<PAGE> 1
PRESIDENTIAL MORTGAGE COMPANY
21031 VENTURA BOULEVARD
WOODLAND HILLS, CALIFORNIA 91364
May 16, 1996
Dear Limited Partner:
From 1981 through 1992, Presidential Mortgage Company (the "Partnership")
operated a profitable real estate lending business and made regular quarterly
distributions to all of the Limited Partners and the General Partner
(collectively, the "Partners") of the Partnership. Changes in business
conditions since 1990, however, resulted in net losses for the three years ended
December 31, 1995, and have necessitated changes in the Partnership's lending
business. The Partnership made substantial progress in its goal of returning to
profitable operations in 1995, and management believes that the Partnership's
business will continue to improve based on results of the first quarter of 1996.
However, restrictions under the Partnership's bank loan agreement will require
that the Partnership continue the current suspension of distributions and
withdrawal payments until at least June 30, 1997. Thereafter, even if the
Partnership operates profitably, the General Partner believes that it will be
difficult for the Partnership to make quarterly distributions comparable to the
amounts paid from 1981 through 1992, or to allow partners to withdraw capital
upon request as previously permitted. The General Partner therefore believes
that it is necessary for all of the Partners to consider whether a change in the
business structure of the Partnership would result in greater benefits to the
Partners than the current structure.
The General Partner has given substantial consideration to several
alternative business plans, including liquidation of the business and various
restructuring plans. Based upon its analysis of the Partnership's business
prospects, the General Partner believes that a restructuring of the business
into a corporation with publicly traded common stock would result in the highest
potential value to all of the partners of the Partnership. Accordingly, the
General Partner has determined to propose a restructuring plan (the
"Restructuring Plan") to the Limited Partners, the terms of which are described
in the Proxy Statement/Prospectus which accompanies this letter. If approved by
the necessary vote of Limited Partners, the terms of the Restructuring Plan, as
described herein, will allow each Limited Partner to choose whether to accept
publicly traded common stock in a corporate holding company that will acquire
all of the assets and liabilities of the Partnership and continue its business
under the same management, or to accept cash in the amount of $10 times the
number of shares that Limited Partner would have received in the corporate
holding company (the "Cash Out Option").
The terms of the Restructuring Plan provide for the Partnership to transfer
all of its assets and liabilities to PacificAmerica Money Center, Inc. (the
"Corporation"), a Delaware corporation wholly-owned by the Partnership, in
exchange for an amount of shares of the common stock (the "Common Stock") of the
Corporation equal to the Net Tangible Equity of the Partnership (as defined
below), as of the last day of the month preceding the closing date of the
Restructuring Plan, divided by 10, provided that the total number of shares to
be issued may not be less than 890,000, less any shares that would have been
issued to Limited Partners who elect the Cash Out Option. The Corporation will
further issue cash in lieu of shares that would otherwise be issued to all
Limited Partners who elect the Cash Out Option. "Net Tangible Equity" for
purposes of the Restructuring Plan will be determined as total assets minus
total liabilities, goodwill and capitalized organization costs, other than costs
of the offering of additional shares described herein, as adjusted for a payment
of $1,185,000 of the debt which the Partnership anticipates will be owed by it
to the General Partner by May 31, 1996, intended to be used by the General
Partner to purchase certain warrants, as described below, and Common Stock in a
Rights Offering (as described below). Based on management's estimate that the
Net Tangible Equity of the Partnership will be approximately $8.9 million by May
31, 1996, it is anticipated that a total of 890,000 shares will be issuable in
connection with the Restructuring Plan, less any cash distributable to Limited
Partners who elect the Cash Out Option.
The Partnership will distribute all of the shares of Common Stock received
by it pro rata to the Partners of the Partnership (other than Limited Partners
who have elected the Cash Out Option) based upon their respective capital
accounts (the "Capital Accounts") in the Partnership. The Capital Account of
each
<PAGE> 2
Limited Partner is determined under the partnership agreement of the Partnership
(the "Partnership Agreement") as that Limited Partner's initial capital
contribution, less capital withdrawals, distributions received in excess of
distributable net profits of the Partnership (as defined in the Partnership
Agreement) and that Limited Partner's allocated share of the net losses of the
Partnership.
The Restructuring Plan must be approved by Limited Partners holding at
least 51% of the capital contributions in the Partnership (voting as a single
class), without considering the capital contributions of the General Partner.
There are no appraisal rights offered in connection with the Restructuring Plan.
However, each Limited Partner who votes in favor of the Restructuring Plan may
elect the Cash Out Option with respect to all partnership interests owned by
that Limited Partner, which will entitle that Partner to receive cash in lieu of
shares of Common Stock equal to $10 times the number of shares of Common Stock
that Limited Partner would have received based on his, her or its Capital
Account in the Partnership. The vote of the Limited Partners on the
Restructuring Plan will be conducted by written Ballot in lieu of a meeting. The
Ballot of each Limited Partner accompanies this letter. Ballots will be
solicited during the period beginning on the date hereof and ending on June 17,
1996 (the "Solicitation Period"), provided that the General Partner may, in its
sole discretion, extend the Solicitation Period for one or more periods not to
exceed July 31, 1996.
In order to raise additional capital to fund the Corporation's growth plan,
subject to the approval of the Restructuring Plan, the Corporation will
simultaneously offer (the "Rights Offering") to all of the existing Partners of
the Partnership, pro rata in accordance with their respective Capital Accounts
in the Partnership, the right (the "Basic Subscription Right") to purchase an
aggregate of 800,000 additional shares of Common Stock (the "Additional
Shares"), subject to reduction if and to the extent necessary to permit the
Corporation to sell a minimum of 200,000 shares in the Public Offering (as
described below) at a purchase price of $10 per share (the "Subscription
Price"). All Partners will also have the right to subscribe (the
"Oversubscription Privilege") for any Additional Shares not purchased by other
Partners through the exercise of their Basic Subscription Rights, subject to
allocation in the event subscriptions are received for an amount in excess of
the Additional Shares. No investor may purchase more than seven percent of the
shares to be issued by the Corporation in the Restructuring, the Rights Offering
and the Public Offering. Partners who wish to purchase Additional Shares in the
Rights Offering must return a Subscription Agreement, in the form which
accompanies this letter, together with a check for the Subscription Price for
all Additional Shares subscribed for, by the end of the Solicitation Period.
For every five shares of Common Stock purchased by Partners in the Rights
Offering, the Corporation will issue a transferable warrant (collectively,
"Subscriber Warrants") for one additional share of Common Stock, exercisable at
any time after issuance for a period of two years, at an exercise price equal to
125% of the price per share of Common Stock sold in the Public Offering (as
described below). Subscriber Warrants will not be issued to investors in the
Public Offering.
LIMITED PARTNERS WHO WISH TO EXERCISE BASIC SUBSCRIPTION RIGHTS AND
OVERSUBSCRIPTION PRIVILEGES, OR TO EXERCISE THE CASH OUT OPTION, MUST VOTE "FOR"
THE RESTRUCTURING PLAN. LIMITED PARTNERS WHO ELECT THE CASH OUT OPTION WILL NOT
RECEIVE CASH UNLESS THE RESTRUCTURING IS COMPLETED.
The Basic Subscription Right allocable to the General Partner will be
exercisable by each partner of the General Partner, pro rata in accordance with
each partner's interest in the General Partner, and each such partner will also
have the right to exercise the Oversubscription Privilege. In addition, the
Corporation has extended the Oversubscription Privilege to all officers,
directors and employees of the Partnership and its subsidiaries, so that these
employees will be entitled to subscribe for shares of Common Stock to the extent
existing Partners do not exercise their Basic Subscription Rights or the
Oversubscription Privilege. These subscribers will also receive Subscriber
Warrants. To the extent that shares are available, certain officers and
directors of the Partnership and its subsidiaries and proposed directors of the
Corporation have committed to subscribe for 170,000 shares ($1,700,000) in the
Rights Offering and the Public Offering. The General Partner will also purchase
80,000 shares in the Rights Offering with the proceeds of repayment of $800,000
of the debt which the Partnership anticipates it will owe to the General Partner
by May 31, 1996.
<PAGE> 3
If the Restructuring Plan is approved by the requisite vote of Limited
Partners, as soon as possible following the end of the Solicitation Period, but
not later than 60 days from the Solicitation Period Expiration Date, the
Corporation will conduct a public offering (the "Public Offering") of the
Additional Shares not sold in the Rights Offering plus an amount equal to the
number of shares which Limited Partners electing the Cash Out Option would have
received for their interests in the Partnership (the "Public Offering Shares").
Friedman, Billings, Ramsey & Co., Inc. has agreed to act as representative (the
"Representative") of a group of underwriters in a firm underwriting of the
Public Offering Shares. The price per share of the Public Offering Shares (the
"Public Offering Price") is expected to be $10 per share, and will be determined
by negotiation between management of the Corporation and the Representative
immediately prior to the commencement of the Public Offering. If the Public
Offering Price per share is less than $10 per share, the vote of the Limited
Partners on the Restructuring Plan will be re-solicited, and a new Rights
Offering will be conducted during the re-solicitation period.
As a condition to completion of the Restructuring Plan, the Corporation
must achieve a minimum market capitalization (total number of shares issued
times Public Offering Price) of $16.9 million (the "Minimum Market
Capitalization"). If the Minimum Market Capitalization is not achieved, the
Restructuring Plan will not be completed and no shares will be sold by the
Corporation. In that event, the Partnership will continue in business under its
current structure.
If the Restructuring Plan is completed, the General Partner will terminate
all management fees and other compensation it receives from the Partnership,
effective as of the closing date of the Restructuring and will not receive any
management fees or other compensation from the Corporation. The General Partner
will receive no additional consideration for its general partner's interest in
the Partnership other than its pro rata interest in shares of Common Stock based
upon its capital account in the Partnership. However, the General Partner will
purchase warrants ("General Partner Warrants") exercisable for additional shares
of the Common Stock equal to 25% of the total outstanding shares of Common Stock
on the closing date of the Restructuring Plan on a fully diluted basis assuming
all General Partner Warrants are exercised. The General Partner Warrants will be
exercisable at any time after issuance for a period of 18 months at an exercise
price per share equal to 150% of the Public Offering Price. The General Partner
will pay $385,000 for the General Partner Warrants, which management believes is
equal to the fair value of the General Partner Warrants based upon the Black-
Scholes method of option valuation.
If the Restructuring Plan is completed, the business of the Partnership
will be transferred to the Corporation. Two organizational charts illustrating
the changes from the partnership to the corporate holding company structure
appear on page 5 of the Proxy Statement/Prospectus accompanying this letter. The
managing officers of the Corporation will be the same as the current managing
officers of the Partnership.
After the Restructuring, management intends to pursue a national expansion
strategy for 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 substantially increased the monthly volume of
mortgage loans originated and sold to larger mortgage lenders for
securitization. For the year ended December 31, 1995, Pacific Thrift
increased gains on sale of loans originated for sale by $7.7 million
(890%), to $8.6 million from $.9 million for the prior year.
-- INCREASE VOLUME OF LOANS ORIGINATED FOR SALE IN STATES IN WHICH PACIFIC
THRIFT HAS RECENTLY COMMENCED LENDING OPERATIONS. In 1994, management
of Pacific Thrift began to implement a geographic expansion strategy to
increase the volume of loans originated for sale. As of April 30, 1996,
Pacific Thrift had loan representatives in the 22 states of Arizona,
California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho,
Illinois, Kansas, Maryland, Massachusetts, Minnesota, Missouri, Nevada,
New York, Oregon, Pennsylvania, Texas, Utah, Virginia and Washington.
In addition, as of April 30, 1996, Pacific Thrift was in the early
stages of operations in Indiana, New Hampshire, New Mexico, North
Carolina, Ohio, Rhode Island, South Carolina, Washington, D.C. and
Wisconsin.
<PAGE> 4
-- EXPAND LOAN OPERATIONS INTO NEW STATES. As of April 30, 1996,
management had taken steps to qualify or confirm exemption from
licensing requirements in the states of Hawaii, Iowa, Kentucky,
Louisiana, Michigan, Montana, Oklahoma, Tennessee, and West Virginia.
-- MINIMIZE OVERHEAD COSTS BY OPERATING WITHOUT OFFICES IN MOST
AREAS. Pacific Thrift hires local loan representatives in each state,
who operate without offices. These loan representatives typically have
contacts with local mortgage loan brokers, which provide sources of
loan referrals. All loan applications and supporting documentation are
delivered to Pacific Thrift's California loan review office for all
processing and underwriting.
-- CONTINUE TO EVALUATE POSSIBLE SECURITIZATION PROGRAMS. Management
believes that Pacific Thrift may reach loan volume levels sufficient to
support direct securitization programs by Pacific Thrift by the end of
1996 or the first half of 1997. Management will continue to evaluate
possible programs to securitize loans to the extent that future lending
volume permits.
-- GRADUALLY REBUILD PACIFIC THRIFT'S LOAN PORTFOLIO BALANCE. Although
management intends to emphasize loans originated for sale, it also
intends to gradually rebuild Pacific Thrift's loan portfolio balance
with residential and commercial mortgage loans.
-- CONTINUE TO IMPROVE ASSET QUALITY. In 1994, management of Pacific
Thrift began an ongoing effort to improve loan underwriting policies
and procedures for portfolio loans. While loan delinquencies over 60
days on portfolio 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 portfolio 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.
The Common Stock of the Corporation has been conditionally approved for
trading on the Nasdaq National Market, subject to completion of the
Restructuring Plan and notification of issuance of the Common Stock. It is
anticipated that the Common Stock will be listed for trading immediately upon
issuance to the Limited Partners. If, for any reason, the Common Stock is not
accepted for listing for trading on the Nasdaq National Market, the American
Stock Exchange or the Pacific Stock Exchange, the Limited Partners will be
notified and a new vote will be required as a condition to the closing of the
Restructuring Plan.
THE GENERAL PARTNER RECOMMENDS THAT LIMITED PARTNERS VOTE FOR THE
RESTRUCTURING PLAN BECAUSE THE GENERAL PARTNER BELIEVES THAT IT REPRESENTS THE
BEST AVAILABLE ALTERNATIVE FOR MAXIMIZING THE VALUE AND LIQUIDITY OF THE LIMITED
PARTNERS' EXISTING INVESTMENT IN THE PARTNERSHIP. IF THE RESTRUCTURING PLAN IS
APPROVED, THE GENERAL PARTNER WILL HAVE NO RIGHT TO RECEIVE MANAGEMENT FEES OR
ANY OTHER COMPENSATION FROM THE PARTNERSHIP OR THE CORPORATION, BUT THE GENERAL
PARTNER WILL RECEIVE PAYMENT OF $1,185,000 OF THE DEBT WHICH THE PARTNERSHIP
ANTICIPATES IT WILL OWE TO THE GENERAL PARTNER BY MAY 31, 1996, WHICH THE
GENERAL PARTNER INTENDS TO USE TO PURCHASE GENERAL PARTNER WARRANTS FROM THE
CORPORATION FOR $385,000, EXERCISABLE FOR UP TO 25% OF THE TOTAL OUTSTANDING
COMMON STOCK OF THE CORPORATION ON THE CLOSING DATE OF THE RESTRUCTURING PLAN
AND TO PURCHASE 80,000 SHARES OF COMMON STOCK FOR $800,000. IN ADDITION, THE
MANAGING OFFICERS OF THE CORPORATION WILL BE ENTITLED TO SALARIES AND BENEFITS,
INCLUDING STOCK OPTIONS, WHICH MAY EXCEED THEIR CURRENT COMPENSATION IF THE
CORPORATION SUBSTANTIALLY INCREASES ITS EARNINGS. FURTHER, THE CORPORATION HAS
ADOPTED CERTAIN PROVISIONS WHICH WOULD MAKE IT MORE DIFFICULT TO CHANGE
MANAGEMENT IN THE FUTURE. SINCE THE MANAGING OFFICERS OF THE PARTNERSHIP AND THE
GENERAL PARTNER ARE THE SAME AS THE MANAGING OFFICERS OF THE CORPORATION, THE
GENERAL PARTNER HAD A CONFLICT OF INTEREST IN STRUCTURING THE TERMS OF THE
RESTRUCTURING PLAN.
Only Limited Partners as of the record date of April 30, 1996, will be
entitled to vote on the Restructuring Plan. To indicate your vote FOR or AGAINST
the proposed Restructuring Plan, a form of Ballot (which is included herewith)
properly completed and signed, must be received by U.S. Stock Transfer
Corporation by 5:00 P.M. (California time), June 17, 1996 (the "Expiration
Date"). The General Partner may, in its sole discretion, extend the Expiration
Date for one or more periods, not to exceed July 31, 1996.
<PAGE> 5
See "Restructuring Plan -- Voting Procedures" in the Proxy Statement/Prospectus
for the exact procedure. Please complete, sign, date and return your Ballot in
the enclosed envelope.
FAILURE TO RETURN YOUR BALLOT BY THE SOLICITATION PERIOD EXPIRATION DATE
WILL BE TREATED AS A VOTE AGAINST THE RESTRUCTURING PLAN.
Georgeson & Company Inc. has been retained by Presidential Mortgage Company
as the Information Agent to assist in connection with the solicitation of votes
on the Restructuring Plan. Questions and requests for assistance regarding the
Restructuring Plan, requests for additional copies of this Proxy
Statement/Prospectus and the Ballot may be directed to the Information Agent for
PacificAmerica, at Wall Street Plaza, New York, New York 10005, telephone (800)
223-2064. In addition, please feel free to call Richard Fremed, a managing
officer of the Partnership, at (818) 992-8999 ext. 250.
Very truly yours,
JOEL R. SCHULTZ,
President, Presidential Services
Corporation, the general partner of
Presidential Management Company, the
general partner of the Partnership
<PAGE> 6
PROXY STATEMENT/PROSPECTUS
PACIFICAMERICA MONEY CENTER, INC.
RESTRUCTURING PLAN OF PRESIDENTIAL MORTGAGE COMPANY
AND
RIGHTS OFFERING OF UP TO 800,000 SHARES
OF COMMON STOCK AT $10 PER SHARE
The General Partner of Presidential Mortgage Company, a California limited
partnership ("Presidential" or the "Partnership"), hereby proposes the adoption
of a restructuring plan (the "Restructuring Plan"), a copy of which is included
as Exhibit A in this Proxy Statement/Prospectus. The terms of the Restructuring
Plan provide for the Partnership to transfer all of its assets and liabilities
to PacificAmerica Money Center, Inc. (the "Corporation"), a Delaware corporation
wholly-owned by the Partnership, in exchange for an amount of shares of the
common stock (the "Common Stock") of the Corporation equal to the Net Tangible
Equity of the Partnership (as defined herein), as of the last day of the month
preceding the closing date of the Restructuring Plan, divided by 10, provided
that the total number of shares to be issued may not be less than 890,000, less
any shares that would otherwise be issued to Limited Partners who elect to
exercise a cash out option (the "Cash Out Option"). The Corporation will further
issue cash in lieu of shares that would otherwise be issued to all Limited
Partners who elect the Cash Out Option, in an amount equal to $10 times the
number of shares each of those Limited Partners would have been entitled to
receive for their interests in the Partnership. The Partnership will distribute
all of the shares of Common Stock received by it pro rata to the Partners of the
Partnership (other than Limited Partners electing the Cash Out Option) based
upon their respective capital accounts (the "Capital Accounts") in the
Partnership. The terms of the Restructuring Plan, including a rights offering
(the "Rights Offering") and a public offering (the "Public Offering") by the
Corporation, are described herein. Following the Partnership's transfer of
assets and liabilities, the Corporation will continue all of the existing
business operations of the Partnership. As a result of the transfer of all of
its assets and liabilities, the Partnership will be deemed dissolved as of the
effective date of the Restructuring Plan.
The Restructuring Plan must be approved by Limited Partners holding at
least 51% of the total capital contributions ("Capital Contributions") in the
Partnership, as required by the Partnership Agreement. Because of the interest
of the General Partner and its affiliates in the Restructuring Plan, the Capital
Contributions of the General Partner representing either its general partner's
interest or its limited partner's interests will not be counted for the vote.
The proposed Restructuring Plan involves a number of risks, as described in
detail under the heading "Risk Factors" at pages 10 through 16 hereof, including
but not limited to the following:
-- No entitlement to distributions of net profits
-- No right to withdraw capital
-- Uncertainties of trading market for Common Stock
-- Additional management control provisions of the Corporation
-- Limitation on annual use of net operating loss carryforward benefits
-- Taxation of all corporate earnings
-- Lack of independent representation of limited partners
There has been no previous trading market for limited partnership interests
in the Partnership or the Common Stock. The Common Stock has been approved for
listing on the Nasdaq National Market under the symbol "PAMM," subject to
completion of the Restructuring Plan and official notice of issuance of the
Common Stock. The trading price of the Common Stock will be subject to
fluctuation, and initially may be less than the net equity per share of the
Corporation. There can be no assurance of the trading value of the Common Stock
at any future date, or that the Common Stock will continue to be traded on the
Nasdaq National Market, or that an active and liquid market for the Common Stock
will develop.
NEITHER THIS TRANSACTION NOR THE SHARES OF COMMON STOCK TO BE ISSUED UNDER THE
RESTRUCTURING PLAN HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. NEITHER THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION OR THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Proxy Statement/Prospectus is May 14, 1996.
<PAGE> 7
TABLE OF CONTENTS
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AVAILABLE INFORMATION................................................................... 2
SUMMARY................................................................................. 3
Risk Factors.......................................................................... 3
Comparison of Ownership of Limited Partnership Units of the Partnership and Common
Stock of the Corporation........................................................... 3
The Partnership.................................................................... 3
The Corporation.................................................................... 4
Current Organizational Structure of the Partnership................................... 5
Proposed Organizational Structure of the Corporation.................................. 5
Summary of The Restructuring Plan..................................................... 6
Fairness of Restructuring Plan........................................................ 9
RISK FACTORS............................................................................ 10
Risk Factors if the Restructuring Plan is Completed................................... 10
Changes in Nature of Investment....................................................... 10
Conflicts of Interest................................................................. 11
Risk Factors if the Restructuring Plan is Not Completed and the Partnership Continues
Under Its Present Structure........................................................ 12
Risk Factors Which Apply Whether or Not the Restructuring Plan is Approved............ 13
COMPARISON OF OWNERSHIP OF LIMITED PARTNERSHIP UNITS OF THE PARTNERSHIP AND COMMON STOCK
OF THE CORPORATION.................................................................... 17
Form of Organization.................................................................. 17
Length of Investment.................................................................. 17
Distribution of Net Profits........................................................... 18
Withdrawal of Capital................................................................. 18
Permitted Investments................................................................. 19
Additional Equity..................................................................... 19
Borrowing Policies.................................................................... 20
Restrictions Upon Related Party Transactions.......................................... 20
Management Control and Responsibility................................................. 21
Management Liability and Indemnification.............................................. 22
Anti-Takeover Provisions.............................................................. 23
Voting Rights......................................................................... 24
Special Meetings and Action Without a Meeting......................................... 24
Compensation, Fees and Distributions.................................................. 25
Limited Liability of Investors........................................................ 25
Review of Investor Lists.............................................................. 26
Taxation.............................................................................. 26
THE RESTRUCTURING PLAN.................................................................. 27
Changes in Business Conditions Which Necessitate Restructuring........................ 27
Transfer of Assets and Liabilities and Distribution of Common Stock................... 28
Rights Offering....................................................................... 29
Public Offering....................................................................... 33
General Partner Warrants.............................................................. 33
Conditions to Restructuring Plan...................................................... 34
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Manner of Effecting the Restructuring Plan............................................ 34
Accounting Treatment of the Restructuring Plan........................................ 34
Expenses of the Restructuring Plan.................................................... 35
Right to Inspect List of Limited Partners............................................. 36
USE OF PROCEEDS......................................................................... 36
CAPITALIZATION.......................................................................... 37
FAIRNESS OF THE RESTRUCTURING PLAN...................................................... 38
General Partner Conclusions........................................................... 38
Alternatives to the Restructuring Plan................................................ 38
Fairness Opinion...................................................................... 41
Experience of Houlihan Lokey.......................................................... 41
Summary of Methodology................................................................ 41
Assumptions........................................................................... 42
Limitations and Qualifications........................................................ 42
Compensation.......................................................................... 42
VOTING REQUIREMENTS..................................................................... 43
Distribution of Solicitation Materials................................................ 43
Vote Required......................................................................... 43
Voting and Cash Out Election Procedures and Ballots................................... 43
Ballot Completion Instructions........................................................ 44
Withdrawal and Change of Election Rights.............................................. 44
Solicitation of Ballots by Information Agent.......................................... 44
Tabulation of Ballots................................................................. 44
CONFLICTS OF INTEREST................................................................... 44
Benefits and Detriments to the General Partner in Completing the Restructuring Plan... 45
Directors and Officers of the Corporation............................................. 45
Lack of Independent Representation of Limited Partners................................ 45
FIDUCIARY RESPONSIBILITY................................................................ 46
Directors and Officers of the Corporation............................................. 46
General Partner of the Partnership.................................................... 46
SELECTED FINANCIAL DATA................................................................. 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 48
General............................................................................... 48
Financial Condition................................................................... 49
Results of Operations................................................................. 50
Liquidity and Capital Resources....................................................... 54
Asset/Liability Management............................................................ 56
Effect of Federal Laws and Regulations................................................ 57
Impact of Inflation and Changing Prices............................................... 57
Effect of New Accounting Standards.................................................... 57
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE CORPORATION................ 60
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS............................................ 64
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BUSINESS................................................................................ 66
The Partnership....................................................................... 66
The Corporation....................................................................... 66
Pacific Thrift........................................................................ 66
CRC, CRC Washington and LPPC.......................................................... 67
PacificAmerica Mortgage............................................................... 67
Business Strategy..................................................................... 68
Lending Activities.................................................................... 69
Lending Policies...................................................................... 72
Maturities and Rate Sensitivities of Loan Portfolio................................... 76
Classified Assets and Loan Losses..................................................... 76
Investment Activities................................................................. 80
Sources of Funds...................................................................... 80
Deposit Analysis...................................................................... 81
Deposit Maturities.................................................................... 81
Competition........................................................................... 83
Employees............................................................................. 83
Properties............................................................................ 83
Legal Proceedings..................................................................... 84
DIVIDEND POLICY......................................................................... 85
MARKET FOR LIMITED PARTNERSHIP UNITS AND COMMON STOCK OF THE CORPORATION................ 88
Limited Partnership Units............................................................. 88
Common Stock.......................................................................... 89
SUPERVISION AND REGULATION.............................................................. 89
Consumer Protection Laws.............................................................. 89
State Law............................................................................. 89
Federal Law........................................................................... 91
BENEFICIAL OWNERSHIP OF COMMON STOCK.................................................... 100
MANAGEMENT.............................................................................. 103
Directors and Executive Officers...................................................... 103
Board of Directors and Committees..................................................... 105
Compensation of Board of Directors.................................................... 106
Executive Compensation................................................................ 106
Employment Agreements................................................................. 107
1995 Stock Option Plan................................................................ 109
Retirement Plan....................................................................... 113
Stock Purchase Plan................................................................... 113
Supplemental Executive Retirement Plan................................................ 114
Limitation of Liability and Indemnification of Directors.............................. 116
Director and Officer Indemnification.................................................. 117
CERTAIN TRANSACTIONS.................................................................... 117
Management and Other Fees and Reimbursements Paid to the General Partner.............. 117
Payments to General Partner Related to Purchase of CRC and LPPC....................... 118
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Payments for Purchase of Equipment.................................................... 118
General Partner Capital Note.......................................................... 118
Amounts Owed From and to the General Partner and the Partnership...................... 118
Payments to Managing Officers......................................................... 118
Personal Guaranty of Partnership Debt by Managing Officers............................ 119
Consulting Agreement with Director of Pacific Thrift.................................. 119
DESCRIPTION OF CAPITAL STOCK............................................................ 120
Common Stock.......................................................................... 120
Preferred Stock....................................................................... 120
Transfer Agent........................................................................ 121
Certain Anti-Takeover Provisions...................................................... 121
Effect of Quasi-California Corporation Law............................................ 123
Market for Common Stock............................................................... 124
Subscriber Warrants................................................................... 124
General Partner Warrants.............................................................. 124
Bank Warrant.......................................................................... 124
SHARES ELIGIBLE FOR FUTURE SALE......................................................... 125
UNDERWRITING OF THE PUBLIC OFFERING..................................................... 126
REGISTRATION OF CERTAIN SHARES FOR RESALE............................................... 127
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE RESTRUCTURING PLAN.................... 129
Introduction.......................................................................... 129
Summary of Tax Consequences........................................................... 129
Qualification of Restructuring Plan under Code Section 351............................ 130
Tax Consequences to the Limited Partners.............................................. 132
Allocation of Final Items............................................................. 133
Net Operating Losses.................................................................. 133
Potential Application of Section 304 to Transfer of Stock of Subsidiary............... 133
Treatment of Stockholders of Corporation.............................................. 134
Collapsible Corporation Rules......................................................... 134
State, Local and Other Taxation....................................................... 135
LEGAL MATTERS........................................................................... 135
EXPERTS................................................................................. 135
GLOSSARY................................................................................ 137
INDEX TO FINANCIAL STATEMENTS........................................................... 139
Exhibit A The Restructuring Plan
Exhibit B Fairness Opinion of Houlihan, Lokey, Howard & Zukin regarding the
Restructuring Plan
</TABLE>
iv
<PAGE> 11
AVAILABLE INFORMATION
The Corporation has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
Common Stock. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Corporation and
the Common Stock, reference is made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements made in this Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected without
charge at the offices of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048, and copies of all or any
part of the Registration Statement may be obtained from the Public Reference
Section of the Commission upon payment of the prescribed fee.
The Partnership is (and, following the Restructuring Plan the Corporation
will be) subject to the requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and, in accordance therewith, each files (or will file) reports,
proxy statements and other information with the Commission. Copies of such
reports, proxy statements and other information can be obtained, at prescribed
rates, from the public reference facilities at the offices of the Commission.
Copies of such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE
IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
The Corporation will be required to furnish its stockholders with annual
reports containing financial statements audited by its independent accountants.
In addition, the Corporation will file quarterly reports containing unaudited
financial statements, which will be furnished to stockholders upon request.
THE SHARES OF COMMON STOCK ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. THE COMMON STOCK MAY NOT BE USED TO SECURE A LOAN FROM PACIFIC THRIFT
AND LOAN COMPANY.
<PAGE> 12
PACIFIC THRIFT LENDING OPERATIONS
LOGO
- ------------
- ------------
- ------------
- ------------
- ------------
- ------------
- ------------
- ------------
Loan representatives in Arizona, California, Colorado, Connecticut,
Delaware, Florida, Georgia, Idaho, Illinois,
- -----------
Kansas, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New
York, Oregon, Pennsylvania, Texas, Utah, Virginia and Washington.
Early stages of operation in Indiana, New Hampshire, New Mexico, North
Carolina, Ohio, Rhode Island, South
- -----------
Carolina, Washington D.C. and Wisconsin.
Applications pending in Hawaii, Iowa, Kentucky, Louisiana, Michigan,
Montana, Oklahoma, Tennessee and West
- -----------
Virginia.
For future consideration in Alabama, Arkansas, Maine, Mississippi,
Nebraska, New Jersey, North Dakota, South Dakota and Wyoming.
<PAGE> 13
SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the detailed information and financial
statements and notes thereto set forth elsewhere in this Proxy
Statement/Prospectus. The term "Presidential" as used herein refers to
Presidential Mortgage Company on an unconsolidated basis, and the term the
"Partnership" refers to Presidential Mortgage Company on a consolidated basis
with all of its subsidiaries. Other capitalized terms referred to in this
summary and elsewhere herein are defined in the Glossary section appearing at
the end of this Proxy Statement/Prospectus.
RISK FACTORS
The completion of the Restructuring Plan involves a number of risk factors
for Partners of the Partnership, as described in detail under the heading "Risk
Factors" at pages 10 through 16 hereof, including but not limited to the
following:
-- Partners of the Partnership will no longer be entitled to distributions
of net profits, but may receive dividends from the Corporation, as and
when declared by the Board of Directors;
-- Partners of the Partnership will no longer have the right to withdraw
capital upon request and approval of the General Partner, but may sell
their Common Stock in the Corporation in the public trading market;
-- The Common Stock of the Corporation will be subject to an uncertain
trading market;
-- The Corporation's organization documents contain a number of
anti-takeover provisions which reduce the ability of investors to
change the management of the Corporation;
-- It is likely that the completion of the Restructuring Plan or trading
in Common Stock following the Restructuring Plan will cause the
Corporation to be subject to limitation on the annual amount of net
operating loss carryforward benefits that may be used to offset future
net income of the Corporation;
-- The Corporation will be subject to taxation on all of its net earnings,
whereas the Partnership is currently subject to taxation only on the
earnings of Pacific Thrift and Loan Company ("Pacific Thrift"), and
Consolidated Reconveyance Corporation ("CRC Washington"), its two
corporate operating subsidiaries; and
-- The terms of the Restructuring Plan were proposed by the General
Partner, which has a conflict of interest with the Limited Partners,
and such terms have been determined without independent representation
of the existing Limited Partners of the Partnership.
COMPARISON OF OWNERSHIP OF LIMITED PARTNERSHIP UNITS OF THE PARTNERSHIP AND
COMMON STOCK OF THE CORPORATION
THE PARTNERSHIP. The Partnership is a California limited partnership,
organized on June 15, 1981, terminating on December 31, 2025, or sooner upon the
occurrence of certain events. The Partnership currently owns 100% of the
outstanding stock of PacificAmerica Money Center, Inc. (the "Corporation"),
Pacific Thrift and Loan Company ("Pacific Thrift"), a California corporation,
PacificAmerica Mortgage, Inc., ("PacificAmerica Mortgage") a Delaware
corporation, and Consolidated Reconveyance Company ("CRC Washington"), a
Washington corporation. The Partnership also owns 100% of the limited
partnership interests and 99% of the income, gain and loss of Consolidated
Reconveyance Company ("CRC") and Lenders Posting and Publishing Company
("LPPC"), both California limited partnerships, the other 1% of which is owned
by the General Partner, as general partner of each entity.
The Partnership's General Partner is Presidential Management Company, a
California limited partnership with 39 limited partners. The Partnership
currently has 2,493 Limited Partners holding six classes of Limited Partnership
Units. All classes of Units are treated equally under the Restructuring Plan. No
single Limited Partner or group of Limited Partners owns more than 5% of the
total Limited Partnership Units, and
3
<PAGE> 14
the largest owner of Limited Partnership Units is the General Partner, which
owns 4.57% of the total Limited Partnership Units, based on original capital
contributions less withdrawals. The principal executive offices of the
Partnership are located at 21031 Ventura Boulevard, Woodland Hills, California
91364, telephone number (818) 992-8999.
The terms of the Partnership Agreement of the Partnership provide for
quarterly distributions of the net profits of the Partnership; however, there
have been no distributions since 1993 due to a lack of distributable net
profits. The Partnership Agreement also provides a right of Limited Partners to
withdraw capital upon request, provided that the General Partner may withhold
approval of requests if necessary to prevent impairment of the capital or
operations of the Partnership; however, there have been no capital withdrawals
approved since 1993 due to restrictions imposed on the Partnership under its
bank loan agreement. The Partnership is managed exclusively by the General
Partner; the General Partner may be removed by the vote of Limited Partners
holding at least 51% of the total Capital Contributions in the Partnership. The
General Partner receives certain management fees from the Partnership based upon
the amount of loan fees generated on all loans originated by the Partnership and
Pacific Thrift. See "COMPARISON OF OWNERSHIP OF LIMITED PARTNERSHIP UNITS OF THE
PARTNERSHIP AND COMMON STOCK OF THE CORPORATION -- Compensation, Fees and
Distributions."
THE CORPORATION. The Corporation is a Delaware corporation organized on
February 22, 1994. Presidential is currently the sole stockholder of the
Corporation. The principal executive offices of the Corporation are located at
21031 Ventura Boulevard, Woodland Hills, California 91364, telephone number
(818) 992-8999. The Corporation is not a bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHC" Act") or a savings and loan
association holding company under the Home Owners Loan Act of 1933, as amended
(the "HOLA"), and therefore is not regulated or supervised by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") or the
Office of Thrift Supervision (the "OTS").
The Corporation may continue in existence in perpetuity. The Corporation
may, but is not required to, pay dividends from its net earnings, subject to
certain regulatory and legal limitations. There is no right to withdraw capital
from the Corporation, and investors wishing to liquidate their investment in the
Corporation will be required to sell their Common Stock in the public trading
market. The Corporation will be managed by its Board of Directors, who will be
subject to election by the stockholders in accordance with the terms of the
Corporation's Restated Certificate of Incorporation. The Corporation's
organizational documents contain a number of anti-takeover provisions which
limit the ability of investors to change the management of the Corporation. The
Corporation will pay no management or other fees to the General Partner or any
other affiliate, but the Corporation has entered into employment and other
agreements with certain executive officers pursuant to which the Corporation
will pay salaries and benefits including stock options, which may exceed the
amounts currently payable to such officers if the Corporation substantially
increases its earnings. See "COMPARISON OF OWNERSHIP OF LIMITED PARTNERSHIP
UNITS OF THE PARTNERSHIP AND COMMON STOCK OF THE CORPORATION" and
"MANAGEMENT -- Compensation, Fees, and Distributions."
4
<PAGE> 15
Following are two organizational charts, one illustrating the current
structure of the Partnership (assuming the completion of a pending transfer of
the stock of Pacific Thrift and CRC Washington), and the other illustrating the
proposed structure of the Corporation after the Restructuring Plan is completed.
CURRENT ORGANIZATIONAL STRUCTURE OF THE PARTNERSHIP
-----------------------
Presidential Services
Company ("Services")
-----------------------
|
-----------------------
Presidential Management
Company (the "General
Partner")
-----------------------
|
---------------------
Presidential Mortgage
Company
(the "Partnership")
------------------------------------
| | |
- -------------- -------------- -----------------------
Consolidated Pacific United Lenders Posting
Reconveyance Group, Inc. and
Company ("United") Publishing Co. ("LPPC")
("CRC")
- -------------- -------------- -----------------------
|
---------------------------------
| | |
- -------------- -------------- -------------------------------
Pacific Thrift Pacific United Consolidated Reconveyance
and Loan Mortgage, Inc. Corporation, a Washington corp.
Company ("Unified") ("CRC Washington")
("Pacific
Thrift")
- -------------- -------------- -------------------------------
PROPOSED ORGANIZATIONAL STRUCTURE OF THE CORPORATION
<TABLE>
<S> <C>
--------------------------
Pacific United Group, Inc.
(the "Corporation"),
a Del. Corp.
-----------------------------------------------------------------------------
| | | | |
- -------------- ---------------- -------------------- --------------- ----------------
Pacific Thrift CRC Reconveyance LPPC Posting and Pacific Unified Consolidated
and Loan Company Publishing Co. Mortgage, Inc. Reconveyance
Company ("CRC") ("LPPC") ("Unified") Corporation, a
("Pacific Washington corp.
Thrift") ("CRC
Washington")
- -------------- ---------------- -------------------- --------------- ----------------
</TABLE>
Upon completion of the Restructuring Plan, the Corporation will own 100% of
the stock of Pacific Thrift, CRC Washington, and PacificAmerica Mortgage, and
99% of the partnership interests of CRC and LPPC. The Corporation may also form
other corporate subsidiaries in the future for specific lending or related
business operations. The Corporation intends to conduct business exclusively
through its subsidiaries.
5
<PAGE> 16
SUMMARY OF THE RESTRUCTURING PLAN
Following is a summary of the proposed Restructuring Plan:
The Restructuring.......The Partnership will transfer all of its assets and
liabilities to the Corporation, in exchange for shares
of Common Stock of the Corporation equal to the
Partnership's Net Tangible Equity as of the last day of
the month preceding the Closing Date of the
Restructuring Plan, divided by 10, provided that the
number of shares shall not be less than 890,000, less
the shares that would otherwise be issued to Limited
Partners electing the Cash Out Option. The Partnership
will then liquidate, making a final distribution of the
Common Stock to all of the Partners (other than Limited
Partners electing the Cash Out Option), pro rata in
accordance with their respective Capital Accounts, and a
final distribution of cash to the Limited Partners
electing the Cash Out Option equal to $10 times the
number of shares that would otherwise have been received
by Limited Partners electing the Cash Out Option.
Capital Accounts are determined as initial capital
contributions less distributions in excess of
distributable net profits and net losses.
Cash Out Option.........Any Limited Partner may elect to receive cash in lieu of
shares of Common Stock of the Corporation, in an amount
equal to $10 times the shares of Common Stock that
Limited Partner would be entitled to receive based on
his, her or its Capital Account. Limited Partners
electing the Cash Out Option must make the election as
to all of their shares, and may not revoke the election.
Fractional Shares.......No fractional shares will be issued. Any fractional
shares issuable to the Limited Partners will be sold by
the Corporation and cash equal to the proceeds of sale
will be delivered to the Limited Partners based on their
fractional interests.
Rights Offering.........The Corporation will concurrently make a Rights Offering
to all Partners, entitling them to purchase up to
800,000 Additional Shares of Common Stock subject to
adjustment if and to the extent necessary to allow the
Corporation to sell a minimum of 200,000 shares in the
Public Offering, at a purchase price of $10 per share.
In order to exercise subscription rights, each Partner
must send a check equal to $10 per share subscribed for
in the Rights Offering, which must be received by the
end of the Solicitation Period.
Each Partner will have the right (the "Basic
Subscription Right") to subscribe for a percentage of
the total Additional Shares offered in the Rights
Offering equal to that Partner's percentage interest in
the Partnership based on his, her or its Capital
Account. Each Partner will also have the right to
subscribe (the "Oversubscription Privilege") for shares
in excess of the Partner's Basic Subscription Privilege,
to the extent available after the exercise of Basic
Subscription Rights and the intended purchase of 80,000
shares by the General Partner (as described below),
subject to proration in the event there are insufficient
shares available to satisfy all oversubscriptions
received, in amounts proportionate to the amount of
Basic Subscription Rights exercised by each Partner. For
example, if a Partner with a Basic Subscription Right to
purchase 50 shares subscribed for 100 shares, but the
total shares subscribed for by all Partners exercising
the Oversubscription Privilege exceeded the remaining
shares available, then the Partner subscribing for 100
shares would be allocated 50 shares plus that number of
shares in excess of 50 shares as would equal the total
remaining available shares times a fraction, the numera-
6
<PAGE> 17
tor of which is that Partner's Capital Account and the
denominator of which is the total Capital Accounts of
all Partners exercising the Oversubscription Privilege.
No investor may purchase shares in excess of seven
percent of the total shares to be issued by the
Corporation in connection with the Restructuring, the
Rights Offering and the Public Offering.
Subscriber Warrants.....For every five shares of Common Stock purchased by
Partners in the Rights Offering, the Corporation will
issue a transferable warrant (collectively, the
"Subscriber Warrants") for one additional share of
Common Stock, exercisable at any time after issuance for
a period of two years, at an exercise price equal to
125% of the Public Offering Price per share.
General Partner
Participation...........The General Partner will receive Common Stock based upon
its Capital Account, on the same basis as all other
Partners. The Basic Subscription Rights and
Oversubscription Privileges of the General Partner will
be exercisable by the individual partners of the General
Partner. In addition, the General Partner will be paid
$800,000 of the debt which the Partnership anticipates
will be owed by the Partnership to the General Partner
on May 31, 1996, which the General Partner intends to
use to purchase Common Stock of the Corporation, on the
same basis as shares offered in the Rights Offering. The
General Partner will distribute all shares and General
Partner Warrants received by it to its partners and to
certain creditors of the General Partner.
Oversubscription
Privilege
Extended to Officers,
Directors and
Employees...............The Partnership will extend the Oversubscription
Privilege to all officers, directors and employees of
the Partnership and its subsidiaries, to the extent that
Basic Subscription Rights and the Oversubscription
Privilege are not exercised by existing Partners and
partners of the General Partner. Officers, directors and
employees who subscribe for shares will also receive
Subscriber Warrants.
Commitment to Purchase
Common Stock............Certain officers and directors of the Partnership and
its subsidiaries and proposed directors of the
Corporation have indicated their intention to purchase
170,000 shares of Common Stock in the Rights Offering
and the Public Offering.
Public Offering.........If the Restructuring Plan is approved by the requisite
vote of Limited Partners, as soon as possible following
the Solicitation Period Expiration Date, but not later
than 60 days thereafter, the Corporation will conduct a
Public Offering of the Additional Shares not sold in the
Rights Offering, plus an additional number of shares
equal to the shares that would otherwise have been
issued to Limited Partners exercising the Cash Out
Option. In addition, the Corporation will grant an
option to the underwriters of the Public Offering to
sell additional shares equal to 15% of the shares sold
by the Corporation in the Public Offering to cover
overallotments. Friedman, Billings, Ramsey & Co., Inc.
has agreed to act as representative (the
"Representative") of a group of underwriters in a firm
commitment underwriting of the Public Offering Shares.
No investor may purchase shares in excess of seven
percent of the total shares to be issued by the
Corporation in connection with the Restructuring, the
Rights Offering and the Public Offering. The Public
Offering Price per share is anticipated to be $10 per
share, to be determined by negotiation between
management of the Corporation and the Representative
immediately prior to
7
<PAGE> 18
the Public Offering. If the Public Offering Price is
lower than $10 per share, the vote of the Limited
Partners will be re-solicited, and the Restructuring
Plan will not be completed unless the requisite number
of Limited Partners consent to the modified terms of the
Public Offering. If the Corporation does not achieve a
minimum market capitalization (total outstanding shares
times Public Offering Price) of $16.9 million, the
Restructuring Plan will not be completed, and the
Partnership will continue under its current structure.
Market for
Common Stock............The Corporation has obtained conditional approval for
listing of the Common Stock on the Nasdaq National
Market. The Common Stock must be approved for listing on
the Nasdaq National Market, the American Stock Exchange
or Pacific Stock Exchange as a condition to the
completion of the Restructuring Plan.
General Partner
Warrants................The General Partner will purchase from the Corporation
General Partner Warrants to purchase 25% of the total
outstanding Common Stock of the Corporation on the
Closing Date, on a fully diluted basis assuming the
exercise of all General Partner Warrants, at an exercise
price equal to 150% of the Public Offering Price per
share. The General Partner Warrants will be exercisable
at any time after issuance for a period of eighteen
months. The General Partner will be paid $385,000 of the
debt which the Partnership anticipates will be owed by
the Partnership to the General Partner on May 31, 1996,
which the General Partner intends to use to purchase
General Partner Warrants. Management believes that the
purchase price represents the fair market value of the
General Partner Warrants, based on the Black-Scholes
method of option valuation.
Bank Warrant............In connection with an extension of an existing bank loan
(the "Bank Loan") owed by the Partnership to Fleet Bank,
N.A. ("Fleet") (into which NatWest Bank, N.A., the
original lender, merged as of May 1, 1996) in November
1995, the Corporation has agreed to grant to Fleet a
five-year warrant (the "Bank Warrant") to purchase 2% of
the outstanding Common Stock of the Corporation on the
Closing Date, exercisable at a price equal to 25% of the
book value per share of the Common Stock at December 31,
1995, as adjusted for the increase in book value after
the completion of the Restructuring Plan. The
Corporation will have the right to redeem the Bank
Warrant at any time within one year after the date of
issuance for $200,000, and the Corporation intends to
redeem the Bank Warrant promptly after the Closing of
the Restructuring.
Use of Proceeds.........The net proceeds of the additional capital raised in the
Rights Offering and the Public Offering, which
management estimates will total $7,307,000 if 800,000
shares are sold at $10.00 per share, net of
underwriters' discounts and offering expenses, will be
used as follows:
-- approximately $1 million to pay down the Bank 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, 1993; and
-- $200,000 to redeem the Bank Warrant;
-- 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
8
<PAGE> 19
capital to Pacific Thrift and/or used to pay down the Bank Loan as management
deems appropriate.
Any additional proceeds raised from offering shares in
the Public Offering equal to the number of shares that
would otherwise be issued to Limited Partners electing
the Cash Out Option will be used to pay the Limited
Partners electing the Cash Out Option.
Fairness Opinion........The consideration to be received by the Limited Partners
collectively has been reviewed by Houlihan, Lokey Howard
& Zukin ("Houlihan Lokey") and determined to be fair,
from a financial point of view, to the Limited Partners
collectively, and the value of the General Partner
Warrants has been determined by Houlihan Lokey to be not
more than $385,000. See "FAIRNESS OF THE RESTRUCTURING
PLAN."
Information Agent.......Georgeson & Company, Inc., Wall Street Plaza, New York,
New York 10005, telephone (800) 223-2064.
Transfer Agent and
Subscription Agent......U.S. Stock Transfer Corporation, 1745 Gardena Avenue,
Suite 200, Glendale, California 91204, telephone (818)
502-1404.
Record Date.............April 30, 1996
Distribution Date.......Certificates representing the Common Stock will be
mailed to Partners within two business days after the
Closing Date.
Solicitation Period.....Commencing on the date of distribution of this Proxy
Statement/Prospectus and expiring on June 17, 1996, or
such later date, not to exceed July 31, 1996, as the
General Partner determines in its sole discretion.
Tax Consequences........See "FEDERAL INCOME TAX CONSEQUENCES."
Dissolution of the
Partnership.............If the proposed Restructuring Plan is approved, all of
the assets and business operations of the Partnership
will be transferred to the Corporation, which will
result in the dissolution of the Partnership.
FAIRNESS OF RESTRUCTURING PLAN
The General Partner believes that the Restructuring Plan is fair to the
Limited Partners of the Partnership because it will increase liquidity and
potential for capital appreciation of the Partner's existing investment in the
Partnership. The Partnership has obtained a fairness opinion (the "Fairness
Opinion"), a copy of which is included as Exhibit B to this Proxy
Statement/Prospectus, from Houlihan Lokey that the consideration to be received
by all of the Limited Partners collectively in connection with the Restructuring
Plan is fair, from a financial point of view, to the Limited Partners
collectively, and, based on the assumed Public Offering Price of $10 per share,
the fair market value of the General Partner Warrants has been determined by
Houlihan Lokey to be not more than $385,000. The full text of the opinion, which
contains a detailed description of the assumptions and qualifications made,
matters considered and limitations on the review and opinion, should be read in
its entirety. Houlihan Lokey is a nationally recognized provider of financial
advisory services that regularly engages in, among other things, the valuation
of businesses and their securities in connection with mergers and acquisitions,
private placements, going-private transactions, and in valuations for estate,
corporate and other purposes. See "FAIRNESS OF THE RESTRUCTURING PLAN."
9
<PAGE> 20
RISK FACTORS
In evaluating the Restructuring Plan, Limited Partners should carefully
consider the contents of this Proxy Statement/Prospectus and should give
particular consideration to the following risk factors. The risk factors
described herein have been classified into three categories: (1) risk factors
which apply only if the Restructuring Plan is completed; (2) risk factors which
apply if the Restructuring Plan is not completed, and Limited Partners continue
to hold Limited Partnership Units in the Partnership as currently structured;
and (3) risk factors which apply generally to the lending business of either the
Partnership or the Corporation, regardless of whether or not the Restructuring
Plan is completed.
RISK FACTORS IF THE RESTRUCTURING PLAN IS COMPLETED
If the Restructuring Plan is completed, the Limited Partners will no longer
hold limited partnership Units of the Partnership, but Common Stock of the
Corporation. The nature of an investment in the Common Stock is different in
many respects from an investment in limited partnership Units, which Limited
Partners should consider when determining whether to approve the Restructuring
Plan. In addition, Limited Partners should consider whether the terms of the
Restructuring Plan are fair. The terms of the Restructuring Plan were determined
by the General Partner, which has conflicts of interest with the Limited
Partners, as further described below in this section, with respect to the
determination of the terms of the Restructuring Plan. The terms of the
Restructuring Plan were not negotiated at arm's-length with any representative
of the Limited Partners or any other third party.
CHANGES IN NATURE OF INVESTMENT
NO ENTITLEMENT TO DISTRIBUTIONS OF NET PROFITS. If the Restructuring Plan
is completed, Limited Partners will no longer have the right to receive
quarterly distributions of the net profits, if any, earned by the Partnership or
the Corporation. The Partnership has suspended all distributions since June
1993, and distributions will continue to be suspended due to restrictions under
the Bank Loan until at least June 30, 1997. To the extent that the Corporation
earns net profits in the future, the Board of Directors may, but is not required
to, declare dividends on the Common Stock. The Board of Directors does not
intend to consider the payment of any dividends until at least the fourth
quarter of 1997, depending upon the earnings and financial condition of the
Corporation and its operating subsidiaries. Payment of future dividends will be
subject to the discretion of the Board of Directors and will depend upon the
consolidated earnings and financial condition of the Corporation, the capital
requirements of Pacific Thrift, applicable governmental policies and regulations
and such other matters as the Board deems appropriate. See "DIVIDEND POLICY".
Pacific Thrift's ability to pay cash dividends is limited by the provisions of
California law with respect to licensed industrial loan companies and by
regulatory policies of the Federal Deposit Insurance Corporation ("FDIC") and
the California Department of Corporations ("DOC"). See "SUPERVISION AND
REGULATION."
NO RIGHT TO WITHDRAW CAPITAL. If the Restructuring Plan is approved, no
further requests to withdraw capital will be approved by the Partnership, and
all Limited Partners will receive Common Stock in liquidation of their interests
in the Partnership. Stockholders will thereafter be required to sell their
Common Stock in order to liquidate their investment in the Corporation.
UNCERTAINTIES OF COMMON STOCK TRADING MARKET. The Common Stock has been
conditionally approved, subject to completion of the Restructuring Plan, for
listing on the Nasdaq National Market, under the symbol "PAMM." Friedman,
Billings, Ramsey & Co., Inc. has indicated an intention to make a market in the
Common Stock. That firm is not obligated, however, to make a market in the
Common Stock and any market making may be discontinued at any time. No assurance
can be given that the Common Stock will continue to be quoted on the Nasdaq
National Market, or that an active and liquid market for the Common Stock will
develop. There has been no prior public market for either the Common Stock or
the Limited Partnership Units of the Partnership. Furthermore, there is
substantial uncertainty as to the price at which the Common Stock will trade
following the completion of the Restructuring Plan. It is possible that the
Common Stock will initially trade below the net equity per share of the
Corporation. Historically, equity securities of new companies formed through the
consolidation of partnerships have traded below, and in many cases
10
<PAGE> 21
substantially below, the net equity per share of the consolidated entity. Among
the factors that might adversely affect the initial trading prices of the Common
Stock are the following: potential pent-up selling pressure as a result of the
historic illiquidity of the Limited Partnership Units; the recent net operating
losses of the Partnership; the absence of an active market for the Common Stock;
and the unfamiliarity of institutional investors, financial analysts and
broker/dealers with the Corporation and its prospects as an investment when
compared against other equity securities (including securities issued by other
financial institution holding companies).
ADDITIONAL MANAGEMENT CONTROL PROVISIONS. Limited Partners currently have
the right to remove the General Partner, elect a new general partner, amend the
Partnership Agreement, sell all or substantially all the assets of the
Partnership, or dissolve the Partnership by vote of a majority interest. The
Corporation, which has the same management as the General Partner, 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 the holders 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 the holders of 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 the holders of 66 2/3% of the outstanding Common Stock. In addition,
Stockholders have no right to call special meetings, and no right to take
actions by written consent unless approved by the Board of Directors. See
"DESCRIPTION OF THE CAPITAL STOCK OF THE CORPORATION -- Anti-Takeover
Provisions."
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARD. Management believes
that it is likely the completion of the Restructuring Plan or trading in Common
Stock after the Restructuring Plan will limit the Corporation's ability to
utilize federal net operating loss carryforwards ("NOL") of Pacific Thrift equal
to approximately $4.0 million at December 31, 1995, which management anticipates
will be reduced to approximately $1.2 million by May 31, 1996. 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 5.68%). 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 1999. See "FEDERAL INCOME TAX CONSEQUENCES -- Net
Operating Loss Carryforward."
TAXATION OF THE CORPORATION. The Corporation is subject to taxation at
corporate income tax rates under federal and state tax laws. The earnings of
Presidential, CRC and LPPC are not subject to entity-level taxation, although
the earnings of Pacific Thrift, and CRC Washington are subject to taxation, and
the Partners are each subject to taxation of their allocated shares of taxable
income of the Partnership. The future tax liability of the Corporation will
decrease the net operating income of Presidential, CRC and LPPC. However,
Limited Partners should note that, since a substantial portion of the
anticipated earnings of the Corporation is expected to be earned by Pacific
Thrift, which is already a corporation subject to federal and state taxation at
the rates applicable to corporations, the increased tax on the consolidated
earnings of the Corporation is not expected to be substantially different than
if the Partnership were to continue under its present structure. In addition,
the Stockholders will be subject to income tax liability for any dividends that
may be paid by the Corporation in the future. See "FEDERAL INCOME TAX
CONSEQUENCES -- Taxation of Stockholders of the Corporation."
CONFLICTS OF INTEREST
LACK OF INDEPENDENT REPRESENTATION. The terms of the Restructuring Plan
have been established by the General Partner, which has the same management as
the Corporation, and the Limited Partners were not
11
<PAGE> 22
separately represented in structuring and negotiating the terms of the
Restructuring Plan, by representative groups of Limited Partners or outside
experts and consultants, such as investment bankers, legal counsel, accountants
and financial experts, who would have been engaged solely to represent the
independent interests of the Limited Partners. Had separate representation been
arranged for the Limited Partners, the terms of the Restructuring Plan might
have been different and possibly more favorable to the Limited Partners. See
"CONFLICTS OF INTEREST."
COMPENSATION OF DIRECTORS AND OFFICERS OF THE CORPORATION. Certain
executive officers of the General Partner will receive salaries and benefits
from the Corporation, including incentive stock options, a stock purchase plan
and a supplemental executive retirement plan, if the Restructuring Plan is
approved. Most of the executive officers could receive higher bonus compensation
from the Corporation than from the Partnership if the earnings of the
Corporation substantially increase. In addition, these officers could also
receive additional compensation in connection with the exercise of stock options
if the value of the Corporation's stock increases, as well as benefits payable
under the supplemental executive retirement plan. Had the Limited Partners been
separately represented, the terms of management compensation might have been
different and possibly more favorable to the Limited Partners. See
"MANAGEMENT -- Executive Compensation."
RISK FACTORS IF THE RESTRUCTURING PLAN IS NOT COMPLETED AND THE PARTNERSHIP
CONTINUES UNDER ITS PRESENT STRUCTURE
If the Restructuring Plan is not completed, the Partnership will continue
under its present structure unless and until an alternative plan is presented by
either the General Partner or the Limited Partners. If the Partnership is
continued under its present structure, Limited Partners should consider the
following risk factors that will affect their investment in Limited Partnership
Units.
CONTINUING SUSPENSION OF DISTRIBUTIONS. The Partnership has suspended all
distributions of net profits (as defined under the Partnership Agreement) since
July 1993 due to restrictions under the Bank Loan and the fact that no
distributable net profits have been earned by the Partnership. The terms of the
Bank Loan will restrict the payment of all distributions through June 30, 1997.
Thereafter, there can be no assurance of the amount of distributable net profits
that will be earned by the Partnership for distribution to the Partners.
CONTINUING SUSPENSION OF WITHDRAWAL PAYMENTS AND APPROVAL OF REQUESTS TO
WITHDRAW CAPITAL. The Partnership has suspended all withdrawal payments to
Limited Partners whose requests to withdraw capital were previously approved,
and the General Partner has not approved any requests to withdraw capital
received since July 1993. If the Restructuring Plan is not approved and the
Partnership continues under its present structure, the terms of the Bank Loan
will restrict all payments of capital to withdrawing Limited Partners through
June 30, 1997. There can be no assurance that additional requests to withdraw
capital will be approved in the future.
UNCERTAINTY AS TO GOING CONCERN. The Partnership's independent certified
public accountants included an explanatory paragraph in their report for the
year ended December 31, 1995, which indicated a substantial doubt as to the
ability of the Partnership to continue as a going concern due primarily to
substantial debt service requirements and restrictions on dividend payments by
Pacific Thrift to the Partnership. Since the date of the report, however, a
regulatory order, which restricted the payment of dividends by Pacific Thrift,
has been terminated. As of March 31, 1996, the only restrictions on payment of
dividends by Pacific Thrift are those imposed on all California corporations
under California law and the requirement that Pacific Thrift maintain the
capital ratios required under the regulations of the FDIC and the DOC, as
modified by the terms of a Memorandum of Understanding with the FDIC and the
DOC. (See "Supervision and Regulation -- Regulatory Actions" and Successor
Independent Certified Public Accountants' Report, page F-1, and Note 1 of the
Notes to Financial Statements.)
12
<PAGE> 23
RISK FACTORS WHICH APPLY WHETHER OR NOT THE RESTRUCTURING PLAN IS APPROVED
There are certain risk factors inherent in the lending business and other
risk factors particular to the Partnership's existing lending business, which
apply whether the lending business continues to be conducted by the Partnership
or is transferred to the Corporation, as described below.
RISK OF CONTINUING LOAN LOSSES. For the years ended December 31, 1995, 1994
and 1993, the Partnership sustained consolidated net losses of $1.7 million,
$9.5 million and $5.9 million, respectively. These losses were due in part to
losses on portfolio loans secured by California real property originated prior
to 1994. At December 31, 1995, the Partnership continued to hold a combined
gross loan portfolio of approximately $19.0 million (net of specific reserves of
approximately $1.0 million) originated prior to 1994, all of which is secured by
California real property. In addition, 90.5% of the total loan portfolio at
December 31, 1995 was secured by California real property. The Corporation may
continue to experience high levels of loan losses on loans originated prior to
1994, because of declines in the value of real property securing these loans
since their origination. Further, there can be no assurance that California real
property values will not continue to decline, which could cause additional loan
losses. See "BUSINESS -- Classified Assets and Loan Losses."
RISK OF REGULATORY ACTIONS. On April 1, 1996, a Memorandum of Understanding
("MOU") was entered into between Pacific Thrift, the Federal Deposit Insurance
Corporation ("FDIC") and the California Department of Corporations ("DOC"). The
MOU provides that Pacific Thrift shall: (i) maintain Tier I capital of 8% or
more of its total assets; (ii) maintain an adequate reserve for loan losses,
which shall be reviewed quarterly by its board of directors; (iii) eliminate
assets classified "loss" as of September 30, 1995, reduce assets classified
"substandard" as of September 30, 1995 to not more than $4,000,000 within 180
days, and reduce all assets classified substandard, doubtful and loss to no more
than 50% of capital and reserves by September 30, 1996; (iv) obtain FDIC
approval before opening additional offices; (v) develop strategies to stabilize
its net interest margin on portfolio loans and develop procedures to implement
these strategies; and (vi) furnish written quarterly progress reports to the
FDIC detailing actions taken to comply with the MOU. Management believes that
Pacific Thrift has the ability to meet the requirements of the MOU within the
time specified therein. However, if the conditions of the MOU were not met,
Pacific Thrift could be subject to further regulatory enforcement action which
could have a material adverse effect upon its business. Pacific Thrift will
remain subject to the MOU until it is terminated by the FDIC and the DOC; the
FDIC and the DOC may determine to retain the MOU, 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 a good 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 loans
eligible for sale or securitization. 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
13
<PAGE> 24
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 management's control can have adverse effects on borrowers' abilities to
repay loans and on the Corporation's future profitability. A rise in interest
rates could result in more defaults and loan losses if borrowers are unable to
pay the higher rates. A reduction in interest rates, on the other hand, could
increase prepayments, which could reduce the value of certain securitization
fees retained by Pacific Thrift on loans sold to Aames.
In addition, rapid changes in interest rates could result in an adverse
impact on net interest income earned on the Corporation's combined loan
portfolio. For example, if interest rates rise rapidly, variable rate loans will
stop repricing as interest rate caps on such loans take effect, The
Corporation's variable rate loans typically have lifetime interest rate caps
that limit rate increases to five percent (or 10 percent in some cases).
Conversely, if interest rates decline, because the Corporation is currently
asset sensitive, its assets will tend to reprice downward more rapidly than its
liabilities, causing a decrease in net interest income. Management believes a
prolonged decline in interest rates, however, would tend to increase net
interest income, as variable rate loans would reach their interest rate floors,
which are typically at their origination rate, while rates paid on liabilities
would continue to decline. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition -- Asset/
Liability Management."
RISKS OF REAL ESTATE SECURED LENDING. The Corporation's primary business
will be real estate secured lending, including loans secured by residential,
multi-family and commercial property. Although the Corporation's predecessors
have historically focused on residential lending, since 1994 portfolio lending
has included a higher amount of commercial lending. At December 31, 1995,
properties securing the combined loan portfolio, based on aggregate principal
balances, consisted of 33% residential property, 21% multi-family property and
46% commercial property. Income producing properties, including primarily
multi-family and commercial property, are generally viewed as exposing the
lender to a greater risk of loss than residential one-to-four family lending.
Income producing property values are also generally subject to greater
volatility than residential property values. The liquidation values of income
producing properties may be adversely affected by risks generally incident to
interests in real property, including changes or continued weakness in general
or local economic conditions and/or specific industry segments; declines in real
estate values; declines in rental, room or occupancy rates; increases in
interest rates, real estate and personal property tax rates and other operating
expenses (including energy costs); the availability of refinancing; changes in
governmental rules, regulations and fiscal policies, including rent control
ordinances, environmental legislation and taxation; and other factors beyond the
control of the borrower or the lender. For a more detailed discussion of the
specific characteristics of the Corporation's real estate loan portfolio, see
"BUSINESS -- Lending Activities -- Portfolio Lending."
CONCENTRATION OF CALIFORNIA REAL PROPERTY SECURING LOAN PORTFOLIO. At
December 31, 1995, approximately 94% of all loans in the combined loan
portfolio, on an aggregate principal balance basis, were secured by real
property located in California, including approximately 74% in Southern
California and approximately 20% in Northern California. The remaining 6% of all
loans are secured by real property located in Washington
14
<PAGE> 25
(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"). In addition, California real property
is subject to the risk of earthquake damage, which may result in higher loan
losses on loans secured by California real property.
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 the holders 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 the holders of 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 the holders of 66 2/3% of the outstanding Common Stock. In addition,
Stockholders have no right to call special meetings, no right to exercise
cumulative voting and no right to take actions by written consent unless
approved by the Board of Directors. See "DESCRIPTION OF THE CAPITAL STOCK OF THE
CORPORATION -- Anti-Takeover Provisions."
ENVIRONMENTAL RISKS. Under various federal, state and local environmental
laws and regulations, a current or previous owner or operator of real property
may be liable for the costs of removal or remediation of hazardous substances
on, under or in such property. In addition, any person or entity who arranges
for the disposal or treatment of hazardous substances may also be liable for the
costs of removal or remediation of hazardous substances at the disposal or
treatment facility. Such laws and regulations often impose liability regardless
of fault and liability has been interpreted to be joint and several unless the
harm is divisible and there is a reasonable basis for allocation of
responsibility. Pursuant to these laws and regulations, under certain
circumstances, a lender may become liable for the environmental liabilities in
connection with its borrowers' properties, if, among other things, it either
forecloses or participates in the management of its borrowers' operation or
hazardous substances handling or disposal practices. Although the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") and
certain state counterparts provide exemptions for secured lenders, the scope of
such exemptions is limited and a rule issued by the Environmental Protection
Agency clarifying such exemption under CERCLA has recently been held invalid. In
addition, CERCLA and certain state counterparts impose a statutory lien, which
may be prior to a lender's interest securing a loan, for certain costs incurred
in connection with removal or remediation of hazardous substances. Other laws
and regulations may also require the removal or remediation of hazardous
substances located on a property before such property may be sold or
transferred.
In 1993, Presidential and Pacific Thrift acquired two properties in
foreclosure which were used by borrowers unaffiliated with the Partnership for
metal plating operations involving hazardous materials. After acquisition of the
two properties, Presidential and Pacific Thrift each received notices from local
government authorities requiring removal of hazardous materials left by the
prior owners of each of the properties and remediation of soil contamination.
Presidential has completed remediation of one property, and has obtained
government agency approval of its closure report. The property is now 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 is now 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
15
<PAGE> 26
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 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 conditionally 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 OF THE PUBLIC
OFFERING."
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 at least 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 FDIC and the DOC. See "SUPERVISION AND REGULATION."
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<PAGE> 27
COMPARISON OF OWNERSHIP OF
LIMITED PARTNERSHIP UNITS OF THE PARTNERSHIP
AND COMMON STOCK OF THE CORPORATION
The information below highlights a number of the significant differences
between the Partnership and the Corporation relating to, among other things,
form of organization, distribution policies, liquidity of investment, management
structure, compensation and fees and investor rights. These comparisons are
intended to assist Limited Partners in understanding how their investments will
be changed if, as a result of the Restructuring Plan, their investment in
Limited Partnership Units of the Partnership becomes an investment in Common
Stock of the Corporation. Following the captioned sections is a summary
discussion of the expected effects of the Restructuring Plan upon Limited
Partners as a result of the change in their investment from Limited Partnership
Units to Common Stock.
FORM OF ORGANIZATION
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
The Partnership is a limited partnership The Corporation is a recently organized
organized under California law, formed for Delaware corporation formed for the purpose
the purpose of engaging in the business of of engaging in the business of originating,
originating, purchasing and selling real purchasing and selling real estate secured
estate secured loans and loan partic- loans and loan participations and related
ipations and related business activities. business activities. The Corporation will be
The Partnership has not been subject to tax a taxable corporation for federal and state
under federal tax laws. The Partnership may income tax purposes. The Corporation may
continue in existence until December 31, remain in existence in perpetuity.
2025 under the Partnership Agreement.
</TABLE>
The Partnership and the Corporation are each vehicles recognized as
appropriate for investing in business enterprises by passive investors, such as
Limited Partners and Stockholders. The Partnership is under the control of the
General Partner, while the Corporation is governed by its Board of Directors.
There are significant differences in the tax treatment of the Partnership and
the Corporation, as summarized below under the caption "Federal Income Tax
Consequences."
LENGTH OF INVESTMENT
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
The Partnership is engaged in an ongoing The Corporation will engage in an ongoing
business operation, and reinvests the lending business, and will reinvest all
proceeds from loan repayments and loan sales revenues in new lending activity and related
in new lending activity and related businesses, except to the extent the Board
businesses. The Limited Partners are of Directors may declare dividends from the
entitled to receive distributions of Net earnings of the Corporation. The Corpora-
Profits earned from Partnership operations. tion could continue in business in
Under the Partnership Agreement, the perpetuity.
Partnership's stated term of existence is
for approximately 40 years.
</TABLE>
The Partnership could continue in business for a substantial period of time
unless sooner dissolved by the vote of the Limited Partners, whereas the
Corporation could continue in business for an indefinite period of time unless
liquidated or merged into another entity by its Board of Directors.
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<PAGE> 28
DISTRIBUTION OF NET PROFITS
<TABLE>
<S> <C>
The Partnership Agreement provides for The Corporation is not required to
regular quarterly distributions of the net distribute net profits except as dividends
profits (as defined therein), if any, earned may be declared by its Board of Directors.
by the Partnership, to the Partners in The Board of Directors does not intend to
accordance with Specified Annual Return consider the payment of dividends until at
Rates. If the Partnership were to continue least the fourth quarter of 1997, depending
as presently structured, distributions of upon the future earnings of the Corporation.
net profits will be suspended until at least The Corporation's earnings will be dependent
June 30, 1997 under the Loan Agreement. upon the earnings of its subsidiaries. In
Thereafter the General Partner believes that the case of Pacific Thrift, dividends
it will be difficult for the Partnership to payable to the Corporation will be limited
earn or distribute net profits at the levels by statutory and regulatory requirements.
distributed from 1981 through 1992. See "DIVIDEND POLICY."
</TABLE>
Limited Partners have the right to receive distributions of the net profits
(as defined in the Partnership Agreement), if any, earned by the Partnership,
although distributions have been suspended since July 1993, and are expected to
remain suspended until at least June 30, 1997. If Limited Partners receive
Common Stock upon completion of the Restructuring Plan, they will have no right
to receive distributions of net profits, although the Board of Directors intends
to consider the payment of dividends in approximately the fourth quarter of
1997. Neither the Partnership nor the Corporation provides the right to its
investors to receive distributions of loan repayment proceeds, which are
reinvested by both the Partnership and the Corporation into continuing business
operations.
WITHDRAWAL OF CAPITAL
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
The Partnership Agreement provides that any Stockholders of the Corporation will have no
Limited Partner may request a withdrawal right to request a return of their capital
of his, her or its capital account at any from the Corporation. However, Stockholders
time, which request may be disapproved by will have the ability to sell their Common
the General Partner if, in the opinion of Stock in a public trading market, as the
the General Partner, it will impair the Common Stock will be listed for trading on
capital or operations of the Partnership. In the Nasdaq National Market. The value of the
addition, the Partnership Agreement limits Common Stock, however, will be subject to
the total amount of capital that may be fluctuation as a result of a number of
withdrawn during any calendar year to no factors, and could be less than the net
more than 10% of the total capital of the equity per share of the Common Stock, as
Partnership. However, all capital withdrawal shown on the books of the Corporation. See
payments have been suspended since June 1993 "RISK FACTORS -- Change in Nature of
due to restrictions imposed under the Bank Investment -- Uncertainties of Common Stock
Loan, and no new requests to withdraw Trading Market" and "MARKET FOR LIMITED
capital have been approved since June 1993 PARTNERSHIP UNITS AND COMMON STOCK."
due to the restrictions under the Bank Loan.
Under the current terms of the Bank Loan,
withdrawal payments will continue to be
suspended until at least June 30, 1997.
Thereafter, the General Partner does not
believe that the Partnership will have the
ability to allow capital withdrawals upon
request for the forseeable future.
</TABLE>
The Partnership Agreement provides limited rights to withdraw capital from
the Partnership, but these rights have been restricted since 1993. There is no
public trading market for the Limited Partnership Units, so it is very difficult
for the Limited Partners to liquidate their investment in the Partnership
without the ability to withdraw capital. If the Restructuring Plan is not
completed, it cannot be predicted when the Partnership will resume payment of
capital withdrawals or begin approving new requests to withdraw capital. In
contrast, the Common Stock of the Corporation is expected to be listed for
trading on the Nasdaq National Market. Although no assurance can be given, it is
anticipated that there will be substantially increased liquidity for the
18
<PAGE> 29
Common Stock compared to the current liquidity of Limited Partnership Units.
However, the market price for the Common Stock will be subject to all of the
risks normally attendant to a publicly traded security, including fluctuations
in price due to market conditions and the future value of the Corporation's
business operations.
PERMITTED INVESTMENTS
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
The Partnership is permitted to engage in Under its Bylaws, the Corporation may engage
the business of originating, purchasing in any lawful business activity. The
and selling loans and loan participations Corporation intends to engage in the same
and related business activities. The lending and trust deed service businesses as
Partnership has engaged in lending the Partnership, and has no intention of
activities directly and through Pacific conducting any other business activities at
Thrift, and has engaged in the trust deed this time. However, the Corporation will
servicing business through CRC and LPPC. The have the authority to engage in other
Partnership is required to obtain the business activities unrelated to the lending
consent of the Limited Partners before business if approved by its Board of
engaging in any other business activities. Directors.
</TABLE>
The Partnership's business is limited under the Partnership Agreement to
real estate secured lending and related businesses. The Corporation expects to
engage only in the businesses of real estate secured lending and related
businesses, but the Corporation is not limited in its authority to engage in
other businesses which the Board of Directors determine to be in the best
interests of the Corporation.
ADDITIONAL EQUITY
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
The Partnership is authorized to issue and The Board of Directors of the Corporation
sell new classes of Limited Partnership may, in its discretion, issue additional
Units in the discretion of the General equity securities consisting of Common Stock
Partner. The Partnership has sold six or Preferred Stock, provided that the total
classes of Limited Partnership Units over number of shares issued does not exceed the
the past twelve years of its operations. The authorized number of shares of Common Stock
consent of the Limited Partners is not or of Preferred Stock set forth in the
required to sell new classes of Limited Corporation's Certificate of Incorporation.
Partnership Units unless the return or other The rights of any Preferred Stock could be
rights granted to the new Limited Partners more favorable than the rights of the Common
would be more favorable than the return or Stockholders, without the consent of the
the rights of any existing class of Limited Stockholders. The Corporation expects to
Partners. issue options to its officers, directors and
employees to acquire Common Stock pursuant
to the Corporation's Stock Option Plan. See
"MANAGEMENT -- 1995 Stock Option Plan." In
addition, the Corporation may raise
additional equity from time to time to
increase its available capital as necessary
to fund its business operations.
</TABLE>
Both the Partnership and the Corporation have substantial flexibility to
raise equity to finance their businesses. The issuance of additional equity
securities by the Corporation would dilute the percentage ownership interest of
the Limited Partners and, if new equity interests were issued at a price below
the net equity value of the Corporation, it would dilute the book value per
share of the Common Stock. In addition, the rights of the holders of any
Preferred Stock may be senior to the holders of the Common Stock, without the
consent of the holders of the Common Stock, whereas the consent of the Partners
is currently required for the Partnership to issue any class of Limited
Partnership Units with a more favorable return or rights than any existing class
of Limited Partners.
19
<PAGE> 30
BORROWING POLICIES
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
The Partnership is authorized to borrow The Corporation is authorized to borrow
funds for use in its lending business in funds for use in its lending business in
such amounts as the General Partner such amounts as the Board of Directors
determines appropriate. The Partnership has determines appropriate. The Corporation
historically used substantial amounts of intends to pay off the Bank Loan owed by the
bank debt to fund its lending activities, Partnership by June 30, 1997, but the Corpo-
but has been required to reduce its bank ration may seek additional debt financing if
borrowings over the past five years due to a the Board of Directors determines that the
reduction in the availability of such Corporation would benefit from the use of
financing and adverse conditions in the real such funds in the Corporation's business. In
estate lending market. The Partnership's addition, Pacific Thrift will continue to
subsidiary, Pacific Thrift, also uses fund its lending operations through the
borrowed financing derived from the issuance issuance of FDIC insured thrift
of FDIC insured thrift certificates to fund certificates.
its lending activities.
</TABLE>
Both the Partnership and the Corporation have the authority to obtain debt
financing. The Partnership has historically utilized substantial amounts of debt
financing but such financing has not been available for the past five years. The
Corporation may obtain new debt financing to the extent that such debt financing
is available on terms approved by the Board of Directors.
RESTRICTIONS UPON RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
The Partnership Agreement authorizes the The Corporation may engage in transactions
Partnership to engage in certain with affiliates, provided that such
transactions with affiliates of the General transactions are approved by a majority of
Partner, including the purchase and sale of the directors or stockholders not interested
loans, the temporary placement of surplus in the transaction, and provided that the
funds with affiliates at specified interest independent directors determine the
rate minimums, the engagement of affiliates transaction to be fair, competitive and
to provide loan referral, loan servicing and commercially reasonable.
trustee services and the use of lines of
credit provided by affiliates. The
Partnership could not engage in any other
transactions with an affiliate without the
specific approval of a majority of the
Limited Partners.
</TABLE>
The Partnership Agreement specifically authorizes the Partnership to engage
in certain transactions with affiliates. Except for transactions specifically
approved in the Partnership Agreement, the Partnership is not authorized to
enter into transactions with the General Partner and its affiliates unless such
transactions are approved in advance by a vote of the Limited Partners. The
Corporation may enter into transactions with interested parties, such as
directors, officers, significant stockholders and affiliates thereof, provided
that any such transaction may be voidable unless it is approved or ratified by a
majority of disinterested directors or stockholders.
20
<PAGE> 31
MANAGEMENT CONTROL AND RESPONSIBILITY
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
Under the Partnership Agreement, the General The Board of Directors of the Corporation
Partner is, subject to certain narrow will have exclusive control over the
limitations, vested with all management Corporation's business and affairs subject
authority to conduct the business of the only to the restrictions in the Certificate
Partnership, including authority and of Incorporation and the Bylaws. Stock-
responsibility for overseeing all executive, holders have the right to elect one-third of
supervisory and administrative services the members of the Board of Directors at
rendered to the Partnership. The General each annual meeting of the Stockholders.
Partner has the right to continue to serve Stockholders also have the authority to
as general partner unless removed by a remove directors for cause upon the vote of
majority vote of the Limited Partners. the holders of at least 66 2/3% of the total
Limited Partners have no right to outstanding Common Stock. The directors are
participate in the management and control of accountable to the Corporation as
the Partnership and have no voice in its fiduciaries and are required to exercise
affairs except for certain limited matters good faith and integrity in conducting the
that may be submitted to a vote of the Corporation's affairs. See "FIDUCIARY
Limited Partners, including removal of the RESPONSIBILITY" and "MANAGEMENT."
General Partner; election of a new general
partner; amendment of the Partnership
Agreement; sale of all or substantially all
of the assets of the Partnership; or
dissolution of the Partnership. The General
Partner is accountable as a fiduciary to the
Partnership and is required to exercise good
faith and integrity in its dealings in
conducting the Partnership's affairs.
</TABLE>
The Partnership is managed by the General Partner and the Corporation is
managed by its Board of Directors. Limited Partners currently have the authority
to remove the General Partner and elect a new general partner by majority vote.
Stockholders will have the power to elect one-third of the members of the Board
of Directors annually, and to remove directors for cause by a vote of the
holders of at least 66 2/3% of the outstanding Common Stock.
21
<PAGE> 32
MANAGEMENT LIABILITY AND INDEMNIFICATION
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
As a matter of state law, the General The Certificate of Incorporation provides
Partner has liability for the payment of that a director's liability for breach of a
Partnership obligations and debts, unless fiduciary duty will be limited to the full
limitations are expressly stated in the extent allowable under Delaware law. The
obligation. The Partnership Agreement Bylaws and state law provide broad
provides that neither the General Partner indemnification rights to directors and
nor any of its affiliates performing officers who act in good faith, and in a
services on behalf of the Partnership will manner reasonably believed to be in or not
be liable to the Partnership or its Limited opposed to the best interests of the
Partners for any act or omission performed Corporation and, with respect to criminal
in good faith pursuant to authority granted actions or proceedings, without reasonable
by the Partnership Agreement, and in a cause to believe their conduct was unlawful.
manner reasonably believed to be within the In addition, the Corporation has entered
scope of authority granted and in the best into and will enter into in the future
interests of the Partnership, provided that indemnification agreements with all of the
such act did not constitute fraud, directors and executive officers of the
misconduct, bad faith or gross negligence. Corporation which indemnify such directors
In addition, the Partnership Agreement and officers against amounts paid in
indemnifies the General Partner and its settlement, authorize the Corporation to
affiliates for liability, loss, damage, advance expenses incurred in defense, upon
costs and expenses, including attorneys' the Corporation's receipt of an appropriate
fees, incurred by them in conducting the undertaking to repay such amounts if
Partnership's business, except in the event appropriate, and authorize the Corporation
of fraud, misconduct, bad faith or gross to carry insurance for the benefit of its
negligence. officers and directors even for matters as
to which such persons are not entitled to
indemnification. See "FIDUCIARY
RESPONSIBILITY." If the Restructuring Plan
is approved, the Corporation will assume all
existing and contingent liabilities of the
Partnership, including its obligation to
indemnify the General Partner and others for
litigation expenses that might be incurred
by them for serving as General Partner of
the Partnership or for sponsoring the
Restructuring Plan. The Corporation intends
to obtain a policy of directors and officers
liability insurance to enhance the
protection of its directors and officers.
</TABLE>
Although the standards are expressed somewhat differently, there are
similar limitations upon the liability of the General Partner and its affiliates
and upon the directors and officers of the Corporation when acting on behalf of
the Partnership or on behalf of the Corporation, respectively. The Corporation
believes that the scope of the liability and indemnification provisions in the
Corporation's governing documents provides protection against claims for
personal liability against the Corporation's directors and officers which is
comparable to, though not identical with, the protections afforded to the
General Partner and its Affiliates under the Partnership Agreement. The
Corporation may provide enhanced protection to officers and directors by
obtaining a policy of insurance on their behalf, the cost of which would be
borne by the Corporation.
22
<PAGE> 33
ANTI-TAKEOVER PROVISIONS
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
Changes in management of the Partnership can The Certificate of Incorporation and Bylaws
be effected only by removal of the General of the Corporation contain a number of
Partner, which requires a majority vote of provisions that might have the effect of
Limited Partners. entrenching current management and delaying
or discouraging a hostile takeover of the
Corporation. These provisions include, among
others, the following:
(a) election of only one-third of the Board
of Directors annually and the lack of
cumulative voting;
(b) limitations on the ability to increase
or decrease the Board of Directors and to
appoint new directors to fill vacancies on
the Board;
(c) the requirement that directors only be
removed for cause with the vote of the
holders of 66 2/3% of the total outstanding
Common Stock unless approved by a majority
of disinterested directors;
(d) restrictions on the ability to call
special meetings of Stockholders which
permit only the Board of Directors, the
Chairman of the Board or the President to
call a meeting for only such business as
directed by the Board;
(e) restrictions on the ability of
Stockholders to take action by written
consent without a meeting unless the Board
first approves the action;
(f) requirements that certain business
combinations be approved by a vote of the
holders of 66 2/3% of the total outstanding
Common Stock unless approved by a majority
of the disinterested Board of Directors, in
addition to certain anti-takeover provi-
sions provided under Delaware law; and
(g) requirements that amendments to the
Certificate of Incorporation and Bylaws
concerning certain control provisions
receive the consent of the holders of
66 2/3% of the total outstanding Common
Stock unless first approved by a majority of
disinterested directors;
(h) authorization of the Board of Directors
to issue up to 2,000,000 shares of Preferred
Stock, having such rights and preferences as
the Board may determine, which may be used
by the Board to deter a future takeover
attempt;
(i) provisions in the stock options granted
to employees of the Corporation which
accelerate the exercisability of such
options in the event of a change in control,
unless the Board of Directors prior to the
change in control approves a carryover of
the options to the new entity.
</TABLE>
23
<PAGE> 34
Certain provisions of the governing documents of the Corporation could be
used to deter attempts to obtain control of the Corporation in transactions not
approved by the Board of Directors. However, since the Common Stock will be
freely transferable and a market for the Common Stock is expected to develop
facilitating the transfers of the Common Stock, and the Corporation's Board of
Directors is subject to election by the Stockholders, there could be a greater
likelihood of changes in control in the case of the Corporation than the
Partnership, notwithstanding those provisions that might be employed by the
Board of Directors to resist efforts to change control.
VOTING RIGHTS
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
Limited Partners by a majority vote may, Stockholders are entitled to elect one-third
without the concurrence of the General of the Corporation's Board of Directors at
Partner, remove the General Partner, elect a each annual meeting of the Corporation.
new General Partner, amend the Partnership Stockholders may elect to remove one or more
Agreement, sell all or substantially all the directors for cause upon the vote of the
assets of the Partnership, or dissolve the holders of at least 66 2/3% of the total
Partnership. Limited Partners are not outstanding Common Stock. The vote of at
entitled to vote on any other matters. least 66 2/3% of the total outstanding
Common Stock is also required to approve
certain business combinations unless
previously approved by a majority of
disinterested directors of the Corporation.
Stockholders are also entitled to vote to
amend the Certificate of Incorporation or
Bylaws of the Corporation, provided that
certain amendments in the control and voting
provisions require the vote of at least
66 2/3% of the total outstanding Common
Stock. See "DESCRIPTION OF CAPITAL STOCK --
Common Stock."
</TABLE>
Stockholders have broader voting rights than those currently afforded to
Limited Partners, although certain matters upon which Stockholders may vote
require a higher majority vote (66 2/3%) than the Partnership Agreement
currently requires for the limited matters upon which Limited Partners are
allowed to vote.
SPECIAL MEETINGS AND ACTION WITHOUT A MEETING
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
Limited Partners holding 10% or more of the Stockholders of the Corporation have no
Capital Contributions of all Limited right to call special meetings of the
Partners may call a special meeting of the Corporation. In addition, no action may be
Limited Partners to vote upon any matter taken by the Stockholders by written consent
that may be presented for the vote of unless first approved by the Board of
Limited Partners. In addition, the Directors.
Partnership Agreement allows Limited
Partners to take actions by written consent
in lieu of a meeting.
</TABLE>
Stockholders of the Corporation would have more limited rights than Limited
Partners currently have to hold special meetings and take actions by written
consent.
24
<PAGE> 35
COMPENSATION, FEES AND DISTRIBUTIONS
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
The Partnership currently pays the following The Corporation will not pay any management
compensation, fees and distribution to the fees, servicing fees, employee
General Partner: reimbursements or distributions of net
profits to the General Partner or any other
(a) a management fee based upon the amount third parties. However, the Corporation will
of Net Profits allocated to each class of hire the employees of the General Partner,
Limited Partners; and will enter into employment agreements
with certain executive officers of the
(b) loan origination, processing and Corporation. In addition, the Corporation
servicing fees equal to 35% of the loan will provide employee benefits, and will
origination fee paid by the borrower of each provide stock option plans and retirement
loan made by the Partnership or Pacific plans to the officers, directors and
Thrift; employees of the Corporation.
(c) an additional servicing fee equal to
3/8ths of 1% of every loan made by the
Partnership or Pacific Thrift with an
original maturity of three or more years;
(d) reimbursement of salary and employee ex-
penses for every employee who devotes part
of all of his or her time to the business
operations of the Partnership or any of its
subsidiaries; and
(e) distributions of any Partnership Net
Profits equal to 50% of any remaining
undistributed Net Profits after each class
of Partner has received a return on their
Capital Contribution equal to their
specified initial return rate.
</TABLE>
Under the Partnership Agreement, the Partnership pays compensation, fees
and distributions to the General Partner. If the Restructuring Plan is
completed, the Corporation will pay no management fees or distributions to any
outside management company. The Corporation or its subsidiaries will directly
employ the former employees of the General Partner, including the current
managing officers of the Partnership and its subsidiaries. See "PRO FORMA
HISTORICAL FINANCIAL STATEMENTS OF THE CORPORATION" for a comparison of the
anticipated expenses of the Corporation compared with the actual expenses of the
Partnership in 1995.
LIMITED LIABILITY OF INVESTORS
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
Under the Partnership Agreement and The Common Stock, upon issuance, would be
California state law, the liability of fully paid and nonassessable. Under Delaware
Limited Partners for the Partnership's debts law, Stockholders would not be liable for
and obligations is generally limited to the Corporation debts or obligations.
amount of their investment in the
Partnership, together with an interest in
undistributed income, if any. The Limited
Partnership Units are fully paid and (except
for Class A Units) nonassessable.
</TABLE>
The limitations on personal liability of stockholders of the Corporation
are substantially the same as that of Limited Partners in the Partnership.
25
<PAGE> 36
REVIEW OF INVESTOR LISTS
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
Limited Partners of the Partnership are A stockholder is entitled, upon written
entitled to request, at their own cost, demand, to inspect and copy the stock
copies of investor lists showing the names records of the Corporation, at any time
and addresses of all Limited Partners of the during usual business hours, for a purpose
Partnership. reasonably related to an interest as a
stockholder.
</TABLE>
Limited Partners and Stockholders have the right to obtain investor lists.
The Corporation has the right to refuse a demand for the stockholder list if the
purpose is not related to a person's interest as a Stockholder. This right could
be used by the Corporation to delay or refuse a demand for the stockholder list.
TAXATION
<TABLE>
<CAPTION>
PARTNERSHIP CORPORATION
- -------------------------------------------- --------------------------------------------
<S> <C>
Earnings of the Partnership are not taxable Earnings of the Corporation are subject to
at the entity level. The earnings of taxation at corporate income tax rates under
Pacific Thrift, however, are subject to federal and state tax laws. In addition, the
taxation at corporate income tax rates under Stockholders will be subject to income tax
federal and state laws. The Partners are liability for any future dividends that may
each subject to taxation on their allocated be paid by the Corporation. Management of
share of Partnership taxable income. the Corporation anticipates that the
Corporation's ability to utilize an existing
net loss carryforward benefit to offset
future taxable income will be subject to
annual limitation as a result of the
Restructuring Plan. See "Federal Income Tax
Consequences -- Net Operating Losses."
</TABLE>
Limited Partners are subject to a single tax on the earnings of the
Partnership. However, since the net income of Pacific Thrift is currently
subject to corporate tax, and these earnings represent the substantial majority
of the Partnership's consolidated net income, the amount of additional tax
liability is not anticipated to be substantially greater than the net income
currently subject to taxation under the Partnership structure. Stockholders will
be subject to double taxation, once at the corporate level and again to the
extent of any dividends paid to Stockholders.
26
<PAGE> 37
THE RESTRUCTURING PLAN
CHANGES IN BUSINESS CONDITIONS WHICH NECESSITATE RESTRUCTURING
From 1981 through 1993, the Partnership's primary business consisted of the
origination of "B and C" credit residential loans, which the Partnership
retained and serviced for the life of the loans. The Partnership further
increased its return on partners' equity by using credit lines to increase
lending volume. The Partnership's lending volume and rate structure on the
Partnership's loans enabled the Partnership to provide distributions to its
Partners based upon specified percentages above the Bank of America reference
rate for each class of Partners, as set forth in the Partnership Agreement (the
"Specified Annual Return Rates"). However, there have been significant changes
in the availability of credit to the Partnership and in the residential lending
market over the past four years, which have resulted in net operating losses
over the past three years.
As Limited Partners are aware from prior reports, the Partnership has been
required since 1990 to pay down over $75 million on its Bank Loan, which in 1990
totalled over $82 million and by April 19, 1996 had a remaining balance of $5.2
million. This has required the Partnership to substantially reduce its loan
portfolio, from a high of $130.2 million in 1989, to $56.5 million (net of
general reserves of $4.2 million, but including $12.6 million in loans held for
sale) as of December 31, 1995. As a result, the Partnership has experienced
substantial reductions in interest income over the past five years. Moreover,
the Partnership has been unable to replace the existing bank debt with a new
credit line. Without a reliable source of available debt financing, the
Partnership can no longer originate the volume of portfolio loans it was
formerly able to fund using credit lines.
During the period from 1985 through 1989, the Partnership was also able to
raise equity financing through public offerings of limited partnership Units.
Due in large part to a number of real estate limited partnership failures after
1989, investments in limited partnerships of any type have fallen out of favor.
Therefore, it has been difficult for Presidential to raise equity financing to
support the growth of its lending business under its current structure. However,
current investment trends have supported various public stock offerings of
thrift and loans and similar lending businesses. Because of this trend,
management believes that the Partnership would have the ability to raise
additional capital from outside investors if the Partnership converts to
corporate form. Under a letter agreement with the Representative, subject to
customary terms and conditions, if the Restructuring Plan is approved, the
Public Offering will raise approximately $8 million in additional capital.
Management believes this additional capital will enhance the Corporation's
ability to meet its goals for revenue growth over the next one to three years.
The residential lending market has also substantially changed over the past
several years, due to the consolidation of the lending industry and the
proliferation of loan securitization. These two factors have dramatically
increased competition for all grades of residential loans, with a resulting
decrease in market interest rates for these loans. The Partnership has therefore
modified the nature of its lending business in order to originate B and C credit
loans primarily for sale to other lending companies. The purchasers pool and
securitize residential loans for resale in the secondary mortgage market. As a
result of this change in the lending market, the Partnership's primary source of
revenues has changed from interest income on portfolio loans to fee income from
loans originated for sale.
Pacific Thrift reported net income of $3.2 million in 1995, primarily from
fee income from loans originated for sale. However, this level of profit would
not have been sufficient to support distributions to Partners equal to the
Specified Annual Return Rates, even if such profits could have been distributed
to the Partners. In order to improve its capital ratios and increase earnings,
it was necessary for Pacific Thrift to retain earnings for funding additional
lending activities. As of March 31, 1996, Pacific Thrift has retained sufficient
earnings to restore its regulatory capital levels, and is now able to pay
dividends to the Partnership. However, the Bank Loan prohibits all distributions
to Partners until the Bank Loan is repaid in full, which is scheduled to occur
in June 1997. In addition, certain other expenses and debts which are not
permitted to be paid by the Partnership under the Bank Loan, including fees and
loans owed to the General Partner and amounts previously approved for capital
withdrawals, will be required to be paid after the Bank Loan is paid in full.
Therefore, management currently anticipates that no distributions could be made
until the fourth quarter
27
<PAGE> 38
of 1997 or the first quarter of 1998. Moreover, even after distributions have
resumed, management believes that it would be unlikely that the amount of
distributions would equal the Specified Annual Rates of Return for the
foreseeable future.
Finally, the Partnership's net partners' equity of $8.7 million at December
31, 1995, does not allow the Partnership to approve requests to withdraw
capital, as originally intended. If the Partnership were to honor requests to
withdraw capital at this time, it would impair the ability of the Partnership to
continue its business operations, which would harm all of the Partners. Due to
the limited capital available to the Partnership, management does not anticipate
that the Partnership will have the ability to honor any additional requests to
withdraw capital for the foreseeable future. Moreover, due to the lack of an
active trading market for limited partnership Units, it would continue to be
extremely difficult for Limited Partners to liquidate their investment in the
Partnership.
In order to provide for the continued growth of Pacific Thrift's business
and provide an alternative means for the Limited Partners to realize potential
capital appreciation and greater liquidity for their investment in the
Partnership, the General Partner developed the Restructuring Plan. The
Restructuring Plan essentially allows the businesses of the Partnership to
continue under existing management, but under a corporate rather than a
partnership structure. The General Partner believes that, under the constraints
of current business conditions, Limited Partners will have substantially more
flexibility with an investment in Common Stock than their current investment in
Units.
TRANSFER OF ASSETS AND LIABILITIES AND DISTRIBUTION OF COMMON STOCK
The Corporation was formed by the Partnership on February 22, 1994, with
Presidential as its sole stockholder. In May, 1996, Presidential intends to
transfer to the Corporation all of the outstanding stock of Pacific Thrift, CRC
Washington and PacificAmerica Mortgage, for the purpose of allowing these
entities to file consolidated tax returns. If the Restructuring Plan is
approved, the Partnership will transfer all of its remaining assets and
liabilities to the Corporation in exchange for a number of shares of Common
Stock of the Corporation equal to the Net Tangible Equity of the Partnership on
the last day of the month preceding the Closing Date, divided by 10, provided
that the number of shares so issued shall not be less than 890,000, less the
number of shares that would otherwise be issued to the Limited Partners electing
the Cash Out Option. The Partnership will, within two business days of the
Closing Date, distribute the Common Stock received by it to all of the Partners
(other than Limited Partners electing the Cash Out Option) pro rata based upon
their respective Capital Accounts. No fractional shares will be issued in
connection with the Restructuring Plan. Fractional share interests will be sold
by the Corporation in the Public Offering and the cash proceeds distributed to
the Partners in proportion to their fractional interests.
The Capital Account of each Partner is determined under the Partnership
Agreement as that Partner's capital contribution, less capital withdrawals,
amounts distributed to the Partner in excess of distributable net profits and an
allocated share of the Partnership's net losses. Those Partners who have
received higher proportionate distributions because they were entitled to higher
Specified Annual Return Rates than other classes of Partners now have
proportionately lower Capital Accounts than the classes of Partners who have
received lower distributions.
28
<PAGE> 39
The following table shows the Capital Account of each class of Partner
based on a $2,500 initial Capital Contribution, and the resulting number of
shares of Common Stock each class of Partner will receive in the Restructuring
Plan, assuming that 890,000 shares are issued:
CAPITAL ACCOUNT INFORMATION
<TABLE>
<CAPTION>
PARTNERSHIP
INITIAL CAPITAL NO. OF
INVESTMENT ACCOUNT SHARES
---------- ----------- ------
<S> <C> <C> <C>
General Partner............................................... 2,500 678 47
Class A....................................................... 2,500 678 47
Class B....................................................... 2,500 963 51
Class C....................................................... 2,500 1,022 55
Class D....................................................... 2,500 972 52
Class E....................................................... 2,500 1,064 57
Distribution Reinvestment Units............................... 2,500 1,111 59
</TABLE>
Each Partner's percentage interest in the Partnership based on his, her or
its Capital Account as of December 31, 1995 is stated in the top right corner of
the first page of each Partner's Ballot. The percentage amount shown represents
the percentage of the total amount of Common Stock to be issued by the
Corporation to the Partnership that would be received by that Partner if the
Restructuring Plan is completed. The exact number of shares of Common Stock to
be issued to each Partner will be determined based upon the Partnership's Net
Tangible Equity as of the last day of the month preceding the Closing Date, less
the shares that would otherwise be issued to the Limited Partners electing the
Cash Out Option.
CASH OUT OPTION. Any Limited Partner may elect to receive cash in lieu of
Common Stock by marking that Partner's Ballot accordingly. Every Limited Partner
electing the Cash Out Option will, within five days following the Closing Date,
receive cash equal to $10 for every share of Common Stock that would otherwise
be issued to that Limited Partner. The Cash Out Option must be elected with
respect to all shares allocable to Limited Partners electing the Cash Out
Option, and the exercise of the Cash Out Option is not revocable. LIMITED
PARTNERS WHO WISH TO EXERCISE THE CASH OUT OPTION MUST VOTE "FOR" THE
RESTRUCTURING PLAN. LIMITED PARTNERS ELECTING THE CASH OUT OPTION WILL NOT
RECEIVE CASH UNLESS THE RESTRUCTURING IS COMPLETED.
RIGHTS OFFERING
BASIC SUBSCRIPTION RIGHTS. Basic Subscription Rights entitle each Partner
to purchase a portion of the 800,000 Additional Shares offered in the Rights
Offering (subject to adjustment if and to the extent necessary to allow the
Corporation to sell a minimum of 200,000 shares in the Public Offering), at a
Subscription Price of $10 per share, pro rata in accordance with that Partner's
Capital Account in the Partnership. The Basic Subscription Rights must be
exercised by the Solicitation Period Expiration Date. Each Partner is entitled
to subscribe for all, or any portion of, the shares subject to the Basic
Subscription Rights. Each Partner's Ballot and Subscription Agreement states in
the upper right hand corner the number of shares which that Partner has the
right to subscribe for through the exercise of Basic Subscription Rights, based
upon that Partner's Capital Account as a percentage of the total Capital
Accounts of all Partners in the Partnership as of December 31, 1995.
OVERSUBSCRIPTION PRIVILEGE. Subject to allocation and possible reduction
described below, Partners who exercise their own Basic Subscription Rights will
also be eligible to exercise the Oversubscription Privilege to subscribe for and
purchase shares in excess of their Basic Subscription Privilege, at the
Subscription Price of $10 per share, but only up to the amount available after
satisfaction of all exercises of the Basic Subscription Privilege and the
purchase of Common Stock by the General Partner with a payment of $800,000 of
the debt owed to the General Partner by the Partnership. A Partner's election to
exercise that Partner's Oversubscription Privilege must be made at the same time
that Partner exercises the Basic Subscription Right. No investor may purchase
more than seven percent of the total shares to be issued by the Corporation in
connection with the Restructuring, the Rights Offering and the Public Offering.
29
<PAGE> 40
If the Additional Shares offered in the Rights Offering are not sufficient
to satisfy all subscriptions pursuant to the Oversubscription Privilege, the
shares will be allocated pro rata (subject to the elimination of fractional
shares) among those Partners exercising Oversubscription Privileges in
proportion to the Basic Subscription Rights exercised by such Partners, relative
to the number of Basic Subscription Rights exercised by all Partners; provided,
however, that if such pro rata allocation results in any Partner being allocated
a greater number of shares than such Partner subscribed for pursuant to the
exercise of the Oversubscription Privilege, then such Partner will be allocated
only that number of shares for which such Partner subscribed, and the remaining
shares will be allocated among all other Partners exercising the
Oversubscription Privilege on the same pro rata basis outlined above. For
example, if a Partner who had a Basic Subscription Right for 50 shares
subscribed for 100 shares, but the Additional Shares available were less than
the amount subscribed for by all Partners exercising the Oversubscription
Privilege, then that Partner would be allocated 50 shares plus that number of
shares in excess of 50 as would equal the total remaining available shares times
a fraction the numerator of which is that Partner's Capital Account and the
denominator of which is the total Capital Accounts of all Partners exercising
the Oversubscription Privilege.
Payments for subscriptions will be deposited upon receipt by the
Subscription Agent and held in escrow pending a final determination of the
number of shares to be issued pursuant to the exercise of Oversubscription
Privileges. If a proration of the shares results in a Partner's receiving fewer
shares than the Partner subscribed for pursuant to its Oversubscription
Privilege, then the excess funds paid by that Partner as the Subscription Price
for shares not issued will be returned promptly without interest or deduction.
SUBSCRIBER WARRANTS. For every five shares of Common Stock purchased in the
Rights Offering by Partners, partners of the General Partner or officers,
directors or employees of the Partnership or its subsidiaries, the Corporation
will issue a transferable warrant for one additional share of Common Stock,
exercisable at any time after issuance for a period of two years, at a price
equal to 125% of the Public Offering Price. Although the Subscriber Warrants are
freely transferable, they will not be listed for trading on the Nasdaq National
Market, and there can be no assurance that a market will develop for the
Subscriber Warrants.
EXERCISE OF BASIC SUBSCRIPTION RIGHTS AND OVERSUBSCRIPTION
PRIVILEGE. Partners may exercise their Subscription Rights by delivering to the
Subscription Agent at the address specified below, at or prior to the Expiration
Date, the properly completed and executed Subscription Agreement, together with
payment in full of the Subscription Price for each Additional Share subscribed
for pursuant to the exercise of such Subscription Rights. THE EXERCISE OF
SUBSCRIPTION RIGHTS IS NOT REVOCABLE.
Payment in full must be made by (i) check or bank draft drawn upon a United
States bank, or postal, telegraphic or express money order, payable to U.S.
Stock Transfer Corporation, as Subscription Agent, or (ii) wire transfer of
funds to the account maintained for this purpose at First Professional Bank, ABA
# 122239335, Trust No. 11, Account No. 004-802578. The Subscription Price will
be deemed to have been received by the Subscription Agent only upon (i)
clearance of any uncertified check, (ii) receipt by the Subscription Agent of
any certified check or bank draft drawn upon a United States bank or of any
postal, telegraphic or express money order or (iii) receipt of collected funds
in the Subscription Agent's account designated above. Funds paid by uncertified
personal check may take at least five business days to clear. Accordingly,
Partners who wish to pay the Subscription Price by means of uncertified personal
check are urged to make payment sufficiently in advance of the Solicitation
Period Expiration Date to ensure that the payment is received and clears by that
time, and are urged to consider in the alternative payments by means of
certified or cashier's check, money order or wire transfer of funds.
Pending disbursement to the Corporation upon issuance of the shares, all
funds received in payment of the Subscription Price will be held in an escrow
account by the Subscription Agent and invested at the direction of the
Corporation in short-term certificates of deposit, short-term obligations of the
United States, any state or any agency thereof, or money market mutual funds
investing in the foregoing instruments. The account in which these funds will be
held is not insured by the FDIC. Any interest earned on these funds will be
retained by the Corporation if the Restructuring Plan is approved, or returned
to Partners if the Restructuring Plan is not approved.
30
<PAGE> 41
The Subscription Agent's address to which the Subscription Agreement and
payment of the Subscription Price should be delivered is as follows: U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204-2991.
The Corporation will pay the fees and expenses of the Subscription Agent,
and has also agreed to indemnify the Subscription Agent against certain
liabilities that it may incur in connection with the Rights Offering.
If an exercising Partner does not indicate the number of shares of Common
Stock being subscribed for pursuant to the exercise of Rights, or does not
forward full payment of the aggregate subscription price for the number of
shares of Common Stock indicated as being subscribed for, then such Partner will
be deemed to have exercised the maximum number of Basic Subscription Rights that
may be exercised for the aggregate subscription price payment delivered by such
Partner, and, to the extent the aggregate subscription price payment delivered
by the Partner exceeds the product of the subscription price multiplied by the
number of Basic Subscription Rights evidenced by the Subscription Agreement
delivered by such Partner, such Partner will be deemed to have exercised the
Oversubscription Privilege to purchase, to the extent available, the number of
whole shares equal to the quotient obtained by dividing the subscription excess
by the subscription price. Any amount remaining after application of the
foregoing procedures shall be returned to such Partner promptly by mail without
interest or deduction.
Certificates representing shares of Common Stock purchased pursuant to the
exercise of Basic Subscription Rights and Oversubscription Privilege will be
issued to Partners within two business days after the Closing Date of the
Restructuring Plan.
Pending issuance of certificates representing shares of Common Stock, funds
received for the exercise of Subscription Rights will be held in a segregated
escrow account maintained by the Subscription Agent and, if and when shares are
issued in respect of exercises of Subscription Rights, payment therefor will be
transferred to the Corporation. If for any reason shares are not issued pursuant
to the exercise of Basic Subscription Rights, or a Partner exercising an
Oversubscription Privilege is allocated less than all of the shares for which
that Partner subscribed pursuant to the Oversubscription Privilege, then the
funds paid by the Partner that are held in escrow as the subscription price for
shares not issued or for shares not allocated to such Partner will be returned
by mail without interest or deduction after the Solicitation Period Expiration
Date promptly following completion of all prorations and adjustments
contemplated by the terms of the Rights Offering.
Record owners of Partnership interests who hold such interests for the
account of others, such as brokers, trustees or depositories for securities,
should contact the respective beneficial owners of such Partnership interests as
soon as possible to ascertain those beneficial owners' intentions and to obtain
instructions with respect to Subscription Rights. If a beneficial owner so
instructs, the record holder of that Partnership interest should complete a
Subscription Agreement and submit it to the Subscription Agent together with
payment for the number of shares of Common Stock subscribed for thereby. In
addition, beneficial owners of Partnership interests held through such a nominee
should contact the nominee and request the nominee to effect transactions in
accordance with the beneficial owner's instructions. In order to exercise the
Oversubscription Privilege, banks, brokers and other nominee record holders of
Partnership interests will be required to certify to the Subscription Agent and
the Corporation the aggregate number of Basic Subscription Rights that have been
exercised on behalf of each beneficial owner of such rights and the number of
Additional Shares subscribed for pursuant to the Oversubscription Privilege by
each such beneficial owner on whose behalf such nominee record holder is acting.
The instructions accompanying the Subscription Agreement should be read
carefully and followed in detail. SUBSCRIPTION AGREEMENTS SHOULD BE SENT WITH
PAYMENT TO THE SUBSCRIPTION AGENT. DO NOT SEND SUBSCRIPTION AGREEMENTS OR
PAYMENTS TO THE PARTNERSHIP OR THE CORPORATION.
THE METHOD OF DELIVERY OF SUBSCRIPTION AGREEMENTS AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE PARTNERS. IF SUBSCRIPTION AGREEMENTS AND PAYMENTS ARE SENT BY MAIL,
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, IS
RECOMMENDED. PERSONS WISHING TO EXERCISE SUBSCRIPTION RIGHTS ARE URGED TO ALLOW
A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO THE
31
<PAGE> 42
SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION DATE.
BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, PARTNERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF
CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Subscription Rights will be determined by the Corporation, whose
determinations will be final and binding. The Corporation, in its sole
discretion, may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Subscription Rights because of any defect or
irregularity. Subscription Agreements will not be deemed to have been received
or accepted until all irregularities have been waived or cured within such time
as the Corporation determines, in its sole discretion. Neither the Corporation
nor the Subscription Agent will be under any duty to give notification of any
defect or to give such notification. The Corporation reserves the right to
reject any exercise if such exercise is not in accordance with the terms of the
Rights Offering or not in proper form or if the acceptance thereof or the
issuance of shares of Common Stock pursuant thereto could be deemed unlawful or
materially burdensome.
Any questions or requests for assistance concerning the method of
exercising Basic Subscription Rights or Oversubscription Rights or requests for
additional copies of this Proxy Statement/Prospectus, should be directed to the
Information Agent, at telephone: (800) 223-2064.
DETERMINATION OF SUBSCRIPTION PRICE. The Subscription Price has been
determined by the General Partner in consultation with the Representative. Prior
to this offering, there has not been an established public market for the Common
Stock of the Corporation or the Partnership interests of the Partnership. The
major factors considered in determining the Subscription Price were the
projected Net Tangible Equity (as defined herein) of the Partnership by May 31,
1996, prevailing market conditions, the market prices relative to earnings, cash
flow and assets for publicly traded common stock of comparable companies, the
revenues and earnings (or losses) of the Partnership and comparable companies in
recent periods, the regulatory status of Pacific Thrift, the Corporation's
earning potential, the experience of its management and the position of the
Partnership in the lending industry. There can be no assurance, however, that
the market price of the Common Stock will not decline, or that a person will be
able to sell shares of Common Stock at a price equal to or greater than the
Subscription Price.
EXERCISE OF BASIC SUBSCRIPTION RIGHTS AND OVERSUBSCRIPTION PRIVILEGE BY
PARTNERS OF GENERAL PARTNER. The Basic Subscription Rights and Oversubscription
Privilege allocable to the General Partner for its pro rata share of the
Partnership will not be exercised by the General Partner directly. Instead,
these rights shall be exercisable by the individual partners of the General
Partner. Basic Subscription Rights will be exercisable by these partners pro
rata based on the amount of their respective investment in the General Partner,
up to the full amount of the Basic Subscription Rights allocable to the General
Partner. In addition, each of these partners will be allowed to exercise the
Oversubscription Privilege to the extent that Additional Shares are available
after the allocation of shares pursuant to the exercise of Basic Subscription
Rights and the purchase of shares by the General Partner with a payment of
$800,000 of the debt owed to the General Partner by the Partnership.
PURCHASE OF ADDITIONAL COMMON STOCK BY THE GENERAL PARTNER. The General
Partner will be repaid $800,000 of the debt which the Partnership anticipates it
will owe to the General Partner on May 31, 1996, which the General Partner will
use to purchase shares of Common Stock upon the same terms as shares offered in
the Rights Offering. The General Partner will transfer all such shares to
creditors and partners of the General Partner.
EXERCISE OF OVERSUBSCRIPTION PRIVILEGE BY OFFICERS AND EMPLOYEES. Certain
officers and employees of the Partnership and its subsidiaries will have the
opportunity to subscribe for shares through the Oversubscription Privilege.
However, officers and employees will only be entitled to subscribe for shares to
the extent not purchased by existing Partners through their Basic Subscription
Rights and the Oversubscription Privilege.
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<PAGE> 43
Certain officers and directors of the Partnership and its subsidiaries and
proposed directors of the Corporation have indicated their intention to purchase
up to 170,000 shares ($1,700,000) through the exercise of Basic Subscription
Rights and the Oversubscription Privilege, to the extent that shares are
available.
CONDITION TO EXERCISE OF BASIC SUBSCRIPTION RIGHTS AND OVERSUBSCRIPTION
PRIVILEGE BY LIMITED PARTNERS. LIMITED PARTNERS WHO WISH TO PURCHASE SHARES IN
THE RIGHTS OFFERING OR EXERCISE THE CASH OUT OPTION MUST VOTE "FOR" THE
RESTRUCTURING PLAN.
PUBLIC OFFERING
If the Restructuring Plan is approved by the requisite vote of Limited
Partners, as soon as possible following the end of the Solicitation Period, but
not later than 60 days from the Solicitation Period Expiration Date, the
Corporation will conduct a Public Offering of all Additional Shares not sold in
the Rights Offering plus shares equal to the number of shares that would
otherwise have been issued to Limited Partners exercising the Cash Out Option.
In addition, the Corporation will grant an option to the Underwriters of the
Public Offering to sell an additional 15% of the total shares sold in the Public
Offering by the Corporation to cover overallotments. No investor may purchase
more than seven percent of the total shares to be issued by the Corporation in
connection with the Restructuring, the Rights Offering and the Public Offering.
It is anticipated that the Public Offering Price per share will be $10 per
share, as determined by negotiation between the General Partner and the
Representative. If the Public Offering Price is less than $10 per share, the
vote of the Limited Partners on the Restructuring Plan will be re-solicited, and
a new Rights Offering will be conducted during the re-solicitation period.
Subject to customary terms and conditions, Friedman, Billings, Ramsey & Co.,
Inc. has agreed to act as Representative of a group of underwriters
participating in the Public Offering on a firm commitment basis. See
"UNDERWRITING OF PUBLIC OFFERING."
As a condition to completion of the Restructuring Plan, the Corporation
must achieve a Minimum Market Capitalization of $16.9 million as a result of the
Rights Offering and the Public Offering. If the Minimum Market Capitalization is
not achieved, the Restructuring Plan will not completed, and the Partnership
will continue under its current structure.
GENERAL PARTNER WARRANTS
The General Partner of Partnership will purchase warrants from the
Corporation ("General Partner Warrants") exercisable for up to 25% of the Common
Stock outstanding on the Closing Date, 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 based upon the
Black-Scholes method of option valuation.
The General Partner Warrants will be non-transferable, except to and
between partners of the General Partner. The General Partner will distribute all
of the General Partner Warrants to its partners. The Common Stock issuable upon
exercise of the General Partner Warrants ("Warrant Stock") has been registered
concurrently with the registration of the shares, and the Corporation will
commit to maintain the effectiveness of such registration until the earlier of
the sale of all the Warrant Stock or five years after the Closing Date. In
addition, under certain circumstances, the holders of the General Partner
Warrants will have one demand registration right and unlimited "piggyback"
registration rights for a period of five years following the Closing Date, for
the purpose of resale of the Warrant Stock.
Holders of General Partner Warrants will not be entitled, by virtue of
being such holders, to receive dividends or subscription rights, vote, consent,
or receive notice as Stockholders of the Corporation in respect of any meeting
of Stockholders for the election of directors of the Corporation or any other
matter, or exercise any other rights whatsoever as Stockholders of the
Corporation.
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<PAGE> 44
CONDITIONS TO RESTRUCTURING PLAN
The Partnership will not complete the Restructuring Plan unless each of the
following conditions is satisfied on or prior to the Distribution Date:
(a) Limited Partners holding at least 51% of the total Capital
Contributions of all Limited Partners (except the General Partner to the
extent of its ownership of Limited Partnership Units) vote to approve the
Restructuring Plan;
(b) Minimum Market Capitalization of $16.9 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, the American Stock Exchange or the Pacific Stock Exchange;
(d) the Bank consents to the completion of the Restructuring Plan;
(e) the FDIC and the DOC consent to the change in control of Pacific
Thrift as a result of the Restructuring Plan;
(f) there is no moratorium resulting from federal or state legislative
action that would prohibit the closing of the Restructuring Plan;
(g) there is no material adverse change in the business or prospects
of the Partnership; and
(h) there is no injunction or court order relating to the
Restructuring Plan that would have a material adverse effect upon the
Corporation or which would prevent the completion of the Restructuring
Plan.
None of the conditions specified in paragraphs (a), (b), (c), (d) or (e) above
may be waived, except with respect to the listing of the Common Stock on the
NNM, AMEX or PSE, which may only be waived upon re-solicitation and the
requisite vote of the Limited Partners to complete the Restructuring Plan on a
modified basis. The conditions specified in paragraphs (f), (g) and (h) may be
waived by the General Partner in its sole discretion.
Except with respect to the required consent of the FDIC and the DOC, there
are no federal or state regulatory requirements that must be complied with or
approvals that must be obtained as a condition of completion of the
Restructuring Plan.
MANNER OF EFFECTING THE RESTRUCTURING PLAN
If the conditions to the Restructuring Plan are satisfied by the Closing
Date, the Partnership will effect the Restructuring Plan by delivering
certificates for shares of Common Stock to the Partners of record on the Record
Date, pro rata in accordance with their Capital Accounts, within two days
following the Closing Date. The Partnership will concurrently file a Certificate
of Dissolution of the Partnership with the California Secretary of State.
Simultaneously, the Corporation will issue certificates for the shares of Common
Stock sold in the Rights Offering and the Public Offering.
No certificates or scrip representing fractional shares of Common Stock
will be issued to Partners as part of the Restructuring Plan. Any fractional
interests resulting from allocation of shares to Partners will be rounded up to
the next whole share.
No Partner will be required to pay any cash for the shares of Common Stock
received in exchange for partnership interests or to surrender or exchange any
Limited Partner Certificate in order to receive Common Stock.
ACCOUNTING TREATMENT OF THE RESTRUCTURING PLAN
The transfer of the Partnership's assets and liabilities to the
Corporation, dissolution of the Partnership and pro rata distribution of the
Common Stock of the Corporation to the Partners will be accounted for as a
34
<PAGE> 45
change in legal organization but not in the enterprise. Therefore, the proposed
transaction will be accounted for as a recapitalization of the Partnership into
the Corporation and the cash paid to the limited partners who elect the Cash Out
Option will be accounted for as a treasury stock transaction. The direct costs
incurred in connection with effecting the Restructuring Plan will be treated as
expenses to be charged against operations in the periods in which such expenses
are incurred. The specific incremental costs attributable directly to the
raising of additional capital in the Rights Offering and the Public Offering,
however, will be deferred and charged against the gross proceeds of such
offerings.
If the General Partner retained all of the Common Stock, Subscriber
Warrants and General Partner Warrants it will receive for its Capital Account in
Presidential and intends to purchase in the Rights Offering, it would own
approximately 30.31% of the total shares and warrants outstanding. However, the
General Partner intends to promptly distribute all of the shares and warrants it
receives and purchases to its creditors and partners. See "Beneficial Ownership
of Common Stock."
EXPENSES OF THE RESTRUCTURING PLAN
Substantial expenses have been and will be incurred by the Corporation in
connection with the Restructuring Plan. These expenses include, among others,
the costs and expenses of organizing the Corporation, structuring the terms and
conditions of the Restructuring Plan, obtaining the Fairness Opinion from
Houlihan Lokey, the offering and issuance of the Common Stock by the
Corporation, the registration of the Common Stock with the Securities and
Exchange Commission, the listing of the Common Stock on the Nasdaq National
Market, soliciting Ballots from Limited Partners and selling commissions and
costs associated with the offering and sale of Common Stock pursuant to the
Rights Offering and the Public Offering.
If the Restructuring Plan is completed, all transaction and solicitation
expenses will be borne by the Corporation. If the Restructuring Plan is not
completed, the Partnership will pay the transaction and solicitation expenses of
the Restructuring Plan and these expenses will be charged to operations.
The General Partner estimates that the expenses of the Restructuring will
total approximately $400,000 and that the expenses of the Rights Offering and
the Public Offering will total approximately $693,000, assuming 890,000 shares
are issued in the Restructuring Plan, 300,000 shares are sold in the Rights
Offering and 500,000 shares are sold in the Public Offering. The amount of
expenses will vary to the extent more or fewer shares are sold in the Rights
Offering and Public Offering, because the underwriters' discount and advisory
fees are calculated as a percentage of shares sold in each of those offerings.
Set forth below is an itemization of the estimated expenses:
<TABLE>
<S> <C>
RESTRUCTURING EXPENSES
Legal.......................................................... $ 125,000
Fairness Opinion............................................... 165,000
Accounting..................................................... 25,000
Printing and Postage........................................... 20,000
Information Agent.............................................. 15,000
Transfer Agent................................................. 14,000
Registration, Listing and Filing Fees.......................... 16,000
Miscellaneous.................................................. 20,000
----------
Total Restructuring Expenses........................... $ 400,000
</TABLE>
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<PAGE> 46
<TABLE>
<S> <C>
OFFERING EXPENSES IN CONNECTION WITH RIGHTS OFFERING AND
PUBLIC OFFERING
Underwriters' Discount and Advisory Fees....................... 405,000
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................................ $ 693,000
==========
</TABLE>
RIGHT TO INSPECT LIST OF LIMITED PARTNERS
Limited Partners of the Partnership are entitled to request at their own
cost copies of investor lists showing the names and addresses of all Limited
Partners of the Partnership. Limited Partners who desire to request a list of
Limited Partners may do so by written request addressed to Richard B. Fremed,
Presidential Mortgage Company, 21031 Ventura Boulevard, Woodland Hills,
California 91364. A check for $50, representing the approximate costs of copying
and mailing of such list, payable to Presidential Mortgage Company, must be
included with the request.
USE OF PROCEEDS
The net proceeds of the Rights Offering and the Public Offering assuming an
initial offering price of $10.00 per share and sales of 300,000 shares in the
Rights Offering and 500,000 shares in the Public Offering (after deducting
estimated offering expenses, including the Underwriters' discount) are estimated
to be $7,307,000, not including (i) any additional proceeds that may be raised
if the Underwriters exercise an overallotment option to sell additional shares
equal to 15% of the shares sold by the Corporation in the Public Offering or
(ii) any additional shares that may be sold in the Public Offering equal to the
shares that would otherwise be issued to Limited Partners electing the Cash Out
Option. The Corporation intends to use the net proceeds approximately as
follows:
<TABLE>
<S> <C>
Pay down of Bank Loan(1)......................................... $1,000,000
Redemption of Bank Warrant....................................... 200,000
Pay down of debt owed to General Partner used to purchase
Common Stock and General Partner Warrants...................... 1,185,000
Pay off debts owed to Partners whose withdrawal requests were
approved prior to June 1993.................................... 1,307,000
Working Capital.................................................. 3,615,000
----------
$7,307,000
==========
</TABLE>
- ---------------
(1) The Bank Loan bears interest at prime plus 1 1/2% and matures on June 30,
1997.
The Corporation may contribute some or all of the balance of net proceeds
from time to time as additional capital to Pacific Thrift or to pay down the
Bank Loan, as management deems appropriate.
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<PAGE> 47
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 800,000 shares of Common Stock at a
price of $10.00 per share (net of underwriting discount and estimated expenses
payable by the Corporation assuming 300,000 shares are sold in the Rights
Offering and 500,000 shares are sold in the Public Offering).
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
PARTNERSHIP CORPORATION
HISTORICAL AS ADJUSTED
----------- -----------
(DOLLARS IN THOUSANDS)
<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............................ 881 -0-(1)
Other Liabilities.............................................. 4,732 4,732
Equity
Partners' capital accounts (Stockholders' Equity).............. 8,727 8,808(2)(3)
Additional Shares.............................................. -0- 7,307(3)
------- -------
Total Equity..................................................... 8,727 16,115
------- -------
Total Liabilities and Equity..................................... $82,557 $86,774
======= =======
Number of shares of Common Stock outstanding(4)................ -0- 1,690
Tangible book value per share(4)................................. N/A $ 9.54
</TABLE>
- ---------------
(1) As of December 31, 1995, a total of $881,000 was owed by the Partnership to
the General Partner, net of amounts owed by the General Partner to the
Partnership. The Partnership will pay this amount to the General Partner, of
which the General Partner will use $385,000 to purchase the General Partner
Warrants and $496,000 to purchase Common Stock. As of May 31, 1996, the
Partnership estimates that the total amount owed to the General Partner, net
of amounts owed by the General Partner to the Partnership will increase to
$1,187,000, due to the accrual of fees which cannot be paid under the terms
of the Bank Loan. Of this amount, the General Partner will pay $385,000 to
the Corporation for the General Partner Warrants and $800,000 for Common
Stock in the Rights Offering, reducing the total debt owed to the General
Partner to $2,000. This amount will be paid by the Corporation if and to the
extent permitted by the Bank until the Bank Loan is repaid in full, with any
remaining balance paid after the Bank Loan has been paid in full.
(2) Includes $385,000 to be paid by the General Partner for the General Partner
Warrants.
(3) Includes $496,000 of the debt owed to the General Partner at December 31,
1995 which will be paid by the Partnership and used by the General Partner
to purchase Common Stock. A total of $800,000 will be paid by the General
Partner for Common Stock.
(4) Not including shares issuable pursuant to the Subscriber Warrants, the Bank
Warrant or the General Partner Warrants, or shares issuable under stock
options granted pursuant to the Corporation's 1995 Stock Option Plan. See
"MANAGEMENT -- 1995 Stock Option Plan."
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<PAGE> 48
FAIRNESS OF THE RESTRUCTURING PLAN
GENERAL PARTNER CONCLUSIONS
The General Partner believes that the terms of the Restructuring Plan, when
considered as a whole, are fair to the Limited Partners. This belief is based
upon the General Partner's analysis of the terms of the Restructuring Plan, an
assessment of its potential economic impact upon the Limited Partners, a
consideration of the potential benefits and detriments of the Restructuring Plan
and the available alternatives, and a review of the financial condition and
performance of the Partnership. This section of the Proxy Statement/Prospectus
is devoted to a discussion of the factors upon which the General Partner has
based its conclusions as to the fairness of the Restructuring Plan and should be
carefully reviewed by the Limited Partners. The General Partner is not in a
position to quantify the relative importance of these factors but has, where
appropriate, noted which of the factors support or detract from its belief as to
the fairness of the Restructuring Plan to the Limited Partners.
ALTERNATIVES TO THE RESTRUCTURING PLAN
The following is a brief discussion of the benefits and disadvantages of
alternatives to the Restructuring Plan that were considered by the General
Partner.
LIQUIDATION. One alternative to the Restructuring Plan would have been to
liquidate the assets of the Partnership and distribute the net liquidation
proceeds to the Partners. The benefit of a liquidation would be that Limited
Partners could liquidate their investment in the Partnership and use the
proceeds for investment, business and other purposes. The detriment would be
that Limited Partners might receive less value for their investment if the
Partnership were liquidated than the fair market value of the Common Stock
Limited Partners would receive if the Restructuring Plan is completed. The
Partnership's primary assets consist of (1) the loan portfolio of Presidential;
(2) the shares of Pacific Thrift; and (3) the interests of Presidential in CRC
and LPPC.
The General Partner has made the following assumptions in connection with
its estimate of liquidation values: (1) loans receivable of Presidential could
be sold at book value; (2) OREO of Presidential could be sold at a 10% discount
to book value; (3) no value would be received by Presidential for fixed assets,
capitalized organization costs or goodwill; (4) Pacific Thrift could be sold for
110% of its book value plus a premium for loans available for sale, less a 10%
discount for selling costs, severance pay, and lease buyouts; CRC and LPPC could
each be sold at book value, less book value of fixed assets, leasehold
improvements and prepaid expenses and a 10% discount for selling costs.
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Based upon the above assumptions, the General Partner estimates that the
following proceeds could be obtained in a liquidation:
LIQUIDATION ANALYSIS
DECEMBER 31, 1995
(000'S OMITTED)
<TABLE>
<CAPTION>
ESTIMATED
LIQUIDATION
ASSETS BALANCE ADJUSTMENT PROCEEDS
- ----------------------------------------------------------- ------- ---------- -----------
<S> <C> <C> <C>
Cash & Investments......................................... $ 609 $ 609
Accounts Receivable........................................ 1 1
Loans Receivable and Accrued Interest, Net of $2,771
Reserve.................................................. 3,689 3,689
Loans Held for Sale........................................ 3,000 3,000
Related Party Receivable................................... 417 417
Fixed Assets, Net.......................................... 48 (48)(1) 0
R.E.O., Net of Mortgage Notes Payable of $560.............. 848 (85)(2) 763
Other Assets............................................... 90 (20)(1) 70
Investment in Subsidiaries:
Pacific Thrift........................................... 6,819 602(3) 7,421
CRC...................................................... 922 (216) 706
LPP...................................................... 226 (44) 182
Corporation.............................................. 3 (3) 0
Goodwill................................................... 1,808 (1,808)(1) 0
------- ------- -------
18,480 (1,622) 16,858
======= ======= =======
Less: Liabilities
Bank Loan.................................................. 6,771 6,771
Interest Payable........................................... 170 170
Accounts Payable and Accrued Expenses...................... 694 694
Partnership Payable........................................ 1,120 1,120
Related Party Payables..................................... 945 945
------- ------- -------
9,700 0 9,700
------- ------- -------
Capital.................................................... $ 8,780 $ (1,622) $ 7,158
======= ======= =======
</TABLE>
- ---------------
(1) Assumed no value for these assets
(2) Assumed 10% reduction in value due to time to sell
(3) Assumed 110% book value plus premium for loans available for sale less 10%
for selling costs, severance, lease buyouts, etc.
Under the above analysis, the net proceeds of liquidation would be
approximately $7,158,000, representing approximately 80% of the total book value
of the Partnership on a consolidated basis at December 31, 1995.
LIMITED PARTNERS SHOULD NOTE THAT THE ABOVE ESTIMATE OF LIQUIDATION
PROCEEDS IS BASED UPON INFORMATION CONCERNING THE GENERAL MARKET FOR ASSETS
SIMILAR TO THE PARTNERSHIP'S ASSETS, AND IS NOT BASED UPON ANY ACTUAL MARKETING
EFFORTS BY THE PARTNERSHIP. THE ACTUAL PROCEEDS WHICH COULD BE OBTAINED IN A
LIQUIDATION COULD BE MORE OR LESS THAN THE AMOUNTS ESTIMATED ABOVE.
If the Corporation or the Partnership were to continue to experience net
losses for the next one to two years, there can be no assurance that a
liquidation of the Partnership at this time would not result in a higher return
to the Limited Partners than the Restructuring Plan. However, based upon current
trends in Pacific Thrift's lending business, including primarily the trend
toward increasing monthly loan originations and sales, as described herein under
the heading "BUSINESS -- Lending Activities," management believes that Pacific
Thrift has the potential for significant growth in earnings over the next one to
three years. See "Fairness of the Restructuring Plan -- Continuing Business
Under the Restructuring Plan."
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<PAGE> 50
CONTINUATION OF THE PARTNERSHIP UNDER THE CURRENT STRUCTURE. Another
alternative to the Restructuring Plan would be to continue the Partnership in
accordance with the existing Partnership Agreement. The benefit of this
alternative is that Limited Partners would retain their existing rights under
the Partnership Agreement, including the rights to remove the General Partner,
dissolve the Partnership or amend the Partnership Agreement by the vote of a
majority in interest of Limited Partners. The General Partner estimates that
limited annual distributions may be resumed in the fourth quarter of 1997 or the
first quarter of 1998, but these distributions would be less than the Specified
Annual Return Rates provided in the Partnership Agreement. A substantial portion
of Pacific Thrift's earnings would be retained by it to support its capital
ratios and fund lending activity. No additional equity or debt would be raised.
The General Partner further believes that no additional requests to withdraw
capital could be permitted for the foreseeable future, because such withdrawals
would impair the capital and operations of the Partnership.
Although Limited Partner Units are freely transferable, and therefore could
be sold in the existing secondary market for limited partnership units, these
types of investments are generally sold at a discount to book value, reflecting
the lower market valuation generally given to investments in limited
partnerships. In contrast, market valuation of common stock is generally based
upon price/earnings ratio, book value and free cash flow.
Although a continuation of the Partnership would, in management's view,
result in a higher potential value of the Partnership's business than
liquidation, because it would allow the continued growth of Pacific Thrift's
business, it would not meet the investment objectives of the Limited Partners.
For the reasons described herein, the Partnership is no longer capable of
meeting its original investment objectives of regular distributions equal to the
Specified Annual Return Rates or withdrawal of capital upon demand. See "The
Restructuring Plan -- Changes in Business Conditions Which Necessitate
Restructuring." Therefore, the General Partner believes that a continuation of
the Partnership under the Partnership Agreement is not in the best interests of
the Limited Partners.
OTHER RESTRUCTURING PLANS. The General Partner considered various other
forms of restructuring plans. One such plan was the same as the Restructuring
Plan but without a concurrent sale of Additional Shares. That alternative would
have the advantage of not causing a reduction of the existing Partner's
interests in the Corporation. However, the market capitalization and tangible
net worth of the Corporation would not be sufficient to satisfy the listing
standards of the Nasdaq National Market, which would reduce the liquidity of an
investment in Common Stock. Therefore, the General Partner believes that the
Restructuring Plan described herein is preferable to a restructuring without a
concurrent offering of additional Common Stock.
CONTINUING BUSINESS UNDER THE RESTRUCTURING PLAN. Pacific Thrift more than
doubled its monthly volume of loans originated for sale between January and
December 1995, and loans in process in March 1996 have more than tripled since
July 1995. Management believes that these trends indicate that Pacific Thrift
may continue to experience significant growth in monthly loan volume through the
remainder of 1996. Based upon these trends, management has reason to believe
that the Partnership will operate profitably in 1996 and will have the ability
to increase earnings over the next two to three years. There can be no assurance
that the Partnership will achieve earnings growth as management believes, since
the achievement of this objective will be subject to numerous factors, including
without limitation: the contraction of interest margins in the B and C lending
market as more and larger lenders compete for loans on the basis of pricing
differentials, the loss of market share as larger lenders seek to gain greater
loan volume from smaller competitors, and high delinquency rates on B and C
loans, which could negatively impact the ability of lenders to securitize B and
C loans. In addition, unforeseen events such as economic recession, natural
disasters, changes in government regulations and other factors, could impair the
Corporation's ability to achieve its objectives. All forward looking statements
made in this Proxy Statement/Prospectus, are subject to these factors, and
represent management's best estimate based upon current trends and known facts
and conditions.
The Restructuring Plan retains the value of the Partnership as a going
concern, and adds the element of liquidity which is not available under the
Partnership's current structure. Moreover, investors in the Corporation would
have the possibility of realizing capital appreciation of the value of their
Common Stock if the Corporation achieves the growth in revenues that management
believes is possible. Therefore, manage-
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<PAGE> 51
ment has determined that continuing the Partnership's business in corporate
format, as provided in the Restructuring Plan, is the best alternative for all
investors in the Partnership.
FAIRNESS OPINION
The General Partner selected Houlihan Lokey to review the terms of the
Restructuring Plan and to provide an opinion concerning the fairness of the
consideration to be received by the Limited Partners, collectively, in
connection with the Restructuring Plan. The General Partner selected Houlihan
Lokey from a field of several valuation firms located in the greater Los Angeles
area, due to its national reputation in the field of business restructurings.
Houlihan Lokey has never had any relationship or participated in any other
transactions with the Partnership or any of its affiliates. Houlihan Lokey did
not determine or recommend the terms of the Restructuring Plan, or the amount of
consideration to be paid to the Limited Partners, collectively, in connection
with the Restructuring Plan. The General Partner did not give any instructions
to Houlihan Lokey in connection with the review of the Restructuring Plan, and
did not impose any limitation on the scope of its review.
In its Fairness Opinion, Houlihan Lokey stated that, based upon the
considerations set forth therein and on other factors it deemed relevant, it was
its opinion that, assuming the Restructuring Plan is completed as proposed, the
consideration to be received by all of the Limited Partners collectively in
connection with the Restructuring Plan is fair, from a financial point of view.
As used in its Fairness Opinion, "consideration" solely means Common Stock of
the Corporation. The Fairness Opinion further states that, in the opinion of
Houlihan Lokey, the fair market value of the General Partner Warrants does not
exceed $385,000, based on the assumed Public Offering Price of $10 per share.
The full text of the opinion, which contains a detailed description of the
assumptions and qualifications made, matters considered and limitations on the
review and opinion, is set forth in Exhibit B and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations to
the Fairness Opinion are set forth below. The summary set forth below does not
purport to be a complete description of the analyses used by Houlihan Lokey in
rendering the Fairness Opinion. Arriving at a fairness opinion is a complex
analytical process not necessarily susceptible to partial analysis or amenable
to summary description.
EXPERIENCE OF HOULIHAN LOKEY
Houlihan Lokey is a nationally recognized provider of financial advisory
services that regularly engages in, among other things, the valuation of
businesses and their securities in connection with mergers and acquisitions,
private placements, going-private transactions, and in valuations for estate,
corporate and other purposes.
SUMMARY OF METHODOLOGY
In rendering its opinion, Houlihan Lokey, among other things, made such
reviews, analyses, and inquiries as it deemed necessary and appropriate under
the circumstances, including, but not limited to, a review of the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1995 and other
filings with the Securities and Exchange Commission, a review of material
agreements, meetings with members of senior management of the Partnership to
discuss operations, financial condition, future prospects, and projected
operations and performance, visits to certain facilities and business offices of
the Partnership, and review of forecasts and projections prepared by management
through 1998. In arriving at its opinion, Houlihan Lokey did not make any
physical inspection or independent appraisal of any of the properties or assets
of the Partnership.
Houlihan Lokey was engaged by the General Partner to render an opinion as
to the fairness, from a financial point of view, that the consideration to be
received by all of the Limited Partners collectively in connection with the
transaction is fair to them. In connection with this analysis, Houlihan Lokey
considered the provisions of the Partnership Agreement applicable in connection
with the liquidation of the Partnership, which provide for distribution of the
net proceeds of liquidation of the Partnership to the General Partner and
Limited Partners in accordance with their respective Capital Accounts. Houlihan
Lokey also considered
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<PAGE> 52
projections and forecasts prepared by the General Partner. These projections
indicated that in each of the three years ending December 1998, the Corporation
would earn net income greater than the corresponding net income for the
Partnership. Furthermore, the General Partner has represented to Houlihan Lokey
that the General Partner believes that the Corporation would continue to have
greater net income than the Partnership for each year after 1998. The increase
in net income to the Corporation results principally from, among other things,
the elimination of various fees to the General Partner and the ability of the
Corporation to offset income from one subsidiary with losses from another
subsidiary. These increases to net income are partially offset by certain
increased costs and expenses reflecting, among other things, increased salaries
and bonuses to officers of the Corporation and additional costs associated with
operating under a corporate structure. Houlihan Lokey also considered the
historical and continuing lack of a readily available market for limited
partnership Units, as compared to the anticipated public market for Common Stock
on the Nasdaq National Market.
ASSUMPTIONS
In conducting its review and arriving at its Fairness Opinion, Houlihan
Lokey relied upon and assumed the accuracy and completeness of the financial and
other information provided to it and did not attempt to independently verify
such information. Houlihan Lokey relied upon the statements and information
provided it by management of the Partnership as to the reasonableness of the
financial forecasts and projections (and the assumptions and bases therefor).
Houlihan Lokey relied upon and assumed, without independent verification, that
the financial forecasts and projections have been reasonably prepared and
reflect the best currently available estimates of the future financial results
and condition of the Partnership and its subsidiaries and the Corporation and
its subsidiaries. In determining the fair market value of the General Partner
Warrants, Houlihan Lokey assumed that the anticipated Public Offering Price of
$10 per share reflects the fair market value of the Common Stock. For purpose of
its analyses, Houlihan Lokey assumed that there has been no material adverse
change in the assets, financial condition, business or prospects of the
Partnership since the date of the most recent financial statements made
available to Houlihan Lokey.
Houlihan Lokey did not solicit third-party indications of interest
concerning the acquisition of all or any part of the Partnership or any of its
underlying assets. Houlihan Lokey did not negotiate the Restructuring Plan on
behalf of any party or provide advice or counsel to any party with respect to
the Restructuring Plan or any of the alternatives which may otherwise be
available to the Partnership or to the Limited Partners.
LIMITATIONS AND QUALIFICATIONS
Houlihan Lokey was not asked to opine on and is not expressing any opinion
as to (i) the terms of the Restructuring Plan (other than the consideration to
be received by the Partners and the value of the General Partner Warrants as
discussed in the Fairness Opinion); (ii) the relative fairness of the
Restructuring Plan to each Partnership class individually; (iii) tax
consequences of the Restructuring Plan for the Limited Partners or any other
party to the Restructuring Plan; (iv) whether or not the Public Offering Price
reflects the fair market value of the Common Stock; or (v) the fairness of the
Public Offering Price to the Limited Partners. Houlihan Lokey's opinion does not
address the Partnership's underlying business decision to proceed with the
Restructuring Plan and the Fairness Opinion should not be construed or
interpreted as a recommendation by Houlihan Lokey either for or against the
Restructuring Plan. Houlihan Lokey's opinion is based on business, economic,
market and other conditions as they existed on the date of the Fairness Opinion
and can be evaluated as of that date.
COMPENSATION
The Partnership agreed to pay Houlihan Lokey total fees and expenses of
approximately $165,000 for rendering the Fairness Opinion. The fee was
negotiated between the Partnership and Houlihan Lokey and payment thereof is not
dependent upon completion of the Restructuring Plan. The Partnership has not
previously engaged Houlihan Lokey to render other consulting or related services
prior to the present engagement.
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<PAGE> 53
VOTING REQUIREMENTS
DISTRIBUTION OF SOLICITATION MATERIALS
This Proxy Statement/Prospectus, together with the Limited Partner Ballot
and the Subscription Agreement enclosed herewith constitutes the solicitation
materials to be distributed to the Limited Partners to obtain their votes for or
against the Restructuring Plan. The Solicitation Period commences upon delivery
of this Proxy Statement/Prospectus and will continue until the later of (i) June
17, 1996 or (ii) such later date as may be selected by the General Partner in
its sole discretion, not to exceed July 31, 1996 (the "Expiration Date"). Any
Ballots received by U.S. Stock Transfer Corporation prior to 11:59 p.m. on the
Solicitation Period Expiration Date will be effective provided that such Ballots
have been properly completed, signed and delivered.
Because of the geographic diversity of the approximately 2,500 Limited
Partners, and management's desire to conduct the vote on the Restructuring Plan
in as efficient and economical a manner as possible, there will be no meeting of
the Partnership to discuss the solicitation materials or the terms of the
Restructuring Plan. The General Partner intends to actively solicit the support
of the Limited Partners for the Restructuring Plan and may, subject to
applicable federal and state securities laws, hold informal meetings with
Limited Partners, answer questions about the Restructuring Plan and the
solicitation materials and explain the General Partner's reasons for
recommending the approval of the Restructuring Plan.
VOTE REQUIRED
The Partnership will not complete the Restructuring Plan unless it is
approved by Limited Partners whose Capital Contributions equal at least 51% of
the total Capital Contributions of all Limited Partners (excluding Limited
Partnership Units held by the General Partner). See "THE RESTRUCTURING PLAN --
Conditions to Completion of Restructuring Plan" for a discussion of the other
conditions precedent to the Partnership's completion of the Restructuring Plan.
Upon expiration of the Solicitation Period, the Partnership will proceed to
(a) determine whether Limited Partners holding at least 51% of the total Capital
Contributions of all Limited Partners (including Limited Partnership Units held
by the General Partner) have approved the Restructuring Plan, (b) assess whether
the conditions to the Restructuring Plan have been satisfied or, to the extent
applicable, waived by the General Partner, and (c) if the conditions to the
Restructuring Plan have been satisfied, proceed to close the Restructuring Plan
as soon as reasonably practicable following the completion of the Public
Offering.
VOTING AND CASH OUT ELECTION PROCEDURES AND BALLOTS
Limited Partners of record on April 30, 1996 (the Record Date) will receive
notice of, and be entitled to vote, with respect to the Restructuring Plan.
By marking the Ballot enclosed with this Proxy Statement/Prospectus, each
Limited Partner may either vote "for," "against" or "abstain" as to the
Restructuring Plan. Any Limited Partner who wishes to exercise the Cash Out
Option must vote "FOR" the Restructuring Plan and indicate the Limited Partner's
election to accept the Cash Out Option on the Ballot. Any Limited Partner who
fails to submit a Ballot, completes his or her Ballot in an unintelligible
manner, or votes "ABSTAIN" will be deemed to have voted "AGAINST." Limited
Partners who submit signed Ballots but fail to make the election required by the
Ballot will be deemed to have voted "FOR" the Restructuring Plan.
A copy of the completed Ballot should be sent to U.S. STOCK TRANSFER
CORPORATION in the enclosed return envelope.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the Ballots will be determined by U.S.
Stock Transfer Corporation whose determination will be final and binding. The
General Partner reserves the absolute right to reject any or all Ballots that
are not in proper form or the acceptance of which, in the opinion of the General
Partner's counsel, would be unlawful. The General Partner also reserves the
right to waive any irregularities or conditions of the Ballots as to particular
Limited
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<PAGE> 54
Partnership Units. Unless waived, any irregularities in connection with the
Ballots must be cured within such time as the General Partner shall determine.
The delivery of the Ballots will not be deemed to have been made until such
irregularities have been cured or waived.
BALLOT COMPLETION INSTRUCTIONS
Each Limited Partner is requested to complete and execute the Ballot in
accordance with the instructions contained therein. For his or her Ballot to be
effective, each Limited Partner must deliver his or her Ballot at any time on or
prior to the Solicitation Period Expiration Date. Ballots must be delivered to
U.S. Stock Transfer Corporation.
A self-addressed stamped envelope for return of the Ballot has been
included with the solicitation materials. The Ballots will be effective only
upon actual receipt by U.S. Stock Transfer Corporation. The method of delivery
of the Ballot to U.S. Stock Transfer Corporation is at the election and risk of
the Limited Partner, but if such delivery is by mail it is suggested that the
mailing be made sufficiently in advance of the Solicitation Period Expiration
Date to permit delivery to U.S. Stock Transfer Corporation prior to that date.
If a Limited Partner has any questions regarding the completion of his or
her Ballot or the options available to him or her or needs an additional Ballot,
he or she should call Georgeson & Company, the Information Agent for the
Restructuring Plan, at telephone (800) 223-2064. Any Limited Partner may also
call Richard Fremed at (818) 992-8999, ext. 250.
WITHDRAWAL AND CHANGE OF ELECTION RIGHTS
Ballots may be withdrawn at any time prior to the expiration of the
Solicitation Period. For a withdrawal or change in election to be effective, the
Limited Partner must submit to U.S. Stock Transfer Corporation a second Ballot,
properly signed and completed, together with a letter indicating that the prior
Ballot has been revoked. The new Ballot and letter must specify the name of the
person having executed the Ballot to be withdrawn or election changed and the
name of the registered holder of the Limited Partnership Units in which the
Ballot applies, if different from that of the person who executed the old
Ballot.
SOLICITATION OF BALLOTS BY INFORMATION AGENT
Georgeson & Company, Inc. has entered into an agreement with the
Partnership under which it will act as Information Agent for the Restructuring
Plan. The Information Agent will be paid a fee of $15,000, plus all
out-of-pocket expenses (including telephone, mailing and legal expenses)
incurred by the Information Agent. All fees and expenses of the Information
Agent will be treated as solicitation expenses and shall be handled as described
under the "THE RESTRUCTURING PLAN -- Expenses of the Restructuring Plan."
The Partnership has agreed to indemnify the Information Agent against
certain liabilities, including certain liabilities under the Securities Act and
state securities laws. TO THE EXTENT THAT SUCH INDEMNIFICATION PROVISIONS
PURPORT TO INCLUDE INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT, IN
THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
CONTRARY TO PUBLIC POLICY AND, THEREFORE, UNENFORCEABLE.
TABULATION OF BALLOTS
U.S. Stock Transfer Corporation has been engaged to receive and tabulate
the Ballots. U.S. Stock Transfer Corporation has also been engaged as the
transfer agent for the Common Stock of the Corporation if the Restructuring Plan
is completed. U.S. Stock Transfer Corporation will be paid total fees of
approximately $19,000 in connection with the Restructuring, the Rights Offering
and the Public Offering.
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships of the
Partnership, the General Partner and the officers and directors of the
Corporation. Certain of these conflicts of interest are summarized below.
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<PAGE> 55
BENEFITS AND DETRIMENTS TO THE GENERAL PARTNER IN COMPLETING THE RESTRUCTURING
PLAN
Because the General Partner has a financial interest in completing the
Restructuring Plan, insofar as the General Partner would receive the General
Partner Warrants, there is an inherent conflict of interest in its structuring
the terms and conditions of the Restructuring Plan. In addition, management of
the General Partner is substantially the same as the management of the
Corporation, and the managing officers have a personal financial interest in the
Restructuring Plan. The manner in which the Restructuring Plan has been
structured might have been different if structured by persons having no
financial interest in whether or not the Restructuring Plan is completed. In
addition, the General Partner currently has substantial control over the
business and affairs of the Partnership. If the Restructuring Plan is completed,
the General Partner will relinquish its control of the Partnership, since the
Corporation will be controlled by its Board of Directors, one-third of which
will be elected annually by the Stockholders. While the investors in the General
Partner will acquire Common Stock in the Corporation, such interests are not
expected, in the aggregate, to be sufficient to permit those persons to elect
members to the Board of Directors.
DIRECTORS AND OFFICERS OF THE CORPORATION
The Corporation has entered into employment agreements with five of the
executive officers of the Corporation, all of whom are current managing officers
of the Partnership and its subsidiaries. The Board of Directors of the
Corporation established the terms of compensation of the Corporation's officers
and directors, which were approved by the independent directors of the
Corporation, subject to completion of the Restructuring Plan. The executive
officers of the Corporation all are currently employees of either the General
Partner or Pacific Thrift, but none of them presently has an employment
contract. The terms of compensation of the executive officers have been
determined annually by the General Partner. Under the heading
"MANAGEMENT -- Executive Officers," there is included a comparison of the
salaries and bonuses earned by the executive officers for the past three years
with the salaries and bonuses which would have been earned under the terms of
the employment agreements with the Corporation. The executive officers may
receive higher compensation than under the Partnership structure if the
Corporation substantially increases it earnings. In addition, the executive
officers will also be eligible to receive grants of stock options under a stock
option plan of the Corporation, to participate in an employee stock purchase
plan of the Corporation, and to receive benefits under a supplemental executive
retirement plan, none of which is currently offered by the Partnership. In
addition, the executive officers will continue to be eligible to participate in
a 401(k) retirement plan, which is currently offered by the Partnership. The
terms of compensation of the Corporation's officers and directors might have
been different if the initial Board of Directors had been elected by the
Stockholders.
LACK OF INDEPENDENT REPRESENTATION OF LIMITED PARTNERS
The terms of the Restructuring Plan were established by the General
Partner, and the Proxy Statement/Prospectus was prepared by the General Partner
in consultation with the Partnership's legal counsel. The Partnership's legal
counsel has not represented the General Partner or the Limited Partners in
connection with the Restructuring Plan. However, legal counsel to the
Partnership receives its directions from the General Partner. In addition, the
principal shareholder of Bruce P. Jeffer, a Professional Corporation, partner of
the Partnership's legal counsel, Jeffer, Mangels, Butler & Marmaro, LLP, owns a
2.23% beneficial limited partner's interest in the General Partner.
There are inherent conflicts of interest between the General Partner and
the Limited Partners in connection with the Restructuring Plan. In recognition
of these conflicts of interest, the Partnership has obtained a fairness opinion
from Houlihan Lokey. However, due to the lack of independent legal
representation, every Limited Partner is urged to consult with his, her or its
own legal counsel in connection with the Restructuring Plan.
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FIDUCIARY RESPONSIBILITY
DIRECTORS AND OFFICERS OF THE CORPORATION
The directors are accountable to the Corporation and its Stockholders as
fiduciaries and must perform their duties in good faith, in a manner believed to
be in the best interests of the Corporation and its Stockholders and with such
care, including reasonable inquiry, as an ordinarily prudent person in a like
position would use under similar circumstances. The Corporation's Certificate of
Incorporation provides that the directors will not be personally liable to the
Corporation or to any Stockholder for the breach of a fiduciary responsibility,
to the full extent that such limitation or elimination of liability is permitted
under Delaware law. The Bylaws provide that the Corporation will indemnify its
directors and officers to the full extent permitted under the Delaware law.
Pursuant to the Bylaws and Delaware law, the Corporation will indemnify each
director and officer against any liability and related expenses (including
attorneys' fees) incurred in connection with any proceeding in which he or she
may be involved by reason of serving in such capacity so long as the director or
officer acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interest of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. A director or officer is also entitled to indemnification
against expenses incurred in any action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of serving in such
capacity if he or she acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of the Corporation, except that no
such indemnification will be made if the director or officer is judged to be
liable to the Corporation, unless the applicable court of law determines that
despite the adjudication of liability the director or officer is reasonably
entitled to indemnification for such expenses. The Bylaws require the
Corporation to advance funds to a director or officer for costs and expenses
(including attorneys' fees) incurred in a suit or proceeding upon receipt of an
undertaking by such director or officer to repay such amounts if it is
ultimately determined that he or she is not entitled to be indemnified. The
Corporation has and will enter into agreements with the Corporation's directors
and executive officers, indemnifying them to the fullest extent permitted by
Delaware law. Stockholders may have more limited recourse against such persons
than would apply absent these provisions. To the extent that the foregoing
provisions concerning indemnification apply to actions arising under the
Securities Act, the Corporation has been advised that, in the opinion of the
Commission, such provisions are contrary to public policy and therefore are not
enforceable. The Corporation is attempting to obtain insurance policies
indemnifying the directors and officers against certain civil liabilities,
including liabilities under the federal securities laws, which might be incurred
by them in such capacity.
GENERAL PARTNER OF THE PARTNERSHIP
Under California partnership law, the General Partner is accountable to the
Partnership as a fiduciary and is required to exercise good faith and integrity
in all its dealings in Partnership affairs. The Partnership Agreement provides
that neither the General Partner nor any of its Affiliates performing services
on behalf of the Partnership will be liable to the Partnership or any of the
Limited Partners for any act or omission by any such person if done pursuant to
advice of legal counsel employed by the General Partner on behalf of the
Partnership, or if done in good faith to promote the best interest of the
Partnership, provided that such act or omission did not constitute gross
negligence, willful or wanton misconduct or failure to adhere to its fiduciary
obligations to the Partnership, or from or out of a violation of any federal or
state securities laws associated with the offer and sale of any Limited
Partnership Units. As a result, Limited Partners might have a more limited right
of action in certain circumstances than they would have in the absence of such a
provision in the Partnership Agreement.
The Partnership Agreement also provides that the General Partner and
certain related parties shall be indemnified by the Partnership from any and all
liability, damage and costs (including reasonable attorneys' fees) incurred by
reason of any act performed or omitted to be performed by them in connection
with the business of the Partnership, including all such liabilities under the
state and federal securities laws, provided that no indemnity shall be provided
for acts or omissions constituting fraud, bad faith, or gross negligence.
46
<PAGE> 57
SELECTED FINANCIAL DATA
The following tables present selected consolidated financial and other data
of the Partnership 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 and in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<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)................................................ 56,485 65,056 84,755 101,405 122,628
Total deposits.............................................. 60,156 69,501 62,421 50,561 39,555
Mortgage notes and notes payable............................ 7,982 17,691 25,578 36,507 59,412
Partners' equity............................................ 8,727 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% 9.98% 8.02% 5.43%
Average partners' equity to average assets.................. 10.28% 13.92% 20.79% 25.34% 27.35%
Loan originations........................................... $ 170,861 $ 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>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
DISTRIBUTION DATA (UNAUDITED)
Distributions to Partners and Net Income (Loss) Per Unit.... $ $ $ $ $
Class A Limited Partners(4)(5)............................ -0- -0- 52 220 264
Net Income (Loss) Per Unit(7)........................... (207) (1,157) (708) 17 756
Distributions Per Unit.................................. -0- -0- 148 628 756
Class B Limited Partners.................................. -0- -0- 74 324 429
Net Income (Loss) Per Unit(7)........................... (207) (1,157) (708) 17 448
Distributions Per Unit.................................. -0- -0- 123 528 448
Class C Limited Partners.................................. -0- -0- 298 1,383 1,887
Net Income (Loss) Per Unit(7)........................... (207) (1,157) (708) 17 414
Distributions Per Unit.................................. -0- -0- 111 478 414
Class D Limited Partners.................................. -0- -0- 280 1,314 1,802
Net Income (Loss) Per Unit(7)........................... (207) (1,157) (708) 17 414
Distributions Per Unit.................................. -0- -0- 111 478 414
Class E Limited Partners.................................. -0- -0- 198 857 1,086
Net Income (Loss) Per Unit(7)........................... (207) (1,157) (708) 17 363
Distributions Per Unit.................................. -0- -0- 92 394 363
DRP Units................................................. -0- -0- 3 12 9
Net Income (Loss) Per Unit(7)........................... (207) (1,157) (708) 17 311
Distributions Per Unit.................................. -0- -0- 74 328 311
General Partner(6)........................................ -0- -0- 12 50 118
</TABLE>
- ---------------
(1) Net of allowances for loan loss and deferred loan fees and costs, including
loans held for sale.
(2) Net interest margin represents net interest income divided by total average
earning assets.
(3) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
(4) These amounts include income earned in the reported periods but not
distributed until 45 days after the end of each quarter and 90 days after
the end of each year, and also include interests of the General Partner(s)
in Class A, B, C and D Units.
(5) All per Unit information is reported on the basis of one Unit equalling a
$5,000 Capital Contribution.
(6) Includes distributions based on the General Partner's Interests only, not on
the Class A, B, C or D Units owned by the General Partner.
(7) The 1995 supplemental net loss per Unit would have been $(195) after the
proposed retirement of debt as seen in the "USE OF PROCEEDS."
47
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Corporation has only recently been formed and, accordingly, has no
results of operations. The following discussion is intended to provide
information to facilitate the understanding and assessment of significant
changes and trends related to the financial condition of the Partnership and its
current operating subsidiaries, Pacific Thrift, CRC and LPPC.
GENERAL
The Partnership operates two business segments: (i) the real estate lending
business, which is conducted through the Partnership and Pacific Thrift and (ii)
the trust deed foreclosure services business, which is conducted through CRC and
LPPC. Presidential reports its financial condition and results of operations on
a consolidated basis with Pacific Thrift, CRC and LPPC. (See Note 18 of the
Notes to Financial Statements.)
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, 1995, 1994 and 1993, the Partnership
experienced consolidated net operating losses due to high loan losses caused by
substantial declines in California real estate values between 1990 and 1995. In
addition, Presidential experienced a decline in net interest income over the
past four years as a result of the steady reduction of its loan portfolio, which
has been necessary to pay down the Bank Loan. Over the past five years, the Bank
Loan had been reduced from a high of $82 million in 1990 to $6.8 million as of
December 31, 1995. The Bank Loan is required to be fully repaid by June 1997.
Management anticipates that the Bank Loan will be paid off with a combination of
interest income and principal reductions on the Presidential loan portfolio
(which had an aggregate gross principal balance of $9.2 million, net of specific
reserves of $.9 million but including loans held for sale of $3.0 million as of
December 31, 1995), sales of OREO ($.8 million at December 31, 1995, net of
senior liens) and sales of portfolio loans as necessary to augment interest and
fee income.
Management's goals for Pacific Thrift's lending business are to (i)
continue to emphasize fee income from loans originated for sale; (ii) increase
the volume of loans originated for sale in states in which Pacific Thrift has
recently commenced lending operations; (iii) expand loan operations into new
states; (iv) minimize overhead costs by operating without offices in most areas;
(v) continue to evaluate possible securitization programs; and (vi) gradually
rebuild Pacific Thrift's loan portfolio balance. See "BUSINESS -- Business
Strategy."
At December 31, 1995, Pacific Thrift had a deferred income tax asset of
$1,225,000 net of a $857,000 valuation allowance. During 1995 $1,225,000 of the
valuation allowance was reversed to reflect expected utilization of the federal
and state net operating loss carryforward over the next twelve months. The
federal net operating loss carryforwards expire between 2007 and 2009 while the
state net operating loss carryforwards
48
<PAGE> 59
expire in 1999. For 1995, Pacific Thrift utilized $1,135,000 of the net
operating loss carryforwards existing at December 31, 1994. While the deferred
tax asset was fully reserved for at December 31, 1994, given the results of
operations in 1995 and the continued improvements in the first quarter of 1996,
management believes it is more likely than not that the $1,225,000 of net
operating loss carryforwards will be realized in 1996. (See Note 8 of the Notes
to Consolidated Financial Statements for additional details.)
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.
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 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
(20.3%) to $82.6 million at December 31, 1995 from $103.7 million at December
31, 1994. The decrease resulted primarily from declines
49
<PAGE> 60
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 (46.4%), to
$10.5 million from $19.6 million. Accounts receivable declined by $1.8 million
(35.3%) to $3.3 million at December 31, 1995 from $5.1 million at December 31,
1994. Excess yield receivable increased $1.8 million, (200.0%) 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 (59.2%),
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 (18.2%),
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 (54.1%), 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 (7.1%), 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 (73.9%), 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 income of Pacific Thrift, $.6 million net income of CRC and $.3 million net
income of LPPC.
AT DECEMBER 31, 1994 COMPARED WITH DECEMBER 31, 1993
Total consolidated assets decreased $10.6 million to $103.7 million at
December 31, 1994 from $114.3 million at December 31, 1993, a decrease of 9.3%.
The decrease in assets during the year was primarily due to reductions in the
Partnership's loans receivable and OREO, offset by an increase in cash and cash
equivalents held to maintain Pacific Thrift's required liquidity ratio.
Presidential's loans receivable declined by $21.6 million, and Pacific Thrift's
loans receivable by $9.6 million, resulting in a total decline of $31.2 million
in 1994, to $53.0 million at December 31, 1994 from $84.2 million at December
31, 1993, a net decline of 37.0%. OREO increased by $1.6 million in 1994 to $7.6
million at December 31, 1994 from $6.0 million at December 31, 1993, an increase
of 26.7%. Offsetting these declines was an increase in cash and cash
equivalents, which increased by $6.4 million in 1994, to $19.6 million at
December 31, 1994 from $13.2 million at December 31, 1993.
Total deposits of Pacific Thrift increased $7.1 million to $69.5 million at
December 31, 1994 from $62.4 million at December 31, 1993, an increase of 11.4%.
Total Partners' capital decreased $9.5 million to $10.4 million at December
31, 1994 from $19.9 million at December 31, 1993, a decline of 47.7%. Reductions
in capital were due to a $9.5 million net operating loss for 1994. During 1994,
the Partnership received additional requests to withdraw capital of
approximately $0.9 million which were not approved, in accordance with the
restrictions provided in the Partnership Agreement and the Bank Loan.
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 for the Partnership. Average balances are calculated on a
50
<PAGE> 61
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 and $1.7 million for the
years ended December 31, 1995 and 1994, respectively.
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
------- -------- ----- -------- -------- -----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
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 of
loans................................ 5,322 6,276
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 average
interest bearing liabilities............ 0.995% 1.093%
</TABLE>
Interest income and interest expense can fluctuate widely based on changes
in the level of interest rates in the economy. The Partnership 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
51
<PAGE> 62
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
-------------------------------------------------------
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------- --------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------------- --------------------------
YIELD/ NET YIELD/ NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ----- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<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. For 1995, the net loss before income tax benefit was $2.9
million and the net loss was $1.7 million, reflecting a tax benefit of $1.2
million due to Pacific Thrift's use of net operating loss carryforwards. Pacific
Thrift has a remaining net operating loss carryforward of approximately $4.0
million as of December 31, 1995, which may be used to offset a tax liability on
future taxable income of Pacific Thrift. The reduction in the net operating loss
carryforward 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 decreased by $1.8 million (15.8%), to $9.6 million for 1995
compared to $11.4 million for 1994, due to a decrease of $2.8 million in
interest income resulting from reductions in the loan portfolio, as assets were
reduced to improve capital ratios in Pacific Thrift and pay down the Bank Loan
at Presidential. The decrease in interest income caused by the reduced loan
portfolio was offset by an increase in interest yield of $1.0 million resulting
from higher interest rates. Total interest expense increased by $.3 million
(6.1%), to $5.2 million for 1995 compared to $4.9 million for 1994, due to an
increase of $1.1 million resulting from higher market interest rates paid on
52
<PAGE> 63
thrift certificates by Pacific Thrift, which partially offset a decrease of $.8
million due to 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 on
which reserves were previously taken and status improvements 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 (121.7%), 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 (888.9%), 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 $8.4
million. These sales included $145 million of securitizable loans, for a gain on
sale of $8.6 million, $8.4 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 (35.3%), to $1.1 million for 1995
compared to $1.7 million for 1994, due to lower revenues of CRC and LPPC.
NONINTEREST EXPENSE
Noninterest expense increased by $1.4 million (8.8%), to $17.3 million for
1995 compared to $15.9 million for 1994. Increases in noninterest expense were
primarily due to increases in salaries, employee benefits and personnel services
and operations of OREO, partially offset by declines in general and
administrative expenses. General and administrative expenses decreased by $.8
million (11.3%) 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 (58.3%) 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 a reduction of
$1.5 million in net interest income due to lower yields, as well as a reduction
of $.5 million resulting from reduced loan volume. Total interest income
decreased $2.8 million, or 19.7%, to
53
<PAGE> 64
$11.4 million in 1994 from $14.2 million in 1993 due to a decrease of $1.4
million resulting from the reduction of $3.3 million in average interest earning
assets and a decrease of $1.4 million due to lower yields. 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 5.94% at December 31, 1993. The ratio of the
allowance for loan losses to nonaccrual loans past due 90 days or more was
136.94% at December 31, 1994 and 58.74% at December 31, 1993.
NONINTEREST INCOME
Noninterest income increased by $0.7 million to $6.0 million in 1994
compared to $5.3 million in 1993. Noninterest income was primarily provided by
trustee and reconveyance fees earned by CRC and LPPC. Trustee and reconveyance
fees decreased by $0.5 million in 1994 to $3.3 million in 1994 compared to $3.8
million in 1993, due to a reduction in loan default levels in 1994.
Gain on sale of loans increased by $0.8 million (800%) in 1994, to $0.9
million in 1994 from $0.1 million in 1993. The increase is the result of an
increase in originations of loans for sale in 1994. A total of $58 million in
loans were sold in 1994, including $29.6 million of loans originated for sale by
Pacific Thrift.
NONINTEREST EXPENSE
Noninterest expense increased by $0.9 million to $15.9 million in 1994 from
$15.0 million in 1993. The major components of this increase included a $1.4
million increase in salaries and employee benefits, a $1.6 million increase in
general and administrative expenses and a $.5 million increase in depreciation
and amortization, offset by a decrease of $2.6 million in operation of OREO. The
increase in salaries and benefits was due to increased staffing at Pacific
Thrift in 1994 and reduced deferred loan origination costs pursuant to FASB 91.
The increase in general and administrative expenses was due to increased
professional fees.
LIQUIDITY AND CAPITAL RESOURCES
Neither Presidential nor any of its subsidiaries other than Pacific Thrift
maintain significant cash and cash equivalent assets. The primary source of
Pacific Thrift's liquidity is the cash and cash equivalents maintained by
Pacific Thrift in connection with its deposit-taking and lending activities. At
December 31, 1995, cash and cash equivalent assets totalled $10.5 million,
compared with $19.6 million at December 31, 1994.
54
<PAGE> 65
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 provide 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.
Since 1991, Presidential has reduced its lending activities as a result of
the need to reduce its borrowings under the Bank Loan. Beginning in 1991,
Presidential began to pay down the Bank Loan, which has been reduced by $26.6
million to $6.8 million at December 31, 1995 from $33.4 million at December 31,
1992. Pacific Thrift has increased its lending activities over the same period,
including primarily loans originated for sale in 1994 and 1995, which are funded
with loan sale proceeds.
Pacific Thrift maintains minimum levels of liquid assets as required under
the liquidity policy adopted by the board of directors of Pacific Thrift. The
relationship between short-term liquid assets and total deposits at December 31,
1995 was 31.7%, which exceeded the 10% minimum established by the board. At
December 31, 1994 and 1993, the liquidity ratio was 26.9% and 20.5%,
respectively.
On December 1, 1995, Pacific Thrift obtained from First Interstate Bank of
California a federal funds credit line, bearing interest at the federal funds
rate as announced from time to time by the Federal Reserve Board, in the amount
of $2.5 million, which was increased to $3.5 million on January 3, 1996. The
line is intended to support short term liquidity, and is not expected to be used
for more than ten consecutive days or more than 12 times during any 30 day
period.
Pacific Thrift is subject to certain leverage and risk-based capital
adequacy standards applicable to FDIC-insured institutions. At December 31,
1994, Pacific Thrift was classified by the FDIC as "undercapitalized." However,
by March 31, 1995, Pacific Thrift was reclassified by the FDIC as "adequately
capitalized." As of December 31, 1995, Pacific Thrift's regulatory capital
levels have increased to levels meeting the FDIC's definition of "well
capitalized;" however, due to the existence of the 1995 Order requiring Pacific
Thrift to maintain certain capital levels, it is classified as "adequately
capitalized." See "SUPERVISION AND REGULATION -- Federal Law -- Capital
Standards."
The Partnership's independent certified public accountants included an
explanatory paragraph in their report for the year ended December 31, 1995,
which indicated a substantial doubt as to the ability of the Partnership to
continue as a going concern due primarily to substantial debt service
requirements and restrictions on dividend payments by Pacific Thrift to the
Partnership. Since the date of the report, however, the 1995 Order, which
restricted the payment of dividends by Pacific Thrift, has been terminated. As
of March 31, 1996, the only restrictions on payment of dividends by Pacific
Thrift are those imposed on all
55
<PAGE> 66
California corporations under California law and the requirement that Pacific
Thrift maintain the capital ratios required under the regulations of the FDIC
and the DOC, as modified by the terms of the MOU. (See Successor Independent
Certified Public Accountants' Report, page F-1, and Note 1 of the Notes to
Financial Statements.)
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that same time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would generally tend to adversely affect net
interest income while a positive gap would generally tend to result in an
increase in net interest income. During a period of declining interest rates, a
negative gap would generally tend to result in increased net interest income
while a positive gap would generally tend to adversely affect net interest
income. At December 31, 1995, total interest-earning assets maturing or
repricing during each period exceeded total interest-bearing liabilities
maturing or repricing in the same periods by $1.7 million, representing a
cumulative interest rate sensitivity gap ratio of 3.0%. However, because
interest rates for different asset and liability products offered by depository
institutions respond differently to changes in the interest rate environment,
the gap is only a general indicator of interest rate sensitivity.
Presidential does not actively originate new loans, and has not done so in
approximately four years. Therefore, Presidential does not actively monitor its
interest rate risk at this time.
Pacific Thrift actively monitors its interest rate risk. Pacific Thrift has
an asset/liability committee which includes its President, Chief Financial
Officer and Deposit Operations Manager. The committee meets regularly to review
Pacific Thrift's interest rate risk position and make whatever adjustments are
necessary. In addition, the board of directors of Pacific Thrift reviews its
asset/liability position on a quarterly basis.
To the extent consistent with its interest rate spread objectives, Pacific
Thrift attempts to reduce its interest rate risk and has taken a number of steps
to match its interest sensitive assets and liabilities to minimize the potential
negative impact of changing interest rates. Pacific Thrift has focused on making
adjustable rate loans, virtually all of which adjust quarterly, and focuses its
investment activity on short-term obligations of banks and U.S. government
securities.
The following table sets forth the interest rate sensitivity of Pacific
Thrift's assets and liabilities at December 31, 1995 on the basis of certain
assumptions. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature during a particular period were determined in accordance
with the earlier of the repricing timing or contractual term of the asset or
liability. Pacific Thrift has assumed that its savings accounts, which totalled
$24.3 million at December 31, 1995 reprice immediately. Certificates of deposit
are included in the table below at their dates of maturity.
Certain shortcomings are inherent in the method of analysis presented in
the following table. For example, interest rate floors on some adjustable rate
loans can have the effect of increasing the net interest income as interest
rates decline or, conversely, limiting net interest income as interest rates
rise. Also, loan prepayments and early withdrawal of certificates of deposit
could cause the interest sensitivities to vary from what appears in the table.
Finally, the ability of many borrowers to service their adjustable rate debt may
be adversely affected by an interest rate increase.
56
<PAGE> 67
INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS OR LIABILITIES AFTER
WHICH 1 DAY 3 MONTHS SIX MONTHS 1-5 5
MATURE OR REPRICE TO 3 MONTHS TO 6 MONTHS TO 1 YEAR YEARS YEARS TOTAL
- ------------------------- ----------- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and Investments..... 9,506,287 0 0 0 0 9,506,287
Variable Rate Loans
Receivable............. 36,479,178 942,408 192,872 901,850 4,264,215 42,780,523
Loans Held for Sale(1)... 9,577,341 0 0 0 0 9,577,341
---------- ----------- ---------- ---------- --------- ----------
Interest-earning
assets................. 55,562,806 942,408 192,872 901,850 4,264,215 61,864,151
========== =========== ========== ========== ========= ==========
Certificates of
deposit................ 12,722,796 13,439,390 9,084,164 635,000 0 35,881,350
Savings accounts......... 24,274,630 0 0 0 0 24,274,630
---------- ----------- ---------- ---------- --------- ----------
Interest-bearing
liabilities............ 36,997,426 13,439,390 9,084,164 635,000 0 60,155,980
========== =========== ========== ========== ========= ==========
Interest rate sensitivity
gap.................... 18,565,380 (12,496,982) (8,891,292) 266,850 4,264,215 1,708,171
Cumulative interest rate
sensitivity gap........ 18,565,380 6,068,398 (2,822,894) (2,556,044) 1,708,171 1,708,171
Interest rate sensitivity
ratio(2)............... 1.50 0.07 0.02 1.42 0.00 1.03
Cumulative interest rate
sensitivity gap
ratio(3)............... 0.33 0.11 -0.05 -0.04 0.03 0.03
</TABLE>
- ---------------
(1) Includes pre-approved loans sold at each month end, for which cash has not
yet been received.
(2) The interest rate sensitivity gap ratio represents total interest-earning
assets divided by total interest-bearing liabilities.
(3) The cumulative interest rate sensitivity gap ratio represents the cumulative
interest rate sensitivity gap divided by total interest-earning assets.
EFFECT OF FEDERAL LAWS AND REGULATIONS
Pacific Thrift's operating results are impacted by Federal laws and
regulations. See "SUPERVISION AND REGULATION."
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of operations of the Partnership and its subsidiaries.
Like most mortgage companies and industrial loan companies, nearly all the
assets and liabilities of the Partnership and Pacific Thrift are monetary. As a
result, interest rates have a greater impact on the Partnership's consolidated
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
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 Partnership's (or the Corporation's) financial
statements. (See Note 2 of the Notes to Financial Statements.)
57
<PAGE> 68
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 adoption of SFAS No. 114
did not have a material impact on the reported financial results of the
Partnership.
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 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.
58
<PAGE> 69
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 Partnership's (or
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 Corporation'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.
59
<PAGE> 70
PACIFICAMERICA MONEY CENTER, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The transfer of the Partnership's assets and liabilities to the
Corporation, dissolution of the Partnership and pro rata distribution of the
Common Stock of the Corporation to the Partners will be accounted for as a
change in legal organization but not in the enterprise. Therefore the following
unaudited pro forma consolidated financial statements give effect to the
Restructuring Plan as a recapitalization of the Partnership into the
Corporation. The unaudited pro forma consolidated balance sheet is presented on
the basis that the Restructuring Plan took place as of December 31, 1995. The
unaudited pro forma consolidated statement of operations is presented on the
basis that the Restructuring Plan was consummated as of January 1, 1995.
These unaudited pro forma consolidated financial statements should be read
in conjunction with the historical consolidated financial statements and the
related notes thereto of Presidential Mortgage Company and Subsidiaries included
in this Proxy/Prospectus Statement.
The unaudited pro forma consolidated statement of operations is not
necessarily indicative of the operating results which would have been achieved
by the Corporation had the Restructuring Plan been consummated as of January 1,
1995 and should not be construed as representative of future operating results
or financial position of the Corporation.
The direct costs incurred in connection with effecting the Restructuring
Plan are period costs to be charged to operations as incurred. The estimated
restructuring charges of $400,000 are not included in the pro-formas. These are
nonrecurring charges which result directly from the transaction and will be
included in the Statement of Operations within the 12 months succeeding the
Restructuring. 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 890,000
shares of common stock of the Corporation are exchanged for the assumed
$8,900,000 of Net Tangible Equity of the Partnership, that 300,000 shares of
Common Stock of the Corporation are sold in the Rights Offering for $10.00 per
share, that 60,000 Subscriber Warrants are issued to subscribers in the Rights
Offering and that 500,000 shares of common stock of the Corporation are sold in
the Public Offering for $10.00 per share.
The historical Weighted Average Common Shares Outstanding at December 31,
1995 assumes that 890,000 shares of Common Stock of the Corporation exchanged
for the Partnership's Net Tangible Equity were outstanding for the entire year,
the exercise of 60,000 outstanding Subscriber Warrants, 563,333 General Partner
Warrants, and 212,400 shares issuable under incentive stock options granted
pursuant to the Corporation's 1995 Stock Option -- See "MANAGEMENT -- 1995 Stock
Option Plan." Primary and Fully Diluted loss per share are the same.
60
<PAGE> 71
PACIFICAMERICA MONEY CENTER, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS
BALANCE (NOTE A) PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents......................... $10,489,000 $ 7,307,000(1) $14,706,000
(1,290,000)(2)
(1,000,000)(3)
(1,185,000)(4)
385,000(5)
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 (Note B)............................. 1,909,000 0 1,909,000
----------- ----------- -----------
$82,557,000 4,217,000 86,774,000
=========== =========== ===========
LIABILITIES AND OWNERS' EQUITY
Liabilities:
Thrift certificates payable....................... $60,156,000 $ 0 $60,156,000
Accounts payable and accrued expenses............. 4,291,000 (170,000)(2) 4,121,000
Partnership withdrawals payable................... 1,120,000 (1,120,000)(2) 0
Notes payable..................................... 6,771,000 (1,000,000)(3) 5,771,000
Mortgages payable................................. 611,000 0 611,000
304,000(4)
Payable to general partner........................ 881,000 (1,185,000)(4) 0
----------- ----------- -----------
73,830,000 (3,171,000) 70,659,000
(304,000)(4)
Owners' Equity (Note C)........................... 8,727,000 385,000(5)
7,307,000(1) 16,115,000
----------- ----------- -----------
$82,557,000 $ 4,217,000 $86,774,000
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma
consolidated financial statements.
61
<PAGE> 72
PACIFICAMERICA MONEY CENTER, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS
BALANCE (NOTE A) 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 (165,000)(11) 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........................ 3,289,000 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 (Note D)............ 6,273,000 336,000(9) 6,434,000
(175,000)(10)
Salaries and employee benefits................. 7,858,000 568,000(8) 8,426,000
Related party fees............................. 1,012,000 (245,000)(7) 0
(767,000)(6)
Depreciation and amortization.................. 919,000 0 919,000
Operations of other real estate................ 1,212,000 0 1,212,000
----------- --------- -----------
17,274,000 (283,000) 16,991,000
----------- --------- -----------
Loss before income taxes (benefit)............... (2,920,000) (448,000) (2,472,000)
----------- --------- -----------
Income taxes (benefit)........................... (1,222,000) -- (1,222,000)
----------- --------- -----------
Net loss......................................... $(1,698,000) $(448,000) $(1,250,000)
=========== ========= ===========
Weighted average common shares outstanding....... 1,725,733 2,129,948
Loss per share (Note E).......................... $ (0.98) $ (0.59)
</TABLE>
See accompanying notes to unaudited pro forma
consolidated financial statements.
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<PAGE> 73
PACIFICAMERICA MONEY CENTER, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- 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.......................................... $5,000,000
Rights offering.......................................... $3,000,000
Estimated offering costs................................. $ (693,000)
----------
$7,307,000
==========
</TABLE>
The proceeds of the Rights Offering include $800,000 paid by the General
Partner to purchase Common Stock.
(2) To reflect the payment of limited partnership capital withdrawals payable
of $1,120,000 and related accrued interest of $170,000 at December 31, 1995
($187,000 at March 31, 1996) 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 Fleet.
(3) To reflect a $1,000,000 paydown of the notes payable to Fleet under the
terms of the Restructuring Plan and the Bank Loan with Fleet.
(4) To adjust payable to General Partner to $1,185,000, the anticipated balance
at May 31, 1996.
(5) To reflect payment of $1,185,000 General Partner payable and the purchase
of General Partner Warrants for a purchase price of $385,000.
(6) To reflect reduction of related party fees to the General Partner equal to
35% of the loan origination fees paid by borrowers to the Partnership.
(7) To reflect reduction of related party fees to the General Partner for
management and supervision of 3/8 of 1% per annum on loans with terms over
three years.
(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 reflect payment of additional directors fees and directors and officers
liability insurance premiums.
(10) To remove payment of legal fees of $100 per loan to an officer of the
Partnership, which totalled $175,000 in 1995, as provided in the
Restructuring Plan.
(11) To remove interest expense associated with the $1,000,000 paydown of the
Fleet loan and the $1,120,000 payoff of the approved limited partner
withdrawals.
NOTE B -- The additional book to tax differences related to non-taxable entities
becoming taxable entities have been fully reserved for at December 31, 1995, as
it is more likely than not that the benefit is not fully realizable.
NOTE C -- Any cash paid to those limited partners who elect the Cash Out Option
will be replaced with additional stock to be sold in the Public Offering in
order to meet the Minimum Market Capitalization.
NOTE D -- The estimated restructuring expenses of $400,000 were not included in
the pro formas. These are nonrecurring charges which result directly from the
transaction and will be included in the Statement of Operations within the 12
months succeeding the Restructuring.
NOTE E -- The pro forma supplemental loss per share and weighted average common
stock outstanding reflect the issuance of 404,215 shares of common stock to
retire debt as seen in the "USE OF PROCEEDS."
63
<PAGE> 74
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
On September 12, 1995, the Partnership dismissed Ernst & Young LLP (E&Y) as
independent certified public accountants of the Partnership and its
subsidiaries, and engaged BDO Seidman, LLP (BDO) as independent certified public
accountants of the Partnership and its subsidiaries.
The report of E&Y for the years ended December 31, 1994 and 1993 did not
contain an adverse opinion or a disclaimer of an opinion, and was not qualified
or modified as to audit scope or accounting principles. The report for the year
ended December 31, 1994 contained an explanatory paragraph concerning a
substantial doubt about the ability of the Partnership to continue as a going
concern due to losses from nonperforming loans that resulted in significant
recurring losses from operations, substantial debt service and other
requirements of the note payable to the Partnership's lender, and the regulatory
capital classification of Pacific Thrift. In addition, the report for the two
years ended December 31, 1994 contained an explanatory paragraph concerning
certain securities litigation containing allegations of securities fraud and
aiding and abetting a breach of fiduciary duty relating to the Partnership and
its Chief Executive Officer. The 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 MOU requiring the
maintenance of a certain capital level (which it currently meets).
The report of E&Y for the year ended December 31, 1993 also contained an
explanatory paragraph concerning the securities litigation referred to in the
report for 1994 and an explanatory paragraph concerning Partnership's liability
for environmental remediation of two properties acquired in foreclosure and
possible government action if the Partnership did not comply with a consent
agreement regarding one of the properties. The environmental remediation action
was not referred to in the report for the year ended December 31, 1994, as there
was no material uncertainty regarding any further liability as of that date.
During the Partnership's two most recent fiscal years and subsequent
interim period, there were disagreements between the Partnership and E&Y
regarding the following matters:
There was a disagreement concerning the scope of the work necessary to be
performed by E&Y in connection with a proposed restructuring of the Partnership,
including procedures and issues raised with respect to the allowance for loan
losses, deferred tax asset and other transactions recorded by the Partnership in
its unaudited financial information as of June 30, 1995. Prior to resolving the
disagreement, the client-auditor relationship was terminated by the Partnership.
There were disagreements regarding the amount of the provision and
allowance for loan losses for the fiscal years ended December 31, 1994 and 1993,
which were resolved by the Partnership recording an additional provision for
each year.
There were disagreements about the scope of audit procedures to be
performed to ascertain the status of certain regulatory matters concerning
Pacific Thrift and the ability of the Partnership to continue as a going concern
for the fiscal year ended December 31, 1994, which were resolved by E&Y
performing the additional procedures.
There was a disagreement about the need to add an explanatory paragraph to
the report of E&Y for the year ended December 31, 1994 concerning the ability of
the Partnership to continue as a going concern, which was resolved by the
Partnership accepting such explanatory paragraph.
There were disagreements regarding the interpretation of regulatory
accounting principles applicable to sales of senior loan participation interests
to third parties by Pacific Thrift which were resolved by Pacific Thrift
requesting an opinion of the FDIC and revising its regulatory reports to conform
to the FDIC's interpretation of such principles.
There was a disagreement regarding the scope of audit procedures necessary
and the necessity of footnote disclosure concerning certain litigation in which
allegations of securities fraud and aiding and abetting in the breach of
fiduciary duty were made against the Partnership and its Chief Executive Officer
by investors in
64
<PAGE> 75
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 were 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.
65
<PAGE> 76
BUSINESS
THE PARTNERSHIP
The Partnership is a California limited partnership formed in 1981. Since
1986, Presidential Management Company has been the sole general partner of the
Partnership. In 1988, the Partnership formed Pacific Thrift as a wholly-owned
subsidiary. In 1990, the Partnership acquired all of the limited partnership
interests of CRC and LPPC. In 1994, the Partnership formed the Corporation and
PacificAmerica Mortgage as wholly-owned subsidiaries in preparation for a
restructuring of the Partnership. Neither of these subsidiaries has conducted
any significant business operations as of March 31, 1996.
THE CORPORATION
The Corporation is a financial institution holding company. In May 1996,
the Partnership intends to transfer all of the outstanding stock of Pacific
Thrift, CRC Washington and PacificAmerica Mortgage 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
PacificAmerica Mortgage.
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. On April 1, 1996, Pacific
Thrift entered into a Memorandum of Understanding (the "MOU") with the FDIC and
the DOC that replaced a Cease and Desist Order entered in May 1995 (the "1995
Order"). See "Business -- Supervision and Regulation -- Regulatory Actions."
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 is subject to the MOU, Pacific Thrift
is classified as "adequately capitalized" 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,
66
<PAGE> 77
respectively. The net income earned in 1995 reflect primarily the substantial
increase in gains on sale of loans in 1995 compared with all prior periods. Net
losses in 1994 and 1993 were due primarily to increased loan losses on Pacific
Thrift's loan portfolio caused by continuing declines in the value of California
real estate held as collateral.
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 trust deeds securing
California real property to over 300 banks, thrifts, mortgage banks, life
insurance companies and federal regulatory agencies where principal offices are
located outside California. 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 May 1996, the Partnership intends to transfer the stock of CRC
Washington 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
lenders 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.
PACIFICAMERICA MORTGAGE
PacificAmerica Mortgage is a newly formed corporation with no business
operations as of December 31, 1995. On the Closing Date, Presidential will
transfer its loan portfolio to PacificAmerica Mortgage. 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 PacificAmerica
Mortgage will actively originate new loans for the foreseeable future, it is
expected that PacificAmerica Mortgage will obtain a California finance lender's
license. PacificAmerica Mortgage may also obtain mortgage lender licenses in
other states, as management deems appropriate. PacificAmerica Mortgage is
expected to rewrite loan receivables as they mature or are otherwise refinanced
in the future. In addition, PacificAmerica Mortgage 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 PacificAmerica Mortgage 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
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<PAGE> 78
which may limit its ability to engage in certain lending activities, or limit
the amount of certain types of loans it may make. PacificAmerica Mortgage will
provide flexibility to management where the need arises for a separate entity
subject to fewer regulatory restrictions than Pacific Thrift.
BUSINESS STRATEGY
After the consummation of the Public Offering and the Restructuring,
management intends to pursue a national expansion program for 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 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. As of April 30, 1996,
Pacific Thrift had loan representatives in the 22 states of Arizona,
California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho,
Illinois, Kansas, Maryland, Massachusetts, Minnesota, Missouri, Nevada,
New York, Oregon, Pennsylvania, Texas, Utah, Virginia and Washington.
In addition, as of April 30, 1996, Pacific Thrift was in the early
stages of operations in Indiana, New Hampshire, New Mexico, North
Carolina, Ohio, Rhode Island, South Carolina, Washington D.C. and
Wisconsin.
-- EXPAND LOAN OPERATIONS INTO NEW STATES. As of April 30, 1996,
management had taken steps to qualify or confirm exemption from
licensing requirements in the states of Hawaii, Iowa, Kentucky,
Louisiana, Michigan, Montana, Oklahoma, Tennessee and West Virginia.
-- MINIMIZE OVERHEAD COSTS BY OPERATING WITHOUT OFFICES IN MOST
AREAS. Management of Pacific Thrift has developed an operating system
which allows it to expand lending operations in new areas without
opening loan production offices. Whenever possible, a senior loan
officer with experience in an existing Pacific Thrift office is
transferred to a new region to hire local loan representatives on a
commission-only basis. The senior loan officer supervises and trains
the local representatives, all of whom operate independently without
office space. Local loan representatives typically have contacts with
local mortgage loan brokers, which provide sources of loan referrals.
All loan applications and supporting documentation are delivered to
Pacific Thrift's California loan review office for all processing and
underwriting. As operations expand in one or more locations, Pacific
Thrift may consider renting small offices as necessary to facilitate
business operations. However, management believes that Pacific Thrift
may effectively conduct business without the expense and risk of
undertaking long-term lease and other material overhead obligations in
most locations.
-- CONTINUE TO EVALUATE POSSIBLE SECURITIZATION PROGRAMS. Management
believes that Pacific Thrift may reach loan volume levels sufficient to
support direct securitization programs by Pacific Thrift by the end of
1996 or the beginning of 1997. 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 retain the interest
spread and servicing fees which it currently
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<PAGE> 79
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. Management believes that
diversification of revenue sources between securitization and loan sales
and loan portfolio income is an advisable 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 for portfolio loans. 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.
Management believes that these changes have substantially improved
asset quality. While loan delinquencies over 60 days on portfolio 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
portfolio 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 this 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, mortgage 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.
LENDING ACTIVITIES
For the past three years, the Partnership has conducted all new lending
activity through Pacific Thrift. 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 lower rate financing at more credit
sensitive 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 management's more than 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.
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<PAGE> 80
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 between 60% and 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, 1995 and 1996:
<TABLE>
<CAPTION>
ORIGINATED SOLD
----------- -----------
<S> <C> <C>
1994
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
October......................................... 17,080,000 15,728,000
November........................................ 15,694,000 14,346,000
December........................................ 22,135,000 16,915,000
1996
January......................................... 19,393,000 16,967,000
February........................................ 20,615,000 22,063,000
March........................................... 20,901,000 22,789,000
April........................................... 30,785,000 30,107,000
</TABLE>
Pacific Thrift and Presidential each entered into 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 to Aames on a nonrecourse basis 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.
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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 residential
loans to Aames which are approved by Aames prior to lending. The new agreement
provides for Pacific Thrift to receive a higher cash premium (compared to the
premium received under the prior agreement with Aames) 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. As of January 1, 1996 the agreement
with Aames 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 $145 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 into 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."
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 $7.7 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
71
<PAGE> 82
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, adverse changes in the pricing
structure for residential loans due to increased competition have caused
management to redirect Pacific Thrift's portfolio lending over the past year to
loans secured by commercial property. Commercial properties accepted by Pacific
Thrift as collateral include primarily retail, multi-unit residential and light
industrial properties. No more than 30% of Pacific Thrift's total loan portfolio
(by principal amount) 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.
72
<PAGE> 83
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- ---------------------------
PRINCIPAL PERCENTAGE OF PRINCIPAL PERCENTAGE OF
LOAN TOTAL LOAN TOTAL
BALANCES PORTFOLIO BALANCES PORTFOLIO
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
One-to-four family residential property
1st TDs.................................. $ 5,553,762 11.33% $ 6,271,007 10.66%
2nd TDs.................................. 8,149,818 16.62 11,983,931 20.39
3rd TDs.................................. 968,926 1.98 1,833,001 3.12
Home Imp. Loans.......................... 1,742,976 3.55 2,298,050 3.91
----------- ------ ----------- ------
Total...................................... 16,415,482 33.48 22,385,989 38.08
=========== ====== =========== ======
Five and Over Multi-Family residential
property
1st TDs.................................. 8,534,795 17.41 13,531,290 23.02
2nd TDs.................................. 1,811,741 3.70 3,154,197 5.37
3rd TDs.................................. -0- -0- 34,993 .06
----------- ------ ----------- ------
Total...................................... 10,346,536 21.11 16,720,480 28.45
=========== ====== =========== ======
Commercial Property
1st TDs.................................. 18,145,302 37.02 14,184,456 24.13
2nd TDs.................................. 2,172,655 4.43 3,579,936 6.09
3rd TDs.................................. 68,766 .14 104,212 .18
----------- ------ ----------- ------
Total...................................... 20,386,723 41.59 17,868,604 30.40
=========== ====== =========== ======
Undeveloped Property
1st TDs.................................. 1,873,953 3.82 1,805,151 3.07
2nd TDs.................................. -0- -0- -0- 0.00
3rd TDs.................................. -0- -0- -0- 0.00
----------- ------ ----------- ------
Total...................................... 1,873,953 3.82 1,805,151 3.07
=========== ====== =========== ======
Total Portfolio
1st TDs.................................. 34,107,812 69.58 35,791,904 60.88
2nd TDs.................................. 12,134,214 24.75 18,718,064 31.85
3rd TDs.................................. 1,037,692 2.12 1,972,206 3.36
Home Imp. Loans.......................... 1,742,976 3.55 2,298,050 3.91
----------- ------ ----------- ------
Total...................................... $49,022,694 100.00% $58,780,224 100.00%
=========== ====== =========== ======
</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 14 loans in the combined loan portfolio which
exceeded $500,000. The average loan balance at December 31, 1995, not including
Home Improvement Loans, was $168,096 for Pacific Thrift and $96,834 for
Presidential.
For each loan made by Pacific Thrift for its own loan portfolio (other than
"piggyback" loans as described below), Pacific Thrift analyzes each loan
applicant's credit and repayment ability by ordering credit histories from
independent credit reporting companies and requiring proof of income, including
two years of income tax returns, a current paycheck stub or a current profit and
loss statement. The maximum debt to income limit for portfolio loans over
$25,000 is 50%.
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<PAGE> 84
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 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-
74
<PAGE> 85
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 YEAR
ENDED DECEMBER 31,
1995
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Beginning Balance(1)..................................... $ 65,056
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.
75
<PAGE> 86
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 THAN MORE THAN
MORE THAN 3 YEARS 5 YEARS MORE THAN
ONE YEAR 1 YEAR TO TO 5 TO 10 10 YEARS TO MORE THAN TOTAL
OR LESS 3 YEARS YEARS YEARS 20 YEARS 20 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 10,346
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.
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
PacificAmerica Mortgage 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
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<PAGE> 87
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 ratios 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 5.94% 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.
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 and 1994 which were (i) accounted
for on a nonaccrual basis; (ii) accruing loans which
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<PAGE> 88
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
====== ====== ==== =======
</TABLE>
The following table sets forth information concerning interest accruals and
interest on nonaccrual loans past due 90 days as of December 31, 1995 and 1994.
<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
====== ==== ======
</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 24 loans with
aggregate principal balances of $.4 million; and rewrote 22 delinquent loans
with an aggregate principal balance of $3.1 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.
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<PAGE> 89
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.
The initiation of foreclosure proceedings against a borrower does not
necessarily suggest that the recovery of the loan is dependent solely on the
underlying collateral. In fact, in the Partnership's experience, many borrowers
will bring payments current or undertake other remedies to avoid completion of
foreclosure.
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 4,665
Chargeoffs..................................... (3,369) (4,912) (4,179)
Recoveries..................................... 2 -- --
------- ------- -------
Balance at end of period....................... $4,229 $ 4,307 $ 3,122
======= ======= =======
</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
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<PAGE> 90
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, management analyzed the amount
of loans charged off throughout 1993 and 1994, and obtained broker price
opinions on a substantial number of loans. As a result of this analysis, the
Partnership determined to make a significant adjustment to the provision for
loan losses for the forth quarter of 1994.
Pacific Thrift's current policy is to maintain an allowance for loan losses
equal to the amount determined necessary based upon Pacific Thrift's asset
classification policy, which is written to conform with generally accepted
accounting principles and FDIC requirements. The Partnership's current policy is
to maintain an allowance for loan losses determined in accordance with generally
accepted accounting principles.
Management utilizes its best judgment in providing for possible loan losses
and establishing the allowance for loan losses. However, the allowance is an
estimate which is inherently uncertain and depends on the outcome of future
events. In addition, regulatory agencies, as an integral part of their
examination process, periodically review Pacific Thrift's allowance for loan
losses. Such agencies may require Pacific Thrift to recognize additions to the
allowance based upon their judgment of the information available to them at the
time of their examination.
Implicit in lending activities is the fact that losses will be experienced
and that the amount of such losses will vary from time to time, depending upon
the risk characteristics of the portfolio. The allowance for loan losses is
increased by the provision for loan losses charged to expense. The conclusion
that a loan may become uncollectible, in whole or in part, is a matter of
judgment.
Adverse economic conditions and a declining real estate market in
California have adversely affected certain borrowers' ability to repay loans. A
continuation of these conditions or a further decline in the California economy
could result in further deterioration in the quality of the loan portfolio and
continuing high levels of nonperforming assets and charge-offs, which would
adversely effect the financial condition and results of operations of the
Partnership and Pacific Thrift.
INVESTMENT ACTIVITIES
Except for Pacific Thrift, neither Presidential nor any of its operating
subsidiaries maintains an investment portfolio. Pacific Thrift's investment
portfolio is used primarily for liquidity purposes and secondarily for
investment income. Effective January 1, 1994, Pacific Thrift's policy is to
invest cash in short-term U.S. government securities or federal funds sold due
in less than 30 days. Overnight federal funds sold are limited to no more than
100% of total capital at any single financial institution that is either
adequately or well capitalized. If the financial institution is neither
adequately nor well capitalized, then the limit is $100,000. As of December 31,
1995 and 1994, Pacific Thrift held investments in federal funds totaling $7.7
million and $12.5 million, respectively. As of December 31, 1993 and 1992,
Pacific Thrift held excess cash in interest-earning bank accounts and there were
no investments.
SOURCES OF FUNDS
DEPOSITS. Pacific Thrift's major source of funds is FDIC-insured deposits,
including passbook savings accounts, money market accounts and investment
certificates (similar to certificates of deposit). Pacific Thrift attracts
customers for its deposits by offering rates that are slightly higher than rates
offered by large commercial banks and savings and loans. Pacific Thrift has no
brokered deposits as of the date hereof. Management believes its deposits are a
stable and reliable funding source. At December 31, 1995, Pacific Thrift had
outstanding 1,486 deposit accounts of approximately $60.2 million.
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<PAGE> 91
The following table sets forth the average balances and average rates paid
on each category of Pacific Thrift's deposits for the three years ended December
31, 1995.
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
AVERAGES FOR 1995 AVERAGES FOR 1994 AVERAGES FOR 1993
----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook/Money Market................... $13,322 5.39% $23,868 3.79% $ 4,451 3.59%
Investment Certificates under
$100,000.............................. $49,931 6.20% $43,828 4.59% $46,609 5.92%
Investment Certificates over $100,000... $ 100 7.02% $ 415 6.68% $ 4,621 6.58%
------- ---- ------- ---- ------- ----
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 AT
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook/Money Market................................. $ 24,275 $ 11,443 $ 21,004
------- ------- -------
Accounts under $100,000 3 months or less.............. $ 12,723 $ 25,522 $ 5,886
Over 3 months through 6 months...................... 13,439 17,201 7,663
Over 6 months through 12 months..................... 9,084 10,654 12,634
Over 12 months...................................... 635 4,579 13,441
------- ------- -------
Total............................................ $ 35,881 $ 57,956 $ 39,624
------- ------- -------
Accounts over $100,000 3 months or less............... -0- $ 102 $ 300
Over 3 months through 6 months...................... -0- -0- 100
Over 6 months through 12 months..................... -0- -0- 1,092
Over 12 months...................................... -0- -0- 300
------- ------- -------
Total............................................ -0- $ 102 $ 1,792
------- ------- -------
TOTAL DEPOSITS........................................ $ 60,156 $ 69,501 $ 62,420
======= ======= =======
</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 in 1990 by NatWest Bank, N.A. (which merged with
Fleet as of May 1, 1996, and is therefore referred to herein as "Fleet") was a
revolving credit line of $105 million, under which Presidential borrowed a
maximum of $82 million during 1990 (the "Bank Loan"). The credit line was
reduced by mutual agreement in 1991 to $48 million with an $18 million interim
loan, which interim loan was fully repaid by April 1992. In March 1992,
Presidential was informed that Fleet'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 Fleet of this event of default on December 8, 1993. All
events of default
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<PAGE> 92
identified by Presidential to Fleet, including the failure to meet certain
financial ratios and the failure to make prepayments required as a result, were
automatically waived when the 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 Fleet. 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 additional consideration for the extension of
the Bank Loan, Presidential agreed to issue to Fleet a warrant (the "Bank
Warrant") exercisable for shares of Common Stock in the Corporation on the
Closing Date of the Restructuring Plan. The Bank Warrant would allow Fleet to
purchase up to 2% of the outstanding capital stock of the new entity at a
purchase price equal to 25% of the net book value per share of such entity,
provided that the Corporation would have a right to redeem the Bank Warrant for
one year after issuance at a redemption price of $200,000. The Corporation
intends to redeem the Bank Warrant immediately upon the Closing Date.
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. Fleet agreed to waive this technical violation of the Bank
Loan on February 12, 1996. In March 1996, Presidential notified Fleet that it
would be unable to make the March 31, 1996 scheduled paydown of the Bank Loan to
$4,993,000. Presidential and Fleet therefore agreed to a new amendment to the
Bank Loan as of March 15, 1996 whereby Presidential received an extension of
time to reduce the Bank Loan balance. The new amendment provides that the Bank
Loan Balance shall be reduced to no more than $4,993,000 upon the first to occur
of (x) the completion of the proposed restructuring plan of Presidential; (y) 10
days following the date that the FDIC terminates the 1995 Order, thereby
allowing Pacific Thrift to pay dividends to Presidential, provided that in no
event shall any such dividends cause Pacific Thrift's capital ratios to fall
below the ratio required by the FDIC; or May 31, 1996. After March 31, 1996, the
Bank Loan balance is required to be reduced by approximately $1 million per
quarter until June 30, 1997, when the balance must be paid in full.
As of March 31, 1996, management believes that Presidential is in full
compliance with all terms and covenants of the Bank Loan except for the covenant
limiting monthly cash expenses. Due to expenses in connection with the
Restructuring Plan, cash expenses exceeded the budgeted expenses by $15,000.
Fleet agreed to waive this condition in April 1996.
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 may not be repaid as to principal or interest without
consent of the Bank.
Upon the Closing Date of the Restructuring Plan, the Bank has agreed to
allow Presidential to pay to the General Partner $1,185,000 of the total debt
which the Partnership estimates it will owe to the General
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<PAGE> 93
Partner by May 31, 1996, which will be used to purchase the General Partner
Warrants for $385,000 and to purchase Common Stock for $800,000. Any remaining
balance owed to the General Partner will be paid if and to the extent permitted
by Fleet, with any remaining balance paid after the Bank Loan has been repaid in
full.
In addition, upon the Closing Date of the Restructuring Plan, the Bank will
receive a five-year warrant to purchase up to 2% of the total outstanding Common
Stock of the Corporation, exercisable at a price equal to 25% of the tangible
book value of the Corporation as of December 31, 1995, as adjusted for the
additional shares sold in the Rights Offering and the Public Offering. The
Corporation will have the right to redeem the warrant at any time for one year
from the date of issuance for $200,000, and the Corporation intends to redeem
the Bank Warrant promptly after the Closing Date.
COMPETITION
Pacific Thrift has significant competition 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 striving to provide 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, PacificAmerica Mortgage, 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)................... 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 (3)..................... 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.
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<PAGE> 94
(2) Pursuant to a lease entered January 11, 1993, annual rental increases to
$505,680 from March 1, 1996 to July 31, 1998, to $517,440 from August 1,
1998 through January 31, 2001, and to $529,200 from February 1, 2001 through
July 31, 2003. The lease is accounted for on the straight line average
method of accounting, in accordance with generally accepted accounting
principles.
(3) 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, believes 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 (the "Whittier" and "San Bernardino" properties) 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 $378,000 of the
reserve which had been set aside to pay for remediation. Remediation was
completed in 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 the closure plan was approved by
the government agency overseeing the remediation process in April 1996. The
property is now listed for sale.
On January 2, 1994, Presidential and Pacific Thrift implemented a
comprehensive environmental policy which requires environmental risk assessment
by appraisers of every new loan made by Presidential or Pacific Thrift and a
full environmental risk report on any commercial or industrial property used as
collateral for a loan of $250,000 or more. The policy provides that no loan will
be made in the event an environmental risk assessment or report indicates the
possible presence of environmental contamination. In addition, the policy
provides that no property will be acquired in foreclosure if facts are
discovered indicating the existence of significant environmental contamination.
If Presidential or Pacific Thrift determines not to foreclose on a secured
property due to environmental contamination, the collectability of a loan could
be substantially reduced.
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<PAGE> 95
FORECLOSURE PUBLICATION FEES ACTIONS. 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.
On April 23, 1996, CRC was served with a complaint by seven individuals
suing both individually and on behalf of the general public in a purported class
action filed in the Superior Court of Los Angeles County, California. The
complaint names over 50 defendants, including numerous title insurance companies
and trust deed services companies, generally alleging that the title insurance
companies did not make certain refunds of certain trustee sale guarantee (TSGs)
fees which they were required to make under the terms of a settlement of a
previous case (in which CRC was not named), and that the trust deed services
companies failed to purchase less costly alternative products, to request and
remit refunds in the cost of TSGs or to advise the members of the class of their
right to a refund from the title insurance companies. The complaint seeks
restitution of all excess charges, an injunction against the practices cited and
attorneys fees. 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 and
TSG fees in compliance with applicable law. However, if the above described
actions were decided against CRC, management estimates that CRC's aggregate
potential liability would not exceed $1 million. A liability of this amount, or
even a lesser amount, could have a material adverse effect on annual earnings of
the Corporation, but would not have a material adverse effect on the financial
condition or longer term earnings of the Corporation.
DIVIDEND POLICY
The Partnership paid regularly quarterly distributions to the Partners in
accordance with the provisions of the Partnership Agreement until June 1993. The
total amount of distributions was based upon the Partnership Agreement, which
provided for distributions based upon the Net Profits of the Partnership,
defined as net profits calculated in accordance with generally accepted
accounting principles, except that loan origination fees are allowed to be
treated as income in the year in which loans are originated, whereas generally
accepted accounting principles require that such income be deferred over the
life of the loan.
For the year ended December 31, 1993, the Partnership distributed $916,309,
all of which was determined at year end to be in excess of Net Profits as
determined under the Partnership Agreement.
No distributions were made by the Partnership in 1994 or 1995.
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<PAGE> 96
Information on the payment of distributions (unaudited) to the Limited
Partners of the Partnership for the past five years is as follows:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER
CLASS OF --------------------------- --------------------------- ---------------------------
LIMITED QUARTERLY QUARTERLY QUARTERLY QUARTERLY QUARTERLY QUARTERLY
PARTNERS DISTRIBUTIONS RETURNS DISTRIBUTIONS RETURNS DISTRIBUTIONS RETURNS
- ---------------------------- ------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1995
Class A..................... -- -- -- -- -- --
Class B..................... -- -- -- -- -- --
Class C..................... -- -- -- -- -- --
Class D..................... -- -- -- -- -- --
Class E..................... -- -- -- -- -- --
DRP Units................... -- -- -- -- -- --
1994
Class A..................... -- -- -- -- -- --
Class B..................... -- -- -- -- -- --
Class C..................... -- -- -- -- -- --
Class D..................... -- -- -- -- -- --
Class E..................... -- -- -- -- -- --
DRP Units................... -- -- -- -- -- --
1993
Class A..................... $ 51,725 2.959% -- -- -- --
Class B..................... 73,603 2.517 -- -- -- --
Class C..................... 298,289 2.244 -- -- -- --
Class D..................... 279,867 2.244 -- -- -- --
Class E..................... 197,583 1.866 -- -- -- --
DRP Units................... 3,404 1.376 -- -- -- --
1992
Class A..................... $ 54,330 3.125% $ 54,330 3.125% $ 54,927 3.125%
Class B..................... 82,447 2.625 80,571 2.625 80,539 2.625
Class C..................... 352,009 2.500 348,356 2.500 344,269 2.500
Class D..................... 337,460 2.500 330,490 2.500 325,920 2.500
Class E..................... 222,171 2.020 209,099 1.916 210,119 1.937
DRP Units................... 2,536 1.625 2,886 1.625 3,199 1.625
1991
Class A..................... $ 64,657 3.750% $ 65,375 3.750% $ 66,094 3.750%
Class B..................... 107,556 3.250 106,204 3.250 105,987 3.250
Class C..................... 473,573 3.000 469,951 3.000 466,953 3.000
Class D..................... 448,578 3.000 448,211 3.000 447,982 3.000
Class E..................... 245,602 2.708 264,268 2.708 287,387 2.636
DRP Units................... 1,496 2.250 2,024 2.250 2,547 2.250
1990
Class A..................... $ 75,497 4.000% $ 74,556 4.000% $ 72,214 4.000%
Class B..................... 121,298 3.500 121,660 3.500 122,512 3.500
Class C..................... 561,713 3.250 559,802 3.250 551,322 3.250
Class D..................... 524,226 3.250 519,480 3.250 509,832 3.250
Class E..................... 99,456 3.120 173,168 3.120 230,747 3.120
DRP Units................... 59 2.500 320 2.500 729 2.500
</TABLE>
86
<PAGE> 97
<TABLE>
<CAPTION>
FOURTH QUARTER
CLASS OF --------------------------- FIFTH FIFTH TOTAL
LIMITED QUARTERLY QUARTERLY LEVEL LEVEL ANNUAL ANNUAL
PARTNERS DISTRIBUTIONS RETURNS DISTRIBUTIONS RETURNS DISTRIBUTIONS RETURNS
- ------------------------------ ------------- --------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
1995
Class A....................... -- -- -- -- -- --
Class B....................... -- -- -- -- -- --
Class C....................... -- -- -- -- -- --
Class D....................... -- -- -- -- -- --
Class E....................... -- -- -- -- -- --
DRP Units..................... -- -- -- -- -- --
1994
Class A....................... -- -- -- -- -- --
Class B....................... -- -- -- -- -- --
Class C....................... -- -- -- -- -- --
Class D....................... -- -- -- -- -- --
Class E....................... -- -- -- -- -- --
DRP Units..................... -- -- -- -- -- --
1993
Class A....................... -- -- -- -- $ 51,725 2.959%
Class B....................... -- -- -- -- 73,603 2.517
Class C....................... -- -- -- -- 298,289 2.244
Class D....................... -- -- -- -- 279,867 2.244
Class E....................... -- -- -- -- 197,583 1.866
DRP Units..................... -- -- -- -- 3,404 1.376
1992
Class A....................... $ 54,927 3.125% $ 1,092 0.063% $ 219,606 12.5625%
Class B....................... 78,784 2.625 1,919 0.063 324,260 10.5625
Class C....................... 329,694 2.375 9,043 0.063 1,383,371 9.5625
Class D....................... 310,862 2.375 9,491 0.063 1,314,223 9.5625
Class E....................... 209,003 1.937 6,691 0.063 857,083 7.8113
DRP Units..................... 3,481 1.625 116 0.063 12,218 6.5625
1991
Class A....................... $ 66,094 3.750% $ 2,185 .125% $ 264,406 15.125%
Class B....................... 105,044 3.250 4,088 .125 428,879 13.125
Class C....................... 456,281 3.000 19,960 .125 1,886,718 12.125
Class D....................... 439,004 3.000 18,596 .125 1,802,371 12.125
Class E....................... 273,833 2.466 15,175 .125 1,086,265 10.643
DRP Units..................... 3,027 2.250 127 .125 9,220 9.125
1990
Class A....................... $ 71,040 4.000% $ 2,289 .125% $ 295,595 16.125%
Class B....................... 120,479 3.500 4,332 .125 490,281 14.125
Class C....................... 537,064 3.250 21,218 .125 2,231,119 13.125
Class D....................... 500,933 3.250 19,726 .125 2,074,196 13.125
Class E....................... 268,688 3.120 8,007 .125 780,066 12.635
DRP Units..................... 1,186 2.500 27 .125 2,320
Initial Return(1)
</TABLE>
- ---------------
(1) Represents the lower initial investment return on Class E Units paid on new
subscriptions for Class E units monthly in excess of $2 million per month,
at a rate equal to 0.125% above the Merrill Lynch Ready Asset Trust
annualized average rate of return after expenses for the past 30 days.
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The following unaudited table illustrates the total amount of distributions
received per $1,000 invested for each class of Partners, beginning in the year
in which each class invested and assuming that the $1,000 investment was made on
the first date that each class of partners was admitted. The table compares the
total amount of distributions to the total amount invested for each class of
Partners.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D CLASS E CLASS R
--------- --------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
DISTRIBUTION ON..................... $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
========= ========= ========= ======= ======= =======
1981 Distribution................... $ 260.40
1982 Distribution................... 260.50
1983 Distribution................... 246.70 $ 176.70
1984 Distribution................... 193.00 173.00
1985 Distribution................... 168.20 148.20 $ 140.70
1986 Distribution................... 156.50 136.50 126.50
1987 Distribution................... 145.30 125.30 115.30 $115.30
1988 Distribution................... 146.30 126.30 116.30 116.30
1989 Distribution................... 171.25 151.25 141.25 141.25 $135.00
1990 Distribution................... 161.25 141.25 131.25 131.25 126.35 $101.25
1991 Distribution................... 151.25 131.25 121.25 121.25 106.43 91.25
1992 Distribution................... 125.62 105.63 95.63 95.63 78.11 65.00
1993 Distribution................... 29.59 24.66 22.19 22.19 18.49 14.79
--------- --------- --------- ------- ------- -------
Total............................... $2,215.86 $1,440.04 $1,010.37 $743.17 $464.38 $272.00
========= ========= ========= ======= ======= =======
Percent of Investment............... 221.59% 144.00% 101.04% 74.32% 46.44% 27.23%
</TABLE>
The Corporation, which was recently organized, has never paid a cash
dividend on its Common Stock and does not intend to consider the payment of
dividends until at least the fourth quarter of 1997. The Corporation's ability
to pay dividends is subject to restrictions set forth in the Delaware General
Corporation law. The Delaware General Corporation Law provides that a Delaware
corporation may pay dividends either (i) out of the corporation's surplus (as
defined in Delaware law), or (ii) if there is no surplus, out of the
corporation's net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. However, pursuant to Section 2115 of the
California General Corporation Law, under certain circumstances, certain
provisions of the California General Corporation Law may be applied to foreign
corporations qualified to do business in California, which may reduce the amount
of dividends payable by the Corporation. See "DESCRIPTION OF CAPITAL
STOCK -- Effect of Quasi-California Corporation Law."
The Corporation's ability to pay cash dividends in the future will depend
in large part on the ability of its operating subsidiaries to pay dividends to
the Corporation. The ability of Pacific Thrift to pay dividends to the
Corporation is subject to restrictions set forth in the California Industrial
Loan Law and the provisions of the California General Corporation Law, and the
Regulations of the FDIC and the DOC. In addition, the provisions of the 1995
Order require the consent of the FDIC for the payment of any dividends by
Pacific Thrift. See "SUPERVISION AND REGULATION -- Federal Law -- Restrictions
on Transfers of Funds to the Partnership or the Corporation by Pacific Thrift."
MARKET FOR LIMITED PARTNERSHIP UNITS
AND COMMON STOCK OF THE CORPORATION
LIMITED PARTNERSHIP UNITS
There is no public trading market for the Limited Partnership Units of the
Partnership and there are restrictions on the transferability of such interests.
For the first nine months of 1995, management has knowledge of five sales of
Limited Partnership units. Management has no information concerning the sale
price with respect to three of the five sales. Management is informed that Class
C Units originally purchased for $30,000 sold for $4,500 and that Class E Units
originally purchased for $9,500 sold for $3,800. Management has no information
concerning the circumstances of each sale or the basis used to establish the
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purchase price of any of the Units sold and management does not believe that
these sales are representative of the market value of limited Partnership Units.
COMMON STOCK
There has been no public market for the Common Stock. The Common Stock has
been conditionally approved for listing on the Nasdaq National Market under the
symbol "PAMM." Friedman, Billings, Ramsey & Co., Inc., has indicated its
intention to make a market in the Common Stock. This firm is not obligated,
however, to make a market in the Common Stock and any market making may be
discontinued at any time.
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, PacificAmerica Mortgage 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 its 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 is 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
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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 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.
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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 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.
In April 1996, proposed legislation was presented to the California
Assembly which would create a new Department of Financial Institutions ("DFI")
as the successor to the Department of Banking. Responsibility for regulation and
supervision of credit unions and industrial loan companies such as Pacific
Thrift would be transferred to DFI from the DOC. The Superintendent of Banks
would become the new commissioner of the DFI, which would also have
responsibility for regulation and supervision of California chartered banks.
Under the proposed legislation, thrift and loan companies will be permitted to
use the word "bank" in their names. There has been no indication regarding
whether or to what extent the current regulations of the DOC governing thrift
and loans would be adopted as regulations of the DFI.
Pacific Thrift is also subject to licensing, consumer lending and other
laws of all of the states in which it originates loans. In each state in which
it commences lending, Pacific Thrift engages legal counsel to review the laws of
that state and determine whether licensing is required in that state. Based on
the advice of its counsel, Pacific Thrift files any license application,
exemption request or other documentation required in order to comply with the
laws of that state. In addition, Pacific Thrift's legal counsel advises it of
any changes in its loan documents necessary in order to comply with the lending
laws of that state.
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 January 1996.
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
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merger, consolidation or change in control, or the establishment or relocation
of any branch office of Pacific Thrift. This supervision and regulation is
intended primarily for the protection of the deposit insurance funds.
Pacific Thrift is subject to certain capital adequacy guidelines issued by
the FDIC. See "Federal Law -- Capital Standards" under this heading.
REGULATORY ACTIONS
As a result of an FDIC examination conducted as of June 15, 1993, the FDIC
and the DOC requested Pacific Thrift to enter into a stipulated Cease and Desist
Order (the "1993 Order") issued November 10, 1993. The Order primarily required
Pacific Thrift to (i) adopt a written policy acceptable to the FDIC and the DOC
governing Pacific Thrift's relationships with its affiliates; (ii) reduce its
volatile liability deposits to specified maximum levels; (iii) increase its
liquidity to specified minimum levels; and (iv) develop a comprehensive
asset/liability management policy. The Order did not require any increase in
capital or loan loss reserves, or a decrease in adversely classified assets. In
order to comply with the Order, Pacific Thrift terminated its personnel services
and facilities arrangements with the Partnership. Substantially all of the
requirements of the Order were met by January 31, 1994 well in advance of the
required dates for compliance specified in the Order.
At the end of August 1994, the FDIC requested Pacific Thrift to enter into
a supplemental stipulated Cease and Desist Order (the "Supplemental Order")
issued October 13, 1994. The Supplemental Order required Pacific Thrift to
obtain the prior consent of the FDIC before opening any new offices and to
design, file and implement plans to increase its net earnings. The Supplemental
Order did not require any increase in capital or loan loss reserves. The
Supplemental Order also required that detailed budgets and comparisons of
budgets with actual results of operations be filed with the FDIC and DOC.
In December 1994, the FDIC notified Pacific Thrift that it was classified
as "critically undercapitalized" as of October 31, 1994. Pacific Thrift had
sufficiently restored its regulatory capital ratios from net operating profits
and capital contributions as of April 30, 1995 to be classified as "adequately
capitalized" under FDIC regulations. The FDIC confirmed Pacific Thrift's
adequate capitalization by letter dated May 8, 1995.
In May 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 required 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.
On April 1, 1996, as a result of its improved capital ratios and
operations, the 1995 Order was terminated and replaced with a Memorandum of
Understanding ("MOU") between Pacific Thrift, the FDIC and the DOC. The MOU
provides that Pacific Thrift shall: (i) maintain Tier I capital of 8% or more of
its total assets; (ii) maintain an adequate reserve for loan losses, which shall
be reviewed quarterly by its board of directors; (iii) eliminate assets
classified "loss" as of September 30, 1995, reduce assets classified
"substandard" as of September 30, 1995 to not more than $4,000,000 within 180
days, and reduce all assets classified substandard, doubtful and loss to no more
than 50% of capital and reserves by September 30, 1996; (iv) obtain FDIC
approval before opening additional offices; (v) develop strategies to stabilize
its net interest margin on portfolio loans and develop procedures to implement
these strategies; and (vi) furnish written quarterly progress reports to the
FDIC detailing actions taken to comply with the MOU. Management believes that
Pacific Thrift has the ability to meet the requirements of the MOU within the
time specified therein.
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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 "Capital Standards" and "Prompt
Corrective Action and Other Enforcement Mechanisms" under this heading for a
discussion of these additional restrictions on capital distributions.
Pacific Thrift is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, the Partnership or other affiliates, the purchase of or
investments in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of the Partnership or other
affiliates. Such restrictions prevent the Partnership and other affiliates from
borrowing from Pacific Thrift unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by Pacific Thrift to or in the Partnership or to or in any other affiliate is
limited to 10% of Pacific Thrift's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of Pacific Thrift's capital and surplus (as defined by federal
regulations). In addition, any transaction with an affiliate of Pacific Thrift
must be on terms and under circumstances that are substantially the same as a
comparable transaction with a non-affiliate. Additional restrictions on
transactions with affiliates may be imposed on Pacific Thrift under the prompt
corrective action provisions of the FDIC Improvement Act. See "Prompt Corrective
Action and Other Enforcement Mechanisms" under this heading.
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a depository institution's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by
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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
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
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<PAGE> 105
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
-----------------------
WELL
ACTUAL CAPITALIZED
RATIO REQUIREMENT
------ ------------
<S> <C> <C>
Leverage ratio......................................... 9.09% 5.0%(1)
Tier 1 risk-based ratio................................ 11.17% 6.0%
Total risk-based ratio................................. 12.42% 10.0%
</TABLE>
- ---------------
(1) Pacific Thrift is required under the MOU to maintain a minimum leverage
ratio of 8.0%.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"Well capitalized"
Total risk-based capital of 10%;
Tier 1 risk-based capital of 6%; and
Leverage ratio of 5%.
"Adequately capitalized"
Total risk-based capital of 8%;
Tier 1 risk-based capital of 4%; and
Leverage ratio of 4% (3% if the institution receives the highest rating
from its primary regulator)
"Undercapitalized"
Total risk-based capital less than 8%;
Tier 1 risk-based capital less than 4%; or
Leverage ratio less than 4% (3% if the institution receives the highest
rating from its primary regulator)
"Significantly undercapitalized"
Total risk-based capital less than 6%;
or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
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<PAGE> 106
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 tothe appropriate federal banking agency 45 days after becoming
undercapitalized. The appropriate federal banking agency cannot accept a capital
plan unless, among other things, it determines that the plan (i) specifies the
steps the institution will take to become adequately capitalized, (ii) is based
on realistic assumptions and (iii) is likely to succeed in restoring the
depository institution's capital. In addition, each company controlling an
undercapitalized depository institution must guarantee that the institution will
comply with the capital plan until the depository institution has been
adequately capitalized on an average basis during each of four consecutive
calendar quarters and must otherwise provide adequate assurances of performance.
The aggregate liability of such guarantee is limited to the lesser of (a) an
amount equal to 5% of the depository institution's total assets at the time the
institution became undercapitalized or (b) the amount which is necessary to
bring the institution into compliance with all capital standards applicable to
such institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose any
of the additional restrictions or sanctions that it may impose on significantly
undercapitalized institutions if it determines that such action will further the
purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced sale
of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to
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<PAGE> 107
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.
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
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<PAGE> 108
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.
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
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<PAGE> 109
member institutions; (iv) provide for a merger of the BIF and the SAIF as of
January 1, 1998; (v) require savings associations to convert to state or
national bank charters by January 1, 1998; (vi) require savings associations to
divest any activities not permissible for commercial banks within five years;
(vii) eliminate the bad-debt reserve deduction for savings associations,
although savings associations would not be required to recapture into income
their accumulated bad-debt reserves; (viii) provide for the conversion of
savings and loan holding companies into bank holding companies as of January 1,
1998, although unitary savings and loan holding companies authorized to engage
in activities as of September 13, 1995 would have such authority grandfathered
(subject to certain limitations); and (ix) abolish the Office of Thrift
Supervision ("OTS") and transfer the OTS' regulatory authority to the other
federal banking agencies. The legislation would also provide that any savings
association that would become undercapitalized under the prompt corrective
action regulations as a result of the special deposit premium assessment could
be exempted from payment of the assessment, provided that the institution would
continue to be subject to the payment of semiannual assessments under the
current rate schedule following the recapitalization of the SAIF. The
legislation was considered and passed by the House Banking Committee's
Subcommittee on Financial Institutions on September 27, 1995, and has not yet
been acted on by the full House Banking Committee.
On September 20, 1995, similar legislation was introduced in the Senate,
although the Senate bill does not include a comprehensive approach for merging
the savings association and commercial bank charters. The Senate bill remains
pending before the Senate Banking Committee.
The future of both these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill,
which was passed by both the House and Senate on November 17, 1995 and vetoed by
the President on December 6, 1995, would: (i) recapitalize the SAIF through a
special assessment of between 70 and 80 basis points on deposits held by all
SAIF 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
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<PAGE> 110
after that date in that state or in other states by that state's banks. The same
concentration limits discussed in the preceding paragraph apply. The Interstate
Act also permits a national or state bank to establish branches in a state other
than its home state if permitted by the laws of that state, subject to the same
requirements and conditions as for a merger transaction.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which Pacific Thrift operates, although it is difficult
to assess the impact that such increased competition may have on Pacific
Thrift's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Pacific Thrift is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities. The FDIC has rated Pacific Thrift
"satisfactory" in complying with its CRA obligations.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a depository institution's compliance
with its CRA obligations. The final regulations adopt a performance-based
evaluation system which bases CRA ratings on an institution's actual lending
service and investment performance rather than the extent to which the
institution conducts needs assessments, documents community outreach or complies
with other procedural requirements. In March 1994, the Federal Interagency Task
Force on Fair Lending issued a policy statement on discrimination in lending.
The policy statement describes the three methods that federal agencies will use
to prove discrimination: (i) overt evidence of discrimination; (ii) evidence of
disparate treatment and (iii) evidence of disparate impact.
POTENTIAL ENFORCEMENT ACTIONS
Insured depository institutions, such as Pacific Thrift, and their
institution-affiliated parties, which include the Partnership and the
Corporation after the Restructuring, may be subject to potential enforcement
actions by the FDIC and the DOC for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits and with respect to Pacific Thrift and the
Partnership, could also include the imposition of civil money penalties, the
issuance of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the imposition of restrictions and sanctions
under the PCA provisions of the FDIC Improvement Act. Management knows of no
pending or threatened enforcement actions against Pacific Thrift; however,
Pacific Thrift is currently operating under the 1996 MOU. See "Supervision and
Regulation -- Federal Law -- Regulatory Actions" above.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The only stockholder of the Corporation as of the date hereof is the
Partnership, which owns 3,000 shares of the Common Stock. After the
Distribution, the Partnership will own no shares of Common Stock. The
Corporation is unaware of any person or group that will control the Corporation
following the Closing Date of the Restructuring Plan. Based upon the ownership
of the Partnership at December 31, 1995, Joel R. Schultz
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<PAGE> 111
would be the only Stockholder to beneficially own more than 5% of the Common
Stock after the Restructuring.
Upon the Closing Date of the Restructuring, Limited Partners of the
Partnership, the General Partner and the purchasers in the Public Offering will
be the Stockholders of the Corporation. As of December 31, 1995, there were
2,493 Limited Partners of the Partnership.
The following tables sets forth the anticipated ownership of Common Stock
after the completion of the Restructuring Plan by (i) the four directors and two
additional proposed directors of the Corporation, (ii) the Chief Executive
Officer and the six other executive officers of the Corporation, and (iii) all
executive officers and directors of the Corporation, as a group, based upon the
Limited Partnership Units and interests in the General Partner beneficially
owned by each such person at December 31, 1995.
The information provided below assumes that (i) 890,000 shares are issued
by the Corporation in exchange for the assets and liabilities of the
Partnership; (ii) 300,000 additional shares are sold in the Rights Offering;
(iii) 500,000 shares are sold in the Public Offering (including over
allotments); (iv) 60,000 Subscriber Warrants are issued in connection with the
Rights Offering; and (v) 563,333 General Partner Warrants are issued. The table
below further assumes that each of the named individuals purchases the number of
shares which he has expressed the intention to purchase in the Rights Offering,
as further described in the footnotes to the table.
<TABLE>
<CAPTION>
COMMON STOCK PERCENT
NAME AND ADDRESS OF BENEFICIALLY OF
BENEFICIAL OWNER OWNED(1) CLASS
---------------------- ------------ -------
<S> <C> <C>
Joel R. Schultz....................................... 242,872(2) 10.50%
21031 Ventura Boulevard
Woodland Hills, CA 91364
Richard D. Young...................................... 19,600(3) *
21031 Ventura Boulevard
Woodland Hills, CA 91364
Kenneth A. Carmona.................................... 36,152(4) 1.56%
21031 Ventura Boulevard
Woodland Hills, CA 91364
Richard B. Fremed..................................... 32,519(5) 1.41%
21031 Ventura Boulevard
Woodland Hills, CA 91364
Norman A. Markiewicz.................................. 90,325(6) 3.90%
21031 Ventura Boulevard
Woodland Hills, CA 91364
Charles J. Siegel..................................... 7,500(7) *
21031 Ventura Boulevard
Woodland Hills, CA 91364
Frank Landini......................................... 7,000(8) *
500 Ygnacio Road
Walnut Creek, CA
Russell A. Allison.................................... 0 *
4409 Via Valmonte
Palos Verdes Estates, CA 90274
Ermyas Amelga 0 *
2103 Ventura Boulevard
Woodland Hills, CA 91364
James C. Neuhauser (proposed director)................ 0 *
1001 Nineteenth Street North
Arlington, Virginia 22209-1710
Paul D. Weiser (proposed director).................... 18,951(9) *
21031 Ventura Boulevard
Woodland Hills, California 91364
All Directors, Proposed Directors and Executive
Officers, as a group (11 persons)................... 454,919 19.67%
</TABLE>
- ---------------
* Less than 1%.
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(1) This includes shares of Common Stock which the named individuals have
indicated the intention to acquire in the Rights Offering, but does not
include (ii) Common Stock issuable upon exercise of stock options to be
granted to the named individuals, which are not exercisable for at least
six months after the effectiveness of the Restructuring Plan, as described
herein under the heading "MANAGEMENT -- Plans and Arrangements -- Stock
Option Plan." Except as otherwise noted and except as required by
applicable community property laws, each person will have sole voting and
disposition powers with respect to the shares.
(2) In addition to the 100,000 shares and 20,000 Subscriber Warrants Mr.
Schultz intends to purchase in the Rights Offering, this amount includes
the following shares and warrants that Mr. Schultz will receive for his
1.49% interest in the General Partner: (i) 918 shares of Common Stock plus
503 additional shares of Common Stock and 350 Subscriber Warrants from the
80,000 shares purchased by the General Partner, and (ii) General Partner
Warrants to purchase 13,408 shares. Mr. Schultz will also receive an
additional 4,153 shares of Common Stock and 2,890 Subscriber Warrants from
the 80,000 shares purchased by the General Partner and 100,650 General
Partner Warrants with respect to interests in the General Partner which he
transferred to his son-in-law, daughter and granddaughter, subject to his
retention of the right to receive the shares and warrants described above
with respect to the transferred interests.
(3) This amount represents the 8,000 shares of Common Stock and 1,600
Subscriber Warrants that Mr. Young intends to purchase in the Rights
Offering and 10,000 shares that Mr. Young intends to purchase through his
401(k) plan in the Public Offering.
(4) This amount includes 10,000 shares of Common Stock and 2,000 Subscriber
Warrants that Mr. Carmona intends to purchase in the Rights Offering and
the following shares that Mr. Carmona and an individual retirement account
in which he is the beneficiary will receive for his 3.75% interest in the
General Partner: (i) 1,572 shares of Common Stock plus 862 additional
shares of Common Stock and 600 Subscriber Warrants from the 80,000 shares
purchased by the General Partner and (ii) General Partner Warrants to
purchase 21,118 shares.
(5) This amount includes 2,500 shares of Common Stock and 500 Subscriber
Warrants that Mr. Fremed intends to purchase in the Rights Offering and the
following shares that Mr. Fremed and an individual retirement account in
which he is the beneficiary will receive for his 4.58% interest in the
General Partner (i) 1,922 shares of Common Stock plus 1,052 additional
shares of Common Stock and 733 Subscriber Warrants from the 80,000 shares
purchased by the General Partner and (ii) General Partner Warrants to
purchase 25,812 shares.
(6) This amount includes 20,000 shares of Common Stock and 4,000 Subscriber
Warrants that Mr. Markiewicz intends to purchase in the Rights Offering and
the following shares that Mr. Markiewicz and an individual retirement
account in which he is the beneficiary will receive for their 10.294%
interest in the General Partner: (i) 4,318 shares of Common Stock plus
2,368 additional shares of Common Stock and 1,647 Subscriber Warrants from
the 80,000 shares purchased by the General Partner and (ii) General Partner
Warrants to purchase 57,992 shares.
(7) This amount represents the 7,500 shares that Mr. Siegel intends to purchase
through his 401(k) Plan in the Public Offering.
(8) This amount represents the 7,000 shares that Mr. Landini intends to
purchase through his 401(k) Plan in the Public Offering.
(9) This amount represents 5,000 shares and 1,000 Subscriber Warrants that Mr.
Weiser intends to purchase in the Rights Offering, and includes the
following shares that Mr. Weiser will receive for his 1.93% interest in the
General Partner: (i) 811 shares of Common Stock plus 936 additional shares
of Common Stock and 309 Subscriber Warrants from the 80,000 shares
purchased by the General Partner and (ii) General Partner Warrants to
purchase 10,895 shares.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors, proposed 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; President of Pacific Thrift from 1988
to December 1993; director of CRC Washington
since November 1995; Chairman of the Board
of CRC and LPPC; Chairman of the Board,
President and Chief Executive Officer of
PacificAmerica Mortgage.
Richard D. Young(1) 56 Director and Senior Executive Vice President
of the Corporation; Senior Executive Vice
President, Chief Operating Officer and a
director of PacificAmerica Mortgage;
President and Chief Operating Officer of
Pacific Thrift from November 1993 to
present; director of Pacific Thrift from
November 1993 to present; President and
Chief Executive Officer of Topa Thrift and
Loan from 1983 to 1993; President of Thrift
Guaranty Corporation from 1984 to 1988;
director of Thrift Guaranty Corporation from
1983 to 1988 and from 1989 to 1995, when the
Thrift Guaranty Corporation was liquidated;
member, Mortgage Bankers Association
Secondary and Capital Markets Committee;
member, California Association of Thrift and
Loans Companies ("CATL") Regulatory Commit-
tee; 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;
director of CRC, LPPC and PacificAmerica
Mortgage.
</TABLE>
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<PAGE> 114
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE OCCUPATION FOR THE PAST FIVE YEARS
- ---------------------- --- --------------------------------------------
<S> <C> <C>
Norman A. Markiewicz 49 Executive Vice President of the Corporation;
Chief Operating Officer of Presidential
since 1981; Chief Operating Officer of
Pacific Thrift from 1988 to September 1993;
Executive Vice President of Pacific Thrift
from 1993 to present; director of Pacific
Thrift from 1988 to present; Executive Vice
President of PacificAmerica Mortgage and
director of CRC, LPPC and PacificAmerica
Mortgage.
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; Trea-
surer 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 and a director of
CRC Washington since November 1995; Chief
Financial Officer of PacificAmerica Mortgage
and director of CRC, LPPC and PacificAmerica
Mortgage; 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 46 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 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(4) 40 Director of the Corporation; director of
Pacific Thrift from June 1992 to present;
co-owner and managing director of AMRAY
Capital Advisers from 1992 to present; Vice
President of Kidder, Peabody & Co. from 1988
to 1992.
</TABLE>
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<PAGE> 115
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE OCCUPATION FOR THE PAST FIVE YEARS
- ---------------------- --- --------------------------------------------
<S> <C> <C>
James C. Neuhauser(2) 37 Proposed Director of the Corporation and
Pacific Thrift; Executive Vice President of
Friedman, Billings Ramsey & Company, Inc.
from March 1993 to present; Senior Vice
President, Trident Financial Corporation
from 1986 to 1993. Chartered Financial
Analyst.
Paul D. Weiser(3) 59 Proposed Director of the Corporation,
Pacific Thrift, PacificAmerica Mortgage,
CRC, CRC Washington and LPPC; from 1968 to
present Senior Vice President, Secretary and
Corporate Counsel of Dataproducts
Corporation, a manufacturer and seller of
computer printers and related products;
licensed California attorney-at-law; past
chairman, Securities and Exchange Commission
Advisory Committee on Shareholder
Communications.
</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.
(4) Mr. Amelga has informed the Board of his intention to resign from the Board
of Directors following the Public Offering.
Messrs. Neuhauser and Weiser have agreed to serve on the Board of Directors
if the Restructuring is completed. It is anticipated that they will become
directors within approximately 30 days following the Closing Date.
BOARD OF DIRECTORS AND COMMITTEES
The business of the Corporation's Board of Directors will be conducted
through its meetings, as well as through meetings of its committees. Set forth
below is a description of the committees of the Board.
The Audit Committee will review and report to the Board on various auditing
and accounting matters, including the annual audit report from the Corporation's
independent public accountants. The Audit Committee consists of Ermyas Amelga
and Russell G. Allison. Mr. Amelga is its Chairman.
The Employee Compensation Committee will determine the salary and bonus
structure for the Corporation's employees who are not employed under written
contracts and will also determine the annual bonuses of Messrs. Markiewicz and
Fremed. The Employee Compensation Committee consists of Joel R. Schultz and
Richard D. Young. Mr. Schultz is its Chairman.
The Executive Compensation and Stock Option Committee will determine the
salary and performance-based bonuses of the Corporation's executive officers,
appropriate awards under the Corporation's 1995 Stock Option Plan and administer
the Corporation's Retirement Plans. See "MANAGEMENT -- 1995 Stock Option Plan"
and "-- Retirement Plan." The Executive Compensation and Stock Option Committee
consists of Ermyas Amelga and Russell G. Allison. Mr. Amelga is its Chairman.
The Executive Committee will have the authority to act on behalf of the
full Board of Directors in between meetings of the Board, except that the
Executive Committee will not have the authority to amend the Certificate of
Incorporation or the Bylaws of the Corporation, adopt an agreement of merger or
consolidation, recommend to the stockholders a dissolution of the Corporation or
a revocation of dissolution or remove or indemnify a director. To the extent
authorized by the Board of Directors, the Executive Committee will also be
authorized to declare dividends of the Corporation and to issue shares of
authorized and unissued Common Stock or any series of Preferred Stock of the
Corporation. The Executive Committee will also act as the Nominating Committee
that nominates officers and directors of the Corporation for election. The
Executive Committee consists of Joel R. Schultz and Richard D. Young. Mr.
Schultz is its Chairman.
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<PAGE> 116
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
and Assistant Corporate Secretary will receive a fee of $200 per meeting
attended provided that only one meeting fee will be paid for meetings held on
the same day.
Each of Pacific Thrift, CRC, CRC Washington, Common LPPC and PacificAmerica
Mortgage 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, CRC Washington LPPC and PacificAmerica
Mortgage will pay each employee director an annual fee of $250 plus $200 for
each meeting attended. CRC, CRC Washington, LPPC and PacificAmerica Mortgage
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 and
Assistant Corporate Secretary will receive a fee of $200 per meeting attended
provided that only one meeting fee will be paid for meetings held on the same
day.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table sets
forth certain summary information concerning compensation paid or accrued by the
Partnership, Pacific Thrift, CRC or LPPC to or on behalf of the Chief Executive
Officer and the four other most highly compensated executive officers who earned
at least $100,000 in 1995. These amounts do not include compensation paid to
certain of these officers by the General Partner, which is not reimbursed by
Presidential or any of its subsidiaries, and are shown in the footnotes of the
table. Also shown is a comparison of the amount of each of these officers would
have received under his employment agreement with the Corporation.
<TABLE>
<CAPTION>
PRO FORMA ANNUAL
ACTUAL ANNUAL COMPENSATION COMPENSATION
-------------------------------- ---------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) SALARY($)(1) BONUS
----------------------------- ---- ------------ -------- ------------ ------
<S> <C> <C> <C> <C> <C>
Joel R. Schultz,(2) 1995 $177,600 -0- 237,900 -0-
Chief Executive Officer, 1994 64,200 -0- 237,900 -0-
Presidential and Pacific 1993 58,992 -0- 237,900 -0-
Thrift
Richard D. Young,(3) 1995 $214,273 237,900 -0-
President and Chief 1994 161,600 237,900 -0-
Operating Officer, Pacific 1993 51,012(3) 86,100 -0-
Thrift
Frank Landini,(4) 1995 $159,600 -0- 159,600 -0-
Executive Vice President -- 1994 109,600 -0- 150,000 -0-
Wholesale Lending Division, 1993 31,194 -0- 37,500 -0-
Pacific Thrift
Kenneth Carmona,(5) 1995 $150,000 -0- 152,650 13,050
President, 1994 150,150 -0- 152,650 17,074
CRC and LPPC 1993 196,745 -0- 152,650 13,324
Charles J. Siegel,(6) 1995 $144,400 -0- 138,000 -0-
Chief Financial Officer, 1994 125,967 -0- 138,000 -0-
Presidential and Pacific 1993 9,133(6) 9,133 -0-
Thrift
</TABLE>
106
<PAGE> 117
- ---------------
(1) The amounts specified above include automobile allowances, 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." Does not
include $230,766, $150,000 and $226,538 paid in 1995, 1994 and 1993,
respectively, by the General Partner and not reimbursed by the Partnership.
(3) Mr. Young commenced employment with Pacific Thrift in September 1993, and he
received compensation for only four months in 1993.
(4) Amount paid for 1995 includes $50,000 paid in January 1996. Mr. Landini
commenced employment with Pacific Thrift in October 1993, and he received
compensation for only three months in 1993.
(5) Includes amounts paid to a wholly owned corporation of Mr. Carmona.
(6) Mr. Siegel commenced employment with Pacific Thrift in December 1993, and he
received compensation for only one month in 1993.
EMPLOYMENT AGREEMENTS
The Corporation has entered into employment agreements with Messrs. Joel R.
Schultz, Richard D. Young, Kenneth A. Carmona, Norman A. Markiewicz and Richard
B. Fremed, subject to completion of the Restructuring Plan. 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 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 PacificAmerica Mortgage. 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 PacificAmerica
Mortgage. 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%
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<PAGE> 118
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.
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, PacificAmerica Mortgage 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 PacificAmerica
Mortgage, 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
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<PAGE> 119
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, Carmona or Landini would also be
entitled to receive a lump sum payment equal to the annual bonus earned by the
employee for the prior fiscal year or, in the case of Mr. Schultz or Mr. Young,
the higher of the bonus earned in the prior year or the bonus that would have
been earned in the current year had the employee continued his employment for
the full year.
The Corporation will have the right to terminate the employee for cause,
which is defined in the agreement as conviction of a felony or any crime
involving moral turpitude, commission of an act of fraud, theft or embezzlement
against the Corporation, or conduct materially injurious to the Corporation's
business or reputation. In the event of termination of the agreement without
cause, the employee would be entitled to the continuation of certain benefits
and severance pay for either six months or one year, as provided in his
agreement.
Effective January 1, 1996, Pacific Thrift entered an employment agreement
with Frank Landini, Executive Vice President of Pacific Thrift, for a term of
two years. The agreement will be automatically extended for additional one year
terms thereafter unless either party gives at least six months written notice of
its or his intention not to renew the agreement. Mr. Landini receives an annual
base salary of $150,000, as adjusted annually for increases in the cost of
living index. Mr. Landini will also receive an annual bonus based upon net
profits earned from wholesale loans originated by Pacific Thrift for sale (the
"Securitizable Loan Division"), over which Mr. Landini has primary
responsibility. Net profits from the Securitizable Loan Division consists of
revenues earned from premiums on loan sales, net interest earned on
securitizable loans prior to sale, and net fees charged to borrowers (less fees
paid to brokers and other referral sources) less employee related and overhead
expenses of the Securitizable Loan Division. For the 1996 fiscal year, up to
$100,000 of Mr. Landini's bonus plus one-half of any bonus earned in excess of
$200,000 will be paid in January 1997, and any bonus earned between $100,000 and
$200,000, plus one-half of the bonus earned in excess of $200,000, will be
payable 36 months later unless Mr. Landini's employment is terminated
voluntarily by him or by Pacific Thrift "for cause." For fiscal years after
1996, one-half of the bonus earned for each year is payable in January of the
following year, and the remaining half is payable 36 months later unless Mr.
Landini's employment is terminated voluntarily by him or by Pacific Thrift for
cause. If Mr. Landini's employment agreement continues for a total of ten years
or more, the provision delaying one-half of his bonus for 36 months will
terminate. Events which are deemed termination "for cause" include conviction of
a felony or any crime involving moral turpitude, commission of an act of fraud,
theft or embezzlement against Pacific Thrift or conduct materially injurious to
Pacific Thrift's business or reputation. Mr. Landini is not eligible for the
employee bonus pool.
1995 STOCK OPTION PLAN
The 1995 PacificAmerica Money Center, 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, non-employee directors and consultants, 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.
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<PAGE> 120
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 Executive
Compensation and Stock Option Committee of the Board of Directors (the
"Committee"). The 1995 Plan provides that the Committee must consist of at least
two directors of the Corporation who are both "disinterested directors" within
the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and "outside directors" within the meaning of proposed
Treasury Regulations sec. 1.162-27(c)(3). The Committee has the sole authority
to construe and interpret the 1995 Plan, to make rules and procedures relating
to the implementation of the 1995 Plan, to select participants, to establish the
terms and conditions of Options and to grant Options, with broad authority to
delegate its responsibilities to others, except with respect to the selection
for participation of, and the granting of Options to, persons subject to
Sections 16(a) and 16(b) of the Exchange Act. Members of the 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 250,000 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 330,000 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
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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 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 212,400 shares of
Common Stock to certain key employees, including the executive officers, of the
Corporation, at an exercise price equal to the Public Offering Price. For
employees who have been employed by the Partnership for five years or more,
options will become exercisable 20% after the first six months following the
grant, and an additional 20% on the first, second, third and fourth anniversary
dates of the grant thereafter. For employees who have been employed by the
Partnership for less than five years, options will become exercisable 25% on
each of the first, second, third and fourth anniversary dates of the grant.
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The following executive officers of the Corporation will receive Incentive
Stock Options for the following amounts of shares of Common Stock if the
Restructuring Plan is completed.
<TABLE>
<CAPTION>
NAME DOLLAR VALUE NUMBER OF SHARES
-------------------------------------------- ------------ ----------------
<S> <C> <C>
Joel R. Schultz............................. * 48,000
Richard D. Young............................ * 48,000
Frank Landini............................... * 16,000
Charles J. Siegel........................... * 10,500
Kenneth A. Carmona.......................... * 9,000
Norman A. Markiewicz........................ * 9,000
Richard B. Fremed........................... * 9,000
Non-officer directors as a group(1)......... 4,000
Executive officers, directors, and proposed
directors as a group (10 persons)......... 153,500
</TABLE>
- ---------------
(1) Includes options for 1,000 shares each to two existing directors and two
proposed directors.
* 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 Closing Date of the Restructuring
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 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 and its subsidiaries will be granted pursuant to
the formula provisions of the 1995 Plan Non-Qualified Options to acquire 6,000
shares of Common Stock, at an exercise price equal to the Public Offering Price.
OPTION EXERCISE PRICES. The exercise price of an Incentive Stock Option
shall be at least 100% of the fair market value of the Common Stock on the date
of grant. Except for Options to Non-Employee Directors, Non-Qualified Stock
Options may be issued at such option exercise price as the Committee shall
determine, but not less than par value per share. The fair market value of all
Options granted on the Closing Date will be determined as the Public Offering
Price.
EXERCISE OF OPTIONS. No Stock Option may be exercised, except as provided
below, unless the holder thereof remains in the continuous employ or service of
the Corporation or one of its subsidiaries.
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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 PacificAmerica Money Center, Inc. Retirement Plan
will constitute an amendment of the existing 401(k) Plan (the "Retirement
Plan"). Following the completion of the Restructuring Plan, the Corporation will
adopt the Retirement Plan as sponsor.
All employees (including officers) of the Corporation and its subsidiaries
on the Distribution Date will be eligible to participate in the Retirement Plan
and future employees will be eligible following the completion of 1,000 hours of
service and their first year of employment. Subject to certain limitations,
participants in the Retirement Plan may make contributions from 2% to 15% of
their pretax compensation, up to a maximum of $9,240 per year (in 1995), subject
to certain limitations and annual adjustments for inflation. The Corporation
may, in its discretion, make a matching contribution equal to a percentage of
compensation contributed by each participant, not to exceed 6% of compensation.
The Retirement Plan is designed to qualify under Section 401(k) of the Code and
therefore contributions by the Corporation and the participants are deductible
by the Corporation and not includible in the income of the participants for
federal income tax purposes. Participants will always be fully vested in all of
their individual contributions to the Retirement Plan (and in earnings on such
contributions). Participants will be fully vested in employer contributions (and
earnings on such contributions) to the Retirement Plan, regardless of years of
service, upon the attainment of normal retirement age (age 65), such
participant's death or permanent and total disability while employed by the
Corporation or the termination or complete discontinuance of the Retirement
Plan. If a participant terminates employment with the Corporation for any other
reason other than retirement, then such participant's interest in employer
contributions to the Retirement Plan shall vest 20% after one year of service,
20% for each year of service thereafter, so they will be vested 100% after five
or more years of service. An employee's service with the Partnership, the
General Partner, and former affiliates is counted for purposes of vesting under
the Retirement Plan.
STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan") provides
for eligible employees of the Corporation and its subsidiaries to participate in
the ownership of the Corporation by acquiring the right to purchase shares of
the Corporation's Common Stock. The Stock Purchase Plan will cover a total of
65,000 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.
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.
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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 Executive Compensation and Stock Option 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.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The PacificAmerica Money Center, Inc. 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
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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
(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
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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>
ANNUAL COMPENSATION
YEARS OF SERVICE AT
AVERAGE ANNUAL RETIREMENT
ELIGIBLE ---------------------
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 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
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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 immediately prior to or upon
the completion of the Restructuring Plan.
CERTAIN TRANSACTIONS
MANAGEMENT AND OTHER FEES AND REIMBURSEMENTS PAID TO THE GENERAL PARTNER
Pursuant to the Partnership Agreement, the General Partner receives 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
December 31, 1995, the General Partner owed $220,000 on this note. No interest
was paid or accrued for 1993. However, interest at the Fleet prime rate plus 1%
has been accrued from January 1, 1994. All accrued interest owed on this amount
has been paid through December 31, 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 Presidential, CRC and LPPC. For the years
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ended December 31, 1995 and 1994, Presidential, 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 or accrued to the General Partner $172,000, $224,000 and
$465,551 pursuant to this provision. No further payments other than the $172,000
accrued in 1995 are payable to the General Partner under this agreement.
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 Presidential. 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 Fleet
prime rate. As of December 31, 1995, the General Partner had made payments of
$266,213 plus accrued interest under the Capital Note. Based upon the terms and
conditions of the Capital Note, the General Partner has had no obligation to
make further payments under the Capital Note since 1994, and there will be no
further obligation after the completion of the Restructuring Plan.
AMOUNTS OWED FROM AND TO THE GENERAL PARTNER AND THE PARTNERSHIP
In order to facilitate an extension of the Bank Loan, the General Partner
made an unsecured loan to the Partnership of $600,000 on May 15, 1992, which
accrues interest at the Bank's prime rate. The loan may not be repaid without
the consent of the Bank. As of December 31, 1995, $69,140 had been accrued in
interest on the loan. In addition, the Partnership owed $133,897 in management
fees and $77,801 for profits earned by CRC and LPPC in 1995, for a total of
$880,838 owed by the Partnership to the General Partner at December 31, 1995.
The General Partner anticipates that the gross amount owed to it by the
Partnership will increase to approximately $1,658,000 by the Closing Date.
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
and which management anticipates will total $471,000 by May 31, 1996. Of the net
$1,187,000 which the Partnership anticipates it will owe to the General Partner
as of May 31, 1996, $800,000 will be paid to the General Partner and used to
purchase Common Stock in the Rights Offering and $385,000 will be paid to the
General Partner and used to purchase the General Partner Warrants. The remaining
$2,000 owed to the General Partner will be paid to the extent permitted by
Fleet, with any remaining balance paid after the Bank Loan has been repaid in
full. The General Partner will distribute all Common Stock, Subscriber Warrants
and General Partner warrants received by it to its partners and creditors.
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
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agreements. Upon the completion of the Restructuring, 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 $175,000, $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,
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 AGREEMENTS WITH DIRECTOR OF PACIFIC THRIFT
Effective August 31, 1992, Pacific Thrift and Presidential 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 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 amounts
are payable to Mr. Amelga under the agreement.
Effective as of the date of his resignation as a director of the
Corporation, which is anticipated may occur within 30 days after the Closing
Date, the Corporation plans to enter into a new consulting agreement with Mr.
Amelga, pursuant to which Mr. Amelga will provide financial and strategic
consulting services to the Corporation for one year. Mr. Amelga will receive
consulting fees of $2,000 per month and stock options for 1,000 shares, which
will replace options for 1,000 shares he receives as a director of the
Corporation, exercisable at the Public Offering Price upon the terms provided
under the Corporation's 1995 Stock Option Plan for Non-Qualified Options.
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DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of certain terms and provisions of the
Corporation's capital stock, which is qualified in its entirety by reference to
the Corporation's Certificate of Incorporation. A copy of the Certificate of
Incorporation has been filed as an exhibit to the Registration Statement of
which this Proxy Statement/Prospectus forms a part.
Under the Certificate of Incorporation. the authorized but unissued and
unreserved shares of the Corporation's capital stock will be available for
issuance for general corporate purposes, including, but not limited to, possible
stock dividends, future mergers or acquisitions, or public or private offerings.
Except as may otherwise be required, stockholder approval will not be required
for the issuance of those shares.
COMMON STOCK
The Corporation's Certificate of Incorporation authorizes the issuance of
up to 8,000,000 shares of Common Stock. The Partnership currently owns all of
the 3,000 outstanding shares of Common Stock. If the Restructuring Plan is
approved, shares equal to the Net Tangible Equity of the Partnership on the last
day of the month preceding the Closing Date, but not less than 890,000 shares,
will be issued to the Partnership for distribution to the General Partner and
the Limited Partners for their interests in the Partnership. An additional
800,000 shares of Common Stock will be offered in the Rights Offering, subject
to adjustment if and to the extent necessary to allow the Corporation to sell a
minimum of 200,000 shares in the Public Offering. Following the Solicitation
Period Expiration Date, the Additional Shares of Common Stock not sold in the
Rights Offering, plus shares equal to the amount that would otherwise be
distributed to Limited Partners electing the Cash Out Option will be offered in
the Public Offering. An additional 330,000 shares of Common Stock have been
reserved for issuance under the Corporation's 1995 Stock Option Plan and 65,000
shares have been reserved for issuance under the Stock Purchase Plan. See
"MANAGEMENT -- 1995 Stock Option Plan" and "-- Stock Purchase Plan."
The holders of Common Stock will be entitled to dividends when, as, and if
declared by the Corporation's Board of Directors out of funds legally available
therefor. The payment of dividends by the Corporation will depend on the
Corporation's net income, financial condition, regulatory capital requirements
and other factors deemed relevant by the Board of Directors. In addition, a
substantial source of funds for the payment of cash dividends will be dividends
paid by Pacific Thrift, the payment of which is limited by the provisions of
California law and FDIC regulations. See "SUPERVISION AND REGULATION -- Federal
Law -- Restrictions on Transfers of Funds to the Partnership by Pacific Thrift."
Each share of Common Stock will entitle the holder to one vote on all matters
upon which Stockholders have the right to vote. The Common Stock will not have
cumulative voting rights in the election of directors.
In the event of liquidation, dissolution or winding up of the Corporation,
the holders of shares of Common Stock will be entitled to share equally after
payment of all debts and liabilities of the Corporation, and subject to the
prior rights of holders of any shares of the Corporation's Preferred Stock, if
issued in the future, in the remaining assets of the Corporation.
Holders of shares of Common Stock are not entitled to preemptive rights
with respect to any shares of Stock of the Corporation that may be subsequently
issued. The Common Stock is not subject to call or redemption and, as to shares
of Common Stock currently outstanding, are fully paid and nonassessable.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors of the
Corporation to issue up to 2,000,000 shares of Preferred Stock of the
Corporation, in one or more series, having such rights and preferences as the
Board of Directors may determine, in its sole discretion. No consent of the
Common Stockholders is required to authorize the issuance of any class of
Preferred Stock. The rights of the holders of the Preferred Stock may be senior
to the holders of the Common Stock. The Board of Directors currently has no
plans to issue any class of Preferred Stock.
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TRANSFER AGENT
The transfer agent for the Common Stock will be U.S. Stock Transfer
Corporation.
CERTAIN ANTI-TAKEOVER PROVISIONS
There has been a recent trend towards the accumulation of substantial stock
positions in public companies by third parties as a prelude to proposing a
takeover or a restructuring or sale of all or part of the company or other
similar extraordinary corporate action. Such actions are often undertaken by the
third party without advance notice to or consultation with management of the
company. In many cases, the purchaser seeks representation on the company's
board of directors in order to increase the likelihood that his proposal will be
implemented by the company. If the company resists the efforts of the purchaser
to obtain representation on the company's board, he may commence a proxy contest
to have himself or his nominees elected to the board in place of certain
directors, or the entire Board.
The Board of Directors of the Corporation believes that an imminent threat
of removal of the Corporation's management severely curtails its ability to
negotiate effectively with such purchasers. Management is deprived of the time
and information necessary to evaluate the takeover proposal, to study
alternative proposals and to help ensure that the best price is obtained in any
transaction involving the Corporation which may ultimately be undertaken.
Takeovers or changes in management of a corporation which are proposed and
effected without prior consultation and negotiation with the Corporation's
management are not necessarily detrimental to the Corporation and its
stockholders. However, the Board feels that the benefits of seeking to protect
its ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to take over or restructure the Corporation outweigh the disadvantages
of discouraging such proposals.
The provisions of the Certificate of Incorporation and Bylaws described
herein would make more difficult or discourage a proxy contest or the assumption
of control by a holder of a substantial block of the Corporation's Common Stock
or the removal of the incumbent Board, and could thus have the effect of
entrenching incumbent management. At the same time, the provisions would help
ensure that the Board, if confronted by a surprise proposal from a third party
who has recently acquired a block of the Corporation's stock, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to seek a premium price for the Stockholders. These provisions are
thus intended to encourage persons seeking to acquire control of the Corporation
to initiate such an acquisition through arms'-length negotiations with the
Corporation's management and Board of Directors. The provisions are permitted
under Delaware law and are consistent with the rules of the Nasdaq National
Market.
These provisions are not in response to any efforts of which the
Corporation is aware to accumulate the Corporation's stock or to obtain control
of the Corporation. The Board of Directors does not presently contemplate
recommending to the stockholders for their approval any further measures which
would affect the ability of third parties to change control of the Corporation.
The following discussion is a general summary of material provisions of the
Corporation's Certificate of Incorporation and Bylaws, as currently in effect,
and certain other regulatory provisions, which may be deemed to have an
"anti-takeover" effect. The following description of certain of these provisions
is necessarily general and, with respect to provisions contained in the
Corporation's Certificate of Incorporation and Bylaws, as currently in effect,
reference should be made in each case to the document in question, each of which
is part of the Registration Statement filed with the Commission. See "ADDITIONAL
INFORMATION."
DIRECTORS. Certain provisions of the Certificate of Incorporation and
Bylaws will impede changes in majority control of the Board of Directors. The
Corporation's Certificate of Incorporation provides that the Board of Directors
of the Corporation, other than those who may be elected pursuant to the terms of
any series of Preferred Stock or any other securities of the Corporation having
a preference to the Common Stock, be divided into three classes, with directors
in each class elected for three-year staggered terms except for the initial
directors. The Corporation's Bylaws provide that, except as may be provided by
the terms of any series of Preferred Stock or any other securities of the
Corporation having a preference to the Common Stock, the size of the Board of
Directors may be increased or decreased only by a majority vote of the whole
Board. The
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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 the
holders 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 the holders 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.
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).
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The Bylaws may be amended by a majority vote of the Board of Directors or
the affirmative vote of a majority of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
DELAWARE ANTI-TAKEOVER STATUTE. The Delaware General Corporation Law
provides that buyers who acquire more than 15% of the outstanding stock of a
Delaware corporation, such as the Corporation, are prohibited from completing a
hostile takeover of such corporation for three years. However, the takeover can
be completed if (i) the buyer, while acquiring the 15% interest, acquires at
least 85% of the corporation's outstanding stock (the 85% requirement excludes
shares held by directors who are also officers and certain shares held under
employee stock plans), or (ii) the takeover is approved by the target
corporation's board of directors and two-thirds of the shares of outstanding
stock of the corporation (excluding shares held by the bidder). The foregoing
provisions of the Delaware General Corporation Law do not apply to Delaware
corporations which do not have a class of voting stock listed on a national
exchange, authorized for quotation on an inter-dealer quotation system of a
registered national securities association or held of record by more than 2,000
stockholders. The Corporation may exempt itself from the requirements of the
statute by adopting an amendment to its Certificate of Incorporation or Bylaws
electing not to be governed by this provision. At the present time, the Board of
Directors does not intend to propose any such amendment.
EFFECT OF QUASI-CALIFORNIA CORPORATION LAW
Section 2115 of the California GCL provides that quasi-California
corporations will be subject to certain substantive provisions in the California
GCL notwithstanding comparable provisions in the law of the jurisdiction where
the corporation is incorporated. Section 2115 is applicable to foreign
corporations which have more than half of their shareholders residing in
California and more than half of their business deriving from California. The
determination of whether a corporation is a quasi-California corporation is
based upon information contained in a certificate required to be filed within
three months and fifteen days after the end of the corporation's fiscal year or
within 30 days after the filing of its franchise tax return, if an extension of
time to file such return was granted. Quasi-California corporations that are
Large Public Corporations (i.e., that have securities listed on the New York or
American stock exchanges, or securities designated for trading on the Nasdaq
National Market, if the corporation has at least 800 holders of its equity
securities as of the record date for its most recent annual meeting), are exempt
from the application of Section 2115.
The Corporation has qualified to do business in the State of California.
The Corporation's subsidiaries will each have substantially all of their
property, employees and operations in California. Therefore, absent an
exemption, the Corporation would be deemed to be a quasi-California corporation.
Management believes that, immediately following the Distribution, the
Corporation would constitute a Large Public Corporation and would thereby be
exempt from the application of Section 2115. The Corporation's Common Stock has
been conditionally approved for listing on the Nasdaq National Market.
Furthermore, as of the September 30, 1995, there were more than 800 holders of
record of the Limited Partnership Units and more than 2,493 beneficial owners of
such Limited Partnership Units. However, there can be no assurance that the
Common Stock will continue to be listed on the Nasdaq National Market or that
the Corporation's equity securities will continue to be held by at least 800
persons. If the Corporation's equity securities were ever to be held by fewer
than 800 persons, or the Common Stock was no longer listed on the Nasdaq
National Market for any reason the Corporation could become subject to the
provisions of the California law as a result of the application of Section 2115.
If the Corporation were determined to be a quasi-California corporation, certain
of the provisions of the Corporation's Certificate of Incorporation and Bylaws
would not be authorized by California law, including the Corporation's
classified board of directors and the supermajority voting provisions. In
addition, under California law cumulative voting for the election of directors
is mandatory unless a corporation that is a Large Public Corporation has
expressly eliminated cumulative voting in its articles of incorporation. The
Corporation has eliminated cumulative voting in its Articles of Incorporation.
Furthermore, California law with respect to the payment of dividends is more
restrictive than Delaware law. Since the Corporation is expected to derive a
substantial amount of its revenues from Pacific Thrift, a California
corporation, California law and FDIC regulations with respect to dividends will
have a substantial effect on the Corporation's ability to pay dividends. Under
California law, a corporation is prohibited from paying dividends unless (i) the
retained earnings of the corporation immediately prior to the
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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 "PAMMC." An investment banking firm has indicated its intention to make a
market in the Common Stock. This firm is not obligated, however, to make a
market in the Common Stock and any market making may be discontinued at any
time.
SUBSCRIBER WARRANTS
For every five shares of Common Stock purchased in the Rights Offering by
Partners, partners of the General Partner or officers or employees of the
Partnership or its subsidiaries, the Corporation will issue a transferable
warrant for one additional share of Common Stock, exercisable at any time after
issuance for a period of two years, at a price equal to 125% of the Public
Offering Price. Although the Subscriber Warrants are freely transferable, they
will not be listed for trading on the Nasdaq National Market, and there can be
no assurance that a market will develop for the Subscriber Warrants.
The Common Stock issuable upon exercise of the Subscriber Warrants
("Subscriber Warrant Stock") has been registered concurrently with the
registration of the Additional Shares, and the Corporation has commited to
maintain the effectiveness of such registration until the expiration of the
Subscriber Warrants.
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 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 General Partner Warrants, exercisable at any time for a period of 18
months after the Closing Date, at an exercise price equal to 150% of the Public
Offering Price per share. The General Partner will pay the Corporation $385,000
to purchase the General Partner Warrants, which management believes represents
the fair market value of the General Partner Warrants. The General Partner
Warrants are not 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 herewith 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 issuance of the General Partner Warrants. 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 issuance 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.
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BANK WARRANT
In connection with the extension of the Loan Agreement, if the
Restructuring Plan is completed, the Corporation has agreed to issue the Bank
Warrant to Fleet. The Bank Warrant is non-transferable, and entitles Fleet to
purchase up to 2% of the total outstanding Common Stock of the Corporation on
the Closing Date, at an exercise price equal to 25% of the net book value of the
Corporation on the Closing Date. The Bank Warrant is exercisable for a period of
five years following the completion date of the Restructuring Plan. The
Corporation may redeem the Bank Warrant at any time within one year for
$200,000, and the Corporation intends to redeem the Bank Warrant promptly after
the Closing Date.
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 Corporation or any other matter, or exercise
any other rights whatsoever as Stockholders of the Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
The offering made by this Proxy Statement/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 890,000 shares of
Common Stock are issued to the Partners by the Corporation in exchange for the
assets and liabilities of the Partnership, 300,000 additional shares of Common
Stock are issued in the Rights Offering, 500,000 additional shares of Common
Stock are issued in the Public Offering, 60,000 Subscriber Warrants are issued
in the Rights Offering and 563,333 General Partner Warrants are issued, there
will be a total of 1,690,000 shares of Common Stock outstanding and warrants
exercisable for an additional 623,333 shares of Common Stock outstanding,
excluding (a) an aggregate of 212,400 shares of Common Stock underlying options
granted pursuant to the Corporation's 1995 Stock Option Plan; and (b) an
aggregate of 37,600 additional shares reserved for issuance pursuant to the
Corporation's 1995 Stock Option Plan.
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 Corporation has committed to maintain effective a Registration
Statement for a period of five years from the Closing Date, pursuant to which
affiliates may sell shares without restriction.
The Corporation will issue General Partner Warrants equal to 25% of the
outstanding Common Stock on the Closing Date, on a fully diluted basis assuming
the exercise of all Subscriber Warrants and General Partner Warrants. The
General Partner Warrants are exercisable at any time for a period of 18 months
following the Closing Date. The Corporation 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 Corporation will grant options for the purchase of 212,400 shares of
Common Stock to certain key employees, officers, directors, employees and
consultants pursuant to the Corporation'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 Corporation 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 THE PUBLIC OFFERING
Pursuant to the terms of an engagement letter dated December 28, 1995, and
subject to the terms and conditions set forth therein, Friedman, Billings,
Ramsey & Co., Inc. (the "Representative") has agreed to enter an Underwriting
Agreement (the form of which has been filed as an exhibit to the registration
statement of which this Proxy Statement/Prospectus is a part) pursuant to which
it will agree to sell on a firm underwriting basis, all of the shares to be
offered in the Public Offering. The Underwriting Agreement will provide that the
obligations of the Representative are subject to certain conditions precedent.
In consideration of the Representative's services in connection with the
Restructuring Plan, the Corporation will agree to pay to the Representative (i)
an advisory fee equal to 1.0% of the gross cash proceeds of the Rights Offering
and the Public Offering (not including proceeds from shares sold equal to the
amount that would otherwise be issued to Limited Partners electing the Cash Out
Option) and (ii) a discount equal to 6.5% of the aggregate public offering price
of Common Stock sold in the Public Offering, provided that no advisory fee or
selling commissions shall be paid on purchases of Common Stock made by officers,
directors or employees of the Corporation or its subsidiaries. The Partnership
has paid the Representative an initial fee of $25,000, which will be applied
against the advisory fee and selling commissions upon the closing of the Public
Offering. The advisory fee and selling commissions are payable in cash if, as
and when the closing of the Public Offering occurs. In addition, the Partnership
has agreed to reimburse the Representative, from time to time upon demand, for
its reasonable out-of-pocket expenses in connection with the performance of its
activities as Representative, including fees and expenses of the
Representative's outside legal counsel and any other advisors, accountants or
appraisers, not to exceed $85,000 without written permission of the Partnership.
Following the completion of the Public Offering, the Corporation has agreed
to retain the Representative, on a non-exclusive basis, to provide ongoing
financial advisory and investment banking services. Fees for performing such
services are to be negotiated separately.
The Partnership has agreed to indemnify the Representative against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Representative may be required to make in respect thereof.
The initial Public Offering Price per share will be determined immediately
prior to the Public Offering, by negotiations between the Corporation and the
Representative. There has never been an established public market for the Common
Stock of the Corporation. The major factors which will be considered in
determining the Public Offering Price will be the prevailing market conditions
at the time of pricing, the market prices relative to earnings, cash flow and
assets for publicly traded common stocks of comparable companies, the loan
volume and earnings of the Corporation (and the Partnership, as its predecessor)
and comparable companies in recent periods, the Corporation's earnings
potential, the experience of its management and the position of the Corporation
in the lending industry.
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REGISTRATION OF CERTAIN SHARES FOR RESALE
The General Partner will receive 41,951 shares for its interest in the
Partnership, and has committed to purchase an additional 80,000 shares in the
Rights Offering, for which it will also receive 16,000 Subscriber Warrants. In
addition, the General Partner has committed to purchase the General Partner
Warrants. The General Partner intends to distribute a portion of the 80,000
shares purchased by it in satisfaction of certain debts owed by it, and to
distribute the remaining shares and warrants to its partners, pro rata in
accordance with their capital accounts in the General Partner. In addition, the
officers, directors and proposed directors of the Corporation have indicated
their intention to purchase additional shares of Common Stock in the Rights
Offering and the Public Offering. Certain of these officers, directors and
proposed directors will also receive a pro rata of the shares and warrants to be
distributed by the General Partner for their interests in the General Partner.
The persons shown in the table below may purchase additional shares in the Right
Offering and/or the Public Offering, but none of these individuals, other than
the officers, directors and proposed directors of the Corporation have indicated
their intention to purchase any additional shares.
The table below indicates the shares and warrants that would be received by
each of the creditors and partners of the General Partner and each of the
officers, directors and proposed directors of the Corporation, which have been
registered for resale by the persons named below. The Corporation is not aware
of any plans by any of the named persons to sell their shares or warrants.
However, the shares, Subscriber Warrants and shares issuable under Subscriber
Warrants and General Partner Warrants are being registered for resale in order
that these individuals may, from time to time in the future as they determine in
their discretion, sell any number of shares of Common Stock or Subscriber
Warrants which they own in the market, upon customary terms and conditions of
resale. If any of the named persons desire to sell shares of Common Stock or
Subscriber Warrants upon terms other than customary terms and conditions, they
would be required to file a registration statement describing the terms of such
sale. The Company will not receive any of the proceeds of any future sales of
such Common Stock. The shares and warrants listed below are not being
underwritten in connection with the Public Offering.
<TABLE>
<CAPTION>
SHARES
SHARES PURCHASED
INTENDED SHARES BY GENERAL
SHARES SHARES TO BE SHARES ISSUABLE PARTNER AND SHARES
SUBSCRIBED ISSUABLE SUBSCRIBED RECEIVED FOR UNDER DISTRIBUTED TO ISSUABLE
FOR IN UNDER FOR IN GENERAL GENERAL ITS PARTNERS UNDER
RIGHTS SUBSCRIBED PUBLIC PARTNER PARTNER AND PURCHASED TOTAL
AFFILIATES OFFERING WARRANTS OFFERING INTEREST WARRANTS CREDITORS WARRANTS SHARES
- --------------- --------------- ---------- ------------- ------------ --------- -------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce
Ackerman..... 2,601 1,676 68 48 4,393
Robin Ackerman
custodian for
Annie Drew
Ackerman..... 1,100 0 0 0 1,100
Robin Lynn
Ackerman..... 3,999 0 0 0 3,999
Transcorp C/F
Joni
O'Keefe...... 254 254
Avo
Avidissian... 125 1,676 68 48 1,917
John Bose...... 312 4,190 171 119 4,792
Darlene &
Thomas
Burton....... 62 838 34 24 958
Cal Trust, TTEE
FBO Kenneth
Carmona...... 102 1,374 56 39 1,571
Kenneth & Mary
Carmona...... 10,000 2,000 1,470 19,744 806 561 34,581
Cal Trust, TTEE
FBO Ann
White........ 281 3,771 154 107 4,313
Cal Trust, TTEE
FBO Norman
Markiewicz... 1,198 16,090 657 457 18,402
Cal Trust, TTEE
FBO Richard
Fremed....... 2,500 500 343 4,609 186 131 8,269
Cal Trust, TTEE
FBO Debra
Fontana...... 287 3,855 157 109 4,408
Debra Hamlyn... 62 838 34 24 958
Cal Trust, TTEE
FBO Debra
Hamlyn....... 218 2,933 120 83 3,354
Cal Trust, TTEE
Bonnie
Bick......... 374 5,028 205 143 5,750
Constance M.
DeRosa....... 3,435 46,134 1,884 1,310 52,763
Deanna V.
DeRosa....... 624 8,380 342 238 9,584
John Alen
DeRosa....... 624 8,380 342 238 9,584
John A.
DeRosa....... 1,644 1,644
Constance M.
DeRosa....... 1,644 1,644
Vincent P.
DeRosa....... 624 8,380 342 238 9,584
John A.
DeRosa....... 3,435 46,134 1,884 1,310 52,763
Elaine & Nelson
Fay.......... 94 1,257 51 36 1,438
Elaine & Nelson
Fay.......... 82 82
Frank & Debbe
Fontana...... 62 838 34 24 958
Richard B.
Fremed &
Ellen F.
Fremed....... 1,579 21,203 866 602 24,250
Jay Fremed..... 250 3,352 137 95 3,834
Marc Fremed.... 325 4,358 178 124 4,985
Hobbs Family
Trust........ 1,248 16,761 684 476 19,169
</TABLE>
127
<PAGE> 138
<TABLE>
<CAPTION>
SHARES SHARES
INTENDED SHARES PURCHASED
SHARES SHARES TO BE SHARES ISSUABLE BY GENERAL SHARES
SUBSCRIBED ISSUABLE SUBSCRIBED RECEIVED FOR UNDER PARTNER AND ISSUABLE
FOR IN UNDER FOR IN GENERAL GENERAL DISTRIBUTED TO UNDER
RIGHTS SUBSCRIBED PUBLIC PARTNER PARTNER ITS PARTNERS PURCHASED TOTAL
AFFILIATES OFFERING WARRANTS OFFERING INTEREST WARRANTS AND CREDITORS WARRANTS SHARES
- --------------- --------------- ---------- ------------- ------------ --------- -------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edward &
Marjorie
Illig........ 624 8,380 342 238 9,584
Edward &
Marjorie
Illig, Family
Trust-1980... 1,233 1,233
Illig Five..... 624 8,380 342 238 9,584
Illig Five..... 1,233 1,233
Victor J. Illig
Trust........ 1,529 20,532 838 583 23,482
Norman L.
Jeffer....... 8,094 8,094
Arnold
Jeffer....... 9,443 9,443
Frank
Landini...... 7,000 7,000
Norman A. &
Roslyn
Markiewicz... 20,000 4,000 3,120 41,902 1,711 1,190 71,923
Christopher J.
& Joni L.
O'Keefe...... 187 2,514 103 71 2,875
PaineWebber
TTEE Bruce
Jeffer....... 936 12,571 513 357 14,377
PaineWebber
TTEE Bruce P.
Jeffer
Professional
Corp......... 6,746 6,746
PaineWebber
TTEE Kathleen
L. Jeffer,
IRA# JP 59230
26........... 6,746 6,746
PaineWebber
TTEE Kathleen
Jeffer....... 936 12,571 513 357 14,377
Cal Trust, TTEE
FOB Robert
Rye.......... 94 1,257 51 36 1,438
Harvey &
Beatrice
Schultz
Trust........ 1,254 16,765 690 476 19,185
Harvey &
Beatrice
Schultz
Trust........ 5,084 5,084
Harvey &
Beatrice
Schultz
Trust........ 3,774 3,774
Joel R.
Schultz...... 100,000 20,000 544 97,297 3,972 2,764 224,577
Ricky
Schultz...... 624 8,380 342 238 9,584
Toby Schultz... 374 16,761 684 476 18,295
Lillian
Shlakman,
TTEE for Jill
Ruth Barsky,
Jeffrey David
Parsky, Marc
S. Fremed c
Jay L.
Fremed....... 762 762
Charles
Siegel....... 7,500 7,500
Richard W. &
Rebecca L.
Smith........ 468 6,285 257 179 7,189
Barbara
Stewart...... 999 13,409 547 381 15,336
Arline
Susswein..... 1,248 16,761 684 476 19,169
Arline Susswein
TTEE of The
Susswein
Family Trust
DTD122486.... 1,644 1,644
Mina Taub...... 3,372 3,372
Transcorp C/F
Christopher
O'Keefe,Acct.#
1RC
6077-OC...... 254 254....
Mac W. &
Barbara D.
Updegraft.... 187 2,514 103 71 2,875
Gary L. &
Audrey I.
Ward......... 62 838 34 24 958
Paul D. & Paula
Weiser....... 5,000 1,000 811 10,895 445 309 18,460
Paul & Paula
Weiser....... 491 491
Winograd 1982
Trust........ 2,496 33,522 1,369 952 38,339
Richard D.
Young........ 8,000 1,600 10,000 19,600
Kip Grossman... 1,000 1,000
Ann Simon...... 1,500 1,500
Robert Rye..... 1,000 1,000
Anthony
Morones...... 1,000 1,000
------- ------ ------ ------ ------- -------
Total.......... 145,500 29,100 24,500 41,951 563,333 80,000 16,000 900,384
======= ====== ====== ====== ======= =======
</TABLE>
128
<PAGE> 139
FEDERAL INCOME TAX CONSEQUENCES
OF THE RESTRUCTURING PLAN
INTRODUCTION
The opinion below summarizes all of the material Federal income tax
consequences to the Limited Partners as a result of the Restructuring Plan.
Jeffer, Mangels, Butler and Marmaro LLP, tax counsel to the Partnership ("Tax
Counsel"), has reviewed the following summary of Federal income tax consequences
and believes it to be a reasonable summary of the matters discussed. The
discussion is based upon current Federal income tax law, including provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
promulgated thereunder, legislative history, published rulings, judicial
decisions, and other interpretations of the Federal income tax law as well as
the assumption that the Partnership is a partnership for Federal income tax
purposes and that the transactions constituting the Restructuring Plan will be
carried out in the manner described in this Proxy Statement/Prospectus.
No rulings have been or will be requested from the Internal Revenue Service
("IRS") concerning any of the matters described in the Proxy
Statement/Prospectus, and there can be no assurance that the IRS will concur
with the views expressed herein. Existing authorities are subject to change by
future legislation, regulations, interpretations by the IRS and court decisions,
and such changes could be retroactively applied to the Restructuring Plan and
alter the tax consequences described below. The discussion below is a general
one and does not describe every tax consequence of the Restructuring Plan, nor
does it take into account the particular tax situation of, or particular tax
consequences to, any of the Limited Partners.
SUMMARY OF MATERIAL TAX CONSEQUENCES
In the opinion of Tax Counsel, the Restructuring Plan will most likely
qualify as a tax-free transaction under the provisions of Code Section 351,
resulting in the following material income tax consequences to the Limited
Partners:
-- No gain or loss will be recognized by a Limited Partner receiving
Common Stock in exchange for such Limited Partner's Units.
-- A Limited Partner electing the Cash Out Option will recognize gain or
loss equal to the difference between the amount of cash received by the
Limited Partner and the tax basis for that Limited Partner's Units in
the Partnership.
-- A Limited Partner's tax basis in Common Stock received pursuant to the
Restructuring Plan (other than Common Stock acquired pursuant to Basic
Subscription Rights, the Oversubscription Privilege or the exercise of
the Subscriber Warrants) will equal the adjusted tax basis of such
Limited Partner's Units immediately prior to the Restructuring Plan.
-- Each share of Common Stock received by a Limited Partner pursuant to
the Restructuring Plan (other than Common Stock acquired pursuant to
Basic Subscription Rights, the Oversubscription Privilege or the
exercise of the Subscriber Warrants) will have several holding periods,
depending on the nature and holding period of assets transferred by the
Partnership to the Corporation. Approximately thirty (30) days after
the effective date of the Restructuring Plan, the Corporation
anticipates providing Limited Partners with the information necessary
to determine the various holding periods associated with the Common
Stock. The holding period of the Common Stock will determine whether
any gain realized upon disposition of the Common Stock is taxed as
short-term or long-term capital gain (assuming a Limited Partner holds
Common Stock as a capital asset). Because a holding period of more than
one year is required for long-term capital gains treatment, any gains
from a subsequent sale of Common Stock by a Limited Partner will result
in 100% long-term capital gains only after the expiration of the one
year period immediately following the date of completion of the
Restructuring Plan.
-- A Limited Partner's tax basis in Common Stock and Subscriber Warrants
purchased pursuant to Basic Subscription Rights or the Oversubscription
Privilege will equal the cash purchase price of
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<PAGE> 140
such Common Stock and Subscriber Warrants. Such tax basis will be
allocated between the Common Stock Subscriber Warrants based on their
relative fair market values. A Limited Partner's holding period with
respect to the Common Stock purchased through the exercise of Basic
Subscription Rights, the Oversubscription Privilege or the exercise of
Subscriber Warrants will commence as of the date of its acquisition.
-- A Limited Partner's tax basis in Common Stock acquired through exercise
of Subscriber Warrants will equal the sum of the tax basis of the
Subscriber Warrants (which will equal the fair market value of the
Subscriber Warrants as of the effective date of the Restructuring Plan)
and the amount of cash paid to acquire the Common Stock through the
exercise of the Subscriber Warrants. A Limited Partner's holding period
with respect to the Common Stock acquired through the exercise of
Subscriber Warrants will commence as of the date of acquisition of the
Common Stock.
QUALIFICATION OF RESTRUCTURING PLAN UNDER CODE SECTION 351
Section 351(a) of the Code sets forth the general rule that no gain or loss
will be recognized by one or more persons transferring assets to a corporation
solely in exchange for the corporation's stock if, immediately after the
exchange, the transferors are "in control" of the transferee corporation. As
explained below, Tax Counsel has opined that it is more likely than not that
Section 351(a) of the Code will apply to the Restructuring Plan. If, for any
reason, Section 351(a) did not apply, each Limited Partner could recognize gain
or loss upon completion of the Restructuring Plan. Tax Counsel for the
Partnership has been informed, and has therefore assumed for purposes of this
opinion, that the Partnership would not recognize a material taxable gain with
respect to any asset transferred to the Corporation if the Restructuring Plan
did not qualify under the provisions of Section 351 of the Code. Accordingly,
Limited Partners would recognize their allocated share of such taxable loss.
However, if, as Tax Counsel has opined, Section 351(a) does apply, Limited
Partners who receive Common Stock in the Restructuring generally will not
recognize any taxable loss as a result of the Restructuring Plan. Each Limited
Partner who elects the Cash Out Option will recognize gain or loss equal to the
difference between the amount of cash that Limited Partner receives and the tax
basis of that Limited Partner's interest in the Partnership.
CONTROL. In order for a transaction to qualify under Code Section 351, the
persons (including entities) transferring property to a corporation issuing the
stock must be in "control" of such issuing corporation immediately after the
exchange transaction. For this purpose, "control" is defined as the ownership of
stock possessing at least 80% of the total combined voting power of all classes
entitled to vote and at least 80% of the total number of shares outstanding of
all other classes of stock of the issuing corporation (the "Control Test").
If the Restructuring Plan is completed, the Partners and the purchasers in
the Public Offering will receive all of the shares of Common Stock of the
Corporation, which will be the only outstanding stock of the Corporation
immediately following the Restructuring Plan. Although the Partnership plans to
liquidate as part of the Restructuring Plan, the distribution by the Partnership
of Common Stock to its Partners will not likely be considered a transfer or part
of a group of transfers which would cause the Partnership to fail the Control
Test, because the Partners would be treated as part of the control group for
purposes of Code Section 351. See Rev. Rul. 84-111, 1984-2 C.B. 88.
In addition, the Public Offering will be conducted pursuant to a "firm
commitment" underwriting. Pursuant to Revenue Ruling 78-294, 1978-2 C.B. 141,
the IRS ruled that the underwriter was a transferror for purposes of Code
Section 351 when there was a firm commitment underwriting. The Treasury has
proposed regulations under Section 351 which would render the ruling in Revenue
Ruling 78-294 obsolete. Under the proposed regulation, a person who acquires
stock from an underwriter in a qualified underwriting transaction is treated as
transferring cash directly to the corporation in exchange for the stock.
Accordingly, the person is treated as a transferror for purposes of the Control
Test. A "qualified underwriting transaction" is a transaction in which a
corporation issues stock for cash in an underwriting in which either the
underwriter is an agent of the corporation or the underwriter's ownership of the
stock is transitory. Tax Counsel believes that the Underwriters' ownership of
Common Stock pursuant to the Public Offering will be transitory. Accordingly,
under the proposed regulations, Tax Counsel has concluded that purchasers in the
Public Offering will be
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<PAGE> 141
considered a part of the transferor group. Although the proposed regulations
have not been finalized, the preamble to the regulations provides that both the
IRS and the Treasury Department believe that Revenue Ruling 78-294 does not
reflect current underwriting practices. Accordingly, Tax Counsel believes that
the Partners and the purchasers in the Public Offering will both be treated as
transferors collectively owning 100% of the Common Stock, thereby satisfying the
Control Test.
EFFECT OF SUBSEQUENT EVENTS ON CONTROL TEST. As described above, the
persons comprising the control group must meet the Control Test "immediately
after the exchange." If, following a transfer of property to the issuing
corporation, the transferring parties have a plan to sell or otherwise dispose
of control of the Corporation, and more than 20% of the Common Stock is sold
immediately following the completion of the Restructuring Plan, the exchange may
be deemed to fail the Control Test.
Subsequent to the Restructuring Plan and the Public Offering, the Common
Stock will be publicly traded. However, it is unlikely that, in the event that
more than 20% of the Common Stock is sold immediately following the completion
of the Restructuring Plan and the Public Offering, the Restructuring Plan and
the Public Offering would fail to qualify pursuant to the provisions of Code
Section 351, since such subsequent sales of Common Stock generally should not be
considered an integrated part of the Restructuring Plan and the Public Offering.
Accordingly, Limited Partners should not anticipate the recognition of tax
losses in the event more than 20% of the Common Stock is sold in the Nasdaq
National Market immediately following the Restructuring Plan and the Public
Offering.
EFFECT OF RECEIPT OF CASH. Code Section 351 provides that gain, but not
loss, will be recognized in the event that property other than stock is received
in connection with the transfer of property to a corporation in exchange for
more than eighty percent (80%) of its stock. In connection with the
Restructuring Plan, the Partnership will receive cash from the Corporation as a
result of Limited Partners' exercise of the Cash Out Option. Tax Counsel has
been informed and has therefore assumed that the transfer of each asset of the
Partnership would not result in the recognition of a material taxable gain in
the event the transaction did not qualify pursuant to Section 351. However, due
to the application of Code Section 351, no loss will be recognized by the
Limited Partners as a result of the receipt by the Partnership of cash. For the
specific tax consequence to the Limited Partners, see "Tax Consequences to
Limited Partners" discussed below.
BASIS OF ASSETS ACQUIRED BY THE CORPORATION. Code Section 362 provides that
the tax basis of assets received by a corporation in connection with a
transaction described in Code Section 351 will equal the tax basis of the assets
in the hands of the transferor, increased by any gain recognized by the
transferor. Accordingly, since it is not anticipated that any gain will be
recognized, the Corporation's tax basis in the assets received from the
Partnership will equal the Partnership's adjusted tax basis in those assets
immediately prior to the Restructuring Plan.
ASSUMPTION OF LIABILITIES. Section 357(a) of the Code provides generally
that if, pursuant to a Section 351 exchange, the issuing corporation assumes the
liability of a person or entity transferring property to such corporation, or if
the issuing corporation acquires from such transferor property subject to a
liability, the transfer of such liability to the issuing corporation will not
prevent the exchange from qualifying under the provisions of Section 351.
However, even though an exchange qualifies under Section 351, Section 357(c)
provides that a transfer of a liability to the issuing corporation will result
in the recognition of gain or other income to a particular transferor if and to
the extent that the aggregate amount of liabilities transferred to the issuing
corporation by that transferor exceeds the total of the adjusted bases of assets
transferred to the issuing corporation by such transferor pursuant to the
Section 351 exchange.
The Partnership has advised Tax Counsel that the aggregate amount of
liabilities transferred to the Corporation by the Partnership will not exceed
the total of the adjusted bases of property transferred to the Corporation by
the Partnership. Based upon this representation, Tax Counsel has opined that it
is unlikely that there will be gain to the Partnership or the Limited Partners
under Code Section 357(c) as a result of the Restructuring Plan.
Additionally, even if Section 357(c) does not apply, the transfer of a
liability to the issuing corporation will, in certain instances, result in the
recognition of gain or other income by the transferor in an amount equal
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<PAGE> 142
to the amount of the liability transferred. For example, Section 357(b) of the
Code provides that if the transferor's principal purpose in transferring a
liability to the issuing corporation is either (i) to avoid federal income tax
or (ii) not a bona fide business purpose, the amount of such liability is
considered to be money received by the transferor in the Section 351 exchange,
thereby possibly resulting in the recognition of gain or other income by the
transferor. Tax Counsel does not believe it is likely that the IRS would
determine that the principal purpose for the transfer of the Partnerships'
liabilities was to avoid federal income tax or was not a bona fide business
purpose. Therefore, in the opinion of Tax Counsel, it is unlikely that there
will be gain to the Partnership or the Limited Partners as a result of the
application of Code Section 357(b).
TAX CONSEQUENCES TO THE LIMITED PARTNERS
Each Limited Partner will receive Common Stock or cash in exchange for such
Limited Partner's Units. No gain or loss will be recognized by a Limited Partner
who receives Common Stock in exchange for his, her or its interest in the
Partnership. A Limited Partner's basis in the Common Stock will equal the
adjusted basis of the Limited Partner's Units immediately before the effective
date of the Restructuring Plan. Because Tax Counsel has been informed by the
General Partner that the Partnership's liabilities are all recourse liabilities
as to the General Partner, Tax Counsel has opined that the transfer of
Partnership liabilities to the Corporation should not affect the Limited
Partners' bases in the Common Stock. A Limited Partner's holding period (and the
tax basis allocated to such holding period) of the Common Stock will be a
fragmented holding period as described below. Limited Partners should not
anticipate the use of any suspended passive losses attributable to such Limited
Partners' Units.
Tax Counsel has opined that a Limited Partner who elects the Cash Out
Option in lieu of receiving Common Stock will recognize a gain or loss equal to
the difference between the cash received by the Limited Partner and the tax
basis of the Limited Partner's Units in the Partnership.
Tax Counsel has opined that a Limited Partner's tax basis in Common Stock
and Subscriber Warrants acquired pursuant to Basic Subscription Rights or the
Oversubscription Privilege will be equal to the amount of cash paid for such
Common Stock and Subscriber Warrants. Such tax basis will be allocated between
such Common Stock and Subscriber Warrants based on their relative fair market
values. Common Stock acquired pursuant to the exercise of the Subscriber
Warrants will have a basis equal to the amount originally allocated to the
Subscriber Warrants plus the amount paid for the Common Stock pursuant to the
exercise of the Subscriber Warrants. The holding period for such Common Stock
acquired pursuant to the Basic Subscription Rights, the Oversubscription
Privilege and the Subscriber Warrants will commence as of the date of
acquisition of such shares.
DETERMINATION OF HOLDING PERIOD OF COMMON STOCK RECEIVED IN EXCHANGE FOR
UNITS. The following opinion of Tax Counsel assumes that a Limited Partner holds
his, her or its Units as a capital asset. (Generally, a Limited Partner's
interest in the Partnership will be considered a capital asset unless the
Limited Partner is a "dealer" in partnership interests and/or other securities).
Following the Restructuring Plan, the holding period for which a Limited
Partner will be treated as having held the shares of Common Stock (other than
Common Stock received pursuant to Basic Subscription Rights or the
Oversubscription Privilege) will include (i.e. have "tacked-on") the
Partnership's holding period for the assets transferred to the Corporation
pursuant to the Restructuring Plan, to the extent such assets were capital
assets or "Section 1231 assets" (the "capital gain assets") in the possession of
the Partnership. However, to the extent that the assets transferred by the
Partnership to the Corporation are not capital gain assets (for example, loans
held for sale) in the possession of the Partnership, then a Limited Partner's
holding period for the Common Stock will not include the Partnership's holding
period for such assets. For this purpose, capital gain assets do not include
cash, accounts receivable, property of a kind which would be properly included
in inventory or property held primarily for sale to customers in the ordinary
course of business (the "ordinary income assets"). Thus, to the extent that the
assets transferred to the Corporation by the Partnership consist of ordinary
income assets, shares of Common Stock attributable to such assets will have a
holding period which begins on the day following the Closing Date of the
Restructuring Plan. Management of the Partnership has advised Tax Counsel that
it understands the assets to be transferred by
132
<PAGE> 143
the Partnership to the Corporation will consist of a combination of both
ordinary income assets and capital gain assets. Accordingly, a portion of each
share of Common Stock received by a Limited Partner (other than Common Stock
received pursuant to Basic Subscription Rights or the Oversubscription
Privilege) will not qualify for a tacked-on holding period.
Additionally, the Partnership's holding periods with respect to its various
capital gain assets vary from asset to asset. Accordingly, the portion of each
Limited Partner's shares of Common Stock attributable to capital gains assets
will likewise have various holding period components. Tax basis allocated to
each component of a share of Common Stock will be determined in accordance with
the relative fair market values of the assets transferred by the Partnership to
the Corporation.
Approximately thirty (30) days after the Closing Date of the Restructuring
Plan, the Corporation shall provide Limited Partners with the information
necessary to calculate the various holding periods and basis allocated to each
holding period for Common Stock received pursuant to the Restructuring Plan
(other than Common Stock and Subscriber Warrants acquired pursuant to Basic
Subscription Rights or the Oversubscription Privilege).
ALLOCATION OF FINAL ITEMS
In addition to the foregoing, each Limited Partner will be required to
report his, her or its distributive share of all income, gains, losses,
deductions and credits of the Partnership for the taxable period prior to the
close of the Partnership's taxable year (which will end as of the date of the
final liquidation of the Partnership) even though there will be no operating
cash distributions from the Partnership. The at-risk rules under Code Section
465, the passive activity rules under Code Section 469 or the basis rules under
Code Section 704 may prevent or may have prevented some Limited Partners from
deducting a portion of their distributive shares of losses of the Partnership.
Such previously disallowed losses may not be deductible by the Limited Partners
following the consummation of the Restructuring Plan. Each Limited Partner is
urged to consult his, her or its own tax adviser concerning these issues.
NET OPERATING LOSSES
Pacific Thrift, which will be a subsidiary of the Corporation, has net
operating loss carryforwards of approximately $4.0 million as of December 31,
1995. Under Section 382 of the Code, the ability of Pacific Thrift to carry
forward its net operating losses is limited if Pacific Thrift experiences an
"ownership change" as a consequence of the Restructuring Plan and the Public
Offering. Section 382 defines an "ownership change" as an increase of more than
fifty (50) percentage points in ownership of stock owned by one or more five
percent (5%) shareholders over the lowest percentage of stock owned by such
shareholders during the preceding three year period.
In connection with the Restructuring Plan, the purchasers in the Public
Offering will also become Stockholders of the Corporation. Assuming none of
these purchasers individually will own five percent (5%) or more of the
Corporation, the purchasers in the Public Offering as a group will be deemed to
be a five percent (5%) shareholder. In the event the purchasers in the Public
Offering purchase fifty percent (50%) or more of the outstanding stock of the
Corporation, there will be an ownership change within the meaning of Section
382.
If there is an "ownership change" within the meaning of Code Section 382,
the utilization of any remaining carryforwards would be limited under Section
382. These limitations would be determined as follows: First, the fair market
value of Pacific Thrift would have to be determined. Then, a percentage equal to
the long-term tax exempt-rate determined by the Treasury Department (currently
5.68%) of the value of Pacific Thrift would equal the amount of the net
operating loss carryforwards of Pacific Thrift which could be used in any given
year to offset taxable income of the Corporation (subject to certain exemptions
for built-in gain items).
POTENTIAL APPLICATION OF SECTION 304 TO TRANSFER OF STOCK OF SUBSIDIARY.
Code Section 304 provides that, notwithstanding the nonrecognition
provisions of Code Section 351, the transfer by a transferor of stock in a
controlled corporation to a corporation also controlled by such transferor (the
"acquiring corporation") is treated as a distribution from the acquiring
corporation to the extent of
133
<PAGE> 144
property received by the transferor. For these purposes, "property" does not
include stock or stock rights, but it does include relief of liabilities.
Although the Partnership will receive property in the form of the relief of
liabilities (since the Corporation will assume the Partnership's liabilities),
the Partnership will not be transferring the stock of any controlled corporation
pursuant to the Restructuring. Accordingly, in the opinion of Tax Counsel
Section 304 should not apply to the Restructuring.
In May 1996, Presidential intends to transfer all of the stock of its
corporate subsidiaries, Pacific Thrift, CRC Washington and PacificAmerica
Mortgage, to the Corporation, which is currently a wholly owned subsidiary of
the Partnership. This transfer will be made in order to allow all of the
corporate subsidiaries to file consolidated tax returns, which is beneficial to
the Partnership as a whole regardless of whether the Restructuring is approved.
Nevertheless, if the transfer of stock in its corporate subsidiaries by
Presidential were integrated with the Restructuring, Section 304 might be
applied since the transfer of stock would take place concurrently with the
transfer of the liabilities of Presidential to the Corporation. In that event,
Section 304 would recharacterize the Restructuring as dividend income to the
Partnership, and therefore to the Partners, equal to the current or accumulated
earnings and profits of the subsidiaries whose stock was transferred to the
Corporation in 1996. In addition, deemed distributions in excess of such
earnings and profits could reduce the tax basis of a Limited Partner's Common
Stock and cause a recognition of capital gains.
Tax Counsel for the Partnership does not believe that the prior transfer of
stock of its corporate subsidiaries by Presidential to the Corporation should be
integrated with the Restructuring, since it had a valid business purpose, and
was not contingent on whether the Restructuring is completed or subject to any
other condition. Accordingly, Tax Counsel has opined that it is more likely than
not that Section 304 will not be applied to the Restructuring.
TREATMENT OF STOCKHOLDERS OF CORPORATION
As part of the Restructuring Plan, the Limited Partners of the Partnership
will become the Stockholders of the Corporation and will no longer be partners
of a partnership. Distributions of the Corporation's earnings and profits to the
Stockholders in the form of dividends will be subject to tax as ordinary income
if the Corporation has current or accumulated earnings and profits. To the
extent that there is no current or accumulated earnings and profits, any
distribution would be treated as a return of capital and would reduce each
Stockholder's basis in his, her or its Common Stock. Distributions in excess of
each Stockholder's basis in shares will be taxed as capital gains assuming the
Common Stock is a capital asset in the hands of the Stockholders.
If a Stockholder disposes of shares of Common Stock in the Corporation, the
difference between the Stockholder's basis in the shares and the consideration
received in exchange for the shares would be subject to tax as either a capital
gain or loss or ordinary income, depending on the holding period of the shares.
See "Tax Consequences to the Partnership and the Limited
Partners -- Determination of Holding Period of Common Stock." If a Stockholder
transfers shares to the Corporation, such transfer may, under some
circumstances, be treated as a dividend rather than a taxable exchange.
In addition, if the Corporation sells appreciated property (including in
liquidation of the Corporation), the gain will be taxable as ordinary income or
capital gain to the Corporation, depending on the character of the asset in the
hands of the Corporation. The Corporation, unlike the Partnership, will itself
be subject to corporate income tax. The top corporate income tax rate currently
is 35%. The Corporation's taxable income will not be reduced by the amount of
any dividends paid to Stockholders, as dividends are not deductible to the
Corporation. The additional tax burden to the Corporation will increase the
expenses of the Corporation and reduce its net income. However, since a
substantial majority of the Corporation's income is expected to be derived from
the earnings of Pacific Thrift, which is already a corporation subject to
corporate income tax, the tax burden to the Corporation is not expected to be
materially different from the tax burden on the Partnership, insofar as a
substantial portion of its income would also be expected to be derived from
Pacific Thrift.
COLLAPSIBLE CORPORATION RULES
Section 341 of the Code provides that the gain from the sale of stock of a
"collapsible corporation" shall be considered as ordinary income. A "collapsible
corporation" is defined as a corporation that is formed or
134
<PAGE> 145
availed of principally for the manufacture, construction or production of
property, for the purchase of "Section 341 assets," or for the holding of stock
in a corporation so formed or availed of, with a view to the sale of stock by
its shareholders before the realization by the corporation of two-thirds of the
taxable income to be derived from such property, and the realization by such
shareholders of gain attributable to such property. Although Tax Counsel
believes it is unlikely, it is possible that the IRS could view the transfer of
assets by the Partnership to the Corporation as a transfer of Section 341
assets.
If Section 341 of the Code were to apply, any gain from the sale of Common
Stock would be subject to tax as ordinary income. There is no clear rule or
regulation that would provide guidance as to whether any of the Partnership's
assets would be deemed Section 341 assets, and it is therefore not possible to
conclude whether the Corporation could be characterized by the IRS as a
"collapsible corporation." However, for the reasons explained below, an
exception will apply to every Stockholder who does not own more than 5% of the
Common Stock, which will prevent the application of the collapsible corporation
rule to those stockholders.
If the Corporation is found to be a collapsible corporation, gain realized
by a Stockholder from the sale of Common Stock will not be subject to the
collapsible corporation provisions if any one of the following four exceptions
applies: (i) the selling stockholder does not own, directly or indirectly, more
than 5% in value of the Common Stock outstanding, (ii) gain recognized by the
selling Stockholder during the taxable year is not more than 70% attributable to
"Section 341 assets," (iii) gain is realized after the expiration of three years
following the completion of the applicable manufacture, construction, production
or purchase, or (iv) less than 15% of the net worth of the Corporation is
attributable to the net unrealized appreciation of certain ordinary income
assets.
Based on the first of these exceptions, the collapsible corporation
provisions would not apply to Stockholders of the Corporation that were
considered to own, directly and by attribution from related parties (including
other partners in a partnership), less than or equal to 5% of the outstanding
Common Stock of the Corporation. The Partnership has informed Tax Counsel that
no Limited Partner will directly or indirectly own more than 5% of the
outstanding Common Stock. In the event a Stockholder were to acquire more than
5% of the outstanding Common Stock, any gain recognized from the sale of shares
of Common Stock could be treated as ordinary income under the collapsible
corporation provisions if the Corporation was found to be a collapsible
corporation and provided none of the other exceptions listed above applied at
the time of the sale of such shares.
STATE, LOCAL AND OTHER TAXATION
The Partnership, its Partners and the Corporation may, as a result of the
Restructuring Plan, be subject to state, local or other tax in their states or
countries of residence, and possibly in states where the properties transferred
to the Corporation are located. It is impractical to discuss general principles
which may be applicable to a particular Partner as such state, local and other
tax effects depend on each set of facts or circumstances. Accordingly, each
Partner should consult with his or her own tax adviser with respect to state,
local, or other taxes which may be applicable.
LEGAL MATTERS
Certain legal matters in connection with the Restructuring Plan, the Rights
Offering and the Public Offering will be passed upon for the Corporation by
Jeffer, Mangels, Butler & Marmaro LLP, Los Angeles, California. The principal
shareholder of Bruce P. Jeffer, a Professional Corporation, 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 December 31, 1994 and 1993 and for each of the two years ended
in the period ended December 31, 1994 appearing in the Proxy
Statement/Prospectus and Registration Statement have been audited by Ernst &
Young, LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein and in the Registration Statement,
135
<PAGE> 146
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 year ended December 31, 1995 appearing in this Proxy
Statement/Prospectus and Registration Statement have been audited by BDO
Seidman, LLP, independent certified public accountants, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The Fairness Opinion has been prepared by Houlihan, Lokey, Howard & Zukin,
an independent valuation firm, and has been included in this Proxy
Statement/Prospectus in reliance upon the authority of such firm as experts in
valuation of businesses.
136
<PAGE> 147
GLOSSARY
The capitalized terms appearing in this Proxy Statement/Prospectus have the
meanings specified below:
Bank Loan. The existing loan owed by Presidential to Fleet, which had an
outstanding balance of $5.2 million at April 19, 1996.
Bank or Fleet. Fleet Bank, N.A., the lender of the Partnership's
outstanding bank debt.
Bank Warrant. The Warrant to be issued by the Corporation to Fleet to
purchase up to 2% of the outstanding Common Stock of the Corporation.
Basic Subscription Rights. The right of each Partner to subscribe for a pro
rata share of the shares of Common Stock offered in the Rights Offering.
BIF. Bank Insurance Fund administered by the FDIC to protect deposits.
Board of Directors. The board of directors of the Corporation.
California Industrial Loan Law. Laws regulating investment authority and
other activities of the thrift and loan business conducted by Pacific Thrift.
CAMEL. Standard rating given to financial institutions by federal banking
regulators consisting of a composite of five critical categories of banking
strength: capital, assets, management, earnings and liquidity. Ratings range
from 1 to 5, with 1 denoting outstanding strength and 5 characterizing
insolvency.
Capital Account. Each Partner's capital account in the Partnership, as
determined in accordance with the Partnership Agreement.
Capital Contribution. Each Partner's original capital contribution, and
additional capital contributions if any, less any withdrawals of capital by such
Partner or distributions of capital to such Partner.
Capital Note. The $1,730,135 promissory note to the Partnership which was
voluntarily contributed by the General Partner in 1993 to increase the capital
of the Partnership by an amount equal to the excess distributions to Partners
made in 1992 in excess of Net Profits.
Cash Out Option. The right of each Limited Partner to elect to receive cash
in lieu of Common Stock in connection with the Restructuring Plan, equal to $10
times the number of shares that Limited Partner would be entitled to receive
based on the Limited Partner's Capital Account in the Partnership.
Closing Date. The closing date of the Restructuring, the Rights Offering
and the Public Offering.
Code. The Internal Revenue Code of 1986, as amended.
Common Stock. The common stock of the Corporation.
Corporation. PacificAmerica Money Center, Inc., a Delaware corporation.
CRA. Community Reinvestment Act of 1977.
CRC. Consolidated Reconveyance Company, a California limited partnership.
Fairness Opinion. The fairness opinion issued by Houlihan Lokey in
connection with the Restructuring Plan.
FDIC. Federal Deposit Insurance Corporation.
FDICIA. Federal Deposit Insurance Corporation Improvement Act of 1991.
General Partner Warrants. The warrants to be issued to the General Partner
to purchase up to 25% of the total outstanding Common Stock of the Corporation
on the Closing Date, on a fully diluted basis assuming the exercise of all
General Partner Warrants, at an exercise price equal to 150% of the Public
Offering Price.
Houlihan Lokey. Houlihan Lokey Howard & Zukin, the independent valuation
firm which has issued the Fairness Opinion.
LPPC. Lenders Posting and Publishing Corporation, a California limited
partnership.
Loan Agreement. Loan Agreement between the Partnership and Fleet.
137
<PAGE> 148
Minimum Market Capitalization. The $16.9 million minimum market value of
the total shares to be issued by the Corporation as a condition to closing the
Restructuring Plan, calculated as total outstanding shares times Public Offering
Price per share.
Net Tangible Equity. Total assets minus total liabilities, goodwill and
capitalized reorganization costs, other than costs of the Rights Offering and
the Public Offering, as adjusted for the increase in capital due to the General
Partner's purchase of General Partner Warrants for $385,000 and the General
Partner's purchase of Common Stock in the Rights Offering for $800,000, with
proceeds from repayment of debt anticipated to be owed by the Partnership to the
General Partner as of May 31, 1996.
OREO. Other real estate owned by the Partnership or Pacific Thrift,
consisting of real estate acquired in settlement of loans.
Oversubscription Privilege. The rights offered to Partners to purchase
shares not subscribed for by Partners entitled to purchase pursuant to their
Basic Subscription Rights.
PCA. Prompt corrective action required to be taken by FDICIA to resolve the
problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios.
Pacific Thrift. Pacific Thrift and Loan Company, a California corporation.
PacificAmerica Mortgage. PacificAmerica Mortgage, Inc., a Delaware
corporation.
Partnership. Presidential Mortgage Company, on a consolidated basis with
its subsidiaries.
Preferred Stock. The 2,000,000 authorized shares of Preferred Stock which
may be issued by the Corporation under its Certificate of Incorporation.
Presidential. Presidential Mortgage Company, on an unconsolidated basis.
Public Offering. The offering of shares to the public immediately following
the Solicitation Period Expiration Date, the closing of which is a condition to
closing of the Restructuring Plan.
Public Offering Price. The offering price per share at which shares of
Common Stock will be sold in the Public Offering.
Public Offering Shares. The shares to be offered by the Corporation in the
Public Offering, the amount of which will be determined as the number of shares
necessary to achieve the Minimum Market Capitalization.
Record Date. The date as of which the identity of the Partners of the
Partnership and the amount of the Partner's Capital Account shall be determined
for purposes of voting rights of the Partners with respect to the Restructuring
Plan.
Restructuring. The transactions contemplated by the Restructuring Plan.
Restructuring Plan. The plan proposed for the vote of the Limited Partners
whereby the Partnership will transfer all of its assets and liabilities to the
Corporation in exchange for Common Stock of the Corporation.
Rights Offering. The rights offered to the Partners of the Partnership, the
partners of the General Partner and the officers, directors and employees of the
Partnership and its subsidiaries to purchase additional shares of Common Stock.
Solicitation Period. The period during which the Limited Partners may vote
to approve the Restructuring Plan.
Solicitation Period Expiration Date. The expiration date of the
Solicitation Period, which is June 17, 1996, or such later date as the General
Partner determines in its sole discretion, not to exceed July 31, 1996.
Specified Annual Return Rates. The specified annual return rates payable
from the Net Profits, if any, of the Partnership, to each class of Partners
under the Partnership Agreement.
Stockholders. The record holders of the Common Stock following the
Restructuring Plan.
138
<PAGE> 149
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRESIDENTIAL MORTGAGE COMPANY AND SUBSIDIARIES
Successor Independent Certified Public Accountants' Report.......................... F-1
Predecessor Independent Auditor's Report............................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994........................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993................................................. F-4
Consolidated Statements of Changes in Partners' Capital for the years ended
December 31, 1995, 1994 and 1993................................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993................................................. F-6
Notes to Consolidated Financial Statements for the years ended
December 31, 1995, 1994 and 1993................................................. F-7
Supplemental material
Schedule I -- Consolidating Schedule -- Financial Position -- December 31,
1994............................................................................ F-36
Schedule II -- Consolidating Schedule -- Operations -- year ended December 31,
1994............................................................................ F-37
Schedule III -- Consolidating Schedule -- Financial Position -- December 31,
1995............................................................................ F-38
Schedule IV -- Consolidating Schedule -- Operations -- year ended December 31,
1995............................................................................ F-39
PACIFICAMERICA MONEY CENTER, INC.
Independent Certified Public Accountants Report.................................. F-40
Balance Sheet.................................................................... F-41
Notes to Balance Sheet........................................................... F-42
</TABLE>
139
<PAGE> 150
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Partners
Presidential Mortgage Company
We have audited the accompanying consolidated balance sheet of Presidential
Mortgage Company (the Partnership) and subsidiaries (collectively, the Company)
as of December 31, 1995, and the related consolidated statements of operations,
changes in partners' capital, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Presidential Mortgage Company and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information in Schedules III and IV is presented for the purpose of additional
analysis of the consolidated financial statements rather than to present the
financial position and results of operations of the individual companies. The
consolidating information in Schedules III and IV has been subjected to the
auditing procedures applied to the audit of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 7 and 20, the Company is subject to substantial debt service and other
requirements of the note payable to its lender and is restricted from receiving
cash dividends from its primary subsidiary Pacific Thrift and Loan Company.
These factors may require the Company to continue to sell loans, real estate or
other assets to remain in compliance with the loan agreement with its lender.
Failure to comply with the principal reduction provisions under the loan
agreement allows the lender to impose various sanctions including increased
interest charges, declare all advances immediately due, and sell the collateral
assigned as security including the common stock of the Company's wholly-owned
subsidiary Pacific Thrift. These matters raise substantial doubt about the
ability of the Company to continue as a going concern. Management's plan
regarding these matters are discussed in Notes 1 and 21. The accompanying
consolidated financial statements do not include any provisions or adjustments
which might result from the outcome of the uncertainties discussed above.
As discussed in Note 2 to the consolidated financial statements in 1995,
the Company adopted SFAS 114, Accounting by Creditors for Impairment of a Loan.
BDO SEIDMAN, LLP
Los Angeles, California
February 29, 1996
F-1
<PAGE> 151
INDEPENDENT AUDITORS' REPORT
To the Partners
Presidential Mortgage Company
We have audited the accompanying consolidated balance sheets of
Presidential Mortgage Company (the Partnership) and subsidiaries (collectively,
the Company) as of December 31, 1994 and 1993, and the related consolidated
statements of operations, changes in partners' capital, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1994 and 1993 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Presidential Mortgage Company and subsidiaries as of December 31,
1994 and 1993, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information in Schedules I and II is presented for the purpose of additional
analysis of the consolidated financial statements rather than to present the
financial position and results of operations of the individual companies. The
consolidating information in Schedules I and II has been subjected to the
auditing procedures applied to the audit of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1, the Company has suffered losses from nonperforming loans that, combined with
other factors, resulted in significant recurring losses from operations. As
discussed in Note 7, the Partnership is subject to substantial debt service and
other requirements of the note payable to its lender. As discussed in Notes 19
and 20, at October 31, 1994, the Partnership's wholly owned subsidiary, Pacific
Thrift and Loan Company (Pacific Thrift), was considered to be "critically
undercapitalized" under the Prompt Corrective Action provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 because its tangible and
leverage capital ratios fell below 2%. As a result of such designation, Pacific
Thrift was subject to severe restrictions on its activities. At December 31,
1994, Pacific Thrift was no longer considered to be "critically
undercapitalized," but still did not meet the minimum capital requirements to be
considered "adequately capitalized" by the Federal Deposit Insurance Corporation
(FDIC). Also at December 31, 1994, Pacific Thrift had a deficiency in its net
worth, based on requirements of the California Financial Code and the California
Department of Corporations (DOC). As a result of its capital designation,
Pacific Thrift was required to submit a capital restoration plan, including a
guarantee by the Partnership, to the FDIC. In addition, Pacific Thrift consented
to a new comprehensive Order to Cease and Desist (the new C&D) by the FDIC and
DOC. The new C&D requires that Pacific Thrift take various actions, including
significantly increasing its leverage capital ratio to 8% by September 30, 1995.
Failure to implement the capital restoration plan and meet the capital
requirements of the new C&D would expose Pacific Thrift to various regulatory
actions, including the risk of regulatory takeover. These matters raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans regarding these matters are discussed in Notes 1 and
20.
ERNST & YOUNG LLP
April 7, 1995,
except as to Note 20 to the
consolidated financial statements,
which is as of May 20, 1995
F-2
<PAGE> 152
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
----------- ------------
<S> <C> <C>
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
=========== ============
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-3
<PAGE> 153
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<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
----------- ----------- -----------
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-4
<PAGE> 154
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1995, 1994 AND 1993
-------------------
<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.......................................................... (1,698,000)
------------
CAPITAL, December 31, 1995.................................................. $ 8,727,000
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 155
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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)
-------------- ------------ -----------
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 partnership
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
============== ============ ===========
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..................................... 895,000 898,000 3,344,000
============== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 156
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, John A. DeRosa and Constance 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.
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.
PacificAmerica Money Center, Inc. (the Corporation) (formerly Pacific
United Group, Inc.) 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 PacificAmerica Mortgage, Inc. (PacificAmerica Mortgage).
PacificAmerica Mortgage 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 PacificAmerica Mortgage. 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-7
<PAGE> 157
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 capital 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.
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 based on the
examination as of March 31, 1995 and a later examination as of September 30,
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 even greater profitability and improved
financial condition through 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-8
<PAGE> 158
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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
Corporation, Partnership, Pacific Thrift, CRC, and LPPC. While CRC Washington
has been organized prior to December 31, 1995, it has 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, 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
F-9
<PAGE> 159
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accounting standard was immaterial to the operating results of the Company for
the year ended December 31, 1995. Prior financial statements are prohibited from
restatement to apply the new accounting standard.
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.
A restructuring of a debt is considered a troubled debt restructuring when
the Company, for economic or legal reasons related to the borrower's financial
difficulties, grants a concession to the borrower that it would not otherwise
grant. Troubled debt restructurings may include changing repayment terms,
reducing the stated interest rate and reducing the amounts of principal and/or
interest due or significantly extending the maturity date. The restructuring of
a loan is intended to recover as much of the Company's investment as possible
and to achieve the highest yield possible.
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, 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.
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
F-10
<PAGE> 160
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 Company 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 for 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.
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.
F-11
<PAGE> 161
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair value estimates were based on existing 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.
<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 12,577,000
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.
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.
F-12
<PAGE> 162
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
<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, 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.
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.
F-13
<PAGE> 163
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. RECLASSIFICATIONS
Certain reclassifications of balances from prior years have been made to
conform to the current year's reporting format.
O. NEW ACCOUNTING STANDARDS
See Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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................... $ 48,545,000 $ 55,235,000
Participations sold............................. (21,783,000) (16,129,000)
------------ ------------
Residential real estate loans -- net............ 26,762,000 39,106,000
------------ ------------
Commercial real estate loans.................... 34,270,000 30,153,000
Participations sold............................. (12,009,000) (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>
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
F-14
<PAGE> 164
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 $1,128,000 and $3,408,000,
respectively. If interest on these loans had been accrued, interest income would
have increased by approximately $151,000 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 $1,508,000 and $3,474,000,
respectively. Interest income recognized on these loans totaled approximately
$130,000 and $298,000 in 1995 and 1994, respectively.
The following information relates to the Company's impaired loans which
includes troubled debt restructurings that meet the definition of 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>
F-15
<PAGE> 165
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounts receivable of $1,713,000 at December 31, 1994 consisted of
proceeds from loan sales. These proceeds were received in early January, 1995.
In December 1993, management developed a loan securitization program under
which the Partnership or Pacific Thrift could sell certain loans receivable to a
primary buyer (the Purchaser). The securitization agreements provided that the
Partnership or Pacific Thrift offer to sell all newly originated qualifying
loans, up to $75,000,000, to the Purchaser through June 1995.
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 who also 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. 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.
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. At January 1, 1996, the Agreement was revised to
eliminate, for all new loans sold, the servicing released fee and replace it
with a higher premium on sale.
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-16
<PAGE> 166
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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.
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 sold $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>
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-17
<PAGE> 167
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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
F-18
<PAGE> 168
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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.
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.
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.
F-19
<PAGE> 169
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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;
(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;
(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.
F-20
<PAGE> 170
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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: $4,993,000 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.
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>
F-21
<PAGE> 171
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Financial Accounting Standards Board Statement No.
109 "Accounting for Income Taxes" as of January 1, 1993. The adoption of the
statement had no significant effect on the financial position or results of
operations.
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>
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>
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.
F-22
<PAGE> 172
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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 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
======== ========
</TABLE>
F-23
<PAGE> 173
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounts payable to the general partner consisted of the following at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
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>
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.
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 generated
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
has not contributed any additional amounts based on continued operating losses
and the level of loan origination fees.
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.
F-24
<PAGE> 174
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 $175,000, $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
$689,000, $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 $269,000 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.
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.
F-25
<PAGE> 175
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
approximately twelve 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.
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.
F-26
<PAGE> 176
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
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
F-27
<PAGE> 177
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. For one
of the properties the accrued remediation liability was reduced by $378,000
during the year ended December 31, 1995 based on a lower bid. The remediation
work was completed in 1995 for this property and in early 1996 the property was
listed as available for sale. Remediation work on the second property, subject
to formal approval by the appropriate authorities, was completed in early 1996.
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 1995
and 1994, the Partnership guaranteed one buyer against losses up to $2,365,000
and $1,800,000, respectively. As security for the guarantee, the Partnership
deposited $237,000 in 1995 and $180,000 in 1994 with the buyer.
The California Franchise Tax Board examined the California corporate tax
returns for Pacific Thrift for 1990, 1991, and 1992 and did not result in a
significant adjustment.
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
F-28
<PAGE> 178
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 $118,000 and $111,000, respectively.
15. WITHDRAWALS
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.
16. CHANGES IN GENERAL AND LIMITED PARTNER'S CAPITAL
The changes in general and limited partnership interests for 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................................. $ 63,000 $ 28,767,000 $ 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....................... (42,000) (5,827,000) (5,869,000)
Special allocation -- 1993 (Note 10)... (266,000) 266,000 --
Capital (deficit) -- December 31, --------- ------------ ------------
1993................................. (4,000) 19,943,000 19,939,000
Contributions.......................... -- -- --
Distributions.......................... -- -- --
Withdrawals............................ -- -- --
Net loss -- 1994....................... (68,000) (9,446,000) (9,514,000)
Capital (deficit) -- December 31, --------- ------------ ------------
1994................................. (72,000) 10,497,000 10,425,000
========= ============ ============
</TABLE>
F-29
<PAGE> 179
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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... $ (72,000) $ 10,497,000 $ 10,425,000
Net loss -- 1995....................... (12,000) (1,686,000) (1,698,000)
--------- ------------ ------------
Capital (deficit) -- December 31,
1995................................. $ (84,000) $ 8,811,000 $ 8,727,000
========= ============ ============
</TABLE>
Presidential Management Company holds the entire general partnership
interest in the Partnership. In addition, Presidential Management Company holds
approximately 3.8% of the limited partnership interests.
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............................ 1,185,000 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-30
<PAGE> 180
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
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
F-31
<PAGE> 181
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
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
F-32
<PAGE> 182
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, 1993
(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.
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
F-33
<PAGE> 183
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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
F-34
<PAGE> 184
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
At December 31, 1995, management of Pacific Thrift believes that it is in
full compliance with the terms of the New C&D.
On February 26, 1996, Pacific Thrift was notified by the FDIC that, based
on the FDIC examination of the September 30, 1995 financial information, full
compliance with the new C&D is reported. In addition, Pacific Thrift would be
allowed to enter into a Memorandum of Understanding (MOU) that, when received by
the FDIC, would provide for the initial step towards removal of the New C&D. The
proposed MOU provides a framework for Pacific Thrift's recovery and its
provisions are similar to crucial sections of the existing C&D. However, since
the New C&D and the proposed MOU contain provisions requiring the maintenance of
a specified capital level, Pacific Thrift would be classified as "adequately
capitalized" under the regulations, and continue to be considered a troubled
institution for all regulatory purposes.
As of December 31, 1995, Pacific Thrift had increased its total risk-based
capital ratio to 12.4%, its Tier 1 risk-based capital ratio to 11.2% and its
leverage capital ratio to 9.1%, which meet the FDIC definition of "well
capitalized." However, due to the requirement of maintaining a specific capital
level, the Company would be classified as "adequately capitalized" under the
regulation.
21. POTENTIAL RESTRUCTURING PLAN
On November 24, 1995, the Partnership filed a Registration Statement on
Form S-4 with the Securities and Exchange Commission ("SEC") in connection with
a proposed restructuring plan of the Partnership, the terms of which will be
presented for the vote of the limited partners in 1996. On March 1, 1996, an
Amendment to the Registration Statement on Form S-4 was filed with the SEC,
together with a Registration Statement on Form S-4 in connection with a proposed
public offering to be conducted concurrently with the restructuring plan. The
terms of the restructuring plan and concurrent public offering are subject to
change, and will not be finalized until the Registration Statements are declared
effective by the SEC. Management currently anticipates that the restructuring
plan will be presented for the vote of the limited partners of the Partnership
in April 1996.
F-35
<PAGE> 185
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 ELIMINATING ENTRIES
MORTGAGE AND LOAN RECONVEYANCE PUBLISHING ------------------------
COMPANY COMPANY COMPANY COMPANY DR CR CONSOLIDATED
------------ ----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents......... $ 655,000 $18,700,000 $ 197,000 $ 76,000 $ -- $ -- $ 19,628,000
Accounts receivable... 1,000 1,713,000 3,348,000 48,000 -- 39,000 5,071,000
Accrued interest
receivable.......... 478,000 647,000 -- -- -- -- 1,125,000
Loans receivable...... 13,064,000 39,981,000 -- -- -- -- 53,045,000
Loans held for sale... 2,605,000 9,406,000 -- -- -- -- 12,011,000
Receivable from
related party....... 426,000 235,000 -- -- -- 183,000 478,000
Excess yield
receivable.......... -- 888,000 -- -- -- -- 888,000
Other real estate..... 6,479,000 1,142,000 -- -- -- -- 7,621,000
Property and
equipment............ 64,000 1,304,000 139,000 4,000 -- 189,000 1,322,000
Goodwill.............. 1,749,000 -- -- -- -- -- 1,749,000
Other assets.......... 379,000 388,000 34,000 8,000 -- -- 809,000
Investment in
subsidiaries........ 4,732,000 -- -- -- 7,640,000 12,372,000 --
----------- ----------- ---------- -------- ---------- ----------- ------------
$30,632,000 $74,404,000 $3,718,000 $136,000 $ 7,640,000 $12,783,000 $103,747,000
=========== =========== ========== ======== ========== =========== ============
LIABILITIES AND
PARTNERS' CAPITAL
Thrift certificates
payable
Full-paid
certificates...... $ -- 58,058,000 $ -- $ -- $ -- $ -- 58,058,000
Installment
certificates...... -- 11,443,000 -- -- -- -- 11,443,000
----------- ----------- ---------- -------- ---------- ----------- ------------
-- 69,501,000 -- -- -- -- 69,501,000
Accounts payable and
accrued expenses.... 971,000 1,280,000 2,187,000 89,000 56,000 -- 4,471,000
Accrued interest
payable............. 234,000 171,000 -- -- -- -- 405,000
Payable to related
party............... 214,000 -- -- -- 80,000 -- 134,000
Mortgage notes
payable............. 2,101,000 212,000 -- -- -- -- 2,313,000
Notes payable......... 14,778,000 -- -- -- -- -- 14,778,000
Note payable to
related party...... 600,000 -- 86,000 -- 86,000 -- 600,000
Partnership
withdrawals
payable............ 1,120,000 -- -- -- -- -- 1,120,000
----------- ----------- ---------- -------- ---------- ----------- ------------
20,018,000 71,164,000 2,273,000 89,000 222,000 -- 93,322,000
----------- ----------- ---------- -------- ---------- ----------- ------------
Commitments and
contingencies
Partners' capital
Common stock....... -- 3,000,000 -- -- 3,000,000 -- --
Additional paid-in
capital........... -- 7,880,000 -- -- 7,880,000 -- --
Accumulated
deficit.......... -- (7,640,000) -- -- -- 7,640,000 --
Partners' capital.. 10,614,000 -- 1,445,000 47,000 1,681,000 -- 10,425,000
----------- ----------- ---------- -------- ---------- ----------- ------------
10,614,000 3,240,000 1,445,000 47,000 12,561,000 7,640,000 10,425,000
----------- ----------- ---------- -------- ---------- ----------- ------------
$30,632,000 $74,404,000 $3,718,000 $136,000 $12,783,000 $ 7,640,000 $103,747,000
=========== =========== ========== ======== ========== =========== ============
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-36
<PAGE> 186
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 ELIMINATING ENTRIES
MORTGAGE AND LOAN RECONVEYANCE PUBLISHING -------------------------
COMPANY COMPANY COMPANY COMPANY DR CR CONSOLIDATED
------------ ----------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable......... $ 2,969,000 $ 8,034,000 $ -- $ -- $ -- $ -- $11,003,000
Deposits with financial
institutions........... 1,000 400,000 -- -- -- -- 401,000
----------- ----------- ---------- -------- ---------- ---------- -----------
Total interest income...... 2,970,000 8,434,000 -- -- -- -- 11,404,000
----------- ----------- ---------- -------- ---------- ---------- -----------
INTEREST EXPENSE
Thrift certificates
greater than $100,000.. -- 28,000 -- -- -- -- 28,000
Other thrift
certificates........... -- 2,917,000 -- -- -- -- 2,917,000
Notes payable............ 1,974,000 8,000 -- -- -- -- 1,982,000
----------- ----------- ---------- -------- ---------- ---------- -----------
Total interest expense..... 1,974,000 2,953,000 -- -- -- -- 4,927,000
----------- ----------- ---------- -------- ---------- ---------- -----------
Net interest income........ 996,000 5,481,000 -- -- -- -- 6,477,000
Provision for loan
losses................... 4,682,000 1,414,000 -- -- -- -- 6,096,000
----------- ----------- ---------- -------- ---------- ---------- -----------
Net interest income after
provision for loan
losses................... (3,686,000) 4,067,000 -- -- -- -- 381,000
----------- ----------- ---------- -------- ---------- ---------- -----------
NONINTEREST INCOME
Trust and reconveyance
fees................... -- -- 3,344,000 -- -- -- 3,344,000
Other income............. 319,000 806,000 -- 587,000 -- -- 1,712,000
Gain on sale of loans.... -- 946,000 -- -- -- -- 946,000
Loan servicing fees...... -- 545,000 -- -- 545,000 -- --
Equity in income (loss)
of subsidiaries........ (2,001,000) -- -- -- 907,000 2,908,000 --
----------- ----------- ---------- -------- ---------- ---------- -----------
(1,682,000) 2,297,000 3,344,000 587,000 1,452,000 2,908,000 6,002,000
----------- ----------- ---------- -------- ---------- ---------- -----------
NONINTEREST EXPENSE
Salaries and employee
benefits............... 295,000 4,460,000 1,569,000 169,000 -- -- 6,493,000
General and
administrative......... 1,752,000 4,081,000 1,168,000 89,000 -- -- 7,090,000
Related party fees....... 1,350,000 -- -- -- -- 545,000 805,000
Operations of other real
estate................. 439,000 293,000 -- -- -- -- 732,000
Depreciation and
amortization........... 310,000 437,000 29,000 -- -- -- 776,000
----------- ----------- ---------- -------- ---------- ---------- -----------
4,146,000 9,271,000 2,766,000 258,000 -- 545,000 15,896,000
----------- ----------- ---------- -------- ---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME
TAXES.................... (9,514,000) (2,907,000) 578,000 329,000 1,452,000 3,453,000 (9,513,000)
INCOME TAXES............... -- 1,000 -- -- -- -- 1,000
----------- ----------- ---------- -------- ---------- ---------- -----------
NET INCOME (LOSS).......... $(9,514,000) $(2,908,000) $ 578,000 $ 329,000 $1,452,000 $3,453,000 $(9,514,000)
=========== =========== ========== ======== ========== ========== ===========
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-37
<PAGE> 187
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE III
CONSOLIDATING SCHEDULE -- FINANCIAL 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>
ASSETS
Cash and cash equivalents... $ 609,000 $ 9,550,000 $ 283,000 $ 47,000
Accounts receivable......... 1,000 126,000 2,925,000 285,000
Accrued interest
receivable................. 357,000 546,000 -- --
Loans receivable............ 3,332,000 40,576,000 -- --
Loans held for sale......... 3,000,000 9,577,000 -- --
Receivable from related
party...................... 417,000 116,000 -- --
Excess yield receivable..... -- 2,725,000 -- --
Other real estate........... 1,408,000 1,748,000 -- --
Property and equipment...... 48,000 1,269,000 115,000 20,000
Goodwill.................... 1,808,000 -- -- --
Other assets................ 90,000 1,665,000 44,000 6,000
Investment in subsidiaries.. 7,970,000 -- -- --
----------- ----------- ---------- --------
$19,040,000 $67,898,000 $3,367,000 $ 358,000
=========== =========== ========== ========
LIABILITIES AND PARTNERS'
CAPITAL
Thrift certificates payable
Full-paid certificates.... $ -- $35,881,000 $ -- $ --
Installment certificates.. -- 24,275,000 -- --
----------- ----------- ---------- --------
-- 60,156,000 -- --
Accounts payable and accrued
expenses.................. 694,000 769,000 2,444,000 132,000
Accrued interest payable.... 170,000 103,000 -- --
Payable to related party.... 345,000 -- -- --
Mortgage notes payable...... 560,000 51,000 -- --
Notes payable............... 6,771,000 -- -- --
Note payable to related
party...................... 600,000 -- -- --
Partnership withdrawals
payable................... 1,120,000 -- -- --
----------- ----------- ---------- --------
10,260,000 61,079,000 2,444,000 132,000
----------- ----------- ---------- --------
Commitments and
contingencies
Partners' capital
Common stock.............. -- 3,000,000 -- --
Additional paid-in capital -- 8,304,000 -- --
Accumulated deficit....... -- (4,485,000) -- --
Partners' capital......... 8,780,000 -- 923,000 226,000
----------- ----------- ---------- --------
8,780,000 6,819,000 923,000 226,000
----------- ----------- ---------- --------
$19,040,000 $67,898,000 $3,367,000 $ 358,000
=========== =========== ========== ========
<CAPTION>
PACIFICAMERICA ELIMINATING ENTRIES
MONEY CENTER, ------------------------
INC. DR CR CONSOLIDATED
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents... $ -- $ -- $ -- $10,489,000
Accounts receivable......... -- -- -- 3,337,000
Accrued interest
receivable................. -- -- -- 903,000
Loans receivable............ -- -- -- 43,908,000
Loans held for sale......... -- -- -- 12,577,000
Receivable from related
party...................... -- -- 186,000 347,000
Excess yield receivable..... -- -- -- 2,725,000
Other real estate........... -- -- -- 3,156,000
Property and equipment...... -- -- 54,000 1,398,000
Goodwill.................... -- -- -- 1,808,000
Other assets................ 104,000 -- -- 1,909,000
Investment in subsidiaries.. -- 4,485,000 12,455,000 --
-------- ----------- ----------- -----------
$104,000 $ 4,485,000 $12,695,000 $82,557,000
======== =========== =========== ===========
LIABILITIES AND PARTNERS'
CAPITAL
Thrift certificates payable
Full-paid certificates.... $ -- $ -- $ -- $35,881,000
Installment certificates.. -- -- -- 24,275,000
-------- ----------- ----------- -----------
-- -- -- 60,156,000
Accounts payable and accrued
expenses.................. -- 21,000 -- 4,018,000
Accrued interest payable.... -- -- -- 273,000
Payable to related party.... 101,000 165,000 -- 281,000
Mortgage notes payable...... -- -- -- 611,000
Notes payable............... -- -- -- 6,771,000
Note payable to related
party...................... -- -- -- 600,000
Partnership withdrawals
payable................... -- -- -- 1,120,000
-------- ----------- ----------- -----------
101,000 186,000 -- 73,830,000
-------- ----------- ----------- -----------
Commitments and
contingencies
Partners' capital
Common stock.............. -- 3,000,000 -- --
Additional paid-in capital 3,000 8,307,000 -- --
Accumulated deficit....... -- -- 4,485,000 --
Partners' capital......... -- 1,202,000 -- 8,727,000
-------- ----------- ----------- -----------
3,000 12,509,000 4,485,000 8,727,000
-------- ----------- ----------- -----------
$104,000 $12,695,000 $ 4,485,000 $82,557,000
======== =========== =========== ===========
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-38
<PAGE> 188
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>
PACIFICAMERICA ELIMINATING ENTRIES
MONEY CENTER, -------------------------
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-39
<PAGE> 189
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REPORT
To the Board of Directors
PacificAmerica Money Center, Inc.
We have audited the accompanying balance sheet of PacificAmerica Money
Center, Inc. (a wholly owned subsidiary of Presidential Mortgage Company) as of
December 31, 1995. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above present fairly, in all
material respects, the financial position of PacificAmerica Money Center, Inc.
(a wholly owned subsidiary of Presidential Mortgage Company) at December 31,
1995, in conformity with generally accepted accounting principles.
The accompanying balance sheet has been prepared assuming that the Company
will continue as a going concern. Should the proposed restructuring plan, as
discussed in Note 1, not be completed, the Company would have no apparent source
of future revenues and cash to operate independently which raises substantial
doubt about the ability of the Company to continue as a going concern.
The accompanying balance sheet does not include any provision or
adjustments which might result from the outcome of the uncertainties discussed
above.
BDO SEIDMAN, LLP
Los Angeles, California
February 29, 1996
F-40
<PAGE> 190
PACIFICAMERICA MONEY CENTER, INC.
(FORMERLY PACIFIC UNITED GROUP, INC.)
(A WHOLLY OWNED SUBSIDIARY OF
PRESIDENTIAL MORTGAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
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
Preferred stock, $.01 par value; authorized 2,000,000 shares; none issued and
outstanding................................................................ --
Common stock, $.01 par value; authorized 8,000,000 shares; issued and
outstanding
3,000...................................................................... 30
Additional paid-in capital.................................................... 2,970
--------
Total stockholder's equity...................................................... 3,000
--------
$ 104,000
========
</TABLE>
See accompanying notes to the balance sheet.
F-41
<PAGE> 191
PACIFICAMERICA MONEY CENTER, INC.
(FORMERLY PACIFIC UNITED GROUP, INC.)
(A WHOLLY OWNED SUBSIDIARY OF
PRESIDENTIAL MORTGAGE COMPANY)
NOTES TO BALANCE SHEET
1. ORGANIZATION
PacificAmerica Money Center, Inc. (the "Corporation") a Delaware
corporation (formerly known as Pacific United Group, Inc.), 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 May 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 PacificAmerica 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 OFFERING COSTS
Deferred offering costs represent incremental costs directly attributable
to the proposed offering that are being deferred and will be charged against the
proceeds of the offering.
3. COMMITMENTS AND CONTINGENCIES
Under a 1995 Stock Option Plan the Corporation may award or grant from time
to time until December 31, 2003 stock 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.
Under a Supplemental Executive Retirement Plan, participants, to be
determined by the Compensation Committee will receive 1% of their average
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.
F-42
<PAGE> 192
Exhibit A
RESTRUCTURING PLAN
OF
PRESIDENTIAL MORTGAGE COMPANY
AND
PACIFICAMERICA MONEY CENTER, INC.
This Restructuring Plan (the "Plan") is adopted as of May 1, 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")
and cash to the extent necessary to pay limited partners of the Partnership
("Limited Partners") who elect a cash out option (the "Cash Out Option"), as
described in Section 3 hereof, 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 and cash from the Corporation, 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, pro rata in accordance with their respective Capital Accounts, as
defined in the Agreement of Limited Partnership of the Partnership, as amended
and currently in effect (the "Partnership Agreement").
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, and the satisfaction of the other conditions referred to in
Section 5 hereof.
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE> 193
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 (as defined
below), as of the last day of the month preceding the Closing Date, divided by
10, provided that such number of shares shall not be less than 890,000, less the
shares that would otherwise be issued to Limited Partners electing the Cash Out
Option in accordance with Section 3 hereof. Net Tangible Equity shall be
determined as the Partnership's total assets, as adjusted for an increase of
$1,185,000 from the repayment of a portion of the debt which the Partnership
anticipates will be owed to the General Partner by the Partnership as of May 31,
1996, $385,000 of which will be used by the General Partner to purchase warrants
(the "General Partner Warrants") as described in the Proxy and $800,000 of which
will be used by the General Partner to purchase Common Stock in the Rights
Offering, minus total liabilities, goodwill and capitalized organization costs
of the Partnership, except capitalized costs of the Public Offering and the
Rights Offering.
2
<PAGE> 194
3. Cash Out Option. Every Limited Partner shall have the right to elect
to receive cash from the Corporation in lieu of shares of Common Stock, in an
amount equal to $10 for each share of Common Stock that would otherwise be
issued to that Limited Partner based upon his, her or its Capital Account in the
Partnership. The method of election of the Cash Out Option shall be as provided
in the Proxy and the Ballot which accompanies the Proxy. The Corporation shall
increase the number of shares to be offered in the Public Offering by an amount
equal to the shares that would otherwise have been issued to Limited Partners
electing the Cash Out Option.
4. Distribution of Common Stock and Cash to Partners. Within two days
following the Closing Date, the Partnership will make a distribution of the
Common Stock to be issued by the Corporation in accordance with Section 2
hereof, pro rata to the General Partner and all of the Limited Partners (other
than those who elect the Cash Out Option) in accordance with their respective
Capital Accounts, as determined in accordance with Section 12 of the Partnership
Agreement. Any fractional shares resulting from the allocation of shares shall
be sold by the Corporation in the Public Offering, and the net proceeds
distributed to each of the Partners in accordance with their respective
fractional interests. Limited Partners who elect the Cash Out Option shall
receive cash in the amount specified in Section 3 hereof concurrently with the
distribution of Common Stock to the other Partners.
5. 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 sold in the Public Offering) of
at least $16.9 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") and the
California Department of Corporations ("DOC") consent to the change in control
of Pacific Thrift as a result of the Plan;
3
<PAGE> 195
(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 approved for listing on the NNM, AMEX or PSE.
Any one or more of the conditions specified in paragraphs 5(f), (g) or (h) may
be waived by the General Partner in its sole discretion.
6. 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.
7. 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
4
<PAGE> 196
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.
8. 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.
9. 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 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 and, if the amendment constitutes a material change
from the terms of the Plan presented for the vote of the Limited Partners in the
Proxy, such amendment shall require the further vote of the Limited Partners in
accordance with the voting requirements of the Partnership Agreement.
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.
5
<PAGE> 197
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: /s/ JOEL R. SCHULTZ
-------------------------------
Joel R. Schultz, President
Presidential Services Corporation,
general partner of Presidential
Management Company, general partner
of the Partnership
PACIFICAMERICA MONEY CENTER, INC.,
a Delaware corporation
By: /s/ JOEL R. SCHULTZ
------------------------------
Joel R. Schultz, President
6
<PAGE> 198
Exhibit B
May 13, 1996
Presidential Management Company,
General Partner of Presidential Mortgage Company
21031 Ventura Blvd.
Woodland Hills, CA 91364
Attention: Mr. Joel R. Schultz
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 PacificAmerica Money Center, Inc. (the "Corporation"), which itself owns
100% of the outstanding stock of Pacific Thrift and Loan Company, a California
corporation, Consolidated Reconveyance Corporation, a Washington corporation,
and PacificAmerica Mortgage, Inc., a Delaware Corporation. Presidential also
owns 100% of the limited partnership interests and 99% of the income, gain and
loss of Consolidated Reconveyance Company and Lenders Posting and Publishing
Company, both California limited partnerships, the other 1% of which is owned
by Presidential Management Company, the general partner of Presidential (the
"General Partner"), as general partner of each entity. We understand that a
Restructuring Plan (the "Restructuring Plan") has been proposed whereby the
Partnership would transfer all of its assets and liabilities to the
Corporation, in exchange for an amount of shares of the common stock (the
"Common Stock") of the Corporation, to be determined as the net tangible
equity of the Partnership (the "Net Tangible Equity" defined as total assets
minus total liabilities, goodwill and capitalized organization costs, other
than costs of the Rights Offering and Public Offering, as defined below, as
adjusted for an increase of $385,000 due to the General Partner's purchase of
certain the GP Warrants (as hereinafter defined) and an increase of $800,000
due to the General Partner's purchase of Common Stock in
the Rights Offering (as
<PAGE> 199
-2-
hereinafter defined) as of the last day of the month preceding the closing date
(the "Closing Date") of the Restructuring Plan , divided by 10, provided that
the total number of shares issued will not be less than 890,000, less shares
that would otherwise be issued to the limited partners of the Partnership (the
"Limited Partners") exercising a Cash Out Option (as hereinafter defined).
This is expected to result in a valuation of $10 per share issued in exchange
for the assets and liabilities of the Partnership, based on management's
estimate of a projected $8.9 million Net Tangible Equity of the Partnership by
May 31, 1996. Presidential will then liquidate, making a final distribution of
the Common Stock (the "Consideration") to the General Partner and Limited
Partners, except Limited Partners exercising the Cash Out Option, pro rata in
accordance with their existing respective capital accounts in Presidential, as
determined in accordance with the partnership agreement of Presidential (the
"Partnership Agreement"). Every Limited Partner will have the right to receive
cash in lieu of shares of Common Stock (the "Cash Out Option") equal to $10 for
each share that such Partner would receive based on that Partner's capital
account in the Partnership.
The Restructuring Plan must be approved by Limited Partners holding at least
51% of the capital contributions in the Partnership (voting as a single class),
without considering the capital contributions of the General Partner.
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
capital account in Presidential. However, we understand that the General
Partner will purchase, for $385,000, warrants (the "GP Warrants") exercisable
for 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, 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
simultaneously make an offer (the "Rights Offering") to all of the Limited
Partners and the General Partner (collectively the "Partners") of Presidential,
to purchase up to 800,000 additional shares of Common Stock, subject to
adjustment if and to the extent necessary to allow the Corporation to sell a
minimum of 200,000 shares in the Public Offering, at a purchase price of $10
per share. The Partners will have the right (the "Basic Subscription Right") to
purchase a portion of the shares offered in the Rights Offering pro rata in
accordance with their respective capital accounts in the Partnership. The
Partners will also have the right ("Oversubscription Privilege") to subscribe
for any shares not purchased by other Partners through the exercise of their
Basic Subscription Rights, subject to allocation in the event subscriptions are
received for an amount in excess of the shares offered in the Rights Offering.
For every five shares of Common Stock purchased by the Partners 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
<PAGE> 200
-3-
years, at an exercise price equal to 125% of the Public Offering Price (as
defined below). In addition, we understand that the Corporation has extended
the Oversubscription Privilege to all officers, directors and employees of the
Partnership and its subsidiaries, so that these employees will be entitled to
subscribe for shares of Common Stock to the extent existing Partners do not
exercise their Basic Subscription Rights or the Oversubscription Privilege. We
further understand that the General Partner intends to use the proceeds of
repayment of $800,000 of debt that the Partnership anticipates it will owe to
the General Partner to purchase Common Stock upon the terms offered in the
Rights Offering. To the extent that shares are available, certain partners of
the General Partner and officers and employees of the Partnership and its
subsidiaries and officers, directors and proposed directors of the Corporation
have committed to subscribe for 180,000 shares ($1,800,000) in the Rights
Offering and the Public Offering.
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 all shares not sold in the Rights Offering
plus additional shares equal to the shares that would otherwise have been
issued to Limited Partners exercising the Cash Out Option, at an anticipated
price of $10 per share (the "Public Offering Price") pursuant to an
underwriting agreement with 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 completion of the Public Offering upon
terms that result in a total market capitalization (total outstanding shares
times the Public Offering Price per share) of $16.9 million 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."
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. At your request, for purposes of
determining the fair market value of the GP Warrants, we have assumed that the
Public Offering Price reflects the fair market value of the Common Stock as of
the Offering Date.
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
<PAGE> 201
-4-
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 audited financial
statements for the four fiscal years ended December 31,
1995 and unaudited financial statements for the fiscal
year 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 four fiscal years ended December 31, 1995;
4) reviewed copies of the Restructuring Plan, dated May 1,
1996;
5) reviewed a draft of Amendment No. Three to the Form S-4
Registration Statement 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 is a part;
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
Corporation to discuss the operations, financial condition,
future prospects and projected operations and performance
of Presidential and its subsidiaries and the Corporation
and its subsidiaries, 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
its subsidiaries and the Corporation and its subsidiaries
for the years ending December 31, 1998;
<PAGE> 202
-5-
10) reviewed certain other publicly available financial data
for certain companies that we deem comparable to
Presidential and its subsidiaries;
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 its subsidiaries and the
Corporation and its subsidiaries, and that there has been no material change in
the assets, financial condition, business or prospects of Presidential and its
subsidiaries and the Corporation and its subsidiaries 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, (iv) whether or not the
Public Offering Price reflects the fair market value of the Common Stock, or
(v) the fairness of the Public Offering Price to the Limited Partners.
Based upon the foregoing, and in reliance thereon, it is our opinion that (i)
the aggregate Consideration to be received by all of the Limited Partners
collectively in connection with the Transaction is fair to them from a
financial point of view, and (ii) based on the Public Offering Price, the fair
market value of the GP Warrants does not exceed $385,000.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
