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As Filed with the Securities and Exchange Commission February __, 1996
Registration No. ________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
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)
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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, and telephone number, LOS ANGELES, CA 90067
including area code, of agent for service) (310) 201-3553
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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 any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
CALCULATION OF REGISTRATION FEE
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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 820,000 $10.00 $ 8,200,000 $2,828
value $.01 per share
Total Registration Fee $2,828
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY..................................................................................... 3
The Corporation .............................................................................. 3
Business Strategy............................................................................. 4
Background and Reasons for Restructuring...................................................... 5
Summary of the Public Offering................................................................ 6
Selected Consolidated Financial and Other Data................................................ 8
Selected Pacific Thrift Financial Data........................................................ 9
RISK FACTORS........................................................................................... 10
USE OF PROCEEDS........................................................................................ 14
CAPITALIZATION......................................................................................... 14
DIVIDEND POLICY........................................................................................ 15
MARKET FOR COMMON STOCK................................................................................ 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................................... 16
General....................................................................................... 16
Financial Condition........................................................................... 17
Results of Operations......................................................................... 18
Liquidity and Capital Resources............................................................... 24
Asset/Liability Management.................................................................... 25
Effect of Federal Laws and Regulations........................................................ 27
Impact of Inflation and Changing Prices....................................................... 27
Effect of New Accounting Standards............................................................ 28
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE
CORPORATION............................................................................................ 30
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS........................................................... 34
BUSINESS............................................................................................... 36
The Partnership............................................................................... 36
The Corporation............................................................................... 36
Pacific Thrift................................................................................ 36
CRC, CRC Washington and LPPC.................................................................. 37
Unified....................................................................................... 37
Lending Activities............................................................................ 38
Lending Policies.............................................................................. 40
Maturities and Rate Sensitivities of Loan Portfolio........................................... 45
Classified Assets and Loan Losses............................................................. 46
Investment Activities......................................................................... 50
Sources of Funds.............................................................................. 50
Deposit Analysis.............................................................................. 51
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Deposit Maturities............................................................................ 51
Competition................................................................................... 53
Employees..................................................................................... 53
Properties.................................................................................... 53
Legal Proceedings............................................................................. 54
SUPERVISION AND REGULATION............................................................................. 56
Consumer Protection Laws ..................................................................... 56
State Law .................................................................................... 56
Federal Law................................................................................... 58
BENEFICIAL OWNERSHIP OF COMMON STOCK................................................................... 68
MANAGEMENT............................................................................................. 71
Directors and Executive Officers.............................................................. 71
Board of Directors and Committees............................................................. 72
Compensation of Board of Directors............................................................ 73
Executive Compensation........................................................................ 73
Employment Agreements......................................................................... 75
Plans and Arrangements........................................................................ 77
1995 Stock Option Plan........................................................................ 77
Retirement Plan............................................................................... 81
Stock Purchase Plan........................................................................... 81
Supplemental Executive Retirement Plan........................................................ 83
Limitation of Liability and Indemnification of Directors...................................... 84
Director and Officer Indemnification.......................................................... 85
CERTAIN TRANSACTIONS................................................................................... 86
Management and Other Fees and Reimbursements Paid to the General Partner...................... 86
Payments to General Partner Related to Purchase of CRC and LPPC .............................. 86
Payments for Purchase of Equipment............................................................ 86
General Partner Capital Note.................................................................. 86
Amounts Owed From and to the General Partner and Unified ..................................... 87
Payments to Managing Officers................................................................. 87
Personal Guaranty of Partnership Debt by Managing Officers.................................... 87
Consulting Agreement with Director of Pacific Thrift.......................................... 87
DESCRIPTION OF CAPITAL STOCK........................................................................... 88
Common Stock.................................................................................. 88
Preferred Stock............................................................................... 88
Transfer Agent................................................................................ 89
Certain Anti-Takeover Provisions.............................................................. 89
Effect of Quasi-California Corporation Law.................................................... 91
Market for Common Stock....................................................................... 92
Subscriber Warrants........................................................................... 92
General Partner Warrants...................................................................... 92
Bank Warrant.................................................................................. 93
SHARES ELIGIBLE FOR FUTURE SALE........................................................................ 94
UNDERWRITING OF PUBLIC OFFERING........................................................................ 95
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REGISTRATION OF CERTAIN SHARES......................................................................... 97
LEGAL MATTERS.......................................................................................... 98
EXPERTS................................................................................................ 98
AVAILABLE INFORMATION.................................................................................. 98
GLOSSARY............................................................................................... 99
PACIFIC UNITED GROUP, INC. FINANCIAL STATEMENTS........................................................ 102
PRESIDENTIAL MORTGAGE COMPANY FINANCIAL STATEMENTS..................................................... 105
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PACIFIC UNITED GROUP, INC.
CROSS-REFERENCE SHEET
FOR
REGISTRATION STATEMENT ON FORM S-1 AND PROSPECTUS
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FORM S-1 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. Summary Information, Risk Factors,
and Ratio of Earnings to
Fixed Charges...................... Summary; Risk Factors;
Selected Financial Data;
Unaudited Consolidated
Financial Statements of
the Corporation
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. The Restructuring Plan
6. Dilution ........................................ Dilution
7. Selling Security Holders......................... Registration of Certain
Shares
8. Plan of Distribution............................. The Restructuring Plan
9. Description of Securities to be
Registered......................... Description of Capital
Stock
10. Interests of Named Experts
and Counsel........................ Legal Matters
11. Information with Respect to
the Registrant..................... Business; Market for
Common Stock; Summary --
Selected Consolidated
Financial and Other Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Change in and
Disagreements with
Accountants; Management;
Beneficial Ownership of
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Common Stock; Certain
Transactions
12. Disclosure of Commission
Position on Indemnification......... Management -- Limitation
of Liability and
Indemnification of
Directors; Underwriting
13. Other Expenses of Issuance
and Distribution.................... Part II - Item 13
14. Indemnification of Directors
and Officers ....................... Part II - Item 14
15. Recent Sales of Unregistered
Securities.......................... Part II - Item 15
16. Exhibits and Financial
Statement Schedules ................ Financial Statements;
Index to Exhibits
17. Undertakings .................................... Part II - Item 17
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH __, 1996
PROSPECTUS
_________ Shares
[PACIFIC UNITED GROUP, INC. LOGO]
Common Stock
Pacific United Group, Inc. (the "Corporation") a Delaware
corporation, is hereby offering (the "Offering") ________ shares of common
stock, $.01 par value, of the Corporation (the "Common Stock"). This Offering is
being conducted concurrently with a restructuring plan (the "Restructuring
Plan") pursuant to which all of the assets and liabilities of Presidential
Mortgage Company, a California limited partnership (the "Partnership"), will be
transferred to the Corporation in exchange for approximately _________ shares of
Common Stock, to be issued to the existing partners of the Partnership (the
"Restructuring"). An additional _________ [NUMBER OF SHARES SUBSCRIBED FOR]
shares of Common Stock will be sold in a rights offering (the "Rights Offering")
to the partners of the Partnership and certain other related persons.
Prior to the Offering, there has been no public market for the
Common Stock and there is no assurance that such a market will exist after this
offering. The Common Stock has been approved for listing on the Nasdaq National
Market, under the symbol "PUGG." Friedman, Billings, Ramsey & Co., Inc., as
representative (the "Representative") of the several underwriters (the
"Underwriters") has indicated its intention to make a market in the Common
Stock. The Representative, however, has no obligation to make such a market and
may discontinue making a market at any time. It is currently anticipated that
the shares of Common Stock offered hereby will be offered at a public offering
price of $____ per share. The initial offering price of the shares of Common
Stock offered hereby has been determined by negotiation between the Corporation
and the Representative. See "Underwriting" for information relating to the
determination of the initial public offering price.
SEE "RISK FACTORS" ON PAGES 10 - 13 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR.
THE SHARES OFFERED HEREBY ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT
INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS (1) THE CORPORATION(2)
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Per Share.......................... $ ____ $___ $____
Total(3)........................... $__________ $_________ $_________
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Corporation estimated at
$_________.
(3) The Corporation has granted the Underwriters a 30-day option to purchase
up to _______ additional shares of Common Stock solely to cover
overallotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares of Common Stock at the Price
to Public shown above. If the option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to the Corporation
will be $________, $________ and $________, respectively. See
"Underwriting."
The Common Stock is offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
their right to withdraw, cancel, or modify the offering and reject orders in
whole or in part. It is expected that delivery of the certificates representing
the shares of Common Stock will be made against payment therefor at the offices
of the Representative or in book entry form through the book entry facilities of
the Depository Trust Company on or about _________________, 1996.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
THE DATE OF THIS PROSPECTUS IS MARCH __, 1996
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[Insert Pictures]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Corporation intends to furnish the holders of the Common Stock annual
reports containing audited combined financial statements with a report thereon
by independent accountants. In addition, the Corporation will file quarterly
reports containing unaudited financial statements which will be furnished to
holders of the Common Stock upon request.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and combined financial statements and related notes thereto
appearing elsewhere in this Prospectus. Completion of this offering is
conditioned upon and will occur contemporaneously with the completion of the
Restructuring Plan of Presidential Mortgage Company (the "Partnership"). All
references to the Corporation after the closing of this Offering assume that the
Restructuring Plan has been completed.
THE CORPORATION
Pacific United Group, Inc. (the "Corporation") is a Delaware
corporation formed in 1994 for the purpose of completing the Restructuring of
Presidential Mortgage Company, a California limited partnership (referred to
herein on a consolidated basis with its subsidiaries as the "Partnership" and on
an unconsolidated basis as "Presidential"). From the date of its formation in
1981 until 1988, Presidential's sole business was the direct origination and
servicing of real estate secured loans under California consumer and commercial
finance lender licenses. In 1988, Presidential formed Pacific Thrift and Loan
Company, a California corporation ("Pacific Thrift"), as a wholly-owned
subsidiary of Presidential, to engage in the business of origination, purchase
and sale of real estate secured loans under a California thrift and loan
license. Since 1990, substantially all new lending activity has been conducted
by Pacific Thrift, and Presidential has continued to hold a portfolio of loans
originated prior to 1991. Also in 1990, Presidential acquired two additional
subsidiaries, Consolidated Reconveyance Company, a California limited
partnership ("CRC"), which provides trust deed foreclosure services, and Lenders
Posting and Publishing Company, a California limited partnership ("LPPC"), which
provides posting and publishing services in connection with trust deed
foreclosures. In 1994, Presidential formed the Corporation and Pacific Unified
Mortgage, Inc. ("Unified") for the purpose of completing a proposed
restructuring of Presidential. These subsidiaries had no operations as of
December 31, 1996. In 1995, Presidential formed another subsidiary, Consolidated
Reconveyance Corporation, a Washington corporation ("CRC Washington"), to
provide trust deed foreclosure services in the State of Washington. In March
1996, Presidential transferred to the Corporation all of the outstanding stock
of Pacific Thrift, CRC Washington and Unified for the purpose of filing
consolidated tax returns for those entities. For the year ended December 31,
1995, the Partnership sustained a consolidated net loss of $1.7 million,
consisting of a $5.8 million net loss of Presidential, offset by $3.2 million
net income of Pacific Thrift, $.6 million net income of CRC and $.3 million net
income of LPPC.
Pursuant to the proposed Restructuring Plan, the Corporation will
acquire all of the assets and liabilities of the Partnership. After the
Restructuring, the Corporation will be a holding company for Pacific Thrift,
Unified, CRC, CRC Washington and LPPC. The principal executive offices of the
Corporation are located at 21031 Ventura Boulevard, Woodland Hills, California
91364, and its telephone number at that address is (818) 992-8999. Following is
a description of each of the subsidiaries:
PACIFIC THRIFT. Pacific Thrift focuses on the origination of
residential, multi-family and commercial real estate loans to borrowers whose
credit histories limit their ability to qualify for low-rate financing at more
credit sensitive financial institutions. Such loans are generally referred to in
the lending industry as "B" and "C" credit loans. Pacific Thrift originated
$150.7 million in loans. Pacific Thrift sells a substantial majority of all
residential loans it originates to larger mortgage lenders for securitization.
During 1995, Pacific Thrift sold $145.0 million of loans originated for sale. At
December 31, 1995, Pacific Thrift held an additional $9.6 million loans for
sale. In addition, Pacific Thrift offers investment certificates in the form of
passbook and certificate of deposit accounts insured by the Federal Deposit
Insurance Corporation ("FDIC") up to applicable limits. At December 31, 1995,
Pacific Thrift had total assets of $67.9 million, total deposits of $60.2
million and total shareholders' equity of $6.8 million.
CRC. CRC provides trust deed foreclosure services to over 300 banks,
thrifts, mortgage banks, life insurance companies and federal regulatory
agencies. At December 31, 1995, CRC had total assets of $3.4 million, total
liabilities of $2.5 million and partners' capital of $.9 million. All of the
limited partnership interests of CRC will be transferred to the Corporation on
the Closing Date.
CRC WASHINGTON. CRC Washington provides trust deed foreclosure services
on loans secured by real estate located in the State of Washington. CRC
Washington had no material assets, liabilities or operations at or during the
year ended December 31, 1995. The Corporation is the sole shareholder of CRC
Washington.
3
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LPPC. LPPC provides posting and publication services in connection with
trust deed foreclosure sales. At December 31, 1995, LPPC had total assets of $.3
million, total liabilities of $.1 million and partners' capital of $.2 million.
The Corporation will acquire all of the limited partnership interests of LPPC on
the Closing Date.
UNIFIED. On the Closing Date, Unified will acquire the loan portfolio
of Presidential, substantially all of which was originated prior to 1991. At
December 31, 1995, the Presidential portfolio consisted of residential,
multi-family and commercial loans with a gross aggregate principal balance of
$9.2 million, including $3.0 million in loans held for sale, down from a high of
$123.0 million in 1989. The Presidential portfolio is pledged to secure a loan
obligation (the "Bank Loan") owed to NatWest Bank, N.A. ("NatWest"), with a
remaining balance of $6.8 million owed as of December 31, 1995. The Presidential
portfolio is being reduced through loan payoffs and loan sales to pay down the
Bank Loan, which is expected to be fully repaid by June 30, 1997. Management
further intends for Unified to become a California licensed finance lender, and,
where necessary or advisable, to obtain other state licenses to act as a real
estate secured lender in locations in which Pacific Thrift is unable to engage
in real estate secured lending.
BUSINESS STRATEGY
After the consummation of this 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 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
4
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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 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.
BACKGROUND AND REASONS FOR RESTRUCTURING
Presidential's primary business from its inception in 1981 through
1990 was the origination of B and C credit loans secured by California real
property (primarily residential), which Presidential retained and serviced for
the life of the loans. Presidential financed its lending activity with revolving
lines of credit from major commercial banks and periodic offerings of limited
partnership units. At the height of this business in 1989, the Partnership had a
total loan portfolio of $130.2 million, a credit line on which it had borrowed
$82 million, and total capital of $44 million.
Beginning in 1990, with the downturn in the California real estate
market, the credit line was restructured as a one-year renewable term loan (the
"Bank Loan") with required monthly or quarterly pay down levels. Accordingly,
since 1990, Presidential has been required to pay down over $75 million on the
Bank Loan, which has resulted in a systematic reduction of the Partnership's
loan portfolio from its high of $130.2 million in 1990 to a combined loan
portfolio of $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. The
reduction in the loan portfolio, coupled with substantial losses caused by
continuing declines in the value of California real estate, caused declines in
the Partnership's net income through 1992 and net losses of $1.7 million, $9.5
million and $5.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. In addition, pursuant to the terms of the Bank Loan, the
Partnership was required to suspend all distributions and capital withdrawal
payments to limited partners in June 1993. As a result, the Partnership has paid
no distributions or capital withdrawal payments since June 1993.
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In 1994 and 1995, management of the Partnership refocused its lending
business on loans originated for sale and securitization and analyzed possible
restructuring alternatives which would provide a means for limited partners of
the Partnership to realize potential capital appreciation as the Partnership's
business improved and greater liquidity for their investment. Management
proposed the Restructuring Plan to the limited partners pursuant to a Proxy
Statement/Prospectus dated March __, 1996, and received the requisite
approval of a majority of limited partners to complete the Restructuring Plan by
April __, 1996. The completion of this Offering is a condition to and will be
the final step in the closing of the Restructuring Plan.
SUMMARY OF THE PUBLIC OFFERING
Common Stock offered by
the Corporation ____________ shares
Use of Proceeds The net proceeds of the additional capital raised
in the Rights Offering and the Public Offering
will be used as follows:
approximately $1 million to pay down the
Bank Loan;
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, 1992;
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.
Proposed Nasdaq National
Market Symbol "PUGG"
SUMMARY OF THE RESTRUCTURING PLAN
Exchange of Assets Shares of Common Stock equal to the Net Tangible Equity of
and Liabilities of the Partnership (total assets minus total liabilities,
the Partnership for goodwill and capitalized organization costs other than
Common Stock capitalized costs of the Rights Offering and Public
Offering, as adjusted for an increase of $385,000 paid by
the General Partner for General Partner Warrants, as
described below), on the last day of the month preceding
the Closing Date, divided by 10, but not less than 830,000
shares, will be distributed to the General Partner and all
Limited Partners of the Partnership. Based on the
estimated $8.3 million in Net Tangible Equity which
management believes will exist on March 31, 1996, 830,000
shares will be distributed with a value of $10 per share.
Rights Offering During the solicitation period for voting on the
Restructuring Plan, Limited Partners, partners of the
General Partner and the officers, directors and employees
of Presidential and its subsidiaries were given the right
to subscribe for 820,000 additional shares in a rights
offering (the "Rights Offering"), at $10 per share,
subject to adjustment to the price at which the Common
Stock is offered hereby (the "Public Offering Price").
Subscriptions for ________ shares were received in the
Rights Offering.
Subscriber For every five shares of Common Stock subscribed for in
Warrants the Rights Offering, the Corporation has agreed to issue
to each subscriber a transferable warrant (the "Subscriber
Warrants") for one additional shares of common Stock,
exercisable at 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 The General Partner of Partnership will purchase warrants
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.
6
<PAGE> 13
Bank Warrant The Corporation has agreed to grant to NatWest a Warrant
(the "Bank Warrant") to purchase 2% of the Common Stock of
the Corporation on the Closing Date, exercisable at any
time for a period of five years after issuance, at an
exercise price equal to 25% of the book value of the
Corporation on December 31, 1995, as adjusted for shares
sold in the Rights Offering and the Public Offering,
redeemable at any time within one year at the option of
the Corporation for $200,000.
7
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present selected consolidated financial and other
data of the Partnership (of which the Corporation will become successor as a
result of the consummation of the Restructuring) as of and for each of the years
in the five years ended December 31, 1995. The information below should be read
in conjunction with, and is qualified in its entirety by, the more detailed
information included elsewhere in this Prospectus, including the Consolidated
Financial Statements of the Partnership and notes thereto.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
(DOLLARS IN THOUSANDS)
--------------------------------------------------------
<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>
================================================================================
(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.
8
<PAGE> 15
SELECTED PACIFIC THRIFT FINANCIAL DATA
The following selected financial data is for Pacific Thrift and Loan
Company, the primary operating subsidiary of the Partnership (and the
Corporation after the Restructuring).
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
(DOLLARS IN THOUSANDS)
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income ............................. $ 1,694 $ 8,434 $ 9,314 $ 8,988 $ 4,492
Total interest expense............................. 3,820 2,953 3,225 3,061 2,081
-------- -------- -------- -------- --------
Net interest income.............................. 3,874 5,481 6,089 5,947 2,411
Total noninterest income........................... 9,599 2,297 405 630 824
Provision for loan losses.......................... 1,394 1,414 2,321 1,054 394
Other real estate owned expense.................... 92 293 1,323 105 117
General and administrative expense................. 10,056 8,978 6,000 6,037 3,423
Provision (benefit) for income taxes............... (1,224) 1 1 1 1
-------- -------- -------- -------- --------
Net income (loss).................................. $ 3,155 $ (2,908) $ (3,151) $ (640) $ (700)
======== ======== ======== ======== ========
Distributions paid................................. -0- -0- -0- -0- -0-
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets....................................... $ 67,899 $ 74,404 $ 70,302 $ 56,286 $ 45,130
Net loans(1)....................................... 50,153 49,357 50,041 51,330 40,928
Total deposits..................................... 60,156 69,501 62,421 50,561 39,555
Stockholder's equity............................... 6,819 3,240 5,029 5,189 2,889
PARTNERSHIP:
SELECTED RATIOS (%)
Return on average assets........................... 4.43 % (4.02)% (4.98)% (1.26)% (2.11)%
Return on average partners' equity................. 62.72 % (70.33)% (61.68)% (15.85)% (23.93)%
Net interest margin(2)............................. 6.06 % 8.36 % 10.62 % 12.71 % 7.99 %
Noninterest expense to average assets.............. 14.26 % 12.81 % 11.57 % 12.11 % 10.69 %
Efficiency ratio(3)................................ 75.32 % 119.20 % 112.77 % 93.67 % 109.43 %
Efficiency ratio excluding REO expense(3).......... 74.64 % 115.43 % 92.39 % 92.07 % 105.81 %
General and administrative expense to average
assets.......................................... 14.13 % 12.41 % 9.48 % 11.90 % 12.33 %
Average shareholder's equity to average assets..... 7.07 % 5.72 % 8.07 % 7.96 % 8.83 %
ASSET QUALITY DATA:
Nonaccrual loans................................... $ 407 $ 1,967 $ 1,230 $ 3,729 $ 3,904
REO (net of senior liens).......................... 1,697 930 2,278 1,473 625
Total nonperforming assets......................... 2,104 2,897 3,508 5,202 4,529
Troubled debt restructurings....................... 588 -0- -0- -0- -0-
Allowance for credit losses........................ 1,458 1,804 1,300 789 733
Net loan charge offs............................... 1,340 910 1,810 799 36
ASSET QUALITY RATIOS:
Nonperforming assets to total assets............... 3.10 % 3.89 % 4.99 % 9.24 % 10.03 %
Allowance for credit losses to net loans........... 2.91 % 3.65 % 2.60 % 1.54 % 1.79 %
Allowance for credit losses to nonaccrual loans.... 358.23 % 91.71 % 105.64 % 21.16 % 18.78 %
Net loan charge offs to average loans.............. 3.50 % 1.83 % 3.57 % 2.17 % .12 %
REGULATORY CAPITAL RATIOS:
Leverage Ratio..................................... 9.09 % 3.87 % 7.12 % 9.21 % N/A
Tier 1 risk-based capital ratio.................... 11.13 % 5.41 % 8.84 % 10.64 % N/A
Total risk based capital ratio..................... 12.42 % 6.66 % 10.09 % 11.89 % N/A
</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.
<PAGE> 16
RISK FACTORS
Prospective investors should carefully consider the following risk
factors as well as the other information contained in this Prospectus before
purchasing the Common Stock offered hereby.
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 1994. At December 31, 1995, the Partnership continues 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 --
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."
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
10
<PAGE> 17
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 71% 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").
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
11
<PAGE> 18
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."
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
12
<PAGE> 19
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.
13
<PAGE> 20
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 $7,399,000 ($________ 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)(2).................................... -0- 1,650
Tangible book value per share(1)(2)................... 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
- -- Plans and Arrangements."
(2) Not including shares that may be issued if the overallotment option is
exercised, which would increase the number of outstanding shares to ______ and
the tangible book value per share to $_______.
14
<PAGE> 21
DIVIDEND POLICY
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 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 and policies of the FDIC and the DOC. In addition, the
provisions of the 1995 Order require the consent of the FDIC for the payment of
any dividends by Pacific Thrift. See "SUPERVISION AND REGULATION -- Restrictions
on Transfers of Funds to the Partnership or the Corporation by Pacific Thrift."
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." The Representative has indicated its intention to make a
market in the Common Stock. The Representative is not obligated, however, to
make a market in the Common Stock and any market making may be discontinued at
any time.
15
<PAGE> 22
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 historical financial condition and results of
operations 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 Presidential 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 of Presidential 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.
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 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.
16
<PAGE> 23
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 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.
17
<PAGE> 24
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.
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.
18
<PAGE> 25
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>
19
<PAGE> 26
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>
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
20
<PAGE> 27
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 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.
21
<PAGE> 28
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 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.
22
<PAGE> 29
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.
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.
23
<PAGE> 30
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.
LIQUIDITY AND CAPITAL RESOURCES
Neither Presidential nor any of its subsidiaries other than Pacific
Thrift maintains 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.
24
<PAGE> 31
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, 1996, 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. The amount of the line 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 capital levels, it is classified as "adequately
capitalized." See "SUPERVISION AND REGULATION -- Federal Law -- Capital Adequacy
Guidelines."
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
25
<PAGE> 32
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.
26
<PAGE> 33
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............. 18,565,380 6,068,398 (2,822,894) (2,556,044) 1,708,171 1,708,171
sensitivity gap
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.
27
<PAGE> 34
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
28
<PAGE> 35
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.
29
<PAGE> 36
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 Prospectus.
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 159,000 shares issuable under incentive stock options granted pursuant to
the Corporation's 1995 Stock Option - See "MANAGEMENT - Plans and Arrangements."
30
<PAGE> 37
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
Additional -0-(1) 7,427,000 16,539,000
----------- ----------- -----------
$82,557,000 $ 5,137,000 $87,694,000
=========== =========== ===========
</TABLE>
31
<PAGE> 38
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>
32
<PAGE> 39
<TABLE>
<S> <C> <C>
Weighted average common shares outstanding
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.
33
<PAGE> 40
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
On September 12, 1995, the Partnership dismissed Ernst & Young LLP ("E&Y")
as independent accountants of the Partnership and its subsidiaries, and engaged
BDO Seidman LLP ("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 Bank Loan and the regulatory capital classification of
Pacific Thrift. In addition, the report for 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 securities litigation
naming the Partnership and the Chief Executive Officer referred to in the
explanatory paragraphs contained in the 1994 reports was dismissed by the
plaintiffs in October 1995. 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 the maintenance of a certain capital level (which it currently
meets).
The report of E&Y for the year ended December 31, 1993 contained an
explanatory paragraph concerning the securities litigation referred to in the
report for 1994 and 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 matter 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.
During the Partnership's two most recent fiscal years and subsequent
interim period, there were disagreements between the Partnership and E&Y. The
disagreements were as follows:
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.
34
<PAGE> 41
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 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.
For the year ended December 31, 1994, E&Y 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 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.
35
<PAGE> 42
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. Since 1990, the Partnership has originated substantially all of its
new loans through Pacific Thrift. 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 1995, 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
36
<PAGE> 43
increased loan losses on Pacific Thrift's loan portfolio caused by continuing
declines in the value of California real estate held as collateral.
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.
37
<PAGE> 44
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>
38
<PAGE> 45
<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."
39
<PAGE> 46
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
40
<PAGE> 47
portfolio may be secured by multi-unit residential 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:
41
<PAGE> 48
<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.
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
42
<PAGE> 49
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 (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
43
<PAGE> 50
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:
<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.
44
<PAGE> 51
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.
45
<PAGE> 52
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.
46
<PAGE> 53
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>
47
<PAGE> 54
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. However, no assurance can be given that Pacific Thrift will not be
required to repurchase any loan participation interests in the future.
48
<PAGE> 55
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 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,
49
<PAGE> 56
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.
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.
50
<PAGE> 57
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>
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,
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<PAGE> 58
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.
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.
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<PAGE> 59
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:
<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
53
<PAGE> 60
$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 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
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<PAGE> 61
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.
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<PAGE> 62
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 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 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
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<PAGE> 63
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 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
57
<PAGE> 64
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 Adequacy Guidelines" 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.
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.
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<PAGE> 65
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.
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
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<PAGE> 66
"Capital Standards" 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.
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 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
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<PAGE> 67
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.
<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>
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<PAGE> 68
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:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4% (3% if the institution receives the
highest rating from its primary regulator)
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4% (3% if the Leverage ratio less than 3%.
institution receives the highest rating
from its primary regulator)
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
</TABLE>
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 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
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<PAGE> 69
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 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.
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<PAGE> 70
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
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.
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<PAGE> 71
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 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.
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<PAGE> 72
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.
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
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<PAGE> 73
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 -- Regulatory Actions" above.
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<PAGE> 74
BENEFICIAL OWNERSHIP OF COMMON STOCK
The only stockholder of the Corporation prior to the Closing Date of the
Restructuring Plan is the Partnership, which owns 3,000 shares of the Common
Stock. On the Closing Date, the Partnership will transfer all of the shares of
Common Stock received by it from the Corporation to the General Partner and
Limited Partners. The Corporation is unaware of any person or group that will
control the Corporation following the completion 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 Closing Date.
After the Restructuring Plan is completed, the General Partner and Limited
Partners of the Partnership, partners of the General Partner, officers,
directors and employees of the Partnership and its subsidiaries, and the
purchasers in the Public Offering will be the Stockholders of the Corporation.
As of the Record Date, 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 interests in the General Partner beneficially owned by each such person
at December 31, 1995.
For purposes of this table, the total number of shares to be issued to the
Partners of the Partnership in consideration of the transfer of the assets and
liabilities of the Partnership to the Corporation is assumed to be 830,000
shares. The actual number of shares to be issued to the Partners will not be
determined until the Net Tangible Equity of the Partnership as of the last day
of the month preceding the closing date of the Restructuring Plan is known. Also
for purposes of this table, the total number of General Partner Warrants to be
issued is assumed to be 563,333, based on the further assumptions that (i) a
total of 1,650,000 shares of Common Stock will be issued in the Restructuring,
the Rights Offering and the Public Offering, all at $10 per share. The actual
number of General Partner Warrants to be issued to the General Partner will not
be determined until the actual number of shares to be issued is known, which
will establish the number of General Partner Warrants to be issued and the
number of shares issuable under the Bank Warrant.
<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 -----
</TABLE>
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<PAGE> 75
<TABLE>
<CAPTION>
Common
Stock Percent
Name and Address of Beneficially of
Beneficial Owner Owned(1) Class
- ------------------- -------- -----
<S> <C> <C>
Norman A. Markiewicz
21031 Ventura Boulevard (5) *
Woodland Hills, CA 91364 -----
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 table does not include Common Stock issuable upon exercise of stock
options to be granted to the named individuals, which are not exercisable
for six months after the Closing Date 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) This amount includes (i) the _____ shares subscribed for in the Rights
Offering by Mr. Schultz; (ii) ___ Subscriber Warrants; (iii) all of the
______ shares of Common Stock issuable to the General Partner by the
Partnership; and (iv) all of the 563,333 General Partner Warrants. Mr.
Schultz, as the controlling shareholder of Presidential Services
Corporation, the general partner of the General Partner, will hold sole
voting and investment power of all shares and General Partner Warrants
issued to the General Partner. However, the General Partner intends, at
some time in the near future, to distribute 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 General
Partner. 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)
114,074 General Partner Warrants, which would result in Mr. Schultz'
beneficial ownership of a total of ________ shares of Common Stock and
General Partner Warrants, or ____% of the total outstanding shares and
warrants. This amount does not include the following shares and warrants of
the adult daughter and son-in-law of Mr. Schultz, as to which he has no
voting or investment power, based upon their subscription for shares in the
Rights Offering and their
69
<PAGE> 76
interest in the General Partner: (i) ___ shares of Common Stock issuable to
the General Partner; (ii) ____ shares subscribed for in the Rights
Offering; (iii) _____ Subscriber Warrants; and (iv) ________ General
Partner Warrants.
(3) This amount includes (i) _____ shares subscribed for in the Rights
Offering; (ii) _____ Subscriber Warrants. This amount does not include (a)
_____ shares of Common Stock issuable to the General Partner by the
Partnership; or (b) _____ General Partner Warrants which Mr. Carmona would
be entitled to receive from the General Partner based upon his ____%
interest in the General Partner, which would increase his total ownership
to ______ shares, representing ____% of the total Common Stock and
Warrants.
(4) This amount includes (i) _____ shares subscribed for in the Rights
Offering; (ii) _____ Subscriber Warrants. This amount does not include (a)
_____ shares of Common Stock issuable to the General Partner by the
Partnership; or (b) _____ General Partner Warrants which Mr. Fremed would
be entitled to receive from the General Partner based upon his ____%
interest in the General Partner, which would increase his total ownership
to ______ shares, representing ____% of the total Common Stock and General
Partner Warrants. This amount also does not include the following shares
and warrants of two adult sons of Mr. Fremed, as to which he has no voting
or investment power, based upon their subscription for shares in the Rights
Offering and their interest in the General Partner: (i) ___ shares of
Common Stock issuable to the General Partner; (ii) ____ shares subscribed
for in the Rights Offering; (iii) _____ Subscriber Warrants; and (iv)
________ General Partner Warrants.
(5) This amount includes (i) _____ shares subscribed for in the Rights
Offering; (ii) _____ Subscriber Warrants. This amount does not include (a)
_____ shares of Common Stock issuable to the General Partner by the
Partnership; or (b) _____ General Partner Warrants which Mr. Markiewicz
would be entitled to receive from the General Partner based upon his ____%
interest in the General Partner, which would increase his total ownership
to ______ shares, representing ____% of the total Common Stock and General
Partner Warrants.
(6) This amount includes (i) _______ shares subscribed for in the Rights
Offering by the officers and directors; (ii) _______ Subscriber Warrants
issuable to the officers and directors; (iii) all of the ______ shares
issuable to the General Partner by the Partnership; and (iv) all of the
________ General Partner Warrants. 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 would be _______, representing
_____% of the total outstanding Common Stock and General Partner Warrants.
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<PAGE> 77
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; California licensed attorney-at-law;
certified public accountant; California licensed real estate broker.
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 Loan 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.
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.
</TABLE>
71
<PAGE> 78
<TABLE>
<S> <C> <C>
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.
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
72
<PAGE> 79
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 -- Plans and Arrangements --
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 Corporate Secretary
will receive a fee of $200 per meeting attended.
Each of Pacific Thrift, CRC, CRC Washington, 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 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
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 $100,000
in 1994. Also shown in the table is the amount of compensation that would have
been earned by each of the named executive officers under the employment
agreements that each of them has entered with the Corporation.
73
<PAGE> 80
<TABLE>
<CAPTION>
Actual Annual Compensation Pro Forma Annual
-------------------------- ----------------
Compensation
------------
Name and Principal Position Year Salary($)(1) Bonus($) Salary($)(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 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 10% 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."
(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.
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<PAGE> 81
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. If the Restructuring
Plan is completed, these employment agreements will take effect as of the
Closing Date. In addition, Pacific Thrift has entered into an employment
agreement with Mr. Frank Landini, which became effective as of January 1, 1996.
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.
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.
75
<PAGE> 82
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 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, or Carmona 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.
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<PAGE> 83
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.
PLANS AND ARRANGEMENTS
Employees of the Corporation, including executive officers, will
be entitled to participate in various benefit plans established by the
Corporation. Prior to the completion of the Restructuring, the Board of
Directors will adopt, subject to consummation of the Restructuring Plan, the
plans described below and the Partnership, as the sole stockholder of the
Corporation, will approve the adoption of the plans.
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.
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 ss.
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
77
<PAGE> 84
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 412,000 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 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
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<PAGE> 85
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 159,000 shares of
Common Stock to certain key employees, including the executive officers, of the
Corporation, at an exercise price equal to the average closing sale price of the
Common Stock for the first 15 trading days after the Distribution. 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.
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.
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<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) 128,000
</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 average closing sale price of
the Common Stock for the first 15 trading days after the Distribution.
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
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<PAGE> 87
Distribution Date will be determined as the average closing sale price of the
Common Stock for the first 15 trading days.
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, the Corporation will adopt the Retirement Plan
as sponsor. The terms of the Retirement Plan allow employees to invest
contributions in Common Stock of the Company.
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 includable 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.
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.
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<PAGE> 88
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 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.
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<PAGE> 89
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;
(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
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<PAGE> 90
(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 Annual Compensation
Eligible Years of Service at Retirement
Compensation --------------------------------------
------------
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 "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
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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 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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<PAGE> 92
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 of
$266,213 plus accrued interest under the Capital Note. Based upon the terms and
conditions
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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 UNIFIED
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 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
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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.
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 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. Upon the Closing Date of the
Restructuring Plan, additional shares will be issued to the Partnership for
distribution to the General Partner and the Limited Partners for their interests
in the Partnership equal to the Net Tangible Equity of the Partnership on the
last day of the month preceding the Closing Date of the Restructuring Plan
divided by 10, provided that not less than 830,000 shares will be issued. In
addition, ___ shares will be issued in connection with the Rights Offering and
___ will be issued in connection with the Public Offering. 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 -- Plans and Arrangements."
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 -- 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 Stockholders is required to authorize the issuance of any class of
Preferred Stock. The rights of the holders
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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. 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."
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
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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 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.
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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 Closing Date, 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.
Furthermore, as of the December 31, 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
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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 super majority 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." The Representative has indicated its intention to make a
market in the Common Stock. The Representative 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, directors or
employees of the Partnership or its subsidiaries, the Corporation will issue a
transferable warrant for one additional share of Common Stock (collectively,
"Subscriber Warrants"). Due to federal regulations applicable to the Retirement
Plan, however, employees who purchase Common Stock with contributions held in
the Retirement Plan will not be eligible to receive Subscriber Warrants. The
Subscriber Warrants are 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.
GENERAL PARTNER WARRANTS
The General Partner will purchase from the Corporation warrants (the
"General Partner Warrants") exercisable for up to 25% of the Common Stock
outstanding on the Closing Date, on a fully diluted basis
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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 equal to 150% of the Public
Offering. 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 Common Stock issuable upon exercise
of the General Partner Warrants ("General Partner 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 General Partner Warrant Stock or five years
after the Initial Exercise 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 Initial Exercise Date, for the purpose of resale of the General
Partner 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 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 Bank Loan, 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
from issuance. The Corporation may redeem the Bank Warrant at any time within
one year from date of issuance 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, assuming that 830,000 shares of
Common Stock are issued to the Partners by the Corporation in exchange for the
assets and liabilities of the Partnership, _______ additional shares of Common
Stock are issued in the Rights Offering, __________ additional shares of Common
Stock are issued in the Public Offering, ______ Subscriber Warrants are issued
in connection with the Rights Offering and 563,333 General Partner Warrants are
issued to the General Partner, there will be a total of _________ shares of
Common Stock outstanding, excluding (a) an aggregate of 159,000 shares of Common
Stock underlying options granted pursuant to the Company's 1995 Stock Option
Plan; (b) an aggregate of 11,000 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 33,000 shares of Common Stock issuable under the Bank Warrant; or
(e) an aggregate of ______ shares of Common Stock issuable under Subscriber
Warrants.
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 exercisable for up
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 159,000 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."
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UNDERWRITING OF PUBLIC OFFERING
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement"), the Corporation has agreed to sell to
the Underwriters named below, and the Underwriters have agreed to purchase from
the Corporation, ______ shares of the Common Stock. The Underwriting Agreement
provides that the obligation of the Underwriter is subject to certain conditions
precedent and that the Underwriter will be obligated to purchase all of the
shares of Common Stock if it purchases any shares of Common Stock.
[INSERT LIST OF UNDERWRITERS]
The Underwriters propose initially to offer the Common Stock to the
public on the terms set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $___ per share.
After the shares of Common Stock have been released for sale to the public, the
offering price and concession may be changed. The Common Stock is offered
subject to receipt and acceptance by the Underwriters, and to certain other
conditions, including the right to reject orders in whole or in part. The
Underwriters have informed management that they do not expect to make sales to
accounts over which they exercise discretionary authority in excess of 5% of the
number of shares of Common Stock offered hereby.
The Corporation and its officers and directors have agreed not to
offer, sell or otherwise dispose of any shares of Common Stock for a period of
90 days after the date of this Prospectus without the prior written consent of
the Representative.
The Corporation has granted an option to the Underwriters, exercisable
during the 30 day period after the date of this Prospectus, to purchase up to a
maximum of _______ additional shares of the Common Stock at the public offering
price less underwriting discounts and commission shown on the cover of this
Prospectus. The Underwriters may exercise this option only to cover
overallotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares of
Common Stock on the same terms as those on which the _________ shares of Common
Stock are being offered.
In consideration of the Representative's services in connection with
the Public Offering, the Partnership has agreed to pay the Representative an
advisory fee equal to 1.0% of the gross cash proceeds of the Rights Offering and
the Public Offering. The Partnership has paid the Representative an initial fee
of $25,000, which will be applied against the advisory fee 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. The Corporation will assume the obligations of the Partnership to
the Representative upon the closing of the Restructuring Plan.
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 Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Public Offering Price per share has been determined 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
95
<PAGE> 102
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.
96
<PAGE> 103
REGISTRATION OF CERTAIN SHARES
An aggregate maximum of _______ shares of Common Stock are being
registered in this offering for the account of certain affiliates of the
Partnership. These shares include the following shares and warrants
subscribed for directly by certain officers or affiliates of the
Partnership ("Affiliates") or which such Affiliates would be entitled to
receive based upon their percentage ownership of the General Partner: (i)
shares of Common Stock distributable to the General Partner by the
Partnership; (ii) shares subscribed for by Affiliates in the Rights
Offering; (iii) Subscriber Warrants; and (iv) shares issuable under the
General Partner Warrants. The Affiliates have informed the Corporation that
they do not presently intend to sell any specific number of shares in
connection with the Restructuring Plan. However, the shares are being
registered for resale in order that the Affiliates may, from time to time
in the future as they determine in their discretion, sell any number of
shares which they own in the open market.
The following table sets forth certain information with respect to the
shares of Common Stock being registered for Affiliates. The Company will
not receive any of the proceeds of any future sales of such Common Stock.
The Affiliates' Common Stock is not being underwritten in connection with
this offering.
<TABLE>
<CAPTION>
Shares
Shares Issuable
Shares Issuable Under
Distributable Shares Subscribed Under General Total Shares
Affiliates of the to the General for in the Rights Subscriber Partner That May
General Partner Partner Offering Warrants Warrants Be Sold
--------------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Bruce Ackerman
Kenneth & Mary Carmona
Cal Trust, Kenny & Mary
Carmona
John A. DeRosa
Constance M. DeRosa
Deanna V. DeRosa
Vincent P. DeRosa
John Alan DeRosa
Richard B. Fremed & Ellen F.
Fremed
Cal Trust, TTEE FBO Richard
Fremed
Jay Fremed
Marc Fremed
Norman A. & Roslyn Markiewicz
Cal Trust, TTEE FBO Norman
Markiewicz
Harvey & Beatrice Schultz Trust
Joel R. Schultz
Ricky Schultz
Toby Schultz
Presidential Services
</TABLE>
97
<PAGE> 104
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Common
Stock 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.
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 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 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.
98
<PAGE> 105
GLOSSARY
The capitalized terms appearing in this Prospectus have the meanings
specified below:
Bank or NatWest. NatWest Bank, N.A., the lender of the Bank Loan.
Bank Loan. The loan obligation of Presidential to NatWest, which had
an outstanding balance of $6.8 million at December 31, 1995.
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 on the
Closing Date.
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.
Closing Date. The Closing Date of the Restructuring Plan and the Public
Offering.
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.
CRC Washington. Consolidated Reconveyance Corporation, a Washington
Corporation.
DOC. California Department of Corporations.
FDIC. Federal Deposit Insurance Corporation.
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 Common Stock of the Corporation
outstanding on the Closing Date, on a fully diluted basis assuming the exercise
of all Subscriber Warrants and General Partner Warrants, for a purchase price
equal to 150% of the Public Offering price per share.
LPPC. Lenders Posting and Publishing Company, a California limited
partnership.
Minimum Market Capitalization. The minimum market capitalization of
$16.5 million (total outstanding shares times Public Offering Price per share)
which must be achieved as a condition to completion of the Restructuring.
99
<PAGE> 106
Net Tangible Equity. Total assets minus total liabilities, goodwill and
capitalized organization costs of the Partnership, other than costs of the
Rights Offering and the Public Offering, as adjusted by an increase of $385,000
to capital due to the purchase of General Partner Warrants by the General
Partner.
OREO. Other real estate owned by the Partnership or Pacific Thrift,
consisting of real estate acquired in settlement of loans.
OTS. Office of Thrift Supervision, a federal agency regulating savings
and loans institutions.
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.
Partners. The general partner and limited partners of the Partnership.
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 of Common Stock to the public
pursuant to this Prospectus.
Public Offering Price. The offering price per share at which the shares
of Common Stock will be sold in the Public Offering.
Restructuring. The transactions contemplated by the Restructuring Plan.
Restructuring Plan. The plan to transfer all of the assets and
liabilities of the Partnership to the Corporation and distribute to the Partners
the stock of the Corporation in liquidation of the Partnership.
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 shares of Common Stock.
Stockholders. The record holders of the Common Stock.
Stock Purchase Plan. The 1995 Employee Stock Purchase Plan providing
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.
Subscription Rights. The Basic Subscription Rights and Oversubscription
Privilege to purchase Additional Shares in the Corporation.
Supplemental Plan. The Supplemental Executive Retirement Plan designed
to provide benefits to certain long-term executive officers of the Corporation
and its predecessors.
Tier I. Core capital component used by the FDIC to evaluate compliance
with risk-based capital requirements and which consists primarily of common
stock, related surplus and retained earnings, qualifying noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries.
Tier II. Supplementary capital component used by the FDIC to evaluate
compliance with risk-based capital requirements and which may consist of (i)
the allowance for possible loan and lease losses in an amount up to 1.25% of
risk-weighted assets; (ii) cumulative perpetual preferred stock and long-term
preferred stock and related surplus; (iii) hybrid capital instruments
(instruments with characteristics of both debt and equity), perpetual debt and
mandatory convertible debt securities; and (iv) eligible term
100
<PAGE> 107
subordinated debt and intermediate-term preferred stock with an original
maturity of five years or more, including related surplus, in an amount up to
50% of Tier I capital.
Unified. Pacific Unified Mortgage, Inc., a Delaware corporation.
101
<PAGE> 108
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.
102
<PAGE> 109
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.
103
<PAGE> 110
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.
104
<PAGE> 111
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>
105
<PAGE> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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> 148
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> 149
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> 150
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> 151
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> 152
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> 153
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> 154
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> 155
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> 156
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> 157
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> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
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> 166
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> 167
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> 168
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> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
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> 177
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> 178
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> 179
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> 180
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<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
</TABLE>
Offering Expenses in Connection with Rights Offering and Public Offering
<TABLE>
<S> <C>
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>
ITEM 14. 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
1
<PAGE> 181
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 liabilities, including liabilities
under the federal securities laws, which might be incurred by them in such
capacity.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of securities by the Registrant within the
past three years.
2
<PAGE> 182
ITEM 17. UNDERTAKINGS
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 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
3
<PAGE> 183
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 provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
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.
4
<PAGE> 184
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <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 (Registra-
tion 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).
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
</TABLE>
5
<PAGE> 185
<TABLE>
<S> <C>
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.
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*
</TABLE>
6
<PAGE> 186
<TABLE>
<S> <C>
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).
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 8 of Part II of this
Registration Statement.
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 by the Registrant with a Registration Statement on
Form S-4 on November 24, 1995.
(B) FINANCIAL STATEMENT SCHEDULES
None.
7
<PAGE> 187
POWER OF ATTORNEY
The undersigned officers and directors of Pacific United Group, Inc.
severally constitute and appoint Joel R. Schultz and Richard B. Fremed, and each
of them, our true and lawful attorneys-in-fact, with full power of substitution
and resubstitution, to sign, execute, certify, acknowledge and deliver for us
and in our names and in the capacities indicated below, the Registration
Statement of Pacific United Group, Inc. on Form S-1 filed herewith and any and
all pre-effective and post-effective amendments to said Registration Statement,
and generally to do all things in our names and behalf in our capacities as
officers and directors to enable Pacific United Group, Inc. to comply with the
provisions of the Securities Act of 1933, as amended, and all requirements of
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys-in-fact, or any of them,
to said Registration Statement and any and all amendments thereto. The foregoing
grant of authority is a special power of attorney coupled with an interest, is
irrevocable and shall survive the death or disability of any of the undersigned,
and may be exercised by such attorneys by listing the names of the undersigned
along with the names of all other persons for whom such attorneys-in-fact are
acting.
8
<PAGE> 188
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,
- ------------------- Officer, and Director 1996
Joel R. Schultz
/s/ CHARLES J. SIEGEL Chief Financial and February 26,
- --------------------- Accounting Officer 1996
Charles J. Siegel
/s/ RICHARD D. YOUNG Senior Executive Vice February 26,
- -------------------- President and Director 1996
Richard D. Young
/s/ RUSSELL G. ALLISON Director February 26,
- ---------------------- 1996
Russell G. Allison
</TABLE>
<PAGE> 189
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
EXHIBIT VOLUME
to
FORM S-1
Registration Statement
Under
The Securities Act of 1933
----------------
PACIFIC UNITED GROUP, INC.
(Exact name of registrant as specified in its charter)
<PAGE> 190
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> 191
<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> 192
<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> 193
<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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(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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<PAGE> 13
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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<PAGE> 19
(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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<PAGE> 26
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).
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(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
