) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in Sections 8(a) and 8(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
written notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make such
designation of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Such an
arbitration would be limited to the operation of the interim reimbursement
provisions contained in Sections 8(a) and 8(b) hereof and would not resolve the
ultimate propriety or enforceability of the obligation to reimburse expenses
which is created by the provisions of such Sections 8(a) and 8(b) hereof.
SECTION 9. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company to sell and deliver the Common
Shares hereunder, and a condition of your obligations or the obligation of each
Underwriter, as the case may be, to purchase the Common Shares in the manner as
described herein, that, except as hereinafter in this paragraph provided, each
of you or the Underwriters, as the case may be, shall purchase and pay for all
the Common Shares agreed to be purchased by you or such Underwriter hereunder
upon tender to you individually or as the Representative of the Underwriters, of
all such shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in your or their obligations to purchase Common Shares
hereunder on either the First Closing Date or Second Closing Date and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase
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<PAGE> 30
on such Closing Date does not exceed 10% of the total number of Common Shares
which the Underwriters are obligated to purchase on such Closing Date, the
non-defaulting Underwriters shall be obligated severally, in proportion to
their respective commitments hereunder, to purchase the Common Shares which
such defaulting Underwriters agreed but failed to purchase on such Closing
Date. If any Underwriter or Underwriters so default and the aggregate number
of Common Shares with respect to which such default occurs is more than the
above percentage and arrangements satisfactory to the Representative and the
Company for the purchase of such Common Shares by other persons are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company except
for the expenses to be paid by the Company pursuant to Section 5 hereof and
except to the extent provided in Section 8 hereof.
If applicable, in the event that Common Shares to which a default
relates are to be purchased by the nondefaulting entities or by another party
or parties, you or the Company shall have the right to postpone the First
Closing Date or Second Closing Date, as the case may be, for not more than five
business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve you or a defaulting Underwriter from
liability for its default.
SECTION 10. Effective Date. This Agreement shall become effective
immediately as to Sections 5, 8, 11 and 12 and, as to all other provisions, (i)
if at the time of execution of this Agreement the Registration Statement has
not become effective, at 4:30 p.m., California Time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at
the time of execution of this Agreement the Registration Statement has been
declared effective, at 4:30 p.m., California Time, on the first full business
day following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine as indicated by notice to the
Company or by release of any of the Common Shares for sale to the public. For
the purposes of this Section 10, the Common Shares shall be deemed to have been
so released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising the Underwriters that the Common Shares are released for public
offering or (ii) offering the Common Shares for sale to securities dealers,
whichever may occur first.
SECTION 11. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to
you, or by you by notice to the Company, at any time prior to the time this
Agreement shall become effective as to all of its provisions, and any such
termination shall be without liability on the part of the Company to you or any
Underwriter (except for the expenses to be paid or reimbursed by the Company
pursuant to Section 5 hereof and except to the extent provided in Section 8
hereof) or of you or any Underwriter to the Company (except to the extent
provided in Section 8 hereof).
30
<PAGE> 31
(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company (i) if trading in the Company's
Common Stock or other securities shall have been suspended by the Commission or
any securities exchange or market or additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over-the-counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or market, or a general banking moratorium shall have been established
by federal, New York or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or any substantial
change in political, financial or economic conditions shall have occurred or
shall have accelerated or escalated to such an extent, as, in your judgment, to
affect materially and adversely the marketability of the Common Shares, (iii)
if any adverse event shall have occurred or shall exist which makes untrue or
incorrect in any material respect any statement or information contained in the
Registration Statement or Prospectus or which is not reflected in the
Registration Statement or Prospectus but should be reflected therein in order
to make the statements or information contained therein in light of the
circumstances under which they were made, not misleading in any material
respect, or (iv) if there shall be any action, suit or proceeding pending or
threatened, or there shall have been any development or prospective development
involving particularly the business or properties or securities of the Company
or the transactions contemplated therein which, in your reasonable judgment, is
reasonably likely to materially and adversely affect the Company's business or
earnings and makes it impracticable or inadvisable to offer or sell the Common
Shares. Any termination pursuant to this subsection (b) shall be without
liability on your part or the part of any Underwriter to the Company or on the
part of the Company to you or any Underwriter, except for expenses to be paid
or reimbursed by the Company pursuant to Section 5 hereof (which shall not be
required to be paid upon termination pursuant to clause (i) or (ii) above) and
except to the extent provided in Section 8 hereof.
SECTION 12. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the parties hereto and of their respective officers set forth in
or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of the Underwriters, the
Company or any of their respective partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder and any termination of this
Agreement.
SECTION 13. Notices. All communications hereunder shall be in writing
and, if sent to the Representative shall be mailed, delivered or telegraphed and
confirmed to you at Friedman, Billings, Ramsey & Co., Inc., 1001 Nineteenth
Street North, Arlington, Virginia 22209 Attention: James C. Neuhauser, with a
copy to Manatt, Phelps & Phillips LLP, 11355 West Olympic Boulevard, Los
Angeles, California 90064, Attention: Paul H. Irving, Esq.; and if sent to the
Company shall be mailed, delivered or telegraphed and confirmed to the Company
at 21031 Ventura Boulevard, Woodland Hills, California 91364, Attention: Joel R.
Schultz, President, with a copy to Jeffer, Mangels, Butler & Marmaro, LLP, 2121
Avenue of the Stars, 10th Floor, Los Angeles, California
31
<PAGE> 32
90067, Attention: Catherine De Bono Holmes, Esq. The Company or you may change
the address for receipt of communications hereunder by giving notice to the
other.
SECTION 14. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto, and to the benefit of the officers and
directors and controlling persons referred to in Section 8, and in each case
their respective successors, personal representatives and assigns, and no other
person will have any right or obligation hereunder. Notwithstanding the
foregoing, this Agreement shall not be assignable by the parties. The term
"successors" shall not include any purchaser of the Common Shares from the
Underwriters as such, merely by reason of such purchase.
SECTION 15. Partial Unenforceability. The invalidity or
unenforceability of any section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other section, paragraph or
provision hereof. If any section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make the remainder of this Agreement valid and enforceable.
SECTION 16. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 17. General. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company and you.
32
<PAGE> 33
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement between the Company and the Underwriters,
all in accordance with its terms.
Very truly yours,
PACIFIC UNITED GROUP, INC.
By:__________________________________________
Name: Joel R. Schultz
Title: President and Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted by us
in Los Angeles, California as of the date
first above written.
FRIEDMAN, BILLING, RAMSEY & CO., INC.
(if applicable, acting as Representative
of the several Underwriters in the
attached Schedule A)
By:_________________________
Name:
Title:
33
<PAGE> 1
EXHIBIT 2.1
RESTRUCTURING PLAN
OF
PRESIDENTIAL MORTGAGE COMPANY
AND
PACIFIC UNITED GROUP, INC.
This Restructuring Plan (the "Plan") is adopted as of ____________,
1996 by Presidential Mortgage Company, a California limited partnership (the
"Partnership"), and Pacific United Group, Inc., a Delaware corporation (the
"Corporation"), with reference to the following facts:
A. The Partnership, which is currently the sole stockholder of the
Corporation, desires to transfer all of its assets and liabilities to the
Corporation in exchange for common stock of the Corporation (the "Common
Stock"), subject to the terms and conditions described herein. The Corporation
desires to accept all of the assets and liabilities of the Partnership, and to
carry on the businesses of the Partnership, subject to the terms and conditions
described herein.
B. Upon receipt of the Common Stock, the Partnership desires to
distribute such Common Stock to the general partner of the Partnership (the
"General Partner") and all of the limited partners of the Partnership (the
"Limited Partners"), pro rata in accordance with their respective Net
Contributed Capital (as defined in Section 3 hereof) in the Partnership.
C. The Partnership intends to submit the Plan for approval of the
Limited Partners in accordance with Section 16 of the Partnership Agreement,
pursuant to a Proxy Statement/Prospectus (the "Proxy") which was filed by the
Corporation on November 24, 1995 with the Securities and Exchange Commission
("SEC") as part of a Registration Statement on Form S-4 (the "Registration
Statement"), as it may be amended from time to time hereafter, in substantially
the form in which such Proxy is amended as of the date the Registration
Statement is declared effective by the SEC.
D. The completion of the Plan is contingent upon, and must occur
concurrently with, the closing of a rights offering (the "Rights Offering") and
a public offering (the "Public Offering") of additional shares of Common Stock
by the Corporation, as described in the Proxy.
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE> 2
1. Transfer of Assets and Liabilities of the Partnership to the
Corporation.
(a) Effective as of the closing date of the Public Offering (the
"Closing Date"), subject to the satisfaction of all of the terms and conditions
of this Agreement, the Partnership shall transfer to the Corporation all of its
assets, both tangible and intangible, including all of the loans receivable and
collateral securing such loans, accounts receivable, leasehold interests, and
all tangible and intangible property of the Partnership, of any kind whatsoever.
The transfer and assignment of assets shall be without recourse, representation
or warranty of the Partnership. If the Partnership shall, subsequent to the
Closing Date, receive (a) any cash, securities or other property distributed or
paid under or pursuant to any of the assets transferred, the Partnership shall
accept the same as the Corporation's agent for such limited purpose and hold the
same in trust for such limited purpose on behalf of and for the benefit of the
Corporation, and shall deliver the same promptly to the Corporation in the same
form in which it is received, with the endorsement (without recourse,
representation or warranty) of the Partnership when necessary or appropriate.
(b) Effective as of the Closing Date, the Corporation shall assume,
as successor-in-interest to the Partnership, all known and unknown, fixed and
contingent, liabilities and obligations of the Partnership, including the
contingent obligation to indemnify the General Partner and any of its officers,
directors, employees or agents, for any liabilities incurred by any such persons
in connection with their actions on behalf of the Partnership, to the extent
provided in Section 27 of the Partnership Agreement.
2. Issuance of Common Stock. In consideration for the transfer of
all assets and liabilities of the Partnership to the Corporation, the
Corporation will issue to the Partnership an amount of shares of Common Stock of
the Corporation equal to the net tangible equity of the Partnership, which shall
be determined as the Partnership's total assets, as adjusted for an increase of
$385,000 from the General Partner's purchase of warrants (the "General Partner
Warrants") as described in the Proxy, minus total liabilities, goodwill and
capitalized organization costs of the Partnership, except capitalized costs of
the Public Offering and the Rights Offering, as of the last day of the month
preceding the Closing Date, divided by 10.
3. Distribution of Common Stock to Partners . Promptly following
the Closing Date, the Partnership will make a distribution of the Common Stock
pro rata to the General Partner and all of the Limited Partners in accordance
with their respective Net Contributed Capital, which shall be calculated as each
Partner's original capital contribution and any additional capital contributions
less withdrawals of capital and distributions of the Partnership in return of
capital.
2
<PAGE> 3
4. Conditions to Completion of Plan. The Plan shall be completed
only if the following conditions are met:
(a) Limited Partners holding at least 51% of the total Capital
Contributions (as defined in the Partnership Agreement) of all Limited partners
(not including the Capital Contributions of the General Partner with respect to
its general partner and limited partner interests in the Partnership) vote to
approve the Plan, as required by Section 16 of the Partnership Agreement;
(b) minimum market capitalization (total outstanding shares of
common stock times the price per share of common stock in the Public Offering)
of at least $16.5 million is achieved as a result of the Rights Offering and the
Public Offering;
(c) The Common Stock is approved for listing on the NASDAQ National
Market ("NNM"), the American Stock Exchange ("AMEX") or the Pacific Stock
Exchange ("PSE");
(d) NatWest Bank, N.A. (the "Bank") consents to the completion of
the Plan;
(e) The Federal Deposit Insurance Corporation ("FDIC") consents to
the change in control of Pacific Thrift as a result of the Plan;
(f) There is no moratorium resulting from federal or state
legislative action that would prohibit the completion of the Plan;
(g) In the judgment of the General Partner, there is no material
adverse change in the business or prospects of the Partnership; and
(h) There is no injunction or court order relating to the Plan that
would have a material adverse effect upon the Corporation or which would prevent
the completion of the Plan.
None of the conditions specified in paragraphs 2(a), (b), (c), (d) or
(e) above may be waived, except with respect to the listing of the Common Stock
on the NNM, AMEX or PSE, which may only be waived if the waiver has been
disclosed to the Limited Partners and, after the disclosure thereof, the Limited
Partners have approved, by vote of Limited Partners holding at least 51% of the
total Capital Contributions in the Partnership (excluding all Capital
Contributions of the General Partner with respect to its general partner and
limited partner interests), the completion of the Plan notwithstanding the
failure of the Common Stock to be listed on the NNM, AMEX or PSE. Any one or
more of the conditions specified in paragraphs 2(f), (g) or (h) may be waived by
the General Partner if it determines, in its sole discretion, that the failure
to meet the condition so waived would not have a material adverse impact upon
the business of the Corporation.
3
<PAGE> 4
5. Additional Assignment and Transfer Documents. Upon and after the
Closing Date, the Partnership shall execute such additional assignment and
transfer documents as shall be necessary to reflect the assignment and transfer
of all Partnership accounts, loan receivables, and all other assets, to the
Corporation, effective as of the Closing Date.
6. Indemnification. In the event the Plan is completed in
accordance with the terms hereof, the Corporation shall defend, indemnify and
hold harmless the Partnership, the General Partner, and each officer, director,
employee and any other person who controls the Corporation, the Partnership or
the General Partner ("controlling person") within the meaning of the Securities
Act of 1933 (each such entity or person referred to herein as an "indemnified
party"), from and against any claims, losses, obligations and liabilities,
whether arising from the prior conduct of the business of the Partnership, any
action taken by any indemnified party in connection with the Plan or any other
actions taken in good faith by any indemnified party on behalf of the
Partnership, the Corporation or the General Partner believed by such indemnified
party to be in the best interests of the Partnership, the Corporation or the
General Partner. In the event the Plan is not completed for any reason, the
Partnership shall defend, indemnify and hold harmless the General Partner, and
each officer, director, employee and any other person who controls the General
Partner ("controlling person") within the meaning of the Securities Act of 1933
(each such entity or person referred to herein as an "indemnified party"), from
and against any claims, losses, obligations and liabilities, whether arising
from any action taken in good faith by any indemnified party in connection with
the Plan, to the extent provided in the Partnership Agreement.
7. Expenses. In the event the Restructuring Plan is completed in
accordance with the terms hereof, the Corporation shall pay all expenses of the
Plan, including all expenses of soliciting the consent of Limited Partners to
the Plan and all expenses of the Rights Offering and the Public Offering. In the
event the Plan is not completed for any reason, the Partnership shall pay all
expenses of the Plan, the Rights Offering and the Public Offering.
8. Miscellaneous.
a. Applicable Law. This Plan shall, in all respects, be
governed by the laws of the State of California applicable to agreements
executed and to be wholly performed within California, except that, with respect
to matters of law concerning the internal corporate affairs of the Corporation,
the Delaware General Corporation Law shall govern.
b. Further Assurances. The Partnership and the Corporation
shall execute and deliver any and all additional papers, documents and other
assurances, and shall do any and all
4
<PAGE> 5
acts and things reasonably necessary in connection with the performance of their
obligations hereunder to carry out the intent of this Plan.
c. Modifications or Amendments. No amendment, change or
modification of this Plan shall be valid, unless in writing and signed by the
General Partner on behalf of the Partnership.
d. Successors and Assigns. All of the terms and provisions
contained herein shall inure to the benefit of and shall be binding upon the
parties hereto and their respective heirs, legal representatives, successors and
assigns.
e. Survival. The agreements of the parties contained herein
shall survive the consummation of the transactions contemplated hereby.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its duly executed authorized officer as of the date
first above written.
PRESIDENTIAL MORTGAGE COMPANY,
a California limited partnership
By:
--------------------------------
Joel R. Schultz, President
Presidential Services Corporation,
general partner of Presidential
Management Company, general partner
of the Partnership
PACIFIC UNITED GROUP, INC.,
a Delaware corporation
By:
--------------------------------
Joel R. Schultz, President
5
<PAGE> 1
EXHIBIT 5.1
[JEFFER, MANGELS, BUTLER & MARMARO letterhead] DRAFT
____________________, 1996
Pacific United Group, Inc.
21031 Ventura Boulevard,
Woodland Hills, California 91364
Gentlemen:
We have acted as special counsel to Pacific United Group, Inc., a
Delaware corporation (the "Corporation"), in connection with: (i) a
restructuring plan (the "Restructuring Plan") between the Corporation and
Presidential Mortgage Company, a California limited partnership (the
"Partnership"), pursuant to which the Partnership will transfer all of its
assets and liabilities to the Corporation in exchange for shares of common
stock, $.01 par value, of the Corporation (the "Common Stock"), in an amount
equal to the net tangible equity of the Partnership on the last day of the month
preceding the closing date of the Restructuring Plan; (ii) a rights offering
(the "Rights Offering") of 820,000 shares of additional Common Stock by the
Corporation to the limited partners of the Partnership, the partners of the
general partner of the Partnership, and the officers, directors and employees of
the Partnership and its subsidiaries; and (iii) a public offering (the "Public
Offering") of additional Common Stock by the Corporation in such amount as will
result in a minimum market capitalization of the Corporation of $16.5 million.
The Restructuring Plan and the Rights Offering are being conducted in
accordance with the terms of a Registration Statement on Form S-4 (the
"S-4 Registration Statement"), as filed on November 24, 1995, with the
Securities and Exchange Commission (the "Commission"), Registration
No. 33-64573, as amended at the time such Registration Statement is declared
effective by the Commission, and pursuant to the terms of a Proxy
Statement/Prospectus (the "Proxy") filed as a part of such S-4 Registration
Statement, in the form in which it is filed with the Commission pursuant to
Rule 424(b) of the Commission, as promulgated under the Securities Act of
1933, as amended (the "Act").
The Public Offering is being conducted in accordance with the terms of
a Registration Statement on Form S-1 (the "S-1 Registration Statement"), as
filed on March 1, 1996, with
<PAGE> 2
JEFFER, MANGELS, BUTLER & MARMARO
Pacific United Group, Inc.
________________, 1996
Page 2
the Commission, Registration No. 33-_____, as amended at the time such
Registration Statement is declared effective by the Commission, and pursuant to
the terms of a Prospectus (the "Prospectus") filed as a part of such
S-1 Registration Statement, in the form in which it is filed with the Commission
pursuant to Rule 424(b) of the Commission, as promulgated under the Act.
We are familiar with the actions taken and proposed to be taken by you
in connection with the authorization and proposed issuance and sale of the
shares of Common Stock pursuant to the Restructuring Plan, the Rights Offering
and the Public Offering.
On the basis of the foregoing, it is our opinion that, when the
S-4 Registration Statement has become effective under the Act, subject to the
appropriate qualification of the Common Stock to be issued and sold pursuant to
the Restructuring Plan and the Rights Offering by the appropriate authorities
of various states in which such Common Stock will be issued and sold, such
Common Stock will, upon the issuance and sale thereof in the manner referred to
in the S-4 Registration Statement, be legally issued, fully paid and
nonassessable. It is further our opinion that, when the S-1 Registration
Statement has become effective under the Act, subject to the appropriate
qualification of the Common Stock to be sold in the Public Offering by the
appropriate authorities of various states in which such Common Stock will be
issued and sold, that such Common Stock will, upon the issuance and sale
thereof in the manner referred to in the S-1 Registration Statement, be legally
issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
S-4 Registration Statement and the S-1 Registration Statement, and we further
consent to the use of our name under the caption "Legal Matters" in each of
such Registration Statements and in the Proxy and the Prospectus.
Respectfully submitted,
<PAGE> 1
[LETTERHEAD] EXHIBIT 8.1
____________, 1996 50036-0045
Presidential Mortgage Company
21031 Ventura Boulevard
Woodland Hills, CA 91364
Attn: Mr. Joel R. Schultz
Re: TAX OPINION FOR PRESIDENTIAL MORTGAGE COMPANY
Dear Mr. Schultz:
You have requested our opinion (the "Opinion") regarding the
material federal income tax consequences of a series of transactions as more
fully described in the Proxy Statement/Prospectus (such transaction as
hereinafter referred to collectively as the "Restructuring Plan").
We have participated with you in the preparation of the Proxy
Statement/Prospectus which was filed with the Securities and Exchange Commission
on November 24, 1995, and amended from time to time thereafter. It is
anticipated that the Proxy Statement/Prospectus will be declared effective on or
about March __, 1996.
The Opinion expressed herein is based on the following
assumptions:
1. The Restructuring Plan will be approved by the limited
partners as described in the Proxy Statement/Prospectus and all of the
transactions discussed therein shall be validly effectuated.
2. The representations of the general partner contained in
that certain representation letter dated of even date herewith are true and
correct as of the date hereof.
3. Presidential Mortgage Company is currently taxed as a
partnership for Federal Income Tax purposes.
<PAGE> 2
JEFFER, MANGELS, BUTLER & MARMARO LLP
Presidential Mortgage Company
____________, 1996
Page 2
Based upon the foregoing, and on the current version of the
Internal Revenue Code, of 1996 as amended, treasury relations promulgated
thereunder, legislative history, published rulings, court decisions and
precedents, and based upon all of the limitations, qualifications, assumptions
and other factual statements contained in the Proxy Statement/Prospectus, it is
our opinion that it is more likely than not that the material income tax
consequences of the Restructuring Plan are as described in the Proxy
Statement/Prospectus in the section entitled "Federal Income Tax Consequences".
We express no opinion herein other than with respect to the
issues described in the Proxy Statement/Prospectus in the section entitled
"Federal Income Tax Consequences," and then only on the conditions and subject
to the qualifications set forth herein and therein. However, the positions of
the Internal Revenue Service and the courts as to such issues change frequently,
and therefore there can be no assurance that the consequences as described in
the Proxy Statement/Prospectus will not be challenged. Any change or
modification of the authorities cited herein or in the Proxy
Statement/Prospectus could adversely affect the income tax consequences of the
Restructuring Plan, and such changes may be applied retroactively. Such changes
may invalidate this Opinion.
Very truly yours,
Jeffer, Mangels, Butler & Marmaro LLP
<PAGE> 1
EXHIBIT 10.17
AMENDMENT TO LOAN AGREEMENT
This AMENDMENT TO LOAN AGREEMENT (this "Agreement"), dated as
of November 29, 1995, is entered into among PRESIDENTIAL MORTGAGE COMPANY, a
California limited partnership (the "Borrower"), the financial institutions
party to the Loan Agreement, and NATWEST BANK N.A., a national banking
association (formerly known as National Westminster Bank USA), as the Agent.
Preliminary Statement
A. The Borrower, the Agent, and the Banks, are parties to the
Loan Agreement.
B. The Borrower has requested that the Agent and the Banks
amend the Loan Agreement in certain respects as hereinafter specified.
C. The parties hereto are willing to enter into this
Agreement.
NOW, THEREFORE, for valuable consideration (the receipt and
sufficiency of which are acknowledged), the parties hereto agree as follows:
ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION
1.1 Definitions. As used herein:
"Agent" means NatWest Bank N.A., a national banking
association, formerly known as National Westminster Bank USA, as agent on behalf
of itself and the banks under the Loan Agreement, and any successor thereto in
such capacity.
"Banks" means the banks party to the Loan Agreement as of the
date first set forth above.
"Borrower" has the meaning set forth in the introduction
hereto.
"Loan Agreement" means that certain Loan Agreement, dated as
of August 28, 1990, as amended, as amended and restated as of May 20, 1992, as
amended, as amended and restated as of September 28, 1994, as amended to the
date first set forth above, between the Borrower, as the borrower thereunder,
and NatWest, as the Agent and the sole Bank thereunder.
<PAGE> 2
"NatWest" means NatWest Bank N.A., a national banking
association, formerly known as National Westminster Bank USA.
"Released Parties" means, collectively, the Agent, the Banks,
and all of the Agent's and each Bank's current and former shareholders,
directors, officers, employees, accountants, attorneys, and agents, and all of
their respective successors and assigns.
1.2 Certain Rules of Construction. For purposes of this Agreement
and unless otherwise specified herein:
1.2.1 Construction. References to the plural include the
singular and to the singular include the plural, references to any gender
include any other gender, the part includes the whole, the term "including" is
not limiting, and the term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or." References to any fiscal
period are references to fiscal periods of the Borrower. References in this
Agreement to any determination by the Agent, the Required Banks, or any Bank
include good faith estimates (in the case of quantitative determinations) and
good faith beliefs (in the case of qualitative determinations) by the Agent, the
Required Banks, or any Bank, as applicable; any determination made in good faith
by the Agent, the Required Banks, or any Bank shall be conclusive absent
manifest error. The words "hereof," "herein," "hereby," and "hereunder," and any
other similar words, refer to this Agreement as a whole and not to any
particular provision of this Agreement. Article, section, subsection, clause,
exhibit and schedule references are to this Agreement. Any reference to this
Agreement or any other Loan Document includes all permitted alterations,
amendments, changes, extensions, modifications, renewals, or supplements thereto
or thereof, as applicable.
1.2.2 No Presumption Against Any Party. Neither this Agreement
nor any uncertainty or ambiguity herein shall be construed or resolved using any
presumption against any party hereto, whether under any rule of construction or
otherwise. On the contrary, this Agreement has been reviewed by each of the
parties and their counsel and, in the case of any ambiguity or uncertainty,
shall be construed and interpreted according to the ordinary meaning of the
words used so as to fairly accomplish the purposes and intentions of all parties
hereto.
1.2.3 Independence of Provisions. All agreements and covenants
hereunder shall be given independent effect such that if a particular action or
condition is prohibited by the terms of any such agreement or covenant, the fact
that such action or condition would be permitted within the limitations of
-2-
<PAGE> 3
another agreement or covenant shall not be construed as allowing such action to
be taken or condition to exist.
1.2.4 Other Defined Terms. Capitalized terms used in this
Agreement, unless otherwise defined, shall have the respective meanings
specified in the Loan Agreement.
ARTICLE II
AMENDMENTS, MODIFICATIONS, AND REAFFIRMATIONS
2.1 Amendment To The Loan Agreement. The Borrower, the Banks, and
the Agent hereby amend the Loan Agreement as follows:
2.1.1 The defined term "Applicable Margin" is hereby amended
to read in full as follows:
"Applicable Margin" means 1.5 percentage points per
annum.
2.1.2 The defined term "Termination Date" is hereby amended to
read in full as follows:
"Termination Date" means June 30, 1997.
2.1.3 The Borrower hereby acknowledges and agrees that the
current outstanding principal amount of the Loans is $7,995,743.91. In light
thereof, Section 2.5(b)(i) of the Loan Agreement is hereby amended to read in
full as follows:
(b) Mandatory Prepayments.
(i) The Borrower shall prepay the Loans so that the
outstanding principal balance of the Loans immediately after
such prepayment will not exceed, on each of the dates set
forth below, the correlative amount set forth below for such
date:
<TABLE>
<CAPTION>
Maximum Outstanding
Date Principal Balance of the Loans
---- ------------------------------
<S> <C>
06/30/96 $3,755,000
09/30/96 $2,755,000
12/31/96 $1,755,000
03/31/97 $755,000
06/30/97 $0
</TABLE>
-3-
<PAGE> 4
The Borrower shall give notice of such prepayments to the
Agent pursuant to subsection (d) of this section.
2.1.4 Section 2.6(b)(i) of the Loan Agreement is hereby
deleted in its entirety.
2.1.5 Section 2.5(b)(ii)(2) of the Loan Agreement is hereby
amended to read as follows:
(2) the Borrower shall prepay the Loans within three (3)
Business Days following the date or dates on which such Net
Equity Proceeds are received by an amount up to $1,000,000.00,
not exceeding the amount of such Net Equity Proceeds.
2.1.6 Section 5.2(b) of the Loan Agreement is hereby amended
to read as follows:
The Borrower shall maintain, as of the end of each
calendar month, a ratio of (i) Net Real Estate Assets to (ii)
the aggregate outstanding Debt of the Borrower owing to the
Agent and the Banks hereunder and under the Notes of not less
than 1.60:1.00.
2.2 Conversion of the Borrower to a Public Stock Corporation. The
Agent and NatWest hereby consent to the conversion of the Borrower from a
limited partnership organized under the laws of the State of California to a
public stock corporation organized under the laws of one of the United States,
such conversion to be upon and subject to the terms and conditions specified in
Exhibit "A" hereto, with such changes to such terms and conditions as the Agent
or NatWest shall hereafter reasonably request and subject, in any event, to any
and all rights of the Agent and NatWest under the Loan Agreement. Within thirty
(30) days after the execution and delivery of this Agreement, the Borrower shall
execute and deliver (or cause to be executed and delivered) to NatWest the
5-year warrant to purchase 2% of the common stock of the corporation to which
the Borrower is to be converted, as described on page 3 of Exhibit "A" hereto,
such warrant to be satisfactory in form and substance to NatWest.
2.3 Extension Fee. In consideration of the Agent's and NatWest's
agreement to extend the Termination Date as provided in Section 2.1.2 of this
Agreement, the Borrower hereby agrees to pay the Agent an extension fee equal to
$75,000, payable, without interest, as follows: (i) $25,000 simultaneously with
the
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<PAGE> 5
execution and delivery of this Agreement by the Borrower; (ii) $25,000 on or
before September 30, 1996; and (iii) $25,000 on or before January 31, 1997. The
extension fee herein described is in addition to the Administration Fees payable
by the Borrower pursuant to Section 2.6(a)(ii) of the Loan Agreement.
2.4 No Other Amendments; Reaffirmation. Except as expressly
amended hereby, the Loan Agreement is in all respects ratified and confirmed and
shall remain unchanged and in full force and effect. The Borrower reaffirms its
obligations and duties under the Loan Agreement, as amended hereby.
ARTICLE III
RELEASE
3.1 Release.
3.1.1 No Present Claims. The Borrower acknowledges and agrees
that: (a) the Borrower has no claim or cause of action against any Released
Party arising under or in any way related to the Loans or the Loan Documents;
(b) the Borrower has no offset right, counterclaim, or defense of any kind
against any of the obligations and liabilities of the Borrower under the Loan
Documents; and (c) each Released Party has heretofore properly performed and
satisfied in a timely manner any and all of such Released Party's obligations,
if any, to the Borrower. The Agent and the Banks desire, and the Borrower
agrees, to eliminate any possibility that any past conditions, acts, omissions,
events, circumstances, or matters would impair or otherwise adversely affect the
Agent or the Banks or any of the Agent's or the Banks' rights, interests,
collateral, security, or remedies under the Loan Documents. Therefore, the
Borrower, on behalf of the Borrower and all successors and assigns of and any
and all other parties claiming rights through the Borrower, unconditionally
releases, acquits, and forever discharges each and every Released Party from:
(i) all liabilities, obligations, duties, or indebtedness of any of the Released
Parties to the Borrower, whether known or unknown, arising prior to the date
first above written; and (ii) all claims, offsets, causes of action, suits, or
defenses, whether known or unknown, which the Borrower might otherwise have
against any of the Released Parties on account of any condition, act, omission,
event, contract, liability, obligation, indebtedness, claim, cause of action,
defense, circumstance, or matter of any kind which existed, arose, or occurred
at any time prior to the date first written above. As further consideration for
the above release, the Borrower specifically agrees, represents, and warrants
that the matters released herein are not limited to matters which are known or
-5-
<PAGE> 6
disclosed, and the Borrower hereby waives any and all rights and benefits which
the Borrower now has, or in the future may have, conferred upon the Borrower by
virtue of the provisions of either New York law or the provisions of Section
1542 of the Civil Code of the State of California which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
3.2 Waiver of Unknown Claims. The Borrower is aware that the Borrower
may later discover facts in addition to or different from those which the
Borrower now knows or believes to be true with respect to the releases given
herein, and that it is nevertheless the Borrower's intention to settle, release,
and discharge fully, finally, and forever all of these matters, known or
unknown, suspected or unsuspected, which previously existed, now exist, or may
exist. In furtherance of such intention, the Borrower specifically acknowledges
and agrees that the releases given in this Agreement shall be and shall remain
in effect as full and complete releases of the matters being released,
notwithstanding the discovery or existence of any such additional or different
facts and that such releases shall not be subject to termination or rescission
by reason of any such additional or different facts.
3.3 Warranty of Non-Assignment. The Borrower hereby represents and
warrants that it has not previously assigned or transferred, or purported to
assign or transfer, to any Person any of the claims, demands, grievances,
liabilities, debts, accounts, obligations, costs, expenses, liens, rights,
actions, or causes of action released by the terms of this Agreement.
ARTICLE IV
GENERAL PROVISIONS
4.1 Conditions to the Effectiveness of this Agreement. This Agreement
shall become effective upon the execution and delivery of this Agreement by both
the Borrower and the Agent.
4.2 Entire Agreement. This Agreement embodies the entire agreement and
understanding among the parties hereto relating to the subject matter hereof and
supersedes all prior agreements and understandings relating to the subject
matter hereof. No course of prior dealings among the parties hereto, no usage of
the trade, and no parol or extrinsic evidence of any nature, shall be
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<PAGE> 7
used or be relevant to supplement, explain or modify any term used herein.
4.3 Governing Law; Jurisdiction and Venue; Waiver of Trial by Jury.
4.3.1 GOVERNING LAW. THE VALIDITY, CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT OF THIS AGREEMENT, AND THE RIGHTS OF THE PARTIES
HERETO AND THERETO, SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK.
4.3.2 JURISDICTION AND VENUE. THE PARTIES HERETO AGREE THAT
ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT OR THE LOAN
DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS
LOCATED IN THE CITY OF NEW YORK, STATE OF NEW YORK OR, AT THE SOLE OPTION OF THE
REQUIRED LENDERS, IN ANY OTHER COURT IN WHICH THE LENDER SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS JURISDICTION OVER THE SUBJECT MATTER AND
PARTIES IN CONTROVERSY. EACH PARTY HERETO WAIVES ANY RIGHT TO ASSERT THE
DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY
PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 6.3.2 AND STIPULATES THAT
THE STATE AND FEDERAL COURTS LOCATED IN THE CITY OF NEW YORK, STATE OF NEW YORK,
SHALL HAVE IN PERSONAM JURISDICTION AND VENUE OVER EACH SUCH PARTY FOR THE
PURPOSE OF LITIGATING ANY SUCH DISPUTE, CONTROVERSY, OR PROCEEDING ARISING OUT
OF OR RELATED TO THIS AGREEMENT, OR THE LOAN DOCUMENTS.
4.3.3 WAIVER OF TRIAL BY JURY. THE PARTIES TO THIS AGREEMENT
HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION,
CAUSE OF ACTION, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO THIS AGREEMENT,
OR THE LOAN DOCUMENTS, OR IN ANY WAY CONNECTED WITH, OR RELATED TO, OR
INCIDENTAL TO, THE DEALINGS OF THE PARTIES HERETO WITH RESPECT TO THIS
AGREEMENT, THE LOAN DOCUMENTS, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN
EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND IRRESPECTIVE OF WHETHER
SOUNDING IN CONTRACT, TORT, OR OTHERWISE. THE PARTIES TO THIS AGREEMENT AGREE
THAT ANY SUCH CLAIM, DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING SHALL BE
DECIDED BY A COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY HERETO MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 6.3.3 WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE OTHER PARTY OR PARTIES HERETO TO WAIVER OF THE
RIGHT TO TRIAL BY JURY.
4.4 Counterparts; Telefacsimile Signatures. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if all signatures were upon the same instrument.
Delivery of an executed counterpart of the signature page to this Agreement by
telefacsimile shall be
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<PAGE> 8
effective as delivery of a manually executed counterpart of this Agreement, and
any party delivering such an executed counterpart of the signature page to this
Agreement by telefacsimile to any other party shall thereafter also promptly
deliver a manually executed counterpart of this Agreement to such other party,
provided that the failure to deliver such manually executed counterpart shall
not affect the validity, enforceability, or binding effect of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first written above.
THE BORROWER: PRESIDENTIAL MORTGAGE COMPANY,
a California limited partnership
By: Presidential Management Company,
a California limited partnership
Title: General Partner
By: Presidential Services Corporation,
a California corporation
Title: General Partner
By:__________________________________
Joel R. Schultz
Title: President
THE AGENT: NATWEST BANK N.A.,
a national banking association
By:_________________________________
Title:______________________________
-8-
<PAGE> 1
EXHIBIT 99.1
THIS DRAFT IS FURNISHED SOLELY TO INDICATE THE EXPECTED FORM OF THE FINAL
OPINION AND THE PROCEDURES AND UNDERLYING ASSUMPTIONS EXPECTED TO BE USED. THE
TEXT OF THE FINAL OPINION WILL NECESSARILY DEPEND UPON OUR REVIEW PROCEDURES,
INCLUDING REVIEW BY COUNSEL, WHICH WILL NOT BE COMPLETED UNTIL SHORTLY BEFORE
THE FINAL LETTER IS DELIVERED.
________ __, 1996
Mr. Joel R. Schultz
The General Partner of Presidential Mortgage Company
Presidential Management Company
21031 Ventura Blvd.
Woodland Hills, CA 91364
Dear Mr. Schultz:
It is our understanding that Presidential Mortgage Company ("Presidential" or
the "Partnership") operates a lending business through a California finance
lender license. In addition, Presidential owns 100% of the outstanding stock of
Pacific United Group, Inc. (the "Corporation"), into which it intends, within
the next 30 days, to transfer 100% of the outstanding stock of Pacific Thrift
and Loan Company ("PTL"), a California corporation, and Consolidated
Reconveyance Corporation, a Washington corporation, and Pacific United Mortgage,
Inc., a Delaware Corporation. Presidential owns 99% of the total interests in
capital and profits and losses of Consolidated Reconveyance Company, a
California limited partnership, and Lenders Posting and Publishing Company, a
California limited partnership. We understand that a Restructuring Plan (the
"Restructuring Plan") has been proposed whereby the Company would transfer all
of its assets and liabilities to the Corporation in consideration of the
issuance of a number of shares of the common stock of the Corporation (the
"Common Stock") equal to the Net Tangible Equity (total assets, increased by
$385,000 to be paid by the General Partner for GP warrants, as defined below,
minus total liabilities, goodwill and capitalized organization costs, other than
costs of the Rights Offering and Public Offering, as defined below) of the
Partnership on the last day of the month preceding the closing date of the
Restructuring Plan (the "Closing Date"). Presidential will then liquidate,
making a final distribution of the Common Stock to the general partner (the
"General Partner") and limited partners (the "Limited Partners") of
Presidential, pro rata in accordance with their respective net contributed
capital in Presidential, which is defined as each Partner's original capital
contribution and any additional capital contribution to the Partnership less
any withdrawals of capital and distributions of the Partnership in return of
capital.
<PAGE> 2
-2-
Mr. Joel R. Schultz
Presidential Management Company
_______ __, 1996
The Restructuring Plan must be approved by the requisite of vote of Limited
Partners pursuant to the requirements of the Partnership Agreement.
It is also our understanding that, if the Restructuring Plan is completed, the
General Partner will have no right to receive management fees or other
compensation from the Corporation, and that the General Partner will receive no
additional consideration for its general partner's interest in Presidential
other than its pro rata interest in shares of Common Stock based upon its net
contributed capital in Presidential. However, we understand that the General
Partner will purchase, for $385,000, warrants (the "GP Warrants") exercisable
into up to 25% of the total outstanding shares of Common Stock on the Closing
Date, on a fully diluted basis assuming the exercise of all GP Warrants and the
Subscriber Warrants (as described below), at an exercise price equal to 150% of
the Public Offering Price (as defined below) of the Common Stock, exercisable at
any time for a period of 18 months after the Closing Date.
It is also our understanding that, subject to the approval of the Restructuring
Plan by the requisite vote of Limited Partners, the Corporation will
concurrently make an offer (the "Rights Offering" ) to all of the Limited
Partners, the partners of the General Partner and the officers, directors and
employees of Presidential and its subsidiaries, to purchase up to 820,000
additional shares of Common Stock, at a purchase price of $10 per share, subject
to adjustment upon the subsequent Public Offering (as defined below) to equal
the Public Offering Price (as defined below). Limited Partners and the partners
of the General Partner (pro rata in accordance with their interests in the
General Partner) will have the right ("Basic Subscription Right") to purchase a
percentage of the shares offered in the Rights Offering equal to their pro rata
percentage interest in Presidential, and all Limited Partners, partners of the
General Partner and the officers, directors, and employees of Presidential and
its subsidiaries will have the right ("Oversubscription Privilege") to subscribe
for any shares not subscribed for pursuant to the exercise of Basic Subscription
Rights. For every five shares of Common Stock subscribed for in the Rights
Offering, the Corporation will issue a transferable warrant for one additional
share of Common Stock (collectively, the "Subscriber Warrants"), exercisable at
any time after issuance for a period of two years, at an exercise price equal to
125% of the Public Offering Price (as defined below).
We further understand that, subject to the approval of the Restructuring Plan by
the requisite vote of Limited Partners, the Corporation will make a public
offering (the "Public Offering") of an additional number of shares of Common
Stock, at a price (the "Public Offering Price") to be determined by negotiation
between the Corporation and Friedman, Billings, Ramsey & Co., Inc., as
representative of a group of underwriters who will participate in the Public
Offering on a firm offering basis. The number of shares to be offered in the
Public Offering will be determined as the amount necessary to result in a total
market capitalization (total outstanding shares times the Public Offering Price
per share) of $16.5 million. The completion of the Public Offering is a
condition of the closing of the Restructuring Plan.
The transactions described above and all related transactions are referred to
collectively herein as the "Transaction."
<PAGE> 3
-3-
Mr. Joel R. Schultz
Presidential Management Company
_______ __, 1996
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address Presidential's underlying business decision
to effect the Transaction. Additionally, you have advised us that Presidential
has no intention of engaging in any alternative to the Transaction. We have not
been requested to, and did not, solicit third party indications of interest in
acquiring all or any part of Presidential. Furthermore, at your request, we have
not negotiated the Transaction or advised you with respect to alternatives to
it. Our Opinion should not be construed or interpreted as a recommendation by
Houlihan Lokey either for or against the Transaction. Also, our Opinion does not
consider the value of Presidential or its subsidiaries in an orderly
liquidation.
The term "fair market value," as used herein, is defined as the amount at which
an asset would change hands between a willing buyer and a willing seller, each
having reasonable knowledge of all relevant facts, neither being under any
compulsion to act, with equity to both.
It is Houlihan Lokey's understanding, upon which it is relying, that the General
Partner and any other recipient of the Opinion will consult with and rely solely
upon their own legal counsel with respect to said definition. No representation
is made herein, or directly or indirectly by the Opinion, as to any legal matter
or as to the sufficiency of said definition for any purpose other than setting
forth the scope of Houlihan Lokey's Opinion hereunder.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1) reviewed Pacific Thrift and Loan's unaudited financial
statements for the year ended December 31, 1995, audited
financial statements for the three fiscal years ended
December 31, 1994 and unaudited financial statements for the
two fiscal years ended December 31, 1991, which the
Partnership's management has identified as being the most
currently available financial statements;
2) reviewed Consolidated Reconveyance Company and Lenders
Posting and Publishing Company unaudited financial
statements for the year ended December 31, 1995, which the
Partnership's management has identified as being the most
currently available financial statements;
3) reviewed the Partnership's audited financial statements for
the three fiscal years ended December 31, 1994;
4) reviewed copies of the Restructuring Plan, dated _________,
1996;
5) reviewed the January 1996 Registration Statement on Form S-4
filed by the Corporation, of which a Proxy
Statement/Prospectus (the "Proxy") with respect to the
approval of the Restructuring Plan and the Rights Offering
and a Prospectus (the "Prospectus") with respect to the
Public Offering are a part;
<PAGE> 4
-4-
Mr. Joel R. Schultz
Presidential Management Company
_______ __, 1996
6) reviewed the: Fifth Amended and Restated Certificate and
Agreement of Limited Partnership of Presidential Mortgage
Company, dated September 7, 1989;
7) met with certain members of the senior management of the
Company to discuss the operations, financial condition,
future prospects and projected operations and performance of
Presidential and the Corporation, and met with
representatives of Presidential's counsel to discuss certain
matters;
8) visited certain facilities and business offices of
Presidential and its subsidiaries;
9) reviewed forecasts and projections prepared by
Presidential's management with respect to Presidential and
the Corporation for the years ending December 31, 1996
through 1998;
10) reviewed certain other publicly available financial data for
certain companies that we deem comparable to Presidential;
11) reviewed drafts of certain documents to be delivered at the
closing of the Transaction; and
12) conducted such other studies, analyses and inquires as we
have deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of Presidential and the Corporation, and that there has
been no material change in the assets, financial condition, business or
prospects of Presidential and the Corporation since the date of the most recent
financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Corporation or Presidential and
its subsidiaries and do not assume any responsibility with respect to it. We
have not made any physical inspection or independent appraisal of any of the
properties or assets of Presidential or the Corporation. Our Opinion is
necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by us at the date of this letter.
Our Opinion does not express any opinion as to (i) the terms of the
Restructuring Plan (other than the opinion expressed in the following
paragraph), (ii) the relative fairness of the Transaction to each Partnership
class individually, (iii) the tax consequences of the Transaction for the
Limited Partners or any other party to the Transaction, or (iv) the fairness of
the Public Offering Price.
<PAGE> 5
-5-
Mr. Joel R. Schultz
Presidential Management Company
_______ __, 1996
Based upon the foregoing, and in reliance thereon, it is our opinion that (i)
the aggregate consideration to be received by the Limited Partners collectively
in connection with the Transaction is fair to them from a financial point of
view, and (ii) the fair market value of the GP Warrants does not exceed
$385,000.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
<PAGE> 1
EXHIBIT 99.3
Limited Partner:
--------------------------
Partner I.D. Code:
------------------------
Class:
------------------------------------
Basic Subscription
Rights: shares
---------------------------------
ALL RIGHTS WILL EXPIRE AT 5:00 P.M., PACIFIC TIME,
ON APRIL __, 1996, UNLESS EXTENDED (THE "EXPIRATION DATE"),
AND THIS SUBSCRIPTION AGREEMENT (THIS "AGREEMENT")
IS VOID THEREAFTER
SUBSCRIPTION AGREEMENT FOR COMMON STOCK OF
PACIFIC UNITED GROUP, INC.
The undersigned ("Subscriber") acknowledges receipt of a Proxy
Statement/Prospectus dated March ___, 1996 (the "Proxy") of Pacific United
Group, Inc., a Delaware corporation (the "Corporation"), and hereby subscribes
for shares of pursuant to the exercise of Basic Subscription Rights and/or the
Oversubscription Privilege (collectively, the "Rights Offering"), subject to the
completion of a restructuring plan (the "Restructuring Plan") between the
Corporation and Presidential Mortgage Company, a California limited partnership
(the "Partnership"), in accordance with the terms described in the Proxy.
Capitalized terms used herein without definition are used as defined in the
Proxy.
In consideration of the Corporation's agreement to sell shares of
Common Stock of the Corporation to Subscriber upon the exercise of the Rights,
and upon the following terms and conditions, Subscriber and the Corporation
hereby agree, represent and warrant as follows:
Basic Subscription Rights:
The undersigned hereby subscribes for the number shares of Common Stock
shown on page 4 hereof under item (a) Basic Subscription Rights (which number
may not be more than the number shown above as the undersigned's Basic
Subscription Rights).
Oversubscription Privilege:
The undersigned hereby subscribes for that number of additional shares
of Common Stock, to the extent such shares are available in accordance with the
terms of the Proxy Statement/Prospectus, shown on page 4 hereof under item (b)
Oversubscription Privilege.
The purchase price for the shares obtained by the exercise of each
Right shall be $10.00 per share, subject to
1
<PAGE> 2
adjustment to the price (the "Public Offering Price") at which the Common Stock
is offered in a public offering (the "Public Offering") by the Corporation, as
described in the Proxy. In the event that the Public Offering Price is less than
$10 per share, the undersigned shall receive that number of shares of Common
Stock as is equal to the subscription price submitted herewith divided by the
Public Offering Price, with the price of any fractional share delivered in cash
to the undersigned. The full subscription amount is herewith delivered to the
U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California
91204-2991, either (a) by check or bank draft drawn upon a United States bank,
(b) by postal, telegraphic or express money order, payable to the Subscription
Agent, or (c) by wire transfer of funds to the account maintained by the
Subscription Agent for this purpose at _________________________, Account No.
________________.
Subscriber further acknowledges the following:
(a) The Corporation or the Subscription Agent may accept or
reject this Agreement or all or any portion of the Rights exercised hereunder,
in whole or in part; provided that such rejection is based on Subscriber's
failure to comply with any of the requirements contained herein or in the Proxy,
including, without limitation, the failure to properly complete or execute this
Agreement or deliver it to the Subscription Agent by the Expiration Date, the
failure of the Restructuring Plan to be approved, the failure to submit full
payment herewith, the failure of such monies paid by Subscriber to be deemed
received by the Subscription Agent by the Expiration Date (as described in the
Proxy) or the inability of the Corporation to satisfy Subscriber's
Oversubscription Privileges as exercised. Acceptance by the Corporation or the
Subscription Agent of Subscriber's subscription and payment will occur only when
each of the Corporation and the Subscription Agent execute this Agreement and
execute and tender delivery of the share certificates representing the shares of
Common Stock of the Corporation purchased by Subscriber hereunder.
(b) Checks or other monies received from Subscriber will be
held in escrow by the Subscription Agent and invested at the direction of the
Corporation in short-term certificates of deposit, short-term obligations of the
United States, any state or any agency thereof, or money market mutual funds
investing in any of the foregoing instruments. Such amounts will be retained by
the Corporation if the Restructuring Plan is approved and the shares subscribed
for by Subscriber are ultimately issued in Subscriber's name, or will be
returned to Subscriber without interest or deduction if the Restructuring Plan
is not approved, the Corporation or the Subscription Agent rejects this
Agreement or Subscriber's Oversubscription Privilege, as exercised, cannot be
fully satisfied (in which case, the amounts to be so returned shall be based on
the percentage of such Oversubscription Privilege for which Subscriber
ultimately receives shares of Common Stock of the Corporation).
2
<PAGE> 3
(c) Subscriber understands that if Subscriber does not indicate the
number of Rights to be exercised or does not forward full payment for the number
of shares indicated to be received (or if such monies paid have not been deemed
to be received by the Subscription Agent by the Expiration Date), Subscriber
will be deemed to have exercised the maximum number of Rights that may be
exercised for the aggregate price delivered herewith that has cleared by the
Expiration Date. Any additional monies deemed received by the Subscription Agent
after the Expiration Date will be returned to Subscriber without interest or
deduction as soon as practicable after receipt thereof.
(d) Subscriber is under no obligation to exercise all of its Basic
Subscription Rights (as listed on the signature page hereto) and may in lieu
thereof elect to exercise none or only a portion of those Rights owned; provided
that Subscriber understands that other stockholders will, as a result thereof,
obtain increased Oversubscription Privileges that could dilute Subscriber's
percentage equity interest in the Corporation. Such dilution could also occur if
the Corporation elects to reject this Agreement; as a result, the Corporation
urges Subscriber to exercise great care in deciding whether to exercise Rights
hereunder, in completing and executing this Agreement, and in opting for a
particular payment method to ensure receipt of such amounts by the Expiration
Date.
3
<PAGE> 4
Limited Partner:
--------------------------
Partner I.D. Code:
------------------------
Class:
------------------------------------
Basic Subscription
Rights: shares
---------------------------------
(Return this page to the Subscription Agent,
together with payment for Shares)
PRESIDENTIAL MORTGAGE COMPANY
(a) Basic Subscription Rights Total Price Enclosed:
Exercised: $
------------------- -----------------------------
($10.00 x (c))
(b) Maximum Rights Exercised
Pursuant to Oversubscription SUBSCRIBER:
Privilege:
-------------------
-----------------------------
(c) Maximum Shares Subscribed [Name]
for ((a)+(b)):
---------------
-----------------------------
Taxpayer ID or Social Security Number: Signature (1)
- ----------------------------------- -----------------------------
Signature of Co-Signer
(if any)
Citizen of:
------------------------ -----------------------------
Name of Co-Signer
(type or print)
-----------------------------------------------------
Name as you would like it to appear on Certificate(s)
Subscriber is a resident of the State of
-----------------------------
- ----------------------------------- -----------------------------
Residence (or Business, if not Address for Sending
an individual) Address Notices (if different)
- ----------------------------------- -----------------------------
City, State and Zip Code City, State and Zip Code
- ----------------------------------- -----------------------------
Telephone Number Telephone Number
ACCEPTED as of ________ ___, 1996
PACIFIC UNITED GROUP, INC.
By:
------------------------
Name:
----------------------
Title:
----------------------
(1) If the Subscription Agreement is executed by an executor, administrator,
trustee, guardian, or other fiduciary, or by a corporation, and the Subscription
Agreement is not issued in the name of such fiduciary or corporation, the person
executing the Subscription Agreement must give his full title and furnish proper
evidence of authority to act. If the form is executed by an attorney-in-fact
(except where such execution is by a bank, trust company, or broker as agent for
the subscriber), and the shares are to be registered in the said name as stated
on the Subscription Agreement, evidence of authority to act must be furnished.
4
