<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1996
REGISTRATION NO. 333-01395
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. THREE
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
PACIFICAMERICA MONEY CENTER, INC.
(FORMERLY KNOWN AS PACIFIC UNITED GROUP, INC.)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6162 95-4465729
(State or Other Jurisdiction
of Incorporation or (Primary Standard Industrial (I.R.S. Employer
Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
21031 VENTURA BOULEVARD, SUITE 102
WOODLAND HILLS, CALIFORNIA 91364
(818) 992-8999
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive office)
------------------------
JOEL R. SCHULTZ
21031 VENTURA BOULEVARD, SUITE 102
WOODLAND HILLS, CALIFORNIA 91364
(818) 992-8999
(Name, address, including Zip Code, and telephone number,
including area code, of agent for service)
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
CATHERINE DEBONO HOLMES, ESQ. PAUL H. IRVING, ESQ.
JEFFER, MANGELS, BUTLER & MARMARO LLP MANATT, PHELPS & PHILLIPS, LLP
2121 AVENUE OF THE STARS 11355 W. OLYMPIC BOULEVARD
LOS ANGELES, CA 90067 LOS ANGELES, CA 90064
(310) 201-3553 (310) 312-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as possible after the effective date of the Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01
per share.................. 878,210 $10.00 $8,782,100 $3,028
Total Registration Fee....... $3,028*
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* $3,449 previously paid
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PACIFICAMERICA MONEY CENTER, INC.
(FORMERLY KNOWN AS PACIFIC UNITED GROUP, INC.)
CROSS-REFERENCE SHEET
FOR
REGISTRATION STATEMENT ON FORM S-1 AND PROSPECTUS
<TABLE>
<CAPTION>
FORM S-1 REGISTRATION STATEMENT CAPTION OR
ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
- ------------------------------------------------ --------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Front Cover Page
2. Inside Front, Outside Back Cover Pages of
Prospectus.............................. Available Information
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges...... Summary; Risk Factors; Selected Financial
Data; Unaudited Consolidated Financial
Statements of the Corporation
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Underwriting of Public Offering
6. Dilution.................................. Not applicable
7. Selling Security Holders.................. Registration of Certain Shares for Resale
8. Plan of Distribution...................... Underwriting of Public Offering
9. Description of Securities to be
Registered.............................. Description of Capital Stock
10. Interests of Named Experts and Counsel.... Legal Matters
11. Information with Respect to the
Registrant.............................. Business; Market for Common Stock;
Summary -- Selected Consolidated Financial
and Other Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Change in and Disagreements
with Accountants; Management; Beneficial
Ownership of Common Stock; Certain
Transactions
12. Disclosure of Commission Position on
Indemnification......................... Management -- Limitation of Liability and
Indemnification of Directors; Underwriting
13. Other Expenses of Issuance and
Distribution............................ Part II -- Item 13
14. Indemnification of Directors and
Officers................................ Part II -- Item 14
15. Recent Sales of Unregistered Securities... Part II -- Item 15
16. Exhibits and Financial Statement
Schedules............................... Financial Statements; Index to Exhibits
17. Undertakings.............................. Part II -- Item 17
</TABLE>
<PAGE> 3
PROSPECTUS
[LOGO]
763,661 SHARES
PACIFICAMERICA MONEY CENTER, INC.
COMMON STOCK
------------------------
PacificAmerica Money Center, Inc., a Delaware corporation (the
"Corporation"), hereby offers 763,661 shares of its Common Stock (the "Common
Stock") in connection with a restructuring plan (the "Restructuring Plan") of
Presidential Mortgage Company, a California limited partnership ("Presidential"
or the "Partnership"). Pursuant to the Restructuring Plan, all of the assets and
liabilities of the Partnership will be transferred to the Corporation in
exchange for approximately 890,000 shares of Common Stock, to be issued to the
partners of the Partnership (the "Restructuring"), less 287,083 shares that
would otherwise be issued to certain limited partners of the Partnership
electing a cash out option (the "Cash Out Option") of $10 per share, and 1,206
shares representing fractional interests, the value of which will be paid in
cash to the partners. An additional 324,628 shares of Common Stock have been
subscribed for at a purchase price of $10 per share in a rights offering (the
"Rights Offering") to the partners of the Partnership and certain other related
persons. See "Prospectus Summary -- Summary of the Restructuring Plan."
Prior to the Offering, there has been no public market for the Common Stock
and there is no assurance that such a market will exist after this offering. The
Common Stock has been conditionally approved for listing on the Nasdaq National
Market, under the symbol "PAMM." Friedman, Billings, Ramsey & Co., Inc., as
underwriter for the Offering (the "Underwriter") has indicated its intention to
make a market in the Common Stock. The Underwriter, however, has no obligation
to make such a market and may discontinue making a market at any time. Shares of
Common Stock offered hereby will be offered at a public offering price of $10
per share. The initial offering price of the shares of Common Stock offered
hereby has been determined by negotiation between the Corporation and the
Underwriter. See "Underwriting of the Public Offering" for information relating
to the determination of the initial public offering price.
SEE "RISK FACTORS" ON PAGES 12-16 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR.
------------------------
THE SHARES OFFERED HEREBY ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND
ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) THE CORPORATION(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................. $10 $.65 $9.35
- -----------------------------------------------------------------------------------------------------------
Total(3).............................. $7,636,610 $422,504 $7,214,106
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.
(2) Before deducting certain expenses payable by the Corporation. See "Use of
Proceeds."
(3) The Corporation has granted the Underwriters a 30-day option to purchase up
to 114,549 additional shares of Common Stock, solely to cover
overallotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares of Common Stock at the Price
to Public shown above. If the option is exercised in full for 114,549
shares, the total Price to Public, Underwriting Discounts and Proceeds to
the Corporation will be $8,782,100, $496,960 and $8,285,140, respectively.
See "Underwriting of the Public Offering."
------------------------
The Common Stock is offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
their right to withdraw, cancel, or modify the offering and reject orders in
whole or in part. It is expected that delivery of the certificates representing
the shares of Common Stock will be made against payment therefor at the offices
of the Representative or in book entry form through the book entry facilities of
the Depository Trust Company on or about June 27, 1996.
------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
THE DATE OF THIS PROSPECTUS IS JUNE 24, 1996
<PAGE> 4
PACIFIC THRIFT LENDING OPERATIONS
LOGO
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE CORPORATION INTENDS TO FURNISH THE HOLDERS OF THE COMMON STOCK ANNUAL
REPORTS CONTAINING AUDITED CONSOLIDATED FINANCIAL STATEMENTS WITH A REPORT
THEREON BY INDEPENDENT ACCOUNTANTS. IN ADDITION, THE CORPORATION WILL FILE
QUARTERLY REPORTS CONTAINING UNAUDITED FINANCIAL STATEMENTS WHICH WILL BE
FURNISHED TO HOLDERS OF THE COMMON STOCK UPON REQUEST.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and related notes thereto
appearing elsewhere in this Prospectus. Completion of this offering is
conditioned upon and will occur contemporaneously with the completion of the
Restructuring Plan of Presidential Mortgage Company (the "Partnership"). All
references to the Corporation after the closing of this Offering assume that the
Restructuring Plan has been completed. See "Risk Factors" on pages 12 through 16
for a discussion of certain factors that should be considered by each
prospective investor.
THE CORPORATION
PacificAmerica Money Center, Inc. (the "Corporation," as previously
defined) is a Delaware corporation formed in 1994 as a wholly owned subsidiary
of Presidential Mortgage Company, a California limited partnership (referred to
herein on a consolidated basis with its subsidiaries as the "Partnership" and on
an unconsolidated basis as "Presidential"). Pursuant to a Restructuring Plan
approved by the general partner of Presidential (the "General Partner") and the
requisite vote of limited partners of Presidential (the "Limited Partners" and
collectively with the General Partner, the "Partners"), Presidential will
transfer all of its assets and liabilities to the Corporation.
From the date of its formation in 1981 until 1988, Presidential's sole
business was the direct origination and servicing of real estate secured loans
under California consumer and commercial finance lender licenses. In 1988,
Presidential formed Pacific Thrift and Loan Company, a California corporation
("Pacific Thrift"), as a wholly owned subsidiary of Presidential, to engage in
the business of origination, purchase and sale of real estate secured loans
under a California thrift and loan license. Since 1990, substantially all new
lending activity has been conducted by Pacific Thrift, and Presidential has
continued to hold a portfolio of loans substantially originated prior to 1991.
In 1990, Presidential acquired two additional subsidiaries, Consolidated
Reconveyance Company, a California limited partnership ("CRC"), which provides
trust deed foreclosure services, and Lenders Posting and Publishing Company, a
California limited partnership ("LPPC"), which provides posting and publishing
services in connection with trust deed foreclosures. In 1994, Presidential
formed the Corporation and PacificAmerica Mortgage, Inc. ("PacificAmerica
Mortgage") for the purpose of completing a proposed restructuring of
Presidential. These subsidiaries have had no significant operations as of March
31, 1996. In 1995, Presidential formed another subsidiary, Consolidated
Reconveyance Corporation, a Washington corporation ("CRC Washington"), to
provide trust deed foreclosure services in the State of Washington. On May 31,
1996, Presidential transferred to the Corporation all of the outstanding stock
of Pacific Thrift, CRC Washington and PacificAmerica Mortgage for the purpose of
filing consolidated tax returns for those entities. On the closing date of the
Restructuring Plan, Presidential will transfer all of its interests in CRC and
LPPC to the Corporation. For the year ended December 31, 1995, the Partnership
sustained a consolidated net loss of $1.7 million, consisting of a $5.8 million
net loss of Presidential, offset by $3.2 million net income of Pacific Thrift,
$.6 million net income of CRC and $.3 million net income of LPPC. For the
quarter ended March 31, 1996, the Partnership reported consolidated net income
of $.3 million, consisting of $.9 million net income of Pacific Thrift, $.2
million net income of CRC and $.1 million net income of LPPC, offset by a net
loss of $.9 million of Presidential.
After the Restructuring, the Corporation will be the holding company for
Pacific Thrift, PacificAmerica Mortgage, CRC, CRC Washington and LPPC. The
principal executive offices of the Corporation are located at 21031 Ventura
Boulevard, Woodland Hills, California 91364, and its telephone number at that
address is (818) 992-8999. Following is a description of each of the
subsidiaries:
PACIFIC THRIFT. Pacific Thrift focuses on the origination of residential,
multi-family and commercial real estate loans to borrowers whose credit
histories limit their ability to qualify for low-rate financing at more credit
sensitive financial institutions. Such loans are generally referred to in the
lending industry as "B" and "C" credit loans. Pacific Thrift originated $151.5
million in loans in all of 1995 and $119.0 million loans in the first five
months of 1996. Pacific Thrift sells a substantial majority of all residential
loans it originates to larger mortgage lenders for securitization. During all of
1995, Pacific Thrift sold $145.0 million of loans originated for sale. During
the five months ended May 31, 1996, Pacific Thrift sold $121.9 million of loans
originated for
3
<PAGE> 6
sale. At April 30, 1996 and December 31, 1995, Pacific Thrift held an additional
$8.9 million and $9.6 million, respectively, of loans originated for sale. In
addition, Pacific Thrift offers investment certificates in the form of passbook
and certificate of deposit accounts insured by the Federal Deposit Insurance
Corporation ("FDIC") up to applicable limits. At March 31, 1996, Pacific Thrift
had total assets of $81.6 million, total deposits of $72.8 million and total
shareholders' equity of $7.8 million. Pacific Thrift is subject to regulation
and supervision by the FDIC and the California Department of Corporations
("DOC").
CRC. CRC provides trust deed foreclosure services to over 300 banks,
thrifts, mortgage banks, life insurance companies and federal agencies. At March
31, 1996, CRC had total assets of $3.2 million, total liabilities of $2.3
million and partners' capital of $.9 million. All of the limited partnership
interests of CRC will be transferred to the Corporation on the Closing Date.
CRC WASHINGTON. CRC Washington provides trust deed foreclosure services on
loans secured by real estate located in the State of Washington. CRC Washington
had no material assets, liabilities or operations at or during the year ended
December 31, 1995 or at or during the quarter ended March 31, 1996. The
Corporation is the sole shareholder of CRC Washington.
LPPC. LPPC provides posting and publication services in connection with
trust deed foreclosure sales. At March 31, 1996, LPPC had total assets of $.3
million, total liabilities of $.1 million and partners' capital of $.2 million.
All of the limited partnership interests of LPPC will be transferred to the
Corporation on the Closing Date.
PACIFICAMERICA MORTGAGE. As part of the Restructuring Plan, PacificAmerica
Mortgage will acquire the loan portfolio of Presidential, substantially all of
which was originated prior to 1991. At March 31, 1996, the Presidential
portfolio consisted of residential, multi-family and commercial loans with a
gross aggregate principal balance of $8.3 million, down from a high of $130.2
million in 1989. The Presidential portfolio is pledged to secure a loan
obligation (the "Bank Loan") owed by Presidential to Fleet Bank, N.A. ("Fleet"
or the "Bank," into which NatWest Bank, N.A., the original lender, was merged as
of May 1, 1996), with a remaining balance of $5.0 million owed as of May 31,
1996 and a maturity date of June 30, 1997. The Presidential portfolio is being
reduced through loan payoffs and loan sales to pay down the Bank Loan.
Management further intends for PacificAmerica Mortgage to become a California
licensed finance lender, and, where necessary or advisable, to obtain other
state licenses to act as a real estate secured lender in locations in which
Pacific Thrift is unable to engage in real estate secured lending.
BUSINESS STRATEGY
After the consummation of this Offering and the Restructuring, management
of the Corporation intends to 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 developed the ability to originate a high
volume of mortgage loans for sale to larger mortgage lenders for
securitization. For the quarter ended March 31, 1996, Pacific Thrift
increased gains on sale of loans by $3.2 million (213.3%) to $4.7
million from $1.5 million for the quarter ended March 31, 1995. For the
year ended December 31, 1995, gains on sale of loans increased by $7.7
million (856%), to $8.6 million from $.9 million for the prior year. By
focusing 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 mitigates the credit risks associated with loan defaults, because
the risk of loss on loans is transferred to the loan purchasers, subject
to standard representations and warranties made by Pacific Thrift to the
loan purchasers at the time of sale for which Pacific Thrift remains
liable.
-- INCREASE VOLUME OF LOANS ORIGINATED FOR SALE IN STATES IN WHICH PACIFIC
THRIFT HAS RECENTLY COMMENCED LENDING OPERATIONS. In 1994, management of
Pacific Thrift began to implement a geographic expansion strategy to
increase the volume of loans originated for sale. Pacific Thrift first
expanded
4
<PAGE> 7
operations into the western states of Washington, Oregon and Nevada,
where certain officers had previous experience with mortgage lending
operations. Pacific Thrift later expanded lending operations into
Colorado, Arizona and Utah, and began exploring other regions for
possible lending operations. As of 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 has taken steps to qualify for or confirm exemption from
consumer lending 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 processing and underwriting. As operations expand
in one or more locations, Pacific Thrift may consider renting small
offices as necessary to facilitate business operations, subject to
applicable regulatory requirements. However, management believes that
Pacific Thrift may continue to be able to 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 the end of 1996 or the
beginning of 1997. Management will continue to evaluate programs to
securitize loans to the extent that future lending volume permits.
Management believes that the implementation of 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 releases for a premium as a seller
of loans. In addition, Pacific Thrift would consider the purchase of
loans from other originators to enhance securitized 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 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 15.22% of all such loans at March
31, 1996, loan delinquencies over 60 days on loans originated after
January 1, 1994 were only 2.07% of all of those loans as of March 31,
1996. There can be no assurance that the level of delinquencies
experienced with respect to portfolio 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
5
<PAGE> 8
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
typically 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 Corporation's lending
business which may occur during these periods.
BACKGROUND AND REASONS FOR RESTRUCTURING
Presidential's primary business from its inception in 1981 through 1990 was
the origination of B and C credit loans secured by California real property
(primarily residential), which Presidential retained and serviced for the life
of the loans. Presidential financed its lending activity with revolving lines of
credit from major commercial banks and periodic offerings of limited partnership
units. At the height of this business in 1989, Presidential and Pacific Thrift
(which commenced business in December 1988) had a total combined loan portfolio
of $130.2 million and Presidential had borrowed $82 million on a credit line.
Beginning in 1990, with the downturn in the California real estate market,
the credit line was restructured as a one-year renewable term loan (the "Bank
Loan") with required monthly or quarterly pay down levels. Accordingly, since
1990, Presidential has been required to pay down over $77 million on the Bank
Loan, which has resulted in a systematic reduction of the Partnership's loan
portfolio from its high of $130.2 million in 1989 to a combined loan portfolio
of $56.6 million (net of general reserves of $4.7 million but including $11.4
million in loans held for sale) as of March 31, 1996. The reduction in the loan
portfolio, coupled with substantial loan losses caused by the California
recession and substantial declines in the value of California real estate,
caused declines in the Partnership's net income through 1992 and net losses of
$1.7 million, $9.5 million and $5.9 million for the years ended December 31,
1995, 1994 and 1993, respectively. In addition, pursuant to the terms of the
Bank Loan, Presidential was required to suspend all distributions and capital
withdrawal payments to limited partners in June 1993. As a result, Presidential
has paid no distributions or capital withdrawal payments since June 1993.
In 1994 and 1995, management of the Partnership refocused its lending
business on loans originated for sale and analyzed possible restructuring
alternatives which would provide a means for limited partners of the
Presidential to realize potential capital appreciation and greater liquidity for
their investment. Management proposed the Restructuring Plan to the Limited
Partners pursuant to a Proxy Statement/Prospectus dated May 14, 1996, and
received the approval of over 70% of the Limited Partners to complete the
Restructuring Plan by June 17, 1996. The completion of this Offering is a
condition to and will be the final step in the consummation of the Restructuring
Plan.
SUMMARY OF THE PUBLIC OFFERING
Common Stock offered by the
Corporation.............. The Corporation is offering 763,661 shares of
Common Stock in this offering. The Corporation has
agreed to issue 890,000 shares to the partners of
Presidential in connection with the Restructuring
Plan, less 287,083 shares that would otherwise be
issued to limited partners electing the Cash Out
Option and 1,206 shares representing fractional
interests, the value of which will be paid in cash
to the partners. The Corporation is also issuing
324,628 shares in connection with the Rights
Offering (as described below). The Restructuring
Plan, the Rights Offering and the Public Offering
will close concurrently (the "Closing Date") and
all shares will be issued on the Closing Date. No
investor may purchase more than seven percent of
the total shares to be issued in connection with
the Restructuring, the Rights Offering and the
Public Offering.
6
<PAGE> 9
Use of Proceeds............ The net proceeds of the additional capital raised
in the Rights Offering and the Public Offering will
be used approximately as follows:
$2,871,000 owed to Limited Partners who have
elected the Cash Out Option in connection with
the Restructuring Plan, which entitles those
Limited Partners to receive $10 times the amount
of shares they otherwise would have received in
connection with the Restructuring based on their
capital accounts in the Partnership;
$1,307,000 to pay the aggregate amount owing to
former Limited Partners who are now creditors of
the Partnership, whose withdrawal requests were
approved prior to June 30, 1993;
$1,185,000 to pay substantially all of the debt
which the Partnership estimates is owed by it to
the General Partner as of May 31, 1996, which the
General Partner will use to purchase General
Partner Warrants and Common Stock in the Rights
Offering;
$1,000,000 to pay down the Bank Loan;
$200,000 to redeem a warrant for 2% of the Common
Stock (see "Summary of the Restructuring
Plan -- Bank Warrants"); and
$12,000 to pay the value of fractional interests
to the partners
the balance of net proceeds will be added to
working capital of the Corporation, portions of
which may be contributed from time to time as
additional capital to Pacific Thrift or used to
pay down the Bank Loan, as management deems
appropriate.
Nasdaq National Market
Symbol................... "PAMM"
SUMMARY OF THE RESTRUCTURING PLAN
Exchange of Assets and
Liabilities of the
Partnership for Common
Stock.................... Shares of Common Stock equal to the Net Tangible
Equity of the Partnership on the last day of the
month preceding the Closing Date, equal to 890,000
shares based on Net Tangible Equity of $8.9 million
at May 31, 1996, will be distributed to the General
Partner and all Limited Partners of the Partnership
on the Closing Date, less 287,083 shares that would
otherwise be issued to Limited Partners electing
the Cash Out Option and 1,206 shares representing
fractional interests, the value of which will be
paid in cash to the partners. Net Tangible Equity
is defined as total assets minus total liabilities,
goodwill and capitalized organization costs other
than capitalized costs of the Rights Offering and
Public Offering, as adjusted for an 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 for
$800,000, to be paid with the proceeds of repayment
of the debt which the Partnership owes to the
General Partner as of May 31, 1996.
Rights Offering............ In connection with the Restructuring Plan, Limited
Partners, partners of the General Partner and the
officers, directors and employees of Presidential
and its subsidiaries were given the right to
subscribe for up to 800,000 additional shares of
Common Stock in a rights offering (the "Rights
Offering"), at $10 per share. Subscriptions for
324,628 shares were received in the Rights
Offering.
7
<PAGE> 10
Subscriber Warrants........ For every five shares of Common Stock subscribed
for in the Rights Offering, the Corporation has
agreed to issue to each subscriber a transferable
warrant (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. Based on subscriptions
for 324,628 shares received in the Rights Offering,
the Corporation will issue 64,925 Subscriber
Warrants.
General Partner Warrants
and Purchase of Common
Stock.................... The General Partner of the Partnership will
purchase warrants from the Corporation ("General
Partner Warrants") exercisable for up to 25% of the
Common Stock outstanding on the Closing Date, on a
fully diluted basis assuming the exercise of all
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
receive payment of $1,185,000 of the debt owed to
it by the Partnership out of the proceeds of this
Offering and will use this amount to pay $385,000
to purchase General Partner Warrants and $800,000
to purchase Common Stock in the Rights Offering.
The General Partner will distribute all Common
Stock, Subscriber Warrants and General Partner
Warrants received by it to its partners and
creditors.
Bank Warrant............... The Corporation has agreed to grant to Fleet a
Warrant (the "Bank Warrant") to purchase 2% of the
Common Stock of the Corporation, exercisable at any
time for a period of five years after issuance, at
an exercise price equal to 25% of the book value of
the Corporation on December 31, 1995, as adjusted
for shares sold in the Rights Offering and the
Public Offering, redeemable at any time within one
year at the option of the Corporation for $200,000.
The Corporation intends to redeem the Bank Warrant
promptly after the closing of the Restructuring
Plan and this offering.
Conditions to Completion of
the Restructuring Plan,
Rights Offering and
Public Offering.......... The closing of the Restructuring Plan, the Rights
Offering and the Public Offering are subject to the
satisfaction of the following conditions:
(a) the approval of 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), which has been
obtained;
(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 ("NNM"), the American
Stock Exchange ("ASE") or the Pacific Stock
Exchange ("PSE");
(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 or a determination is made
by the FDIC and the DOC that their consent is
not required;
8
<PAGE> 11
(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.
The FDIC has determined that the Restructuring Plan
does not require its approval. Except with respect
to the possible required consent of 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.
9
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present selected consolidated financial and other data
of the Partnership as of and for the three months ended March 31, 1996 and 1995
and 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
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income........................ $ 2,408 $ 2,612 $ 9,577 $ 11,404 $ 14,212 $ 16,827 $ 18,668
Total interest expense....................... 1,227 1,405 5,199 4,927 5,718 6,725 8,683
-------- -------- -------- -------- --------
Net interest income.................. 1,181 1,207 4,378 6,477 8,494 10,102 9,985
Total noninterest income..................... 5,807 2,608 13,265 6,002 5,305 5,316 4,865
Provision for loan losses.................... 725 446 3,289 6,096 4,655 3,888 2,617
Other real estate owned expense.............. 165 238 1,212 732 3,307 1,014 881
General and administrative expense........... 5,471 3,354 16,062 15,164 11,705 10,367 7,517
Provision for income taxes (benefit)......... 348 (430) (1,222) 1 1 1 -0-
-------- -------- -------- -------- --------
Net income (loss)............................ $ 279 $ 207 $ (1,698) $ (9,514) $ (5,869) $ 148 $ 3,835
======== ======== ======== ======== ========
Distributions paid........................... -0- -0- -0- -0- 1,943 4,610 5,747
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets................................. $95,030 $101,694 $ 82,557 $103,747 $114,324 $120,216 $138,405
Net loans(1)................................. 56,637 59,280 56,485 65,056 84,755 101,405 122,628
Total deposits............................... 72,781 69,032 60,156 69,501 62,421 50,561 39,555
Mortgage notes and notes payable............. 7,753 15,611 7,982 17,691 25,578 36,507 59,412
Partners' equity............................. 9,006 10,632 8,727 10,425 19,939 28,830 36,706
SELECTED RATIOS (%):
Return on average assets..................... 1.26% .82% (1.82)% (8.73)% (5.00)% .11% 2.77%
Return on average partners' equity........... 12.62% 7.97% (17.73)% (62.67)% (24.07)% .45% 10.13%
Net interest margin(2)....................... 6.20% 5.62% 5.79% 6.82% 8.65% 8.71% 7.57%
Noninterest expense to average assets........ 25.46% 14.18% 18.54% 14.58% 12.80% 8.80% 6.07%
Efficiency ratio(3).......................... 80.65% 94.15% 97.91% 127.38% 108.79% 73.82% 56.55%
Efficiency ratio excluding REO expense(3).... 78.29% 87.92% 91.04% 121.52% 84.82% 67.24% 50.62%
General and administrative expense to average
assets..................................... 24.71% 13.24% 17.24% 13.91% 9.98% 8.02% 5.43%
Average partners' equity to average assets... 9.99% 10.25% 10.28% 13.92% 20.79% 25.34% 27.35%
Loan originations............................ $66,388 $ 30,905 $170,861 $ 76,838 $ 48,612 $ 53,207 $ 60,278
ASSET QUALITY DATA:
Nonaccrual loans............................. $ 781 $ 4,340 $ 793 $ 3,146 $ 5,316 $ 3,253 $ 3,942
REO (net of senior liens).................... 2,606 5,702 2,545 5,308 4,225 6,973 4,199
Total nonperforming assets................... 3,387 10,042 3,338 8,454 9,541 10,226 8,141
Troubled debt restructurings................. 950 324 948 -0- -0- -0- -0-
Allowance for credit losses.................. 4,725 3,940 4,229 4,307 3,122 2,646 1,821
Net loan charge offs......................... 229 813 3,367 4,912 4,178 3,063 1,907
ASSET QUALITY RATIOS:
Nonperforming assets to total assets......... 3.56% 9.87% 4.04% 8.15% 8.35% 8.51% 5.88%
Allowance for credit losses to net loans..... 8.34% 6.65% 7.49% 6.62% 3.68% 2.61% 1.48%
Allowance for credit losses to nonaccrual
loans...................................... 604.99% 90.78% 533.29% 136.94% 58.74% 81.34% 46.19%
Net loan charge offs to average loans........ 1.38% 5.30% 5.28% 5.79% 4.12% 2.67% 1.32%
</TABLE>
- ---------------
(1) Net of allowances for loan loss and deferred loan fees and costs, including
loans held for sale.
(2) Net interest margin represents net interest income divided by total average
earning assets.
(3) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
10
<PAGE> 13
SELECTED PACIFIC THRIFT FINANCIAL AND OTHER DATA
The following selected financial and other data is for Pacific Thrift and
Loan Company, the primary operating subsidiary of the Partnership and of the
Corporation from and after the Closing Date of the Restructuring.
<TABLE>
<CAPTION>
AS OF AND FOR
THE THREE MONTHS
ENDED MARCH 31, AS OF AND FOR THE YEARS ENDED
(UNAUDITED) DECEMBER 31,
------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total interest income.................... $ 2,112 $ 2,132 $ 7,695 $ 8,434 $ 9,314 $ 8,988 $ 4,492
Total interest expense................... 1,010 980 3,820 2,953 3,225 3,061 2,081
------- ------- ------- ------- ------- ------- -------
Net interest income.................... 1,102 1,152 3,875 5,481 6,089 5,927 2,411
Total noninterest income................. 4,789 1,610 9,599 2,297 405 630 824
Provision for loan losses................ 649 (60) 1,395 1,414 2,321 1,054 394
Other real estate owned expense.......... 105 18 92 293 1,323 105 117
General and administrative expense....... 3,857 2,151 10,056 8,978 6,000 6,037 3,423
Provision for income taxes (benefit)..... 348 (430) (1,224) 1 1 1 1
------- ------- ------- ------- ------- ------- -------
Net income (loss)........................ $ 932 $ 1,083 $ 3,155 $(2,908) $(3,151) $ (640) $ (700)
======== ======== ======== ======== ======== ======== ========
Dividends paid........................... -0- -0- -0- -0- -0- -0- -0-
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets............................. $81,566 $75,840 $67,899 $74,404 $70,302 $56,286 $45,170
Net loans(1)............................. 51,269 44,953 50,153 49,387 50,091 51,330 40,928
Total deposits........................... 72,781 69,032 60,156 69,501 62,421 50,561 39,555
Mortgage notes and notes payable......... 366 697 51 212 1,024 81 2,200
Stockholder's equity..................... 7,751 4,401 6,819 3,240 5,029 5,189 2,889
SELECTED RATIOS (%):
Return on average assets................. 5.00% 5.85% 4.43% (4.02)% (4.98)% (1.26)% (2.11)%
Return on average partners' equity....... 51.31% 114.98% 62.73% (70.33)% (61.68)% (15.85)% (23.94)%
Net interest margin(2)................... 7.15% 6.99% 6.06% 8.36% 10.62% 12.71% 7.99%
Noninterest expense to average assets.... 21.26% 11.71% 14.26% 12.81% 11.57% 12.11% 10.69%
Efficiency ratio(3)...................... 67.26% 78.53% 75.32% 119.20% 112.77% 93.67% 109.43%
Efficiency ratio excluding REO
expense(3)............................. 65.47% 77.88% 74.63% 115.43% 92.39% 92.07% 105.81%
General and administrative expense to
average assets......................... 20.70% 11.61% 14.13% 12.41% 9.48% 11.90% 10.33%
Average shareholder's equity to average
assets................................. 9.75% 5.09% 7.07% 5.71% 8.07% 7.96% 8.83%
ASSET QUALITY DATA:
Nonaccrual loans......................... $ 513 $ 2,818 $ 405 $ 1,967 $ 1,230 $ 3,720 $ 3,904
REO (net of senior liens)................ 1,789 2,026 1,697 930 2,278 1,473 1,385
Total nonperforming assets............... 2,302 4,844 2,102 2,897 3,508 5,202 5,269
Troubled debt restructurings............. 590 324 588 -0- -0- -0- -0-
Allowance for credit losses.............. 1,954 1,419 1,458 1,804 1,300 789 733
Net loan charge offs..................... 154 325 1,741 910 1,810 999 36
ASSET QUALITY RATIOS:
Nonperforming assets to total assets..... 2.82% 6.39% 3.10% 3.89% 4.99% 9.24% 11.70%
Allowance for credit losses to net
loans.................................. 3.81% 3.16% 2.91% 3.65% 2.60% 1.54% 1.79%
Allowance for credit losses to nonaccrual
loans.................................. 380.90% 50.35% 360.00% 91.71% 105.69% 21.16% 18.78%
Net loan charge offs to average loans.... 1.22% 2.79% 3.50% 1.83% 3.57% 2.17% .12%
REGULATORY CAPITAL RATIOS:
Leverage Ratio........................... 9.42% 5.47% 9.09% 3.87% 7.12% 9.21% N/A
Tier 1 risk-based capital ratio.......... 10.65% 7.15% 11.17% 5.41% 8.84% 10.64% N/A
Total risk based capital ratio........... 11.90% 8.40% 12.42% 6.66% 10.09% 11.89% N/A
</TABLE>
- ---------------
(1) Net of allowances for loan loss and deferred loan fees and costs, including
loans held for sale.
(2) Net interest margin represents net interest income divided by total average
earning assets.
(3) Efficiency ratio represents noninterest expense divided by noninterest
income and net interest income.
11
<PAGE> 14
RISK FACTORS
Prospective investors should carefully consider the following risk factors
as well as the other information contained in this Prospectus before purchasing
the Common Stock offered hereby.
RISK OF CONTINUING LOAN LOSSES. For the years ended December 31, 1995,
1994 and 1993, the Partnership sustained consolidated net 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 March 31, 1996, the Partnership continued to hold a combined
gross loan portfolio of approximately $16.3 million (net of specific reserves of
approximately $.5 million) originated prior to 1994, all of which is secured by
California real property. In addition, 96% of the total loan portfolio at March
31, 1996 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 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, although there can be no assurance that it will be
able to meet the requirements in the future. 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 they determine to be
appropriate. See "SUPERVISION AND REGULATION -- Regulatory Actions."
RELIANCE ON PRIMARY LOAN PURCHASER. For the quarter ended March 31, 1996
and the year ended December 31, 1995, Aames Capital Corporation ("Aames") was
the largest purchaser of loans originated for sale by Pacific Thrift,
representing 89.0% and 85.2%, respectively, 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. There can be no
assurance, however, that this relationship will continue. In the event that the
relationship with Aames were to terminate, 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. See
"Business -- Lending Activities -- Loans Originated for Sale."
REPORT ON FINANCIAL STATEMENTS. For the year ended December 31, 1995, the
report of the Partnership's independent certified public accountants included an
explanatory paragraph that expressed substantial doubt as to the ability of the
Partnership to continue as a going concern due to its debt service requirements
and the restrictions on the ability of Pacific Thrift to pay dividends.
Subsequent to the date of the report, the restriction on Pacific Thrift's
ability to pay dividends under the 1995 Order was removed in April 1996. If the
Restructuring is completed, the Corporation would have substantial additional
working capital, which management believes would be sufficient to substantially
pay off the Bank Loan.
COMPETITION IN THE LENDING INDUSTRY. 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.
12
<PAGE> 15
Larger institutions, having the capability of generating substantial economies
of scale, 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 and/or securitization. There are many
mortgage lenders which are also seeking to increase the volume of loans they
originate for sale or securitization. There can be no assurance that Pacific
Thrift will continue to increase the volume of loans originated for sale or
securitization, which is necessary for the Corporation to operate profitably.
Further, there can be no assurance that future changes will not occur in the
lending industry which make it more difficult for Pacific Thrift to operate
profitably.
Pacific Thrift has significant competition for all loans from other thrift
and loans, commercial banks, savings and loan associations, finance 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 loan associations, 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 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 loan portfolio. For
example, if interest rates rise rapidly, adjustable rate loans will stop
repricing as interest rate caps on such loans take effect. The Corporation's
adjustable rate loans typically have lifetime interest rate caps that limit rate
increases from the fully indexed rate in effect at a loan's inception to five
percentage points (or 10 percentage points in some cases) in the aggregate.
Conversely, if interest rates decline, because the Corporation's 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 adjustable 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 March 31, 1996,
properties securing the combined loan portfolio, based on aggregate principal
balances, consisted of 32% residential property, 21% multi-family property and
47% 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
13
<PAGE> 16
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
March 31, 1996, approximately 96% of all loans in the Partnership's loan
portfolio, on an aggregate principal balance basis, were secured by real
property located in California, including approximately 74% in Southern
California and approximately 22% in Northern California. The remaining 4% of all
loans are secured by real property located in Washington (3%) and Oregon (1%).
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 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
14
<PAGE> 17
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 has now been listed for sale. Although
management believes that the Corporation should have no further liability with
respect to the two properties, there can be no assurance that additional
contamination will not be discovered, for which the Corporation may be obligated
for the cost of additional remediation. In addition, although management is not
aware of any other properties containing contamination or hazardous substances,
there can be no assurance that such contamination or substances will not be
discovered on any property in the future, or that the cost of any required
removal or remediation or related liabilities on any such property would not be
material or substantially exceed the value of the property, or that the
Corporation's ability to sell the property would not be adversely affected.
Since 1994, it has been Pacific Thrift's policy to identify and review
certain environmental issues pertaining to its borrowers and the properties
securing the loans of its borrowers prior to making any loan or foreclosing on
any 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 audit or Phase II
environmental audit has 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 a property
or surrounding properties will not result in the imposition of environmental
liability on Pacific Thrift and/or the Corporation.
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 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, if any, 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 also 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."
15
<PAGE> 18
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 $1.8 million at March 31, 1996 and $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.
USE OF PROCEEDS
The net proceeds of the Rights Offering and the Public Offering, (after
deducting estimated offering expenses, including the Underwriter's discount),
are estimated to be approximately $10,064,000 ($11,135,000 if the Underwriters'
overallotment option is exercised in full for an additional 114,549 shares). The
Corporation intends to use the net proceeds approximately as follows:
<TABLE>
<S> <C>
Pay Limited Partners electing the Cash Out Option....................... $ 2,871,000
Pay off debts owed to Partners whose withdrawal requests were approved
prior to June 1993.................................................... 1,307,000
Pay off debt owed to the General Partner, used to purchase Common Stock
and General Partner Warrants.......................................... 1,185,000
Pay down of Bank Loan(1)................................................ 1,000,000
-----------
Redeem Bank Warrant..................................................... 200,000
Pay partners for fractional share interests............................. 12,000
Working Capital(2)...................................................... 3,489,000
-----------
$10,064,000
===========
</TABLE>
- ---------------
(1) The Bank Loan bears interest at Fleet's prime rate plus 1 1/2% and matures
on June 30, 1997.
(2) Working capital will be used primarily to fund the Corporation's lending
business. The Corporation may contribute working capital from time to time
as additional capital to Pacific Thrift and use additional working capital
to pay down the Bank Loan, as management deems appropriate.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Partnership at March 31, 1996, and of the Corporation as adjusted to give effect
to the sale by the Corporation of 763,661 shares of Common Stock at a public
offering price of $10.00 per share (net of underwriting discount and estimated
expenses payable by the Corporation).
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
PARTNERSHIP CORPORATION
----------- -----------
HISTORICAL AS ADJUSTED
----------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Deposits........................................................... $72,781 $72,781
Borrowings:
Bank debt........................................................ 6,500 5,500
Liabilities owed to Withdrawing Partners......................... 1,307 -0-
Liabilities owed to General Partner.............................. 933 -0-(1)
Other Liabilities................................................ 4,171 4,171
Equity:
Partners' capital accounts (Stockholders' Equity)................ 9,006 9,055(2)
Additional Shares................................................ 10,064(3)
Payment of Limited Partners electing the Cash Out Option......... (2,871)
Redeem Bank Warrant.............................................. (200)
Payment of fractional share value................................ (12)
------- -------
Total Equity............................................. 9,006 16,036
------- -------
Total Liabilities and Equity............................. $94,698 $98,488
======= =======
Number of shares of Common Stock outstanding....................... N/A 1,690
Tangible book value per share(4)................................... $ 9.40
</TABLE>
- ---------------
(1) At March 31, 1996, a total of $933,000, net of a payable of $1,265,000 and a
receivable of $332,000, was owed by the Partnership to the General Partner.
Of this amount, the General Partner will pay $385,000 to purchase the
General Partner Warrants and $548,000 to purchase Common Stock in the Rights
Offering. At 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 has increased to approximately $1,187,000, due to the
accrual of fees which are not permitted to 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 to be 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 $548,000 of the debt owed to the General Partner at March 31, 1996
which will be paid for Common Stock by the General Partner. A total of
$800,000 will be paid by the General Partner for Common Stock.
(4) Tangible book value per share is based on an estimated Net Tangible Equity
of the Partnership of $8,900,000 at May 31, 1996, less $2,871,000 to be paid
to Limited Partners electing the Cash Out Option, $200,000 to redeem the
Bank Warrant and $12,000 representing cash to be paid for fractional
interests, plus the $10,064,000 in net proceeds from the Rights Offering and
Public Offering. The number of shares does not include 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."
17
<PAGE> 20
DIVIDEND POLICY
The Corporation, which was recently organized, has never paid a cash
dividend on its Common Stock and does not intend to consider the payment of
dividends until at least the fourth quarter of 1997. The Corporation's ability
to pay dividends is subject to restrictions set forth in the Delaware General
Corporation law. The Delaware Corporation Law provides that a Delaware
corporation may pay dividends either (i) out of the corporation's surplus (as
defined in Delaware law), or (ii) if there is no surplus, out of the
corporation's net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. However, pursuant to Section 2115 of the
California General Corporation Law, under certain circumstances, certain
provisions of the California General Corporation Law may be applied to foreign
corporations qualified to do business in California, which may reduce the amount
of dividends payable by the Corporation. See "DESCRIPTION OF CAPITAL
STOCK -- Effect of Quasi-California Corporation Law."
The Corporation's ability to pay cash dividends in the future will depend
in large part on the ability of its operating subsidiaries to pay dividends to
the Corporation. The ability of Pacific Thrift to pay dividends to the
Corporation is subject to restrictions set forth in the California Industrial
Loan Law and the provisions of the California General Corporation Law, and the
regulations and policies of the FDIC and the DOC. See "SUPERVISION AND
REGULATION -- Restrictions on Transfers of Funds to the Partnership or the
Corporation by Pacific Thrift."
MARKET FOR COMMON STOCK
There has been no public market for the Common Stock. The Common Stock has
been conditionally approved for listing on the Nasdaq National Market under the
symbol "PAMM." The Underwriter has indicated its intention to make a market in
the Common Stock. The Underwriter is not obligated, however, to make a market in
the Common Stock and any market making may be discontinued at any time.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Corporation has only recently been formed and, accordingly, has no
results of operations. The following discussion is intended to provide
information to facilitate the understanding and assessment of significant
changes and trends related to the historical financial condition and results of
operations of the Partnership and its operating subsidiaries, Pacific Thrift,
CRC and LPPC. Information related to the three months ended March 31, 1996 and
1995 and as of March 31, 1996 is unaudited.
GENERAL
The Partnership operates two business segments: (i) the real estate lending
business, which is conducted through Presidential and Pacific Thrift and (ii)
the trust deed foreclosure services business, which is conducted through CRC and
LPPC. 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 $5.0 million as of
May 31, 1996. The Bank Loan is required to be fully repaid by June 1997.
Management of Presidential anticipates that the Bank Loan will be paid off with
a combination of interest income and principal reductions on the Presidential
loan portfolio, (which had an aggregate gross principal balance of $8.3 million,
net of specific reserves of $.7 million but including loans held for sale of
$3.0 million as of March 31, 1996), sales of OREO ($.8 million at March 31,
1996, net of senior liens) and sales of portfolio loans as necessary to augment
interest and fee income.
For the year ended December 31, 1995, the report of the Partnership's
independent certified public accountants included an explanatory paragraph that
expressed substantial doubt as to the ability of the Partnership to continue as
a going concern due to its debt service requirements and the restrictions on the
ability of Pacific Thrift to pay dividends. Subsequent to the date of the
report, the restriction on Pacific Thrift's ability to pay dividends under the
1995 Order was removed in April 1996. If the Restructuring is completed, the
Corporation would have substantial additional working capital, which management
believes would be sufficient to substantially pay off the Bank Loan.
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
19
<PAGE> 22
overhead costs by operating without offices in most areas; (v) continue to
evaluate possible securitization programs; (vi) gradually rebuild Pacific
Thrift's loan portfolio balance; and (vii) continue to improve asset quality.
See "Prospectus Summary -- Business Strategy."
At March 31, 1996, Pacific Thrift had net operating loss carryforwards of
$1.8 million. The federal net operating loss carryforwards expire during the
years 2007 through 2009 while the state net operating loss carryforwards 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 approximately $1.8 million 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. 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. None of CRC, CRC Washington or LPPC own substantial tangible assets or
have substantial operating expenses other than general and administrative and
personnel expenses.
Management's basic goal for the 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, they have not been replaced
soon enough to fully offset declines in revenues from accounts lost.
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. During the quarter
ended March 31, 1996, total consolidated assets increased $12.5 million (15.2%)
to $95.0 million from $82.5 million at December 31, 1995, reflecting primarily a
$12.6 million increase in accounts receivable from loan sales.
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 $28.4 million to $5.0 million at May 31, 1996
from $33.4 million at December 31, 1992.
Total deposits of Pacific Thrift have increased $22.2 million to $72.8
million at March 31, 1996 from $50.6 million at December 31, 1992, an increase
of 44%. 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, but increased by $.3
million for the quarter ended March 31, 1996 reflecting net income for the
quarter. Reductions in capital over the past three fiscal years were due to 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, $1.9 million in
distributions paid in 1993, and capital withdrawals of $1.4 million paid in 1993
to withdrawing Limited Partners in accordance with the terms of the Partnership
Agreement, partially offset by $.3 million in capital contributions in 1993.
During the years ended December 31, 1995,
20
<PAGE> 23
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 MARCH 31, 1996 COMPARED WITH DECEMBER 31, 1995
Total consolidated assets of the Partnership increased $12.5 million
(15.2%) to $95.0 million at March 31, 1996 from $82.5 million at December 31,
1995 due to an increase in lending activity. Accounts receivable increased by
$12.6 million (381.8%) to $15.9 million at March 31, 1996 from $3.3 million at
December 31, 1995, due to sales of loans originated for sale made in March for
which payment was received in April 1996. Proceeds from sales of loans
originated for sale are generally used to originate new loans. The increase in
accounts receivable was offset by a decrease in loans held for sale, which
decreased by $1.2 million (9.5%), to $11.4 million at March 31, 1996 from $12.6
million at December 31, 1995. Loans receivable increased by $1.4 million (3.2%),
to $45.3 million at March 31, 1996 from $43.9 million at December 31, 1995,
reflecting an increase in origination of portfolio loans by Pacific Thrift.
Excess yield receivable decreased by $.2 million (7.4%) during the period to
$2.5 million from $2.7 million. Real estate acquired in settlement of loans
("OREO") increased by $.1 million (3.1%), to $3.3 million at March 31, 1996,
from $3.2 million at December 31, 1995.
Total liabilities increased $12.2 million (16.5%) to $86.0 million at March
31, 1996 from $73.8 at December 31, 1995. The increase resulted primarily from a
$12.6 million (20.9%) increase in thrift certificates payable, to $72.8 million
at March 31, 1996 from $60.2 million at December 31, 1995 due to management's
decision to increase funding of lending activities, including loans originated
for sale and portfolio lending. Payables to a related party increased by $.4
million (133.3%) to $.7 million at March 31, 1996 from $.3 million at December
31, 1995 due to the accrual of fees payable to the General Partner which may not
be paid under the terms of the Bank Loan without Fleet's consent.
Total partnership capital increased by $.3 million (3.4%) to $9.0 million
at March 31, 1996 from $8.7 million at December 31, 1995, due to net income of
$.3 million reported for the quarter ended March 31, 1996.
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 in cash and cash
equivalents, loans receivable, 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
21
<PAGE> 24
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 $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, 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 thrift certificates payable 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.
22
<PAGE> 25
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
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 $.1 million and $.2 million for the
quarters ended March 31, 1996 and 1995, and $.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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans receivable........................... $ 66,372 $ 2,278 13.77% $ 69,943 $ 2,386 13.83%
Interest-bearing deposits in other
financial institutions and securities
purchased under agreements to sell...... 10,016 130 5.21% 16,026 226 5.72%
------- ------ ----- ------- ------ -----
Total interest-bearing assets...... 76,388 2,408 12.64% 85,969 2,612 12.32%
------- ------ ----- ------- ------ -----
Noninterest-earning assets:
Cash and due from banks.................... 6,167 3,864
Premises & equipment, net.................. 1,490 1,418
Real estate held for sale.................. 4,260 7,563
Other Assets............................... 3,419 8,030
------- -------
Total noninterest-earning assets... 15,336 20,875
------- -------
Less allowance for loan losses............... 4,107 4,123
------- ------ ------- ------
87,617 2,408 102,721 2,612
======= ====== ======= ======
Liabilities & Partners' Capital
Interest-bearing liabilities:
Notes payable.............................. 6,672 217 13.05% 14,294 425 12.05%
Savings deposits........................... 32,110 387 4.83% 11,457 139 4.92%
Time CDs................................... 38,753 623 6.45% 57,432 841 5.94%
------- ------ ----- ------- ------ -----
Total interest-bearing
liabilities...................... 77,535 1,227 6.35% 83,183 1,405 6.85%
------- ------ ----- ------- ------ -----
Noninterest-bearing liabilities:
Accounts payable & accrued expenses........ 511 9,009
------- -------
Total liabilities............................ 78,046 92,192
Partners' Capital............................ 9,571 10,529
------- ------ ------- ------
$ 87,617 $ 1,227 $102,721 $ 1,405
======= ====== ======= ======
Net interest income/spread................... $ 1,181 6.29% $ 1,207 5.47%
====== ===== ====== =====
Net interest margin.......................... 6.20% 5.62%
Net Income................................... $ 279 $ 207
====== ======
Average interest earning assets to average
interest bearing liabilities............... 0.985 1.033
</TABLE>
23
<PAGE> 26
<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)
<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 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 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.
24
<PAGE> 27
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities due to changes in volume and interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume which cannot be segregated have been
allocated proportionately to changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS
-----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH
31, 1996 COMPARED TO
THREE MONTHS ENDED MARCH
31, 1995 1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------ -------------------------- ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN DUE TO CHANGES IN
------------------------ -------------------------- ---------------------------
YIELD/ NET YIELD/ NET YIELD/ NET
VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ------ ------ ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans............................ $ (98 ) $ (10 ) $(109 ) $(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............. (78 ) (18 ) (96 ) 76 215 291 399 (1) 398
---- ---- ---- ------ ----- ------ ------ ------ ------
Total interest-earning assets.... (176 ) (28 ) (204 ) (2,815) 988 (1,827) (1,422) (1,386) (2,808)
---- ---- ---- ------ ----- ------ ------ ------ ------
Interest-bearing liabilities:
Notes payable.................... (246 ) 38 (208 ) (669) 66 (603) (1,243) 728 (515)
Savings deposits................. 251 (3 ) 248 (485) 299 (186) 734 10 744
Time CDs......................... (299 ) 81 (218 ) 293 768 1,061 (382) (638) (1,020)
---- ---- ---- ------ ----- ------ ------ ------ ------
Total interest-bearing
liabilities.................... (294 ) 116 (178 ) (861) 1,133 272 (891) 100 (791)
---- ---- ---- ------ ----- ------ ------ ------ ------
Change in net interest income.... $ 118 $(144 ) $ (26 ) $(1,954) $ (145) $(2,099) $ (531) $(1,486) $(2,017)
==== ==== ==== ====== ===== ====== ====== ====== ======
</TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
GENERAL
The Partnership reported net income of $.3 million for the three months
ended March 31, 1996, after an income tax expense of $.3 million. For the three
months ended March 31, 1995, the Partnership reported net income of $.2 million,
after recognizing a tax benefit of $.4 million from net operating loss
carryforwards of Pacific Thrift. The Partnership has a deferred tax asset of
approximately $.8 million at March 31, 1996, which management believes is more
likely than not to be utilized in 1996.
INTEREST INCOME
Net interest income before provision for loan losses remained substantially
unchanged at $1.2 million for the quarter ended March 31, 1996 compared to the
quarter ended March 31, 1995. Total interest income decreased by $.2 million
(7.7%), to $2.4 million for the quarter ended March 31, 1996 compared to $2.6
million for the quarter ended March 31, 1995. This resulted primarily from a
shorter holding period on loans originated for sale, which reduced the interest
received on loans held for sale pending the sale date of such loans. Interest on
investments also declined by $.1 million (50.0%), to $.1 million from $.2
million, due to a decrease in the volume of investments. Total interest expense
decreased by $.2 million (14.3%), to $1.2 million for the quarter ended March
31, 1996 from $1.4 million for the quarter ended March 31, 1995, due to a
decrease of $.2 million (50.0%) in interest payments on the Bank Loan to $.2
million from $.4 million, and a decrease of $.2 million in interest payments on
time certificates of deposit to $.6 million from $.8 million.
25
<PAGE> 28
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $.3 million (75.0%), to $.7
million for the quarter ended March 31, 1996, from $.4 million for the quarter
ended March 31, 1995. The total allowance for loan losses was $4.7 million at
March 31, 1996, compared to $4.2 million at December 31, 1995.
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. The ratio of nonaccrual loans past due 90 days or more to
total loans was 1.4% at March 31, 1996, compared to 1.6% at December 31, 1995.
NONINTEREST INCOME
Total noninterest income increased by $3.2 million (123.1%), to $5.8
million for the quarter ended March 31, 1996 from $2.6 million for the quarter
ended March 31, 1995. The increase is due primarily to an increase of $3.2
million (213.3%) in gains on loans originated for sale, to $4.7 million for the
quarter ended March 31, 1996 from $1.5 million for the quarter ended March 31,
1995, reflecting a substantial increase in the volume of loans sold that were
originated for sale. During the quarter ended March 31, 1996, the Partnership
originated $60.9 million and sold $61.8 million of loans originated for sale,
compared to originations of $25.9 million and sales of $29.5 million for the
quarter ended March 31, 1995. Trustee and reconveyance fees increased by $.1
million (12.5%), to $.9 million for the quarter ended March 31, 1996 compared to
$.8 million for the quarter ended March 31, 1995. Other income declined by $.1
million for the quarter, to $.2 million from $.3 million.
NONINTEREST EXPENSE
Noninterest expense increased by $2.0 million (55.6%), to $5.6 million for
the quarter ended March 31, 1996, from $3.6 million for the quarter ended March
31, 1995. The increase primarily reflects an increase in salaries, employee
benefits and personnel services of $1.2 million (75.0%), due to the increase in
loan volume and related loan representative commissions, and hiring of
additional support personnel to handle the increased loan volume. In addition,
general and administrative expenses increased by $.7 million (50.0%), to $2.1
million for the quarter ended March 31, 1996 from $1.4 million for the quarter
ended March 31, 1995, due to additional expenses related to the increase in loan
originations. Related party fees increased by $.3 million (150.0%), reflecting
an increase in fees payable to the General Partner due to increased loan volume
and fees based on net income.
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.
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.
The decrease in interest income caused
26
<PAGE> 29
by the reduced loan portfolio was partially 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 thrift certificates by Pacific Thrift, which
partially offset a decrease of $.9 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 classification 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. The increase in the reserve for loan losses was
due primarily to reserves taken by Pacific Thrift on certain "piggyback loans"
consistent with Pacific Thrift's general policy of reserving higher amounts for
these loans. See "Business Lending Policies -- Loan Origination and
Underwriting."
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, including $145.0 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 expenses related to 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 compared to 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.
27
<PAGE> 30
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 $11.4 million in 1994 from $14.2 million in
1993 due to a decrease of $1.8 million resulting from the reduction of $13.4
million in average loans outstanding and a decrease of $1.4 million due to lower
yields, offset by an increase of $.4 million in interest income due to an
increase in volume of interest bearing deposits and securities. 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.
28
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
Neither Presidential nor any of its subsidiaries other than Pacific Thrift
maintains significant cash and cash equivalent assets. The primary source of
Pacific Thrift's liquidity is the cash and cash equivalents maintained by
Pacific Thrift in connection with its deposit-taking and lending activities. At
March 31, 1996, cash and cash equivalent assets totalled $10.2 million, compared
with $10.5 million at December 31, 1995.
At March 31, 1996, 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 March 31, 1996 totalled $35.8
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 $28.4
million to $5.0 million at May 31, 1996 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, 1995 and the first
quarter of 1996, 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 March 31,
1996 was 40.9%, which exceeded the 10% minimum established by the board. At
December 31, 1995, 1994 and 1993, the liquidity ratio was 31.7%, 26.9% and
20.5%, respectively.
On December 1, 1995, Pacific Thrift obtained from First Interstate Bank of
California (which merged with Wells Fargo Bank on April 1, 1996) a federal funds
credit line, bearing interest at the federal funds rate as announced from time
to time by the Federal Reserve Board, in the amount of $2.5 million. The amount
of the line was increased to $3.5 million on January 3, 1996. The line is
intended to support short term liquidity, and is not expected to be used for
more than ten consecutive days or more than 12 times during any 30-day period.
Pacific Thrift is subject to certain leverage and risk-based capital
adequacy standards applicable to FDIC-insured institutions. At December 31,
1994, Pacific Thrift was classified by the FDIC as "undercapitalized." However,
by March 31, 1995, Pacific Thrift was reclassified by the FDIC as "adequately
capitalized." As of December 31, 1995, Pacific Thrift's regulatory capital
levels have increased to levels meeting the FDIC's definition of "well
capitalized;" however, due to the existence of the MOU, which requires Pacific
Thrift to maintain certain capital levels, it is currently classified as
"adequately capitalized." See "SUPERVISION AND REGULATION -- Federal
Law -- Capital Adequacy Guidelines."
29
<PAGE> 32
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 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 March 31, 1996, total interest-bearing liabilities maturing or
repricing during each period exceeded total interest-earning assets maturing or
repricing in the same periods by $9.6 million, representing a cumulative
interest rate sensitivity gap ratio of (15%). 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 March 31, 1996 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
$35.0 million at March 31, 1996, 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
30
<PAGE> 33
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.
INTEREST RATE SENSITIVITY GAP AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
AFTER
ASSETS OR LIABILITIES WHICH 1 DAY 3 MONTHS SIX MONTHS 1-5 5
MATURE OR REPRICE TO 3 MONTHS TO 6 MONTHS TO 1 YEAR YEARS YEARS TOTAL
- ------------------------------------------ ----------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and Investments...................... $9,285,626 $ 0 $ 0 $ 0 $ 0 $ 9,285,626
Variable Rate Loans Receivable............ 36,134,734 216,193 210,108 862,856 8,155,493 45,579,384
Loans Held for Sale (1)................... 8,361,000 0 0 0 0 8,361,000
----------- ------------ ------------ ------------ ----------- -----------
Interest-earning assets................... 53,781,360 216,193 210,108 862,856 8,155,493 63,226,010
=========== =========== =========== =========== ========== ==========
Certificates of deposit................... 14,490,584 8,821,734 12,534,313 1,967,225 0 37,813,856
Savings accounts.......................... 34,967,530 0 0 0 0 34,967,530
----------- ------------ ------------ ------------ ----------- -----------
Interest-bearing liabilities.............. 49,458,114 8,821,734 12,534,313 1,967,225 0 72,781,386
=========== =========== =========== =========== ========== ==========
Interest rate sensitivity gap............. $4,323,246 $ (8,605,541) $(12,324,205) $ (1,104,369) $ 8,155,493 $(9,555,376)
Cumulative interest rate sensitivity
gap..................................... $4,323,246 $ (4,282,295) $(16,606,500) $(17,710,869) $(9,555,376) $(9,555,376)
Interest rate sensitivity ratio(2)........ 1.09 0.02 0.02 0.44 0.00 0.87
Cumulative interest rate sensitivity gap
ratio (3)............................... 0.08 -0.08 -0.31 -0.32 -0.15 -0.15
</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
prices 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 for the three months
ended March 31, 1996, and is not expected to have a material impact on the
Corporation's financial statements. (See Note 2 of the Notes to Financial
Statements.)
31
<PAGE> 34
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 any 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.
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
32
<PAGE> 35
mortgage servicing rights that are capitalized after the adoption of this
Statement based on one or more of the predominant risk characteristics of the
underlying loans. Impairment should be recognized through a valuation allowance
for each impaired stratum.
This Statement applies prospectively in fiscal years beginning after
December 15, 1995, to transactions in which a mortgage banking enterprise sells
or securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights, including
those purchased before the adoption of this Statement. Earlier application is
encouraged. Retroactive capitalization of mortgage servicing rights retained in
transactions in which a mortgage banking enterprise originates mortgage loans
and sells or securitizes those loans before the adoption of this Statement is
prohibited. Based on management's belief that no material amount of portfolio
loans will be sold for the foreseeable future, management does not believe that
the adoption of SFAS 122 will have a material impact on the Corporation's
financial statements.
In October, 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a method of accounting for stock
compensation plans based on fair value of grants made under such plans on the
date of grant using certain option-pricing models. SFAS No. 123 allows companies
to continue to account for their stock option plans in accordance with APB
Opinion 25 "Accounting for Stock Issued to Employees," which provides for an
intrinsic valuation model that recognizes only the difference between the fair
market value of a company's stock and the price paid to acquire the stock under
the stock compensation plan. However, SFAS No. 123 encourages the adoption of
the fair value accounting method. Companies electing not to follow the new fair
value based method are required to provide expanded footnote disclosures,
including pro forma net income and earnings per share, determined as if the
company had applied the new method. SFAS No. 123 is required to be adopted
prospectively beginning January 1, 1996. Management intends to account for
grants under the 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.
33
<PAGE> 36
PACIFICAMERICA MONEY CENTER, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
OF THE CORPORATION
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 March 31, 1996. The
unaudited pro forma consolidated statements of operations are presented on the
basis that the Restructuring Plan was consummated as of the beginning of each of
the periods reported.
These unaudited pro forma consolidated financial statements should be read
in conjunction with the historical consolidated financial statements and the
related notes thereto of Presidential Mortgage Company and Subsidiaries included
in this Prospectus.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results which would have been achieved
by the Corporation had the Restructuring Plan been consummated as of the
beginning of each of the periods reported 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-forma financial
statements. These are nonrecurring charges which result directly from the
Restructuring 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 such
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 less 287,083 shares that
would otherwise be issued to Limited Partners electing the Cash Out Option, and
less 1,206 shares representing fractional interests, the value of which will be
paid in cash to the partners, that 324,628 shares of Common Stock of the
Corporation are sold in the Rights Offering for $10.00 per share, that 64,925
Subscriber Warrants are issued to subscribers in the Rights Offering and that
763,661 shares of Common Stock of the Corporation are sold in the Public
Offering for $10.00 per share.
The historical and pro forma Weighted Average Common Shares Outstanding at
March 31, 1996 and December 31, 1995 assumes that 890,000 shares of Common Stock
of the Corporation are exchanged for the Partnership's Net Tangible Equity, and
the exercise of 64,925 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 income (loss) per share are the same for
the periods presented.
34
<PAGE> 37
PACIFICAMERICA MONEY CENTER, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------------------------------
HISTORICAL
BALANCE ADJUSTMENTS PRO FORMA
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Cash & cash equivalents.......................... $10,158,000 $10,064,000(1) $ 13,616,000
(1,307,000)(2)
(1,000,000)(3)
(1,601,000)(4)
385,000(5)
(2,871,000)(5)
(200,000)(5)
(12,000)(5)
Accounts receivable.............................. 15,917,000 0 15,917,000
Accrued interest receivable...................... 931,000 0 931,000
Loans receivable................................. 45,276,000 0 45,276,000
Loans held for sale.............................. 11,361,000 0 11,361,000
Excess yield receivable.......................... 2,467,000 0 2,467,000
Other real estate................................ 3,259,000 0 3,259,000
Receivable from related party.................... 333,000 0 333,000
Property and equipment, net...................... 1,542,000 0 1,542,000
Goodwill......................................... 1,778,000 0 1,778,000
Other assets (Note B)............................ 2,008,000 0 2,008,000
----------- ------------ -----------
$95,030,000 $ 3,458,000 $ 98,488,000
=========== ============ ===========
LIABILITIES AND OWNERS' EQUITY
Liabilities:
Thrift certificates payable...................... $72,781,000 $ 0 $ 72,781,000
Accounts payable and accrued expenses............ 3,705,000 (187,000)(2) 3,518,000
Partnership withdrawals payable.................. 1,120,000 (1,120,000)(2) 0
Notes payable.................................... 6,500,000 (1,000,000)(3) 5,500,000
Mortgages payable................................ 653,000 0 653,000
Payable to general partner....................... 1,265,000 336,000(4) 0
(1,601,000)(4)
----------- ------------ -----------
86,024,000 (3,572,000) 82,452,000
Owners' Equity (Note C).......................... 9,006,000 385,000(5) 16,036,000
(2,871,000)(5)
(200,000)(5)
(12,000)(5)
(336,000)(4)
10,064,000(1)
----------- ------------ -----------
$95,030,000 $ 3,458,000 $ 98,488,000
=========== ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
35
<PAGE> 38
PACIFICAMERICA MONEY CENTER, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996 YEAR ENDED DECEMBER 31, 1995
-------------------------------------------- ---------------------------------------------
HISTORICAL HISTORICAL
BALANCE ADJUSTMENTS PRO FORMA BALANCE ADJUSTMENTS PRO FORMA
----------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable........... $ 2,278,000 $ 0 $2,278,000 $ 8,885,000 $ 0 $ 8,885,000
Deposits with financial
institutions............. 130,000 0 130,000 692,000 0 692,000
----------- --------- ----------- ----------- --------- -----------
Total interest income........ 2,408,000 0 2,408,000 9,577,000 0 9,577,000
=========== ========= =========== =========== ========= ===========
Interest Expense:
Thrift certificates........ 1,010,000 0 1,010,000 3,820,000 0 3,820,000
Notes payable.............. 217,000 (41,000)(11) 176,000 1,379,000 (165,000)(11) 1,214,000
----------- --------- ----------- ----------- --------- -----------
Total interest expense....... 1,227,000 (41,000) 1,186,000 5,199,000 (165,000) 5,034,000
=========== ========= =========== =========== ========= ===========
Net interest income.......... 1,181,000 41,000 1,222,000 4,378,000 165,000 4,543,000
Provision for loan losses.... 725,000 0 725,000 3,289,000 0 3,289,000
----------- --------- ----------- ----------- --------- -----------
Net interest after provision
for loan losses............ 456,000 41,000 497,000 1,089,000 165,000 1,254,000
----------- --------- ----------- ----------- --------- -----------
Noninterest income:
Trustee and reconveyance
fees..................... 857,000 0 857,000 3,248,000 0 3,248,000
Other income............... 238,000 0 238,000 1,122,000 0 1,122,000
Gain on sale of loans...... 4,712,000 0 4,712,000 8,895,000 0 8,895,000
----------- --------- ----------- ----------- --------- -----------
5,807,000 0 5,807,000 13,265,000 0 13,265,000
Noninterest Expense:
General and administrative
(Note D)................. 2,085,000 84,000(9) 2,085,000 6,273,000 336,000(9) 6,434,000
(84,000)(10) (175,000)(10)
Salaries and employee
benefits................. 2,781,000 142,000(8) 2,923,000 7,858,000 568,000(8) 8,426,000
Related party fees......... 472,000 (63,000)(7) 0 1,012,000 (245,000)(7) 0
(307,000)(6) (767,000)(6)
(102,000)(12)
Depreciation and
amortization............. 133,000 0 133,000 919,000 0 919,000
Operations of other real
estate................... 165,000 0 165,000 1,212,000 0 1,212,000
----------- --------- ----------- ----------- --------- -----------
5,636,000 (330,000) 5,306,000 17,274,000 (283,000) 16,991,000
----------- --------- ----------- ----------- --------- -----------
Income (loss) before income
taxes (benefit)............ 627,000 371,000 998,000 (2,920,000) 448,000 (2,472,000)
----------- --------- ----------- ----------- --------- -----------
Income taxes (benefit)....... 348,000 -- 348,000 (1,222,000) -- (1,222,000)
----------- --------- ----------- ----------- --------- -----------
Net income (loss)............ $ 279,000 $ 371,000 $ 650,000 $(1,698,000) $ 448,000 $(1,250,000)
=========== ========= =========== =========== ========= ===========
Weighted average common
shares outstanding......... 1,730,658 2,153,469 1,730,658 2,153,469
Income (loss) per share (Note
E):........................ $ 0.16 $ 0.30 $ (0.98) $ (0.58)
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
36
<PAGE> 39
PACIFICAMERICA MONEY CENTER INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- The adjustments to the unaudited pro forma consolidated financial
statements areas 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......................................... $ 7,637,000
Rights offering......................................... $ 3,246,000
Estimated offering costs................................ $ (819,000)
----------
$10,064,000
==========
</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 $1,290,000 including related accrued interest of $170,000 at December
31, 1995 ($1,307,000 including related accrued interest of $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 intercompany accounts with the General Partner to no amounts due
or payable.
(5) To reflect the purchase of General Partner Warrants at a purchase price of
$385,000, the payment of $2,871,000 to Limited Partners electing the Cash
Out Option, the payment of $200,000 to redeem the Bank Warrant, and the
payment of $12,000 to partners for the value of fractional share interests.
(6) To remove payment to the General Partner of a base fee up to 35% of the
loan origination fees paid by borrowers to the Partnership, as provided in
the Restructuring Plan.
(7) To remove payment of management and supervision fee to General Partner of
3/8 of 1% per annum on loans with terms over three years, as provided in
the Restructuring Plan.
(8) To reflect payment of salaries that were previously paid by the General
Partner, which will now be paid directly by the Corporation under the
Restructuring Plan.
(9) To 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 and $84,000 for the three
months ended March 31, 1996, 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.
(12) To remove management and other fees payable to the General Partner of
$102,000 for the three months ended March 31, 1996.
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, and
March 31, 1996, 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 income (loss) per share and weighted
average common stock outstanding reflect the issuance of 711,100 shares, to be
used to pay down debt, of the 1,088,289 shares offered in the Rights Offering
and the Public Offering less 287,083 shares for the Cash Out Option, and 1,206
shares representing fractional interests, and does not include 377,189 shares of
Common Stock relating to working capital as seen in the "USE OF PROCEEDS."
37
<PAGE> 40
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 Bank Loan and the regulatory capital classification of
Pacific Thrift. In addition, the report for 1994 contained an explanatory
paragraph concerning certain securities litigation containing allegations of
securities fraud and aiding and abetting a breach of fiduciary duty relating to
the Partnership and its Chief Executive Officer. The securities litigation
naming the Partnership and the Chief Executive Officer referred to in the
explanatory paragraphs contained in the 1994 reports was dismissed by the
plaintiffs in October 1995. As of the date hereof, Pacific Thrift has been
reclassified as "adequately capitalized" by the FDIC, and its regulatory capital
ratios meet the FDIC's regulatory definition of "well capitalized," although it
is classified as "adequately capitalized" due to the provisions of the 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 contained an
explanatory paragraph concerning the securities litigation referred to in the
report for 1994 and an explanatory paragraph concerning the Partnership's
liability for environmental remediation of two properties acquired in
foreclosure and possible government action if the Partnership did not comply
with a consent agreement regarding one of the properties. The environmental
remediation matter was not referred to in the report for the year ended December
31, 1994, as there was no material uncertainty regarding any further liability
as of that date.
During the Partnership's two most recent fiscal years and subsequent
interim period, there were disagreements between the Partnership and E&Y. The
disagreements were as follows:
There was a disagreement concerning the scope of the work necessary to be
performed by E&Y in connection with a proposed restructuring of the Partnership,
including procedures and issues raised with respect to the allowance for loan
losses, deferred tax asset and other transactions recorded by the Partnership in
its unaudited financial information as of June 30, 1995. Prior to resolving the
disagreement, the client-auditor relationship was terminated by the Partnership.
There were disagreements regarding the amount of the provision and
allowance for loan losses for the fiscal years ended December 31, 1994 and 1993,
which were resolved by the Partnership recording an additional provision for
each year.
There were disagreements about the scope of audit procedures to be
performed to ascertain the status of certain regulatory matters concerning
Pacific Thrift and the ability of the Partnership to continue as a going concern
for the fiscal year ended December 31, 1994, which were resolved by E&Y
performing the additional procedures.
There was a disagreement about the need to add an explanatory paragraph to
the report of E&Y for the year ended December 31, 1994 concerning the ability of
the Partnership to continue as a going concern, which was resolved by the
Partnership accepting such explanatory paragraph.
There were disagreements regarding the interpretation of regulatory
accounting principles applicable to sales of senior loan participation interests
to third parties by Pacific Thrift which were resolved by Pacific Thrift
requesting an opinion of the FDIC and revising its regulatory reports to conform
to the FDIC's interpretation of such principles.
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
38
<PAGE> 41
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.
39
<PAGE> 42
BUSINESS
THE PARTNERSHIP
The Partnership is a California limited partnership formed in 1981. Since
1986, Presidential Management Company has been the sole general partner of the
Partnership. Since 1990, the Partnership has originated substantially all of its
new loans through Pacific Thrift. In 1988, the Partnership formed Pacific Thrift
as a wholly owned subsidiary. In 1990, the Partnership acquired all of the
limited partnership interests of CRC and LPPC. In 1995, the Partnership formed
the Corporation and 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. On May 31,
1996, the Partnership transferred 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. The working capital to be raised in this Offering will
be used primarily to fund the Corporation's lending business. See "PROSPECTUS
SUMMARY -- Business Strategy."
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 88
commission-based loan representatives (as of March 31, 1996) who operate in
California, Washington and 19 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 $3.2 million (213.3%) to $4.7 million for the quarter ended
March 31, 1996 compared to the first quarter of 1995, and by $7.7 million
(856.0%), to $8.6 million for the year ended December 31, 1995 compared to 1994.
Management's goal is to continue 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 10.33% at March 31,
1996 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 was subject to the
40
<PAGE> 43
MOU of the FDIC as of April 1, 1996, Pacific Thrift is classified as "adequately
capitalized", in spite of its higher capital ratios.
Pacific Thrift earned net income of $.9 million after an income tax
provision of $.3 million for the quarter ended March 31, 1996 and $3.2 million
for the year ended December 31, 1995, compared with net income of $1.1 million
after an income tax benefit of $.4 million for the quarter ended March 31, 1995
and net losses of approximately $2.9 million and $3.2 million for the years
ended December 31, 1994 and 1993, respectively. The net income earned in 1995
reflect primarily the substantial increase in gains on sale of loans in 1995
compared with all prior periods. Net losses in 1994 and 1993 were due primarily
to increased loan losses on Pacific Thrift's loan portfolio caused by increased
foreclosures and 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 whose principal offices are
located outside of 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, Consolidated Reconveyance Corporation, a Washington corporation
("CRC Washington"). On May 31, 1996, the Partnership transferred 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 of this Prospectus.
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, and $.3 million for the quarter ended March
31, 1996. 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 March 31, 1996. 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
41
<PAGE> 44
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 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.
LENDING ACTIVITIES
For the past three years, the Partnership has conducted all new lending
activity through Pacific Thrift pursuant to its lending guidelines. Under an
arrangement between Presidential and Pacific Thrift effective January 1, 1994,
Pacific Thrift provides loan servicing for all of Presidential's outstanding
loans for a loan servicing fee of 1.5% per annum of the principal amount of each
loan serviced.
Management's strategy for the Partnership's lending business has been to
focus on the B and C credit lending market. Accordingly, substantially all of
the Partnership's loans are made to borrowers whose credit histories or other
factors limit their ability to qualify for 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 its more than 20 years of experience in the B and C credit market
provide it with certain 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 1,500 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.
42
<PAGE> 45
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 in
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............................................. $ 30,735,000 $ 30,107,000
May............................................... $ 27,332,000 $ 29,942,000
----------- -----------
</TABLE>
Pacific Thrift and Presidential each entered into agreements with Aames
Capital Corporation ("Aames" as previously defined) 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 March 31, 1996, five
loans ($275,000 aggregate principal amount) had been repurchased by
43
<PAGE> 46
Pacific Thrift and no additional loans have been requested to be repurchased.
Pacific Thrift does not expect to incur a loss on the five loans repurchased.
Except for an initial sale of approximately $3.9 million in loans, all loans
sold by Pacific Thrift to Aames were sold for a premium above face value of the
loans sold. Pacific Thrift received a servicing release fee payable quarterly on
the principal amount of each loan sold from September 19, 1994 to January 1995.
Effective February 1, 1995, the servicing release fee was increased on the
principal amount of each loan sold, including the loans sold from September 1994
to May 26, 1995, until each loan is paid off. Pacific Thrift retains an interest
in the net spread (i.e. all interest and fees paid on the loans less servicing
and other costs) on $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 effective June 21,
1995, pursuant to which it will continue to sell residential loans to Aames
which are approved by Aames prior to funding. 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.
For the five months ended May 31, 1996 and the year ended December 31,
1995, Pacific Thrift sold an aggregate of $121.9 million and $145 million,
respectively, 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.
44
<PAGE> 47
Pacific Thrift held $1.6 million of home improvement loans and loan
participations at March 31, 1996, compared with $1.7 million, $2.3 million and
$7.7 million at December 31, 1995, 1994 and 1993, respectively. Due to claims
made on Title I Loans and privately insured loans for the four years ended
December 31, 1994, there is no material amount of insurance coverage remaining
on any of the outstanding home improvement loans. Pacific Thrift has continued
to service all outstanding home improvement loans in the manner that is required
pursuant to its contracts with the purchasers of loan participations. However,
the fact that there is no material insurance coverage available on any home
improvement loans exposes Pacific Thrift to contingent risks of loss on home
improvement loans and loan participations held by Pacific Thrift.
Pacific Thrift has resumed a Title I Loan origination program, in which
Pacific Thrift acts exclusively as a correspondent lender for one or more larger
mortgage lenders who securitize Title I Loans. Pacific Thrift anticipates that
these loans would be sold without recourse within 30 days of origination, and
would result in additional fee income, which would be received immediately upon
sale of the loans.
No home improvement loans were originated between March 1993 and July 1995.
In August 1995, Pacific Thrift resumed originating Title I loans for sale.
During 1995, Pacific Thrift sold $1,976,307 of home improvement loans, including
$1,126,307 of seasoned home improvement loans originated prior to March 1993 at
par value and $850,000 in new Title I loans at a premium. For the three months
ended March 31, 1996, Pacific Thrift sold $676,000 Title I loans originated for
sale.
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 March 31, 1996, the combined loan portfolio
of Presidential and Pacific Thrift included loans geographically distributed as
follows: approximately 74% in Southern California (south of San Luis Obispo),
22% in Northern California, 3% 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 March 31, 1996, approximately 32% 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, 44% by commercial property, and 3% by undeveloped
property.
45
<PAGE> 48
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>
MAR. 31, 1996
MAR. 31, 1996 PERCENTAGE OF DEC. 31, 1995 DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1994
PRINCIPAL LOAN TOTAL PRINCIPAL LOAN PERCENTAGE OF PRINCIPAL LOAN PERCENTAGE OF
BALANCES PORTFOLIO BALANCES TOTAL PORTFOLIO BALANCES TOTAL PORTFOLIO
-------------- -------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
One-to-four family
residential
property
1st TDs........... $ 5,076,856 9.98% $ 5,553,762 11.33% $ 6,271,007 10.66%
2nd TDs........... 8,438,835 16.60 8,149,818 16.62 11,983,931 20.39
3rd TDs........... 1,034,031 2.03 968,926 1.98 1,833,001 3.12
Home Imp. Loans..... 1,626,879 3.20 1,742,976 3.55 2,298,050 3.91
----------- ------ ----------- ------ ----------- ------
TOTAL...... 16,176,601 31.81 16,415,482 33.48 22,385,989 38.08
=========== ====== =========== ====== =========== ======
Five and Over Multi-
Family residential
property
1st TDs........... 8,882,313 17.47 8,534,795 17.41 13,531,290 23.02
2nd TDs........... 1,709,181 3.36 1,811,741 3.70 3,154,197 5.37
3rd TDs........... -0- 0.00 -0- -0- 34,993 .06
----------- ------ ----------- ------ ----------- ------
TOTAL...... 10,591,494 20.83 10,346,536 21.11 16,720,480 28.45
=========== ====== =========== ====== =========== ======
Commercial Property
1st TDs........... 19,718,182 38.78 18,145,302 37.02 14,184,456 24.13
2nd TDs........... 2,415,590 4.75 2,172,655 4.43 3,579,936 6.09
3rd TDs........... 69,018 0.14 68,766 .14 104,212 .18
----------- ------ ----------- ------ ----------- ------
TOTAL...... 22,202,790 43.67 20,386,723 41.59 17,868,604 30.40
=========== ====== =========== ====== =========== ======
Undeveloped Property
1st TDs........... 1,875,213 3.69 1,873,953 3.82 1,805,151 3.07
2nd TDs........... -0- 0.00 -0- -0- -0- 0.00
3rd TDs........... -0- 0.00 -0- -0- -0- 0.00
----------- ------ ----------- ------ ----------- ------
TOTAL...... 1,875,213 3.69 1,873,953 3.82 1,805,151 3.07
=========== ====== =========== ====== =========== ======
TOTAL PORTFOLIO
1st TDs........... 35,552,564 69.92 34,107,812 69.58 35,791,904 60.88
2nd TDs........... 12,563,606 24.71 12,134,214 24.75 18,718,064 31.85
3rd TDs........... 1,103,049 2.17 1,037,692 2.12 1,972,206 3.36
Home Imp. Loans..... 1,626,879 3.20 1,742,976 3.55 2,298,050 3.91
----------- ------ ----------- ------ ----------- ------
TOTAL...... $ 50,846,098 100.00% $ 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 March 31,
1996 Pacific Thrift employed 88 loan representatives, who maintain contacts with
loan referral sources and provide customer service.
At March 31, 1996, the maximum amount that Pacific Thrift could loan to one
borrower was $1,502,000. On that date, the largest Presidential loan in the
combined portfolio was $597,222 and the largest Pacific Thrift loan in the
portfolio was $796,585. There were nine loans in the combined loan portfolio
which exceeded $500,000. The average loan balance at March 31, 1996, not
including Home Improvement Loans, was $170,527 for Pacific Thrift and $96,359
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
46
<PAGE> 49
returns, a current paycheck stub or a current profit and loss statement. The
maximum debt to income limit for portfolio loans over $25,000 is 50%.
Pacific Thrift also makes "piggyback loans," which are real property
secured loans made in tandem with loans originated for sale. Management uses
piggyback loans to enhance the loan products available from its loan purchasers,
and thereby increase production of loans originated for sale. Piggyback loans
meet the same credit and documentation requirements as the companion senior loan
originated for sale, except that the loan to value ratio may be up to 5% higher
than the loan to value ratio allowed by the purchaser of the senior loan. To
compensate for the lower credit standards, Pacific Thrift provides higher
general reserves for piggyback loans. As of March 31, 1996, Pacific Thrift held
402 piggyback loans with an aggregate principal balance of $3,353,000.
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; (x)
any major code violations discovered must be reported and analyzed for the
impact on value and an estimate of cost to correct; (xi) a list of all
significant deferred maintenance must be noted, with an estimate of the cost to
cure; (xii) any agreements of sale, option or listing of the property within the
last 12 months must be disclosed; (xiii) any information required or deemed
pertinent to completion of the report which was not available must be disclosed;
(xiv) 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 (xv) 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-officer 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.
47
<PAGE> 50
Pacific Thrift's loan policies, in conformity with FDIC regulations,
require that maximum loan to value ratios be limited as follows with respect to
the following types of properties (except for home improvement loans described
below): 90% for owner-occupied one-to-four family residential property with
mortgage insurance or readily marketable collateral; 85% for all other improved
property; 85% for construction of one-to-four family residential property; 80%
for construction of commercial, multi-family and non-residential property; 75%
for land development and 65% for unimproved land. Pacific Thrift generally seeks
to originate portfolio loans with loan to value ratios which are generally 5% or
more lower than these maximum ratios. Loans to facilitate sale of properties
acquired in settlement of loans (also known as "other real estate owned," or
"OREO") may be higher than the maximum loan to value ratios allowed for new
loans. Due to the significant decline in Southern California real estate values
over the past five years, management believes that the current values of
properties securing loans made prior to 1994 do not meet the original loan to
value ratios.
It is anticipated by management that Pacific Thrift's Board of Directors
will periodically adjust and modify its collateral requirements and underwriting
criteria in response to economic conditions and business opportunities.
The following table sets forth the combined loan originations by category
and purchases, sales and repayments at or for the first three months of 1996 and
at or for the year ended December 31, 1995:
<TABLE>
<CAPTION>
AT OR FOR THE THREE AT OR FOR THE
MONTHS ENDED MARCH 31, YEAR ENDED
1996 DECEMBER 31, 1995
---------------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning Balance(1)............... $ 56,485 $ 65,056
Loans Originated for Sale.......... 61,846 151,538
Portfolio Loans originated:
Real estate:
One- to four-family........... 679 3,067
Multi-family.................. 945 4,521
Commercial.................... 2,918 11,585
Construction and land......... -0- 150
Home improvement.............. -0- -0-
---------
Total loans originated... 4,542 19,323
Loans purchased.................... -0- -0-
---------
Total.................... 122,873 235,917
Less:
Principal repayments............. (4,224) (12,905)
Sales of loans originated for
sale.......................... (62,495) (145,832)
Sales of portfolio loans......... (258) (13,371)
Transfers of OREO net of
reserves...................... (757) (7,944)
Other net changes(2)............. 1,498 620
---------
Total loans(1)........... $ 56,637 $ 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.
48
<PAGE> 51
MATURITIES AND RATE SENSITIVITIES OF LOAN PORTFOLIO
Loan Maturity. The following table sets forth the contractual maturities
of the combined gross loans at March 31, 1996.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
--------------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN 3 YEARS 5 YEARS MORE THAN
ONE YEAR 1 YEAR TO TO TO 10 YEARS TO MORE THAN TOTAL
OR LESS 3 YEARS 5 YEARS 10 YEARS 20 YEARS 20 YEARS LOANS
-------- --------- --------- --------- ----------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...... $4,046 $ 872 $ 2,311 $ 1,021 $ 1,275 $ 5,025 $14,550
Multi-family............. 1,088 1,265 1,707 3,176 1,294 2,061 10,591
Commercial............... 1,505 799 3,560 11,416 2,710 2,212 22,202
Construction and land.... 126 1,228 274 0 0 248 1,876
Home improvement......... 0 0 0 1,627 0 0 1,627
------ ------ ------ ------- ------ ------ -------
Total amount
due.......... $6,765 $ 4,164 $ 7,852 $17,240 $ 5,279 $ 9,546 $50,846
====== ====== ====== ======= ====== ====== =======
</TABLE>
The following table sets forth, as of March 31, 1996, the dollar amounts of
gross loans receivable that are contractually due after March 31, 1997 and
whether such loans have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1997
---------------------------------
FIXED ADJUSTABLE(1) TOTAL
------- ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
One- to four-family............................ $ 5,762 $ 4,742 $10,504
Multi-family................................... 1,164 8,340 9,504
Commercial..................................... 2,855 17,842 20,697
Construction and land.......................... 630 1,119 1,749
Home improvement............................... 1,627 0 1,627
------ ------- -------
Total loans receivable............... $12,038 $32,043 $44,081
====== ======= =======
</TABLE>
- ---------------
(1) Includes approximately $1.7 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 loans, 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 total combined loans, 13.3% are
due in one year or less, and 63.0% are variable rate loans due after March 31,
1997. Based upon these facts, over 76% of the combined loan portfolio 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
typically cannot decrease below the original interest rate set for each loan.
49
<PAGE> 52
CLASSIFIED ASSETS AND LOAN LOSSES
The general policy of Pacific Thrift is to discontinue accrual of interest
and make a provision for anticipated loss on a loan when: (i) it is more than
two payments contractually past due and the current estimated loan-to-value
ratio is 90% or more; or (ii) the loan exhibits the characteristics of an
in-substance foreclosure, generally including any loan as to which the borrower
does not have the ability, willingness or motivation to repay the loan. The
current estimated loan-to-value 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 PacificAmerica Mortgage 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 1.44% at March 31,
1996, compared to 1.62%, 5.35% and 5.94% at December 31, 1995, 1994 and 1993,
respectively. The ratio of the allowance for loan losses to nonaccrual loans
past due 90 days or more was 604.99% at March 31, 1996, compared to 533.29%,
136.94% and 58.74% at December 31, 1995, 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 March 31, 1996, and December
31, 1995 and 1994.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
--------------------------------------------------------------------------
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...................... $ 241,093 $ 873,558 $1,114,651 2.19%
60 to 89 days...................... 0 636,377 636,377 1.25%
90 days or more.................... 589,534 913,705 1,503,239 2.96%
---------- ---------- ---------- ----
TOTAL.................... $ 830,627 $2,423,640 $3,254,267 6.40%
========== ========== ========== ====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------------------------------------------
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 $ 29,763 $ 209,979 .43%
60 to 89 days...................... 525,674 1,586 527,260 1.08%
90 days or more.................... 719,182 1,391,318 2,110,500 4.30%
---------- ---------- ---------- ----
TOTAL.................... $1,425,072 $1,422,667 $2,847,739 5.81%
========== ========== ========== ====
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
--------------------------------------------------------------------------
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 March 31, 1996 and December 31, 1995 and 1994 which
were (i) accounted for on a nonaccrual basis; (ii) accruing loans which are
contractually past due 90 days or more as to principal and interest payments;
and (iii) troubled debt restructurings. Presidential and Pacific Thrift follow a
practice of extending or modifying loans in certain circumstances. Loans
modified to reduce interest rates below market rates, to reduce amounts due at
maturity to reduce accrued interest or to loan additional funds are considered
"troubled debt restructurings" as defined in SFAS 15.
<TABLE>
<CAPTION>
ACCRUING LOANS NONACCRUING LOANS
PAST DUE PAST DUE 90 DAYS TROUBLED DEBT
90 DAYS OR MORE OR MORE RESTRUCTURINGS TOTAL
--------------- ----------------- ------------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
At March 31, 1996
Presidential............................. $ 321 $ 268 $ 360 $ 949
Pacific.................................. 401 513 590 1,504
------ ------ --- ------
Combined................................. $ 722 $ 781 $ 950 $2,453
====== ====== === ======
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>
51
<PAGE> 54
The following table sets forth information concerning interest accruals and
interest on nonaccrual loans past due 90 days as of March 31, 1996 and 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 March 31, 1996
Presidential............................... $ 84 $ 27 $ 57
Pacific.................................... 613 56 557
------ ---- ------
Combined................................... $ 697 $ 83 $ 614
====== ==== ======
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. For
the first three months of 1996, Presidential and Pacific extended three loans
with an aggregate principal balance of $.2 million. 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. For the first three months of 1996, Presidential
and Pacific modified two loans with an aggregate principal balance of $.6
million; no delinquent loans were rewritten in the first three months of 1996.
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 an aggregate principal balance 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 borrower's current income, current debt to
income ratio, or anticipated sale of the collateral. Management believes that
these accommodations are a reasonable and necessary response to the increased
level of delinquencies experienced during the past three years. Presidential and
Pacific Thrift have had generally favorable experience with repayment of loans
extended, modified or rewritten on this basis.
Procedures upon delinquency of home improvement loans vary from the
foreclosure procedures ordinarily used to collect other loans. Upon 10 days'
delinquency, the borrower is contacted and an attempt to schedule payments is
made; if this is not possible, a determination is made whether the proceeds of a
foreclosure sale would result in a recovery of all or part of the loan amount,
after costs of foreclosure. In almost every case, there is insufficient equity
to foreclose on a home improvement loan, and the loan is charged off if it
becomes five payments delinquent. In addition to losses on its retained interest
in home improvement loans, Pacific Thrift may be required to repurchase
participation interests sold in Title I Loans if Pacific Thrift is found to have
breached its warranties that such loans complied with insurance requirements.
Pacific Thrift has never been required to repurchase any loan participation
interests. However, no assurance can be given that Pacific Thrift will not be
required to repurchase any loan participation interests in the future.
52
<PAGE> 55
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 March 31, 1996, Presidential and Pacific Thrift held OREO (net of
specific reserves) of $3.3 million (inclusive of senior liens of $.7 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 March 31, 1996 are nine single family residences with
an aggregate net book value of $1.2 million (inclusive of $.4 million senior
liens); one multi-family unit with an aggregate net book value of $.2 million
(inclusive of $.1 million in senior liens) 14 commercial properties with an
aggregate net book value of $1.8 million (inclusive of senior liens of $.2
million); and two undeveloped properties with an aggregate net book value of $.1
million (with no senior liens). For the three months ended March 31, 1996, total
expenses on operation of OREO, including valuation allowances, were $.2 million,
and there were no material gains on the sale of OREO. 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 net 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 the three months ended March 31, 1996 and each of the years ended December
31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED
AT AND FOR THE DECEMBER 31,
THREE MONTHS ENDED -------------------------------
MARCH 31, 1996 1995 1994 1993
------------------ ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of
period................... $4,229 $ 4,307 $ 3,123 $ 2,646
Provision for loan
losses................ 725 3,289 6,096 4,655
Chargeoffs............... (229) (3,369) (4,912) (4,179)
Recoveries............... -- 2 -- --
------ ------- ------- -------
Balance at end of period... $4,725 $ 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 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
53
<PAGE> 56
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 fourth 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 March 31,
1996 and December 31, 1995 and 1994, Pacific Thrift held investments in federal
funds totaling $6.8 million, $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 material 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 March 31, 1996, Pacific Thrift had
outstanding 1,724 deposit accounts of approximately $72.8 million.
54
<PAGE> 57
The following table sets forth the average balances and average rates paid
on each category of Pacific Thrift's deposits for the quarter ended March 31,
1996 and 1995 and the three years ended December 31, 1995.
DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
AVERAGES FOR THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1996 1995 AVERAGES FOR 1995 AVERAGES FOR 1994 AVERAGES FOR 1993
----------------- ----------------- ----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook/Money Market......... $32,110 4.83% $11,457 4.92% $13,322 5.39% $23,868 3.79% $ 4,451 3.59%
Investment Certificates
under $100,000.............. 38,753 6.45% 57,193 5.93 49,931 6.20 43,828 4.59 46,609 5.92
Investment Certificates
over $100,000............... -- -- 239 6.78 100 7.02 415 6.68 4,621 6.58
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total................. $70,863 5.72% $68,889 5.77% $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 March 31, 1996 and December 31, 1995, 1994 and 1993.
DEPOSIT MATURITIES
<TABLE>
<CAPTION>
AT AT AT AT
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
--------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Passbook/Money Market...................... $34,967 $ 24,275 $ 11,443 $ 21,004
------- ------- ------- -------
Accounts under $100,000
3 months or less......................... $14,490 $ 12,723 $ 25,522 $ 5,886
Over 3 months through 6 months........... 8,822 13,439 17,201 7,663
Over 6 months through 12 months.......... 12,535 9,084 10,654 12,634
Over 12 months........................... 1,967 635 4,579 13,441
------- ------- ------- -------
Total............................ $37,814 $ 35,881 $ 57,956 $ 39,624
------- ------- ------- -------
Accounts over $100,000
3 months or less......................... $ -0- $ -0- $ 102 $ 300
Over 3 months through 6 months........... -0- -0- -0- 100
Over 6 months through 12 months.......... -0- -0- -0- 1,092
Over 12 months........................... -0- -0- -0- 300
------- ------- ------- -------
Total............................ $ -0- $ -0- $ 102 $ 1,792
------- ------- ------- -------
TOTAL DEPOSITS................... $72,781 $ 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 May 31, 1996, Presidential owed a total balance of $5.0 million on the Bank
Loan.
55
<PAGE> 58
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 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 new entity 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 Warrants 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. As of May 31, 1996, the
Bank Loan had been paid down to $4,990,000, and the Partnership was therefore in
compliance with this provision. 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
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
approximately $15,000, which Fleet agreed to waive 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
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.
56
<PAGE> 59
Borrowings under the Bank Loan are secured by Presidential's loans
receivable and other assets. As additional security for the Bank Loan, the
General Partner has pledged its Class A and B Units in Presidential. Further,
the General Partner made an unsecured loan to Presidential of $600,000 on May
15, 1992, which accrues interest at the Bank's prime rate (8.25% as of February
1, 1996), but which will not be repaid as to principal or interest without
consent of the Bank.
Upon the Closing Date of the Restructuring Plan, 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 owes to the General Partner as of 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 March 31, 1996, 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 one part time employee on the payroll
of the General Partner. As of the same date, Pacific Thrift had 247 of its own
full time employees, including 88 commission-based loan representatives and two
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.
57
<PAGE> 60
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 $ 505,650 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).............................. 10,468 241,642 11/14/00
San Jose, CA..................................... 1,483 26,694 02/28/97
Bellevue, WA..................................... 2,224 36,696 08/31/98
</TABLE>
- ---------------
(1) Subject to annual adjustment in accordance with customary escalation
clauses, except as provided in footnote 2 below with respect to the Woodland
Hills lease, which only provides for escalation of expense sharing
obligations.
(2) Pursuant to a lease entered January 11, 1993, annual rental increases to
$505,680 from March 1, 1996 to July 31, 1998, to $517,440 from August 1,
1998 through January 31, 2001, and to $529,200 from February 1, 2001 through
July 31, 2003. The lease is accounted for on the straight line average
method of accounting, in accordance with generally accepted accounting
principles. In addition, Presidential pays signage fees of $3,312 per month
for the Woodland Hills main office.
(3) In April 1996, separate leases for an aggregate of 10,468 square feet were
rewritten into one lease providing for annual rent of $241,642, increasing
to $244,451 per annum from September 15, 1997 until November 14, 2000.
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.
58
<PAGE> 61
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.
FORECLOSURE PUBLICATION FEES ACTION. On June 6, 1995, CRC and LPPC were
served with a complaint by Consumer Action and two consumers suing both
individually and on behalf of the general public in a purported class action
filed in the Superior Court of Contra Costa County, California. The complaint
named CRC and LPPC, along with 13 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 $1 million, or
even a lesser amount, could have a material adverse effect on the consolidated
annual earnings of the Corporation, but would likely not have a material adverse
effect on the financial condition or longer term earnings of the Corporation.
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 AND LICENSING 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
59
<PAGE> 62
Reporting Act, the Federal Fair Debt Collection Practices Act and the Federal
Reserve Board's Regulations B and Z. These laws and regulations, among other
things, limit the finance charges, fees and other charges on loans, require
certain disclosures be made to borrowers, regulate the credit application and
evaluation process and regulate certain servicing and collection practices.
These laws and regulations impose specific liability upon lenders who fail to
comply with their provisions, and may give rise to defense to payment of a
borrower's obligation in the event of a failure to comply with certain
applicable laws. Presidential and Pacific Thrift believe they are currently in
compliance in all material respects with applicable laws, but there can be no
assurance that they will be able to maintain such compliance. The failure to
comply with such laws, or a determination by a court that their interpretation
of law was erroneous, could have a material adverse effect on Presidential or
Pacific Thrift, or upon the Corporation as a whole following the Restructuring.
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 hires 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 each state in which it operates.
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 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
60
<PAGE> 63
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 required by the DOC, Pacific Thrift is authorized to operate with a
ratio of deposits to unimpaired capital and unimpaired surplus of up to 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 March 31, 1996, Pacific Thrift had a 9.65:1
thrift ratio.
Under provisions of the FDIC Improvement Act and regulations issued by the
FDIC, additional limitations have been imposed with respect to depository
institutions' authority to accept, renew or rollover brokered deposits. Pacific
Thrift does not have any brokered deposits as of the date hereof.
Thrift and loan companies are not permitted to borrow, except by the sale
of investment or thrift certificates, in an amount exceeding 300% of tangible
net worth, surplus and undivided profits, without the DOC's prior consent. All
sums borrowed in excess of 150% of tangible net worth, surplus and undivided
profits must be unsecured borrowings or, if secured, approved in advance by the
DOC, and be included as investment or thrift certificates for purposes of
computing the maximum amount of certificates a thrift and loan may issue.
However, collateralized Federal Home Loan Bank advances are excluded for this
test of secured borrowings and are not specifically limited by California law.
Pacific Thrift had no borrowed funds other than deposits at March 31, 1996.
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,
61
<PAGE> 64
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 in 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.
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 merger, consolidation
or change in control, or the establishment or relocation of any branch office of
Pacific Thrift. This supervision and regulation is intended primarily for the
protection of the deposit insurance funds.
Pacific Thrift is subject to certain capital adequacy guidelines issued by
the FDIC. See "Federal Law -- Capital Adequacy Guidelines" under this heading.
REGULATORY ACTIONS
As a result of an FDIC examination conducted as of June 15, 1993, the FDIC
and the DOC requested Pacific Thrift to enter into a stipulated Cease and Desist
Order (the "1993 Order") issued November 10, 1993. The Order primarily required
Pacific Thrift to (i) adopt a written policy acceptable to the FDIC and the DOC
governing Pacific Thrift's relationships with its affiliates; (ii) reduce its
volatile liability deposits to specified maximum levels; (iii) increase its
liquidity to specified minimum levels; and (iv) develop a comprehensive
asset/liability management policy. The Order did not require any increase in
capital or loan loss reserves, or a decrease in adversely classified assets. In
order to comply with the Order, Pacific Thrift terminated its personnel services
and facilities arrangements with the Partnership. Substantially all of the
requirements of the Order were met by January 31, 1994, well in advance of the
required dates for compliance specified in the Order.
At the end of August 1994, the FDIC requested Pacific Thrift to enter into
a supplemental stipulated Cease and Desist Order (the "Supplemental Order")
issued October 13, 1994. The Supplemental Order required Pacific Thrift to
obtain the prior consent of the FDIC before opening any new offices and to
design, file and implement plans to increase its net earnings. The Supplemental
Order did not require any increase in capital or loan loss reserves. The
Supplemental Order also required that detailed budgets and comparisons of
budgets with actual results of operations be filed with the FDIC and DOC.
62
<PAGE> 65
In December 1994, the FDIC notified Pacific Thrift that it was classified
as "critically undercapitalized" as of October 31, 1994. Pacific Thrift had
sufficiently restored its regulatory capital ratios from net operating profits
and capital contributions as of April 30, 1995 to be classified as "adequately
capitalized" under FDIC regulations. The FDIC confirmed Pacific Thrift's
adequate capitalization by letter dated May 8, 1995.
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.
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
63
<PAGE> 66
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" under this
heading for a discussion of these additional restrictions on capital
distributions.
Pacific Thrift is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, the Partnership or other affiliates, the purchase of or
investments in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of the Partnership or other
affiliates. Such restrictions prevent the Partnership and other affiliates from
borrowing from Pacific Thrift unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by Pacific Thrift to or in the Partnership or to or in any other affiliate is
limited to 10% of Pacific Thrift's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of Pacific Thrift's capital and surplus (as defined by federal
regulations). In addition, any transaction with an affiliate of Pacific Thrift
must be on terms and under circumstances that are substantially the same as a
comparable transaction with a non-affiliate. Additional restrictions on
transactions with affiliates may be imposed on Pacific Thrift under the prompt
corrective action provisions of the FDIC Improvement Act.
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a depository institution's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans.
A depository institution's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require depository institutions to maintain a minimum amount of Tier 1 capital
to total assets, referred to as the leverage ratio. For a depository institution
rated in the highest of the five categories used by regulators to rate
depository institutions, the minimum leverage ratio of Tier 1 capital to total
assets is 3%. For all depository institutions not rated in the highest category,
the minimum leverage ratio must be at least 100 to 200 basis points above the 3%
minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines
and leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a depository
institution's capital adequacy, an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a depository institution's exposure
64
<PAGE> 67
to interest rate risk, which is the subject of a proposed policy statement
issued by the federal banking agencies concurrently with the final regulations.
The proposal would measure interest rate risk in relation to the effect of a 200
basis point change in market interest rates on the economic value of a
depository institution. Banks with high levels of measured exposure or weak
management systems generally will be required to hold additional capital for
interest rate risk. The specific amount of capital that may be needed would be
determined on a case-by-case basis by the examiner and the appropriate federal
banking agency. Because this proposal has only recently been issued, Pacific
Thrift currently is unable to predict the impact of the proposal on Pacific
Thrift if the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule relating
to capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks, will be required to set aside capital
in excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
The benchmark set forth by such policy statement is the sum of (a) assets
classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of
assets classified substandard; and (d) estimated credit losses on other assets
over the upcoming 12 months.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies recently issued final rules, effective April 1, 1995, which
limit the amount of deferred tax assets that are allowable in computing an
institution's regulatory capital. The standard has been in effect on an interim
basis since March 1993. Deferred tax assets that can be realized for taxes paid
in prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of (i) the amount that can be realized within one year of
the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 Capital and
total assets and regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of Pacific Thrift to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
The following table presents the amounts of regulatory capital and the
capital ratios for Pacific Thrift, compared to the regulatory capital
requirements for well capitalized institutions as of March 31, 1996.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
WELL
ACTUAL CAPITALIZED
RATIO REQUIREMENT
------ -----------
<S> <C> <C>
Leverage ratio................................................. 9.42% 5.0%(1)
Tier 1 risk-based ratio........................................ 10.65% 6.0%
Total risk-based ratio......................................... 11.90% 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
65
<PAGE> 68
capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
<TABLE>
<S> <C>
"Well capitalized" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4% (3% if the
institution
receives the highest rating from its
primary
regulator)
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; Tier 1 risk-based capital less than 3%;
or or
Leverage ratio less than 4% (3% if the Leverage ratio less than 3%.
institution receives the highest rating
from its
primary regulator)
"Critically undercapitalized"
Tangible equity to total assets less than
2%
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized,
(ii) is based on realistic assumptions and (iii) is likely to succeed in
restoring
the depository institution's capital. In addition, each company controlling an
undercapitalized depository institution must guarantee that the institution will
comply with the capital plan until the depository institution has been
adequately capitalized on an average basis during each of four consecutive
calendar quarters and must otherwise provide adequate assurances of performance.
The aggregate liability of such guarantee is limited to the lesser of (a) an
amount equal to 5% of the depository institution's total assets at the time the
institution became undercapitalized or (b) the amount which is necessary to
bring the institution into compliance with all capital standards applicable to
such institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose any
of the additional restrictions or sanctions that it may 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
66
<PAGE> 69
institutions; (viii) restrictions on capital distributions by the holding
companies of such institutions; (ix) required divestiture of subsidiaries by the
institution; or (x) other restrictions as determined by the appropriate federal
banking agency. Although the appropriate federal banking agency has discretion
to determine which of the foregoing restrictions or sanctions it will seek to
impose, it is required to force a sale of voting shares or merger, impose
restrictions on affiliate transactions and impose restrictions on rates paid on
deposits unless it determines that such actions would not further the purpose of
the prompt corrective action provisions. In addition, without the prior written
approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior executive
officers or provide compensation to any of them at a rate that exceeds such
officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial depository institutions may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
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
67
<PAGE> 70
appraiser is required for all other appraisals. However, appraisals performed in
connection with "federally related transactions" must now comply with the
agencies' appraisal standards. Federally related transactions include the sale,
lease, purchase, investment in, or exchange of, real property or interests in
real property, the financing or refinancing of real property, and the use of
real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, as required by
FDICIA, effective January 1, 1994, under which an institution's premium
assessment is based on the probability that the deposit insurance fund will
incur a loss with respect to the institution, the likely amount of any such
loss, and the revenue needs of the deposit insurance fund. As long as BIF's
reserve ratio is less than a specified "designated reserve ratio," 1.25%, the
total amount raised from BIF members by the risk-based assessment system may not
be less than the amount that would be raised if the assessment rate for all BIF
members were .023% of deposits. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly, issued final
regulations adopting an assessment rate schedule for BIF members of 4 to 31
basis points effective on June 1, 1995. On November 14, 1995, the FDIC further
reduced deposit insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such as
Pacific Thrift is categorized into one of three capital categories (well
capitalized, adequately capitalized, and undercapitalized) and one of three
categories based on supervisory evaluations by its primary federal regulator (in
Pacific Thrift's case, the FDIC). The three supervisory categories are:
financially sound with only a few minor weaknesses (Group A), demonstrates
weaknesses that could result in significant deterioration (Group B), and poses a
substantial probability of loss (Group C). The capital ratios used by the FDIC
to define well-capitalized, adequately capitalized and undercapitalized are the
same in the FDIC's prompt corrective action regulations. The BIF assessment
rates are summarized below; assessment figures are expressed in terms of cents
per $100 in deposits.
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>
68
<PAGE> 71
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 March 31, 1996, Pacific Thrift paid assessments at the rate of $.24 per
$100 in deposits. Supervisory subgroups are set once every six months, based
upon a depository institution's last supervisory and capital classification.
A number of proposals have recently been introduced in Congress to address
the disparity in bank and thrift deposit insurance premiums. On September 19,
1995, legislation was introduced and referred to the House Banking Committee
that would, among other things: (i) impose a requirement on all SAIF member
institutions to fully recapitalize the SAIF by paying a one-time special
assessment of approximately 85 basis points on all assessable deposits as of
March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread
the responsibility for FICO interest payments across all FDIC-insured
institutions on a pro-rata basis, subject to certain exceptions; (iii) require
that deposit insurance premium assessment rates applicable to SAIF member
institutions be no less than deposit insurance premium assessment rates
applicable to BIF member institutions; (iv) provide for a merger of the BIF and
the SAIF as of January 1, 1998; (v) require savings associations to convert to
state or national bank charters by January 1, 1998; (vi) require savings
associations to divest any activities not permissible for commercial banks
within five years; (vii) eliminate the bad-debt reserve deduction for savings
associations, although savings associations would not be required to recapture
into income their accumulated bad-debt reserves; (viii) provide for the
conversion of savings and loan holding companies into bank holding companies as
of January 1, 1998, although unitary savings and loan holding companies
authorized to engage in activities as of September 13, 1995 would have such
authority grandfathered (subject to certain limitations); and (ix) abolish the
Office of Thrift Supervision ("OTS") and transfer the OTS' regulatory authority
to the other federal banking agencies. The legislation would also provide that
any savings association that would become undercapitalized under the prompt
corrective action regulations as a result of the special deposit premium
assessment could be exempted from payment of the assessment, provided that the
institution would continue to be subject to the payment of semiannual
assessments under the current rate schedule following the recapitalization of
the SAIF. The legislation was considered and passed by the House Banking
Committee's Subcommittee on Financial Institutions on September 27, 1995, and
has not yet been acted on by the full House Banking Committee.
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.
69
<PAGE> 72
In light of ongoing debate over the content and fate of the budget bill,
the different proposals currently under consideration and the uncertainty of the
Congressional budget and legislative processes in general, management cannot
predict whether any or all of the proposed legislation will be passed, or in
what form. Accordingly, the effect of any such legislation on Pacific Thrift
cannot be determined.
INTERSTATE BANKING AND BRANCHING
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval under the BHCA to
acquire an existing bank located in another state without regard to state law. A
bank holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which Pacific Thrift operates, although it is difficult
to assess the impact that such increased competition may have on Pacific
Thrift's operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
Pacific Thrift is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally 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.
70
<PAGE> 73
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 MOU. See "Supervision and
Regulation -- Regulatory Actions" above.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The only stockholder of the Corporation prior to the Closing Date of the
Restructuring Plan is the Partnership, which owns 3,000 shares of the Common
Stock. On the Closing Date, the Partnership will transfer all of the shares of
Common Stock received by it from the Corporation to the General Partner and
Limited Partners. The Corporation is unaware of any person or group that will
control the Corporation following the completion of the Restructuring Plan.
Based upon the ownership of the Partnership at December 31, 1995, Joel R.
Schultz would be the only Stockholder to beneficially own more than 5% of the
Common Stock after the Closing Date.
After the Restructuring Plan is completed, the General Partner and Limited
Partners of the Partnership, partners of the General Partner, officers,
directors and employees of the Partnership and its subsidiaries, and the
purchasers in the Public Offering will be the Stockholders of the Corporation.
As of the Record Date, there were 2,493 Limited Partners of the Partnership.
The following tables sets forth the anticipated ownership of Common Stock
after the completion of the Restructuring Plan by (i) the four directors 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
shares they have subscribed for in the Rights Offering, the shares they have
expressed the intention of purchasing in the Public Offering, or the shares they
will receive based on their interests in the General Partner.
71
<PAGE> 74
<TABLE>
<CAPTION>
COMMON STOCK
AND WARRANTS PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF 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 *
21031 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, CA 91364
All Directors, Proposed Directors and Executive Officers, as a
group (11 persons)............................................. 454,919 19.67%
</TABLE>
- ---------------
* Less than 1%.
(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.
72
<PAGE> 75
(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.
73
<PAGE> 76
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, who have terms of one, two or three years. 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; California licensed
attorney-at-law; certified public accountant; California
licensed real estate broker.
Richard D. Young(1)..... 56 Director and Senior Executive Vice President of the
Corporation; Senior Executive Vice President and 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 Loan Companies ("CATL") Regulatory
Committee; chairman, CATL Executive Committee; former
chairman, CATL Legislative Committee; Vice President of CATL
(1995-present).
Kenneth A. Carmona...... 39 Executive Vice President of the Corporation; President and
Chief Executive Officer of CRC from inception in 1985 to
present and of LPPC from inception in 1990 to the present;
Senior Vice President of Pacific Thrift from 1989 to the
present; President and director of CRC Washington since
November 1995; director of CRC, LPPC and PacificAmerica
Mortgage.
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.
</TABLE>
74
<PAGE> 77
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME AGE OCCUPATION FOR THE PAST FIVE YEARS
- ------------------------ --- ------------------------------------------------------------
<S> <C> <C>
Richard B. Fremed....... 53 Executive Vice President and Secretary of the Corporation;
Chief Financial Officer of Presidential from 1981 to April
1994; Chief Financial Officer of Pacific Thrift from 1988 to
December 1993; Secretary of Pacific Thrift from December
1988 to present; Treasurer of Pacific Thrift from December
1993 to present; director of Pacific Thrift from 1988 to
present; Chief Financial Officer of CRC from inception in
1985 to present and of LPPC from inception in 1990 to
present; Chief Financial Officer of CRC Washington since
November 1995; Chief Financial Officer and a director 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 Advisors from 1992 to present; Vice President
of Kidder, Peabody & Co. from 1988 to 1992.
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)....... 60 Proposed director of the Corporation, Pacific Thrift,
PacificAmerica Mortgage, CRC Washington, CRC and LPPC; from
1968 to present Senior Vice President, Secretary and general
counsel of Dataproducts Corporation, a manufacturer and
seller of computer printers and related products; licensed
California attorney-at-law; 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. It is anticipated that Mr.
Neuhauser will replace Mr. Amelga upon his resignation.
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.
75
<PAGE> 78
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 -- Plans and
Arrangements -- 1995 Stock Option Plan" and " -- Retirement Plan." The Executive
Compensation and Stock Option Committee consists of Ermyas Amelga and Russell G.
Allison. Mr. Amelga is its Chairman.
The Executive Committee will have the authority to act on behalf of the
full Board of Directors in between meetings of the Board, except that the
Executive Committee will not have the authority to amend the Certificate of
Incorporation or the Bylaws of the Corporation, adopt an agreement of merger or
consolidation, recommend to the stockholders a dissolution of the Corporation or
a revocation of dissolution or remove or indemnify a director. To the extent
authorized by the Board of Directors, the Executive Committee will also be
authorized to declare dividends of the Corporation and to issue shares of
authorized and unissued Common Stock or any series of Preferred Stock of the
Corporation. The Executive Committee will also act as the Nominating Committee
that nominates officers and directors of the Corporation for election. The
Executive Committee consists of Joel R. Schultz and Richard D. Young. Mr.
Schultz is its Chairman.
COMPENSATION OF BOARD OF DIRECTORS
It is the Corporation's intention to pay fees to its officer and
non-officer directors for serving on the Board of Directors and for their
attendance at Board and committee meetings. The Corporation will pay each
employee director an annual fee of $500, plus $200 per board or committee
meeting attended. The Corporation will pay each non-employee director an annual
fee of $2,500, plus $750 for each board meeting attended, plus $300 for each
telephonic meeting of over 30 minutes in length, plus $350 per committee meeting
for committee chairman and $250 per committee meeting for other committee
members. Only one meeting fee will be paid for meetings of the Boards of
Directors of the Corporation and one or more of its subsidiaries on the same day
and for meetings of two or more committees of the Board of Directors of the
Corporation or any of its subsidiaries on the same day. The Corporate Secretary
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, 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
76
<PAGE> 79
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 $100,000 in 1995. These amounts do not include compensation paid to
certain of these officers by the General Partner, which is not reimbursed by
Presidential or any of its subsidiaries, and are shown in the footnotes of the
table. Also shown is a comparison of the amount each of these officers would
have received under his employment agreement with the Corporation.
<TABLE>
<CAPTION>
PRO FORMA ANNUAL
ACTUAL ANNUAL COMPENSATION COMPENSATION
---------------------------------- -------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($)(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 Thrift 1993 58,992 -0- 237,900 -0-
Richard D. Young(3),.................. 1995 $214,273 -0- 237,900 -0-
President and Chief 1994 161,600 -0- 237,900 -0-
Operating Officer, Pacific Thrift 1993 51,012(3) -0- 86,100 -0-
Frank Landini,(4)..................... 1995 $159,600 -0- 159,600 -0-
Executive Vice President -- 1994 109,600 -0- 150,000 -0-
Wholesale Lending Division, Pacific
Thrift 1993 31,194 -0- 37,500 -0-
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 36,324
Charles J. Siegel,(6)................. 1995 $144,400 -0- 138,000 -0-
Chief Financial Officer, 1994 125,967 -0- 138,000 -0-
Presidential and Pacific Thrift 1993 9,133(6) -0- 9,133 -0-
</TABLE>
- ---------------
(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
77
<PAGE> 80
of the Closing Date. In addition, Pacific Thrift has entered into an employment
agreement with Mr. Frank Landini, which became effective as of January 1, 1996.
Mr. Schultz will be employed for an initial term of three years, which will
be automatically extended for additional one year terms thereafter unless either
party gives at least six months written notice of its or his intention not to
renew the agreement. Mr. Schultz will be employed as the President and Chief
Executive Officer of the Corporation, Chief Executive Officer of Pacific Thrift,
and President and Chief Executive Officer of 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% 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
78
<PAGE> 81
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 directors at the beginning of such
twelve (12) month period; or (vi) with respect to Joel Schultz only, a change in
his duties or a reduction in compensation.
The Corporation will retain the right to terminate the employment agreement
in the event of an employee's physical or mental disability which will render
him unable to perform under the agreement for any period of one hundred and
twenty consecutive days or for an aggregate period of one hundred and twenty or
more days during any twelve-month period. In the event of termination due to
disability, an employee would be entitled to receive as disability compensation
a lump sum payment equal to the annual bonus earned by employee during the
fiscal year preceding the year of termination, one year's annual salary, payable
not less frequently than monthly and continuation of certain benefits for the
greater of one year or the remainder of the term under the agreement. In the
event of death, an employee's personal representative will be entitled to
receive as a death benefit, in addition to any other payments which he may be
entitled to receive under any of the Corporation's benefit plans, payment of one
year's salary, payable not less frequently than monthly. In addition, the
personal representative of Mr. Schultz, Young, or Carmona would also be entitled
to receive a lump sum payment equal to the annual bonus earned by the employee
for the prior fiscal year or, in the case of Mr. Schultz or Mr. Young, the
higher of the bonus earned in the prior year or the bonus that would have been
earned in the current year had the employee continued his employment for the
full year.
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
79
<PAGE> 82
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.
PLANS AND ARRANGEMENTS
Employees of the Corporation, including executive officers, will be
entitled to participate in various benefit plans established by the Corporation.
Prior to the completion of the Restructuring, the Board of Directors will adopt,
subject to consummation of the Restructuring Plan, the plans described below and
the Partnership, as the sole stockholder of the Corporation, will approve the
adoption of the plans.
1995 STOCK OPTION PLAN
The 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.
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 persons" 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.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 Executive
Compensation and Stock Option Committee will not be eligible
80
<PAGE> 83
to receive discretionary Options under the 1995 Plan. On or after August 15,
1996, the requirement that all members of the Board of Directors or the
Committee be "disinterested persons" shall not apply. However, all members of
the Committee must be "non-employee directors" within the meaning of Rule
16b-3(b)(3)(i) promulgated by the Securities and Exchange Commission.
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 issued or subject to issuance
upon exercise or settlement of Options, determined at the date of the grant of
such Options. However, if any Options are forfeited, terminated, settled in cash
or exchanged for other Options or expire unexercised, the shares of Common Stock
previously subject to such Options shall again be available for further Option
grants. The shares of Common Stock which may be issued to participants in the
1995 Plan may be either authorized and unissued Common Stock or issued Common
Stock reacquired by the Corporation. No fractional shares may be issued under
the 1995 Plan.
The maximum numbers of shares of Common Stock in payment of Options granted
or which may be subject to Options, as applied to the 1995 Plan and its several
components, are subject to appropriate equitable adjustment in the event of a
reorganization, stock split, stock dividend, combination of shares, merger,
consolidation or other recapitalization of the Corporation.
TRANSFERABILITY. No Option granted under the 1995 Plan, and no right or
interest therein, shall be assignable or transferable by a participant except by
will or the laws of descent and distribution.
TERM, AMENDMENT AND TERMINATION. The 1995 Plan will terminate on December
31, 2003, except with respect to Options then outstanding. The Board or
Directors may amend or terminate the 1995 Plan at any time, except that, (i) to
the extent restricted by Rule 16b-3 promulgated under the Exchange Act, as
amended and in effect from time to time (or any successor rule), the Board of
Directors may not, without approval of the Stockholders of the Corporation, make
any amendment that would (1) increase the total number of shares available for
issuance (except as permitted by the 1995 Plan to reflect changes in capital
structure), (2) materially change the eligibility requirements, or (3)
materially increase the benefits accruing to participants under the 1995 Plan,
and (ii) prior to August 15, 1996, 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
81
<PAGE> 84
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. On the date hereof, the Board of
Directors of the Corporation has granted 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.
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 (including two proposed
directors)(4)................................................. * 4,000
Executive Officers, directors and proposed directors as a group
(11 persons).................................................. * 153,500
</TABLE>
- ---------------
* Not yet determinable.
(1) Includes options for 1,000 shares each to two existing directors and two
proposed directors.
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.
82
<PAGE> 85
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 4,000
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 date hereof will be determined as the Public Offering
Price.
EXERCISE OF OPTIONS. No Stock Option may be exercised, except as provided
below, unless the holder thereof remains in the continuous employ or service of
the Corporation or one of its subsidiaries.
Stock Options shall be exercisable only upon the payment in full of the
applicable option exercise price in cash or, if approved by the Committee, in
shares of the Common Stock (at the fair market value thereof at exercise date)
or, if approved by the Committee, by surrendering outstanding Options
denominated as to which the participant is vested. The Committee also has
discretion to offer or arrange for the extension of credit to assist an optionee
in the exercise of outstanding options. 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. Employee Savings
Plan will constitute an amendment of the existing 401(k) Plan (the "Retirement
Plan"). Following the completion of the Restructuring, the Corporation will
adopt the Retirement Plan as sponsor. The terms of the Retirement Plan allow
employees to invest contributions in Common Stock of the Company.
All employees (including officers) of the Corporation and its subsidiaries
on the Distribution Date will be eligible to participate in the Retirement Plan
and future employees will be eligible following the completion of 1,000 hours of
service and their first year of employment. Subject to certain limitations,
participants in the Retirement Plan may make contributions from 2% to 15% of
their pretax compensation, up to a maximum of $9,500 per year (in 1996), 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
83
<PAGE> 86
401(k) of the Code and therefore contributions by the Corporation and the
participants are deductible by the Corporation and not includable in the income
of the participants for federal income tax purposes. Participants will always be
fully vested in all of their individual contributions to the Retirement Plan
(and in earnings on such contributions). Participants will be fully vested in
employer contributions (and earnings on such contributions) to the Retirement
Plan, regardless of years of service, upon the attainment of normal retirement
age (age 65), such participant's death or permanent and total disability while
employed by the Corporation or the termination or complete discontinuance of the
Retirement Plan. If a participant terminates employment with the Corporation for
any other reason other than retirement, then such participant's interest in
employer contributions to the Retirement Plan shall vest 20% after one year of
service, 20% for each year of service thereafter, so they will be vested 100%
after five or more years of service. An employee's service with the Partnership,
the General Partner, and former affiliates is counted for purposes of vesting
under the Retirement Plan. Participants have the right to direct the Trustee
with respect to the investment of their accounts under the Retirement Plan among
a choice of mutual funds and a Company stock fund. Participants have the right
to direct that some or all of the existing funds allocated to their accounts, as
well as future deferrals, be invested in Common Stock.
STOCK PURCHASE PLAN
The 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 100% of the fair market
value of a share of Common Stock on the first day of the applicable Option
Period.
Unless terminated, options granted at the commencement of an Option Period
are exercised automatically on the last day of that Option Period. An option
terminates upon a voluntary withdrawal from participation in the Stock Purchase
Plan by a participant, which may be effected any time prior to the last day of
the Option Period by completing a notice of termination form. An option also
terminates automatically if the participant holding the option ceases to be
employed by the Corporation or a subsidiary of the Corporation for any reason
(including death, disability or retirement) prior to the last day of the Option
Period.
An option may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent or
distribution, and may be exercised, during the lifetime of the optionee, only by
such optionee. Optionees do not have rights as Stockholders with respect to
option shares until they exercise their options.
ELIGIBILITY AND PARTICIPATION. All full-time employees of the Corporation
and its subsidiaries who have been employed continuously for at least 30 days
and who work more than 20 hours per week are eligible to participate in the
Stock Purchase Plan at their election. However, no employee may be granted an
option if such employee would immediately thereafter own, directly or
indirectly, 5% or more of the combined voting power of all classes of stock, of
the Corporation, as determined pursuant to Section 424(d) of the Code.
Eligible employees may enroll as participants in the Stock Purchase Plan by
executing a form provided by the Corporation prior to the commencement of each
Option Period on which they may designate (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
84
<PAGE> 87
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 generally cannot be decreased or increased
without terminating the option. However, limited exceptions in this rule are
specified in the plan. 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 $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 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.
85
<PAGE> 88
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 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
AVERAGE ANNUAL YEARS OF SERVICE AT 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>
86
<PAGE> 89
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 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.
87
<PAGE> 90
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 and the quarter ended March
31, 1996.
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. At March 31, 1996, $16,733 of interest
had been accrued and was unpaid on this loan.
The General Partner received no management fees in 1994 or 1995. A
management fee of $38,000 was accrued but not paid to the General Partner for
the three months ended March 31, 1996.
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. Supervision fees of $403,511 were accrued but not paid to the
General Partner for the three months ended March 31, 1996.
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 three
months ended March 31, 1996 and the years ended December 31, 1995 and 1994,
Presidential, CRC and LPPC reimbursed the General Partner $27,000, $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 and 1994 the
Partnership paid or accrued to the General Partner $224,000 and $465,551
pursuant to this provision. No further amounts other than the $172,000 accrued
for 1995 are payable to the General Partner under this agreement for any period
after December 31, 1995.
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
88
<PAGE> 91
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
At March 31, 1996, a total of $1,265,341 was owed by the Partnership to the
General Partner, including a $600,000 unsecured loan made on May 15, 1992 plus
interest thereon of $81,542, plus accrued and unpaid management, supervision and
other fees of $583,799. As of May 31, 1996, management estimates that the total
amount owed by the Partnership to the General Partner is $1,600,538. 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 $332,683 at March 31, 1996, and which management
estimates total $413,538 as of May 31, 1996. Of the net $1,187,000 which the
Partnership estimates it owes 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.
PAYMENTS TO MANAGING OFFICERS
Two of the Managing Officers, Joel R. Schultz and Norman A. Markiewicz,
have employment agreements providing incentive payments based upon net operating
profits of the Partnership. For the two years ended December 31, 1995 and 1994,
no compensation was paid under these agreements. For the year ended December 31,
1993 Mr. Schultz received $20,000 and Mr. Markiewicz received $10,000 under
these agreements. Upon the completion of the Restructuring, 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 $84,000, $175,000, $62,000 and $56,400 were paid to Mr. Schultz for the
three months ended March 31, 1996 and 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
89
<PAGE> 92
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.
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of certain terms and provisions of the
Corporation's capital stock, which is qualified in its entirety by reference to
the Corporation's Certificate of Incorporation. A copy of the Certificate of
Incorporation has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
Under the Certificate of Incorporation. the authorized but unissued and
unreserved shares of the Corporation's capital stock will be available for
issuance for general corporate purposes, including, but not limited to, possible
stock dividends, future mergers or acquisitions, or public or private offerings.
Except as may otherwise be required, stockholder approval will not be required
for the issuance of those shares.
COMMON STOCK
The Corporation's Certificate of Incorporation authorizes the issuance of
up to 8,000,000 shares of Common Stock. The Partnership currently owns all of
the 3,000 outstanding shares of Common Stock. Upon the Closing Date of the
Restructuring Plan, 890,000 shares will be issued to the General Partner and the
Limited Partners for their interests in the Partnership based on the $8.9
million Net Tangible Equity of the Partnership on May 31, 1996, less 287,083
shares that would otherwise be issued to Limited Partners electing the Cash Out
Option and 1,206 shares representing fractional shares, the value of which will
be paid in cash to the partners. In addition, 324,628 shares will be issued in
connection with the Rights Offering and 763,661 additional shares will be issued
in connection with the Public Offering which will cause the total number of
shares of Common Stock to be equal to 1,690,000 shares. 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 -- Plans and Arrangements."
The holders of Common Stock will be entitled to dividends when, as, and if
declared by the Corporation's Board of Directors out of funds legally available
therefor. The payment of dividends by the Corporation will depend on the
Corporation's net income, financial condition, regulatory capital requirements
and other factors deemed relevant by the Board of Directors. In addition, a
substantial source of funds for the payment of cash dividends will be dividends
paid by Pacific Thrift, the payment of which is limited by the provisions of
California law and FDIC regulations. See "SUPERVISION AND REGULATION --
Restrictions on Transfers of Funds to the Partnership by Pacific Thrift." Each
share of Common Stock will entitle the holder to one vote on all matters upon
which Stockholders have the right to vote. The Common Stock will not have
cumulative voting rights in the election of directors.
In the event of liquidation, dissolution or winding up of the Corporation,
the holders of shares of Common Stock will be entitled to share equally after
payment of all debts and liabilities of the Corporation, and subject
90
<PAGE> 93
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.
TRANSFER AGENT
The transfer agent for the Common Stock is U.S. Stock Transfer Corporation,
Glendale, California.
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.
91
<PAGE> 94
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 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
92
<PAGE> 95
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
the holders of at least 66 2/3% of the outstanding voting stock is generally
required for certain provisions (i.e., provisions relating to number,
classification, election and removal of directors; amendment of bylaws; call of
special stockholder meetings; offers to acquire and acquisitions of control;
director liability; certain business combinations; power of indemnification; and
amendments to provisions relating to the foregoing in the Certificate of
Incorporation).
The Bylaws may be amended by a majority vote of the Board of Directors or
the affirmative vote of a majority of the total votes eligible to be voted at a
duly constituted meeting of stockholders.
DELAWARE ANTI-TAKEOVER STATUTE. The Delaware General Corporation Law
provides that buyers who acquire more than 15% of the outstanding stock of a
Delaware corporation, such as the Corporation, are prohibited from completing a
hostile takeover of such corporation for three years. However, the takeover can
be completed if (i) the buyer, while acquiring the 15% interest, acquires at
least 85% of the corporation's outstanding stock (the 85% requirement excludes
shares held by directors who are also officers and certain shares held under
employee stock plans), or (ii) the takeover is approved by the target
corporation's board of directors and two-thirds of the shares of outstanding
stock of the corporation (excluding shares held by the bidder). The foregoing
provisions of the Delaware General Corporation Law do not apply to Delaware
corporations which do not have a class of voting stock listed on a national
exchange, authorized for quotation on an inter-dealer quotation system of a
registered national securities association or held of record by more than 2,000
stockholders. The Corporation may exempt itself from the requirements of the
statute by adopting an amendment to its Certificate of Incorporation or Bylaws
electing not to be governed by this provision. At the present time, the Board of
Directors does not intend to propose any such amendment.
EFFECT OF QUASI-CALIFORNIA CORPORATION LAW
Section 2115 of the California GCL provides that quasi-California
corporations will be subject to certain substantive provisions in the California
GCL notwithstanding comparable provisions in the law of the jurisdiction where
the corporation is incorporated. Section 2115 is applicable to foreign
corporations which have more than half of their shareholders residing in
California and more than half of their business deriving from California. The
determination of whether a corporation is a quasi-California corporation is
based upon information contained in a certificate required to be filed within
three months and fifteen days after the end of the corporation's fiscal year or
within 30 days after the filing of its franchise tax return, if an extension of
time to file such return was granted. Quasi-California corporations that are
Large Public Corporations (i.e., that have securities listed on the New York or
American stock exchanges, or securities designated for trading on the Nasdaq
National Market, if the corporation has at least 800 holders of its equity
securities as of the record date for its most recent annual meeting), are exempt
from the application of Section 2115.
The Corporation has qualified to do business in the State of California.
The Corporation's subsidiaries will each have substantially all of their
property, employees and operations in California. Therefore, absent an
exemption, the Corporation would be deemed to be a quasi-California corporation.
Management believes that, immediately following the Closing Date, the
Corporation would constitute a Large Public Corporation and would thereby be
exempt from the application of Section 2115. The Corporation's Common Stock has
been conditionally approved for listing on the Nasdaq National Market.
Furthermore, as of the December 31, 1995, there were more than 800 holders of
record of the Limited Partnership Units and more than 2,493 beneficial owners of
such Limited Partnership Units. However, there
93
<PAGE> 96
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 super majority voting
provisions. In addition, under California law cumulative voting for the election
of directors is mandatory unless a corporation that is a Large Public
Corporation has expressly eliminated cumulative voting in its articles of
incorporation. The Corporation has eliminated cumulative voting in its Articles
of Incorporation. Furthermore, California law with respect to the payment of
dividends is more restrictive than Delaware law. Since the Corporation is
expected to derive a substantial amount of its revenues from Pacific Thrift, a
California corporation, California law and FDIC regulations with respect to
dividends will have a substantial effect on the Corporation's ability to pay
dividends. Under California law, a corporation is prohibited from paying
dividends unless (i) the retained earnings of the corporation immediately prior
to the distribution exceeds the amount of the distribution; (ii) the assets of
the corporation exceed 1 1/4 times its liabilities; or (iii) the current assets
of the corporation exceed its current liabilities, but if the average pretax net
earnings of the corporation before interest expense for the two years preceding
the distribution was less than the average interest expense of the corporation
for those years, the current assets of the corporation must exceed 1 1/4 times
its current liabilities.
MARKET FOR COMMON STOCK
There has been no public market for the Common Stock. The Common Stock has
been conditionally approved for listing on the Nasdaq National Market under the
symbol "PAMM." The Representative has indicated its intention to make a market
in the Common Stock. The Representative is not obligated, however, to make a
market in the Common Stock and any market making may be discontinued at any
time.
SUBSCRIBER WARRANTS
For every five shares of Common Stock purchased in the Rights Offering by
Partners, partners of the General Partner, or officers, directors or employees
of the Partnership or its subsidiaries, the Corporation will issue a
transferable warrant for one additional share of Common Stock (collectively,
"Subscriber Warrants"). Due to federal regulations applicable to the Retirement
Plan, however, employees who purchase Common Stock with contributions held in
the Retirement Plan will not be eligible to receive Subscriber Warrants. The
Subscriber Warrants are exercisable at any time after issuance for a period of
two years, at a price equal to 125% of the Public Offering Price. Although the
Subscriber Warrants are freely transferable, they will not be listed for trading
on the Nasdaq National Market, and there can be no assurance that a market will
develop for the Subscriber Warrants.
The Common Stock issuable upon exercise of the Subscriber Warrants
("Subscriber Warrant Stock") has been registered concurrently with the
registration of the Additional Shares, and the Corporation has committed 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 Corporation or any other
matter, or exercise any other rights whatsoever as Stockholders of the
Corporation.
GENERAL PARTNER WARRANTS
The General Partner will purchase from the Corporation warrants (the
"General Partner Warrants") exercisable for 563,333 shares, which is equal to
25% of the Common Stock outstanding on the Closing Date, on a fully diluted
basis assuming the exercise of all General Partner Warrants. The General Partner
Warrants will be exercisable at any time after issuance for a period of 18
months, at an exercise price equal to 150% of
94
<PAGE> 97
the Public Offering. The General Partner will pay the Corporation $385,000 to
purchase the General Partner Warrants, which management believes represents the
fair market value of the General Partner Warrants based on 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 Common Stock issuable upon exercise of the General Partner Warrants
("General Partner Warrant Stock") has been registered concurrently with the
registration of the Additional Shares, and the Corporation will commit to
maintain the effectiveness of such registration until the earlier of the sale of
all the General Partner Warrant Stock or five years after the Initial Exercise
Date. In addition, under certain circumstances, the holders of the General
Partner Warrants will have one demand registration right and unlimited
"piggyback" registration rights for a period of five years following the Initial
Exercise Date, for the purpose of resale of the General Partner Warrant Stock.
Holders of General Partner Warrants will not be entitled, by virtue of
being such holders, to receive dividends or subscription rights, vote, consent,
or receive notice as Stockholders of the Corporation in respect of any meeting
of Stockholders for the election of directors of the Company or any other
matter, or exercise any other rights whatsoever as Stockholders of the
Corporation.
BANK WARRANT
In connection with the extension of the Bank Loan, if the Restructuring
Plan is completed, the Corporation has agreed to issue the Bank Warrant to
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
from issuance. The Corporation may redeem the Bank Warrant at any time within
one year from date of issuance 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 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, there will be a total of 1,690,000
shares of Common Stock (1,804,549 if the over allotment option is exercised) and
warrants exercisable for an additional 628,258 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 Company has committed to maintain effective the Registration
Statement of which this Prospectus is a part for a period of five years from the
Closing Date. For so long as the Registration Statement is in effect, affiliates
of the Corporation may sell shares without restriction.
The General Partner Warrants exercisable for 563,333 shares of Common Stock
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
95
<PAGE> 98
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."
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 portion of the shares and
warrants to be distributed by the General Partner for their interests in the
General Partner. See "Beneficial Ownership of Common Stock."
Concurrently with the registration of shares in this offering, the
Corporation has registered all of the shares of Common Stock, Subscriber
Warrants, shares issuable under Subscriber Warrants and shares issuable under
the General Partner Warrants for resale by the partners of the General Partner
and the officers, directors and proposed directors of the Corporation. The
Corporation is not aware of any plans by any of these individuals to sell their
shares or warrants. However, the shares, Subscriber Warrants, 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 these individuals 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, unless an exemption from registration was available in
connection with the proposed transaction. The Corporation will not receive any
of the proceeds of any future sales of such Common Stock or Subscriber Warrants,
and no such sales are being underwritten in connection with this offering.
96
<PAGE> 99
UNDERWRITING OF THE PUBLIC OFFERING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Corporation has agreed to sell to the
Underwriter and the Underwriter has agreed to purchase from the Corporation,
763,661 shares of the Common Stock. The Underwriting Agreement provides that the
obligation of the Underwriter is subject to certain conditions precedent and
that the Underwriter will be obligated to purchase all of the shares of Common
Stock if it purchases any shares of Common Stock.
The Underwriter proposes initially to offer the Common Stock to the public
on the terms set forth on the cover page of this Prospectus, provided that no
concessions will be charged on shares sold to officers, directors or employees
of the Corporation (assumed to be 113,655 shares for purposes of the terms set
forth on the cover page). After the shares of Common Stock have been released
for sale to the public, the offering price and concession may be changed. The
Common Stock is offered subject to receipt and acceptance by the Underwriter,
and to certain other conditions, including the right to reject orders in whole
or in part. The Underwriter has informed management that it does not expect to
make sales to accounts over which it exercises discretionary authority in excess
of 5% of the number of shares of Common Stock offered hereby. No investor may
purchase more than seven percent of the total shares to be issued by the
Corporation in the Restructuring, the Rights Offering and the Public Offering.
The Corporation and its officers and directors have agreed not to offer,
sell or otherwise dispose of any shares of Common Stock for a period of 90 days
after the date of this Prospectus without the prior written consent of the
Underwriter.
The Corporation has granted an option to the Underwriter, exercisable
during the 30 day period after the date of this Prospectus, to purchase up to
114,549 additional shares, at the public offering price less underwriting
discounts shown on the cover of this Prospectus. The Underwriter may exercise
this option only to cover overallotments made in connection with the sale of the
Common Stock offered hereby. If purchased, the Underwriter will offer such
additional shares of Common Stock on the same terms as those on which the other
shares of Common Stock being sold by the Corporation are being offered in the
Public Offering.
In consideration of the Underwriter's services in connection with the
Public Offering, the Corporation has agreed to pay the Underwriter an advisory
fee equal to 1.0% of the gross cash proceeds of the Rights Offering and the
Public Offering. The Partnership has paid the Underwriter an initial fee of
$25,000, which will be applied against the advisory fee upon the closing of the
Public Offering. The advisory fee and selling commissions are payable in cash
if, as and when the closing of the Public Offering occurs. In addition, the
Corporation has agreed to reimburse the Underwriter, from time to time upon
demand, for its reasonable out-of-pocket expenses in connection with the
performance of its activities as Underwriter, including fees and expenses of the
Underwriter's outside legal counsel and any other advisors, accountants or
appraisers, not to exceed $85,000 without written permission of the Corporation.
Following the completion of the Public Offering, the Corporation has agreed
to retain the Underwriter, 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 Corporation has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriter may be required to make in respect thereof.
The Public Offering Price per share has been determined by negotiations
between the Corporation and the Underwriter. There has never been an established
public market for the Common Stock of the Corporation. The major factors which
have been considered in determining the Public Offering Price are 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.
97
<PAGE> 100
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Common Stock
will be passed upon for the Corporation by Jeffer, Mangels, Butler & Marmaro
LLP, Los Angeles, California. The principal shareholder of Bruce P. Jeffer,
Esq., a Professional Corporation, a partner of Jeffer, Mangels, Butler & Marmaro
LLP, will own 14,036 shares of Common Stock, 12,571 General Partner Warrants and
1,525 Subscriber Warrants. 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 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, 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
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.
AVAILABLE INFORMATION
The Corporation has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
Common Stock. This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Corporation and the Common Stock,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements made in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the offices of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048, and copies of all or any part of the Registration Statement may
be obtained from the Public Reference Section of the Commission upon payment of
the prescribed fee.
The Partnership is (and, following the Restructuring Plan the Corporation
will be) subject to the requirements of the Securities Exchange Act of 1934 and,
in accordance therewith, each files (or will file) reports, proxy statements and
other information with the Commission. Copies of such reports, proxy statements
and other information can be obtained, at prescribed rates, from the public
reference facilities at the offices of the Commission. Copies of such material
can also be obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE
IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
98
<PAGE> 101
GLOSSARY
The capitalized terms appearing in this Prospectus have the meanings
specified below:
Bank or Fleet. Fleet Bank, N.A., the lender of the Bank Loan.
Bank Loan. The loan obligation of Presidential to Fleet, which had an
outstanding balance of $5.0 million at May 31, 1996.
Bank Warrant. The Warrant issuable by the Corporation to Fleet to purchase
up to 2% of the outstanding Common Stock of the Corporation on the Closing Date,
which the Corporation intends to redeem immediately after the Closing Date.
BIF. Bank Insurance Fund administered by the FDIC to protect deposits.
Board of Directors. The board of directors of the Corporation.
California Industrial Loan Law. Laws regulating investment authority and
other activities of the thrift and loan business conducted by Pacific Thrift.
CAMEL. Standard rating given to financial institutions by federal banking
regulators consisting of a composite of five critical categories of banking
strength: capital, assets, management, earnings and liquidity. Ratings range
from 1 to 5, with 1 denoting outstanding strength and 5 characterizing
insolvency.
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 to 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.
CRC Washington. Consolidated Reconveyance Corporation, a Washington
Corporation.
DOC. California Department of Corporations.
FDIC. Federal Deposit Insurance Corporation.
FDICIA. Federal Deposit Insurance Corporation Improvement Act of 1991.
General Partner Warrants. The warrants to be issued to the General Partner
to purchase up to 25% of the total Common Stock of the Corporation outstanding
on the Closing Date, on a fully diluted basis assuming the exercise of all
Subscriber Warrants and General Partner Warrants, for a purchase price equal to
150% of the Public Offering price per share.
LPPC. Lenders Posting and Publishing Company, a California limited
partnership.
Minimum Market Capitalization. The minimum market capitalization of $16.9
million (total outstanding shares times Public Offering Price per share) which
must be achieved as a condition to completion of the Restructuring.
Net Tangible Equity. Total assets minus total liabilities, goodwill and
capitalized organization costs of the Partnership, other than costs of the
Rights Offering and the Public Offering, as adjusted by an increase of $385,000
to capital due to the purchase of General Partner Warrants by the General
Partner and the General Partner's purchase of Common Stock in the Rights
Offering for $800,000 with the proceeds from repayment
99
<PAGE> 102
of the debt owed to the General Partner by the Partnership as of May 31, 1996.
Net Tangible Equity is $8.9 million at May 31, 1996.
OREO. Other real estate owned by the Partnership or Pacific Thrift,
consisting of real estate acquired in settlement of loans.
OTS. Office of Thrift Supervision, a federal agency regulating savings and
loans institutions.
PCA. Prompt corrective action required to be taken by FDICIA to resolve
the problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios.
PacificAmerica Mortgage. PacificAmerica Mortgage, Inc., a Delaware
corporation.
Pacific Thrift. Pacific Thrift and Loan Company, a California corporation.
Partners. The general partner and limited partners of the Partnership.
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 of Common Stock to the public
pursuant to this Prospectus.
Public Offering Price. The offering price per share at which the shares of
Common Stock will be sold in the Public Offering.
Restructuring. The transactions contemplated by the Restructuring Plan.
Restructuring Plan. The plan to transfer all of the assets and liabilities
of the Partnership to the Corporation and distribute to the Partners the stock
of the Corporation in liquidation of the Partnership.
Rights Offering. The rights offered to the Partners of the Partnership,
the Partners of the General Partner and the officers, directors and employees of
the Partnership and its subsidiaries to purchase shares of Common Stock.
Stockholders. The record holders of the Common Stock.
Subscription Rights. The Basic Subscription Rights and Oversubscription
Privilege to purchase Additional Shares in the Corporation.
Supplemental Plan. The Supplemental Executive Retirement Plan designed to
provide benefits to certain long-term executive officers of the Corporation and
its predecessors.
Tier I. Core capital component used by the FDIC to evaluate compliance
with risk-based capital requirements and which consists primarily of common
stock, related surplus and retained earnings, qualifying noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries.
Tier II. Supplementary capital component used by the FDIC to evaluate
compliance with risk-based capital requirements and which may consist of (i) the
allowance for possible loan and lease losses in an amount up to 1.25% of
risk-weighted assets; (ii) cumulative perpetual preferred stock and long-term
preferred stock and related surplus; (iii) hybrid capital instruments
(instruments with characteristics of both debt and equity), perpetual debt and
mandatory convertible debt securities; and (iv) eligible term subordinated debt
and intermediate-term preferred stock with an original maturity of five years or
more, including related surplus, in an amount up to 50% of Tier I capital.
100
<PAGE> 103
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 Accountant's Report.......................... F-1
Predecessor Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and
December 31, 1995 and 1994....................................................... F-3
Consolidated Statements of Operations for the three months ended March 31, 1996 and
1995 (unaudited) and for the years ended December 31, 1995, 1994 and 1993........ F-4
Consolidated Statements of Changes in Partners' Capital for the three months ended
March 31, 1996 (unaudited) and for the years ended December 31, 1995, 1994 and
1993............................................................................. F-5
Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and
1995 (unaudited) and for the years ended December 31, 1995, 1994 and 1993........ F-6
Notes to Consolidated Financial Statements for the three months ended March 31, 1996
and 1995 (unaudited) and 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 Sheets as of March 31, 1996 (unaudited) and December 31, 1995............ F-41
Notes to Balance Sheet........................................................... F-42
</TABLE>
101
<PAGE> 104
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> 105
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 30, 1995
F-2
<PAGE> 106
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
MARCH 31, ----------- ------------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS (Note 2C).................... $10,158,000 $10,489,000 $ 19,628,000
ACCOUNTS RECEIVABLE.................................... 15,917,000 3,337,000 5,071,000
ACCRUED INTEREST RECEIVABLE............................ 931,000 903,000 1,125,000
LOANS RECEIVABLE (Notes 2D, 2E, 3, and 7).............. 45,276,000 43,908,000 53,045,000
LOANS HELD FOR SALE (Notes 2F and 3)................... 11,361,000 12,577,000 12,011,000
RECEIVABLE FROM RELATED PARTY
(Notes 9 and 10)..................................... 333,000 347,000 478,000
EXCESS YIELD RECEIVABLE (Notes 2G and 3)............... 2,467,000 2,725,000 888,000
OTHER REAL ESTATE (Notes 2H and 4)..................... 3,259,000 3,156,000 7,621,000
PROPERTY AND EQUIPMENT (Notes 2I and 5)................ 1,542,000 1,398,000 1,322,000
GOODWILL (Notes 2J and 11)............................. 1,778,000 1,808,000 1,749,000
OTHER ASSETS (Note 8).................................. 2,008,000 1,909,000 809,000
----------- ----------- ------------
$95,030,000 $82,557,000 $103,747,000
=========== =========== ============
LIABILITIES AND PARTNERS' CAPITAL
THRIFT CERTIFICATES PAYABLE (Note 6)
Full-paid certificates............................... $37,814,000 $35,881,000 $ 58,058,000
Installment certificates............................. 34,967,000 24,275,000 11,443,000
----------- ----------- ------------
Total thrift certificates payable...................... 72,781,000 60,156,000 69,501,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES.................. 3,399,000 4,018,000 4,471,000
ACCRUED INTEREST PAYABLE............................... 306,000 273,000 405,000
PAYABLE TO RELATED PARTY (Note 10)..................... 665,000 281,000 134,000
MORTGAGE NOTES PAYABLE (Note 4)........................ 653,000 611,000 2,313,000
NOTE PAYABLE (Note 7).................................. 6,500,000 6,771,000 14,778,000
NOTE PAYABLE TO RELATED PARTY (Note 7)................. 600,000 600,000 600,000
PARTNERSHIP WITHDRAWALS PAYABLE (Note 15).............. 1,120,000 1,120,000 1,120,000
----------- ----------- ------------
Total liabilities...................................... 86,024,000 73,830,000 93,322,000
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES
Notes 12, 13, 14, 19, 20 and 21
----------- ----------- ------------
PARTNERS' CAPITAL...................................... 9,006,000 8,727,000 10,425,000
----------- ----------- ------------
$95,030,000 $82,557,000 $103,747,000
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 107
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable
(Notes 2D, 2E and 3)......... $2,278,000 $2,386,000 $ 8,885,000 $11,003,000 $14,209,000
Deposits with financial
institutions................. 130,000 226,000 692,000 401,000 3,000
---------- ---------- ---------- ----------- -----------
Total interest income............. 2,408,000 2,612,000 9,577,000 11,404,000 14,212,000
---------- ---------- ---------- ----------- -----------
INTEREST EXPENSE
Thrift certificates greater
than $100,000................ -- 4,000 7,000 28,000 304,000
Other thrift certificates....... 1,010,000 976,000 3,813,000 2,917,000 2,917,000
Notes payable................... 217,000 425,000 1,379,000 1,982,000 2,497,000
---------- ---------- ---------- ----------- -----------
Total interest expense............ 1,227,000 1,405,000 5,199,000 4,927,000 5,718,000
---------- ---------- ---------- ----------- -----------
Net interest income............... 1,181,000 1,207,000 4,378,000 6,477,000 8,494,000
PROVISION FOR LOAN LOSSES
(Notes 2D, 2E and 3)............ 725,000 446,000 3,289,000 6,096,000 4,655,000
---------- ---------- ---------- ----------- -----------
Net interest income after
provision for loan losses....... 456,000 761,000 1,089,000 381,000 3,839,000
---------- ---------- ---------- ----------- -----------
NONINTEREST INCOME
Trustee and reconveyance fees... 857,000 785,000 3,248,000 3,344,000 3,781,000
Other income.................... 238,000 308,000 1,122,000 1,712,000 1,381,000
Gain on sale of loans........... 4,712,000 1,515,000 8,895,000 946,000 143,000
---------- ---------- ---------- ----------- -----------
Total noninterest income.......... 5,807,000 2,608,000 13,265,000 6,002,000 5,305,000
---------- ---------- ---------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits
(Notes 10 and 14)............ 2,781,000 1,623,000 7,858,000 6,493,000 5,064,000
General and administrative (Note
10).......................... 2,085,000 1,413,000 6,273,000 7,090,000 5,491,000
Related party fees
(Notes 9 and 10)............. 472,000 174,000 1,012,000 805,000 847,000
Operations of other real estate
(Note 4)..................... 165,000 238,000 1,212,000 732,000 3,307,000
Depreciation and amortization... 133,000 144,000 919,000 776,000 303,000
---------- ---------- ---------- ----------- -----------
Total noninterest expense......... 5,636,000 3,592,000 17,274,000 15,896,000 15,012,000
---------- ---------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
(BENEFIT)....................... 627,000 (223,000) (2,920,000) (9,513,000) (5,868,000)
INCOME TAXES (BENEFIT) (Notes 2K
and 8).......................... 348,000 (430,000) (1,222,000) 1,000 1,000
---------- ---------- ---------- ----------- -----------
Net income (loss)................. $ 279,000 $ 207,000 $(1,698,000) $(9,514,000) $(5,869,000)
========== ========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 108
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1993, 1994 AND 1995
AND THREE MONTHS ENDED
MARCH 31, 1996
----------------------
<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
Net income for the three months ended March 31, 1996 (unaudited)...... 279,000
------------
CAPITAL, March 31, 1996 (unaudited)..................................... $ 9,006,000
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 109
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------
1996 1995 1995 1994 1993
------------ ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................. $ 279,000 $ 207,000 $ (1,698,000) $ (9,514,000) $(5,869,000)
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Provision for loan losses................... 725,000 446,000 3,289,000 6,096,000 4,655,000
Provision for losses on other real estate... 102,000 177,000 1,188,000 202,000 1,069,000
Net gain on sale of other real estate....... 3,000 (100,000) (469,000) (625,000) (345,000)
Proceeds from sale of loans................. 62,495,000 29,257,000 145,266,000 29,315,000 4,252,000
Originations of loans held for sale......... (61,846,000) (25,932,000) (151,538,000) (41,055,000) (6,320,000)
Depreciation and amortization............... 133,000 144,000 919,000 776,000 303,000
Net change in assets and liabilities
Accounts receivable......................... (12,580,000) (6,503,000) 1,734,000 (1,731,000) (359,000)
Accrued interest receivable................. (28,000) 472,000 222,000 966,000 122,000
Receivable from related party............... 14,000 300,000 131,000 316,000 (411,000)
Excess yield receivable..................... 258,000 362,000 (1,837,000) 7,000 117,000
Goodwill.................................... 30,000 73,000 (172,000) (127,000) (309,000)
Other assets................................ (125,000) 270,000 (1,500,000) (420,000) (79,000)
Payable to related party.................... 384,000 211,000 147,000 (442,000) 576,000
Accounts payable, accrued expenses, and
accrued interest payable.................. (586,000) (523,000) (584,000) 186,000 2,200,000
----------- ---------- ------------ ----------- ----------
Net cash used in operating activities........... (10,742,000) (1,139,000) (4,902,000) (16,050,000) (398,000)
----------- ---------- ------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of loans................... 258,000 3,525,000 13,371,000 28,402,000 25,884,000
Increase in loans receivable.................. (2,839,000) (2,438,000) (12,325,000) (10,249,000) (16,069,000)
Proceeds from sale of other real estate....... 847,000 959,000 14,253,000 5,994,000 7,001,000
Mortgage assumed (repaid) in connection with
other real estate........................... 42,000 (511,000) (1,702,000) 536,000 (730,000)
Purchase of property and equipment............ (251,000) (307,000) (482,000) (883,000) (853,000)
----------- ---------- ------------ ----------- ----------
Net cash provided by (used in) investing
activities.................................... (1,943,000) 1,228,000 13,115,000 23,800,000 15,233,000
----------- ---------- ------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in thrift
certificates................................ 12,625,000 (469,000) (9,345,000) 7,080,000 11,860,000
Paydowns of note payable...................... (271,000) (969,000) (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 provided by (used in) financing
activities.................................... 12,354,000 (1,438,000) (17,352,000) (1,342,000) (2,068,000)
----------- ---------- ------------ ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (331,000) (1,349,000) (9,139,000) 6,408,000 12,767,000
CASH AND CASH EQUIVALENTS, at beginning......... 10,489,000 19,628,000 19,628,000 13,220,000 453,000
----------- ---------- ------------ ----------- ----------
CASH AND CASH EQUIVALENTS, at end............... $ 10,158,000 $18,279,000 $ 10,489,000 $ 19,628,000 $13,220,000
=========== ========== ============ =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for Interest........ $ 1,211,000 $ 1,324,000 $ 5,331,000 $ 4,704,000 $ 5,838,000
Income taxes.................................. 131,000 2,000 2,000 1,000 1,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Loans transferred to other real estate........ $ 2,956,000 $ 1,382,000 $ 10,489,000 $ 7,542,000 $ 7,270,000
Mortgage payable assumed in connection with
other real estate........................... 866,000 428,000 1,545,000 2,499,000 3,289,000
Loans to facilitate sales of other real
estate...................................... 62,000 209,000 895,000 898,000 3,344,000
=========== ========== ============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 110
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 March 31, 1996 and 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.
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
F-7
<PAGE> 111
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-8
<PAGE> 112
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BASIS OF PRESENTATION -- THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The unaudited interim financial statements as of March 31, 1996 and for the
three month periods ended March 31, 1996 and 1995 included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and, in the opinion of the Company,
reflect all adjustments (consisting only of normal recurring adjustments) and
disclosures which are necessary for a fair presentation. The results of
operations for the three month period ended March 31, 1996 is not necessarily
indicative of the results for the full year.
C. 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.
D. 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.
E. 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.
F. ALLOWANCE FOR LOAN LOSSES
Loan losses are charged to the ALL; recoveries are credited to the
allowance. The provision for loan losses charged to expense and added to the ALL
is based upon management's judgment and evaluation of the known and inherent
risks in the loan portfolio. Management's judgment takes into consideration such
factors as changes in the nature and volume of the portfolio, continuing review
of delinquent loans, current economic conditions, risk characteristics of the
various categories of loans, and other pertinent factors that may affect the
borrower's ability to repay. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan (as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures). The effect of adopting this new
accounting standard was immaterial to the operating results of the Company for
the 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
F-9
<PAGE> 113
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
G. 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.
H. 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.
I. OTHER REAL ESTATE
Other real estate is comprised of formally foreclosed property and
in-substance foreclosed property to which the Company does not have legal title.
These assets are recorded at the lower of the net investment in the loan or the
fair value of the property less selling costs. At the time of foreclosure, any
excess of the net investment in the loan over its fair value is charged to the
allowance for loan losses. Any subsequent declines in value are charged to
operations. Prior to 1995, loans were classified as in-substance foreclosures
when they exhibited characteristics more closely associated with the risk of
real estate ownership than with loans. Collateral that has been classified as an
in-substance foreclosure was reported in the same manner as collateral that has
been formally foreclosed. Effective January 1, 1995, with the adoption date of
SFAS No. 114, the category of loan classified as in-substance foreclosures was
eliminated resulting in such loans being reflected as loan receivable rather
than as foreclosed real estate.
J. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation of property and equipment is based on the asset's estimated useful
life, ranging from two to eight years, and is computed using the straight-line
method. Expenditures that improve or extend the service lives of assets are
capitalized. Repairs and maintenance are charged to expense as incurred.
F-10
<PAGE> 114
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. 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.
L. 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.
M. 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.
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
F-11
<PAGE> 115
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-12
<PAGE> 116
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
N. 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.
O. RECLASSIFICATIONS
Certain reclassifications of balances from prior years have been made to
conform to the current year's reporting format.
F-13
<PAGE> 117
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans Receivable
Loans receivable at March 31, 1996 and December 31, 1995 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
MARCH 31, ------------ ------------
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Residential real estate loans........ $ 37,388,000 $ 48,545,000 $ 55,235,000
Participations sold.................. (10,620,000) (21,783,000) (16,129,000)
------------ ------------ ------------
Residential real estate
loans -- net....................... 26,768,000 26,762,000 39,106,000
------------ ------------ ------------
Commercial real estate loans......... 36,170,000 34,270,000 30,153,000
Participations sold.................. (12,092,000) (12,009,000) (10,479,000)
------------ ------------ ------------
Commercial real estate
loans -- net....................... 24,078,000 22,261,000 19,674,000
------------ ------------ ------------
Total loans receivable............... $ 50,846,000 $ 49,023,000 $ 58,780,000
============ ============ ============
Loans receivable held for
investment......................... $ 50,846,000 $ 49,023,000 $ 58,780,000
Net deferred loan fees and costs..... (845,000) (886,000) (1,428,000)
Allowance for loan losses............ (4,725,000) (4,229,000) (4,307,000)
------------ ------------ ------------
$ 45,276,000 $ 43,908,000 $ 53,045,000
============ ============ ============
</TABLE>
The components of the loan portfolio at March 31, 1996 and December 31,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
MARCH 31, ------------ ------------
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
One-to-four family residential....... $ 14,550,000 $ 14,672,000 $ 20,088,000
Five-or-more family residential...... 10,591,000 10,347,000 16,720,000
Home improvement..................... 1,627,000 1,743,000 2,298,000
Commercial........................... 22,203,000 20,387,000 17,869,000
Land and other....................... 1,875,000 1,874,000 1,805,000
------------ ------------ ------------
$ 50,846,000 $ 49,023,000 $ 58,780,000
============ ============ ============
</TABLE>
For the three months ended March 31, 1996 (unaudited) and for the years
ended December 31, 1995 and 1994, the Company sold, without recourse to the
Company, approximately $258,000, $13,371,000 and $25,632,000, respectively, of
real estate loans to various outside parties.
Significant Concentrations of Risk
The Company makes mortgage loans primarily secured by first or second trust
deeds on Southern California real estate. The loans are secured by single-family
residential and other types of real estate and collateralized by the equity in
the borrowers' real estate. Prior to the fourth quarter of 1993, these borrowers
generally had a credit standing such that the Company relied heavily on the
value of the underlying collateral in its lending practices. In the fourth
quarter of 1993, however, the Company began implementing a revised policy to
place more emphasis on the creditworthiness of the borrower. Loans are expected
to be repaid either by cash from the borrower at maturity or by borrower
refinancing.
F-14
<PAGE> 118
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Allowance for Loan Losses
Changes in the allowance for loan losses for the three months ended March
31, 1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993 are
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balances at beginning............ $4,229,000 $4,307,000 $ 4,307,000 $ 3,123,000 $ 2,646,000
Provision charged to expense..... 725,000 446,000 3,289,000 6,096,000 4,655,000
Loan charge-offs................. (229,000) (813,000) (3,367,000) (4,912,000) (4,178,000)
---------- ---------- ----------- ----------- -----------
Balance at end................... $4,725,000 $3,940,000 $ 4,229,000 $ 4,307,000 $ 3,123,000
========== ========== =========== =========== ===========
</TABLE>
At March 31, 1996 (unaudited) and December 31, 1995 and 1994, loans with
more than two monthly payments past due and on nonaccrual status totaled
$1,265,000, $1,128,000 and $3,408,000, respectively. If interest on these loans
had been accrued, interest income would have increased by approximately
$140,000, $151,000 and $955,000 for the three months ended March 31, 1996
(unaudited) and the year ended December 31, 1995 and 1994, respectively. At
March 31, 1996 (unaudited), December 31, 1995 and 1994, loans with more than two
monthly payments past due and on accrual status totaled $875,000, $1,508,000 and
$3,474,000, respectively. Interest income recognized on these loans totaled
approximately, $84,000, $130,000 and $298,000 for the three months ended March
31, 1996 (unaudited) and the years ended December 31, 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 March 31, 1996, December 31, 1995 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
MARCH 31, ----------- -----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Real estate loans................... $11,361,000 $12,577,000 $10,885,000
Title I loans....................... -- -- 1,126,000
----------- ----------- -----------
$11,361,000 $12,577,000 $12,011,000
=========== =========== ===========
</TABLE>
Accounts receivable of $12,131,000, $-0- and $1,713,000 at March 31, 1996
(unaudited), December 31, 1995 and December 31, 1994 consisted of proceeds from
loan sales. These proceeds were received early in the following month.
F-15
<PAGE> 119
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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. For the three months ended March 31, 1996 (unaudited) and for the years
ended December 31, 1995 and 1994, Pacific Thrift sold $-0-, $1,126,000 and
$2,770,000, respectively, of these loans and recorded losses totaling $-0-, $-0-
and $39,000, respectively. As of March 31, 1993, Pacific Thrift discontinued the
origination and sale of Title I and other similar loans.
F-16
<PAGE> 120
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
For the three months ended March 31, 1996 (unaudited) and the year ended
December 31, 1995, Pacific Thrift sold $-0- and $1,126,000 of seasoned home
improvement loans originated prior to March 1993 at par value and $676,000 and
$850,000, respectively, in new Title I loans at a premium.
4. OTHER REAL ESTATE
Other real estate consisted of the following at March 31, 1996, December
31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
MARCH 31, ----------- ----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Foreclosed real estate................... $ 5,350,000 $ 5,590,000 $7,478,000
In-substance foreclosures................ -- -- 545,000
Allowance for losses on other real
estate................................. (2,091,000) (2,434,000) (402,000)
----------- ----------- ----------
$ 3,259,000 $ 3,156,000 $7,621,000
=========== =========== ==========
</TABLE>
Changes in the allowance for losses on other real estate for the three
months ended March 31, 1996 and 1995 and for the years ended December 31, 1995,
1994 and 1993 and are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- --------- ---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning............... $2,434,000 $ 402,000 $ 402,000 $ 783,000 $ 867,000
Provisions for losses.............. 102,000 157,000 1,188,000 202,000 1,069,000
Net (charge-offs) recoveries....... (445,000) (119,000) 844,000 (583,000) (1,153,000)
---------- --------- ---------- --------- -----------
Balance at end..................... $2,091,000 $ 440,000 $2,434,000 $ 402,000 $ 783,000
========== ========= ========== ========= ===========
</TABLE>
Operations of other real estate for the three months ended March 31, 1996
and 1995 and for the years ended December 31, 1995, 1994 and 1993 consisted of
the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- --------- ---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision for losses............... $ 102,000 $ 177,000 $1,188,000 $ 202,000 $ 1,069,000
Net (gain) on sales................ 3,000 (99,000) (469,000) (625,000) (345,000)
Other expenses..................... 60,000 160,000 493,000 1,155,000 2,583,000
---------- --------- ---------- --------- -----------
$ 165,000 $ 238,000 $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
$653,000, $611,000 and $2,313,000 at March 31, 1996 (unaudited), December 31,
1995 and 1994, respectively.
F-17
<PAGE> 121
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 March 31, 1996,
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
MARCH 31, ----------- -----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software......... $ 1,564,000 $ 1,211,000 $ 1,078,000
Furniture and fixtures.................. 824,000 745,000 583,000
Leasehold improvements.................. 537,000 519,000 455,000
----------- ---------- ----------
2,925,000 2,475,000 2,116,000
Accumulated depreciation and
amortization.......................... (1,383,000) (1,077,000) (794,000)
----------- ---------- ----------
$ 1,542,000 $ 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 March 31, 1996 (unaudited) was 5.80% and
5.25% and at December 31, 1995 was 6.08% and 5.66%, respectively. The interest
payable on the thrift certificates totaled $69,000, $104,000 and $171,000 at
March 31, 1996 (unaudited), December 31, 1995 and 1994, respectively.
At March 31, 1996, December 31, 1995 and 1994, full-paid thrift
certificates consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
MARCH 31, ----------- -----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Certificates greater than $100,000...... $ -- $ -- $ 102,000
Certificates less than $100,000......... 37,814,000 35,881,000 57,956,000
----------- ----------- -----------
$37,814,000 $35,881,000 $58,058,000
=========== =========== ===========
</TABLE>
The scheduled maturities of full-paid thrift certificates were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
MARCH 31, ------------
1996
-----------
(UNAUDITED)
<S> <C> <C>
Less than 3 months...................................... $14,490,000 $ 12,723,000
3 to 6 months........................................... 8,822,000 13,439,000
6 to 12 months.......................................... 12,535,000 9,084,000
1 to 5 years............................................ 1,967,000 635,000
----------- -----------
$37,814,000 $ 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> 122
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.
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.
F-19
<PAGE> 123
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 non-performance fees or $500,000.
In addition, the general partner and three managing officers reaffirmed
their guarantees.
As consideration for the September 1994 amended and restated loan
agreement, NatWest waived the defaults which existed under the previous
agreement. In addition, certain financial standards under the previous agreement
are no longer required, including the borrowing base and eligible loan
restrictions, a minimum amount of excess tangible financial assets, a maximum
ratio of total liabilities to excess tangible financial assets, and a minimum
interest coverage ratio.
F-20
<PAGE> 124
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
and $6,500,000 at March 31, 1996 (unaudited) 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>
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
F-21
<PAGE> 125
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
YEARS ENDED DECEMBER 31,
---------------------------------
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>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward................... $1,361,000 $2,457,000
Loan loss reserves................................ 179,000 477,000
Interest reserves................................. 233,000 226,000
Write-down of other real estate................... 365,000 39,000
Loans held for sale............................... 220,000 78,000
Deferred rent..................................... 106,000 59,000
Environmental remediation......................... -- 270,000
Other............................................. 5,000 3,000
---------- ----------
Total deferred tax assets........................... 2,469,000 3,609,000
---------- ----------
Less valuation allowance............................ 857,000 2,946,000
---------- ----------
1,612,000 663,000
---------- ----------
Deferred tax liabilities
Depreciation...................................... 34,000 28,000
Deferred loan costs............................... 225,000 433,000
Excess yield...................................... 128,000 202,000
---------- ----------
Total deferred tax liabilities...................... 387,000 663,000
---------- ----------
Total net deferred tax asset........................ $1,225,000 $ --
========== ==========
</TABLE>
A valuation allowance has been established to reduce the deferred tax
assets to the amount considered realizable at December 31, 1995 and 1994. The
valuation allowance reserves the amount of income tax benefit recognized that is
dependent on future taxable income to be realizable. During 1995, $1,225,000 of
the valuation allowance was reversed to reflect the expected utilization of the
net operating loss over the next twelve months. However should there occur a 50%
ownership change of the Company as defined under Section 382 of the Internal
Revenue Code of 1986, the Company's ability to use the net operating losses
would be restricted to a prescribed annual amount.
At December 31, 1995, Pacific Thrift has net operating loss carryforwards
for federal income tax purposes of approximately $3,979,000 that are available
to offset future federal taxable income. These federal net operating losses
expire during the years 2007 through 2009. Pacific Thrift has net operating loss
carryforwards
F-22
<PAGE> 126
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. For the three
months ended March 31, 1996 and 1995 (unaudited), the management fee was
$102,000 and 0, respectively.
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
March 31, 1996, December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
MARCH 31, -------- --------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Unearned annual management fees........... $ 220,000 $220,000 $330,000
Amounts due for salaries, rent and
overhead................................ 113,000 127,000 148,000
-------- -------- --------
$ 333,000 $347,000 $478,000
======== ======== ========
</TABLE>
Accounts payable to the general partner consisted of the following at March
31, 1996, December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
MARCH 31, -------- --------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Base fee and loan servicing fees.......... $ 587,000 $203,000 $ 86,000
Contingent consideration in connection
with the purchase of CRC and LPPC....... 78,000 78,000 48,000
-------- -------- --------
$ 665,000 $281,000 $134,000
======== ======== ========
</TABLE>
F-23
<PAGE> 127
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Partnership had various related party transactions with the following
entities:
- PRESIDENTIAL MANAGEMENT COMPANY -- The general partner received specified
fees for services performed and reimbursements of certain expenses. Under
the Partnership Agreement, the general partner receives a base fee of up
to 35% of the loan origination fees paid by borrowers to the Company. The
base fee was 35% of loan origination fees for the Company in 1994 and 35%
in 1995. 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 three months ended March 31, 1996 and
1995 and for the years ended December 31, 1995, 1994 and 1993 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------
1996 1995 1995 1994 1993
-------- -------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Base fee............................... $307,000 $113,000 $ 767,000 $589,000 $ 669,000
Loan servicing fee..................... 63,000 61,000 245,000 216,000 178,000
Management and other fees.............. 102,000 -- -- -- --
-------- -------- ---------- -------- ----------
Total fees............................. 472,000 174,000 $1,012,000 $805,000 $ 847,000
======== ======== ========= ======== =========
Salaries and overhead reimbursements... $ 27,000 $ 26,000 $ 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.
Pacific Thrift paid and allocated certain salaries and overhead for the
Partnership, CRC, LPPC and the general partner totaling $29,000, $45,000, $1,000
and $103,000 for the three months ended March 31, 1996 (unaudited) and $84,000,
$81,000, $3,000 and $127,000 for the three months ended March 31, 1995
(unaudited), respectively, and was reimbursed on a monthly basis.
The Company incurs salary and employee-related expenses for individuals who
perform services for the Partnership and Pacific Thrift and do not own more than
a 1% interest in the general partner. The Company also incurs these expenses for
all individuals who perform services for CRC and LPPC, regardless of their
ownership interest in the general partner. The general partner, however, incurs
salary and employee-related expenses for three managing officers who perform
services for the Partnership and Pacific Thrift and own more than a 1% interest
in the general partner.
F-24
<PAGE> 128
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- 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 $84,000 and $28,000 for the three months ended March
31, 1996 and 1995 (unaudited) and $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
$237,000 for the three months ended March 31, 1996 (unaudited) and $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 $-0- and $41,000 for
the three months ended March 31, 1996 and 1995 (unaudited), respectively and
$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 $32,000, $63,000 and $236,000 at March 31, 1996 (unaudited),
December 31, 1995 and 1994, respectively, on terms slightly more favorable than
the terms for unrelated parties. Interest expense on these certificates totaled
approximately $1,000 and $2,000 for the three months ended March 31, 1996 and
1995 (unaudited) and $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.
During 1996, 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 $61,000 and
$107,000 for the three months ended March 31, 1996 and 1995 (unaudited) and
totaled $351,000 and $545,000 in 1995 and 1994 and were eliminated in the
consolidation.
Also, during 1994, the Partnership had loans receivable, with balances
totaling $464,000, that were refinanced into two loans: one a Pacific Thrift
loan in first position and the remainder a Partnership loan in second position.
In order to satisfy regulatory requirements applicable to affiliate
transactions, such refinances were subject to certain underwriting and
performance requirements.
F-25
<PAGE> 129
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-26
<PAGE> 130
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 $241,000 and $220,000 for the three months ended March 31, 1996
and 1995 (unaudited), respectively, and $905,000, $926,000 and $908,000,
respectively, 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
F-27
<PAGE> 131
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 March 31, 1996 (unaudited), December 31, 1995 and 1994, the Company was
servicing Title I loans for others totaling approximately $10,089,000,
$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. As security for the guarantee, the Partnership deposited with
the buyer $237,000 in 1995 and $180,000 in 1994.
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 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.
F-28
<PAGE> 132
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. WITHDRAWALS
Partnership withdrawals payable of $1,120,000 at March 31, 1996 (unaudited)
and 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 March 31, 1996 (unaudited) and at December 31, 1995 and December
31, 1994, other limited partners with original capital contributions totaling
$9,400,000, $9,400,000 and $9,103,000, respectively, 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>
LIMITED
PARTNERSHIP
INTERESTS TOTAL
GENERAL ------------ ------------
PARTNERSHIP (UNAUDITED)
INTEREST
-----------
(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>
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
Net income for the three months ended
March 31, 1996 (unaudited)........... 2,000 277,000 279,000
--------- ------------ ------------
Capital (deficit) -- March 31, 1996
(unaudited).......................... $ (82,000) $ 9,088,000 $ 9,006,000
========= ============ ============
</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.
F-29
<PAGE> 133
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
MAR 31, JUN 30, SEPT 30, DEC 31,
1995 1995 1995 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Interest income................................ $2,612,000 $2,424,000 $2,368,000 $ 2,173,000
Interest expense............................... 1,405,000 1,426,000 1,248,000 1,120,000
---------- ---------- ---------- ----------
Net interest income............................ 1,207,000 998,000 1,120,000 1,053,000
Provision for loan losses...................... 446,000 554,000 861,000 1,428,000*
Other income................................... 2,608,000 2,841,000 3,366,000 4,450,000
Other expense.................................. 3,592,000 3,905,000 4,494,000 5,283,000
Income tax benefit............................. 430,000 84,000 664,000 44,000
---------- ---------- ---------- ----------
Net income (loss).............................. $ 207,000 $ (536,000) $ (205,000) $(1,164,000)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MAR 31, JUN 30, SEPT 30, DEC 31,
1994 1994 1994 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income............................. $ 2,915,000 $ 3,514,000 $ 3,414,000 $ 1,561,000
Interest expense............................ 1,185,00 1,200,000 1,182,000 1,360,000
---------- ---------- ---------- ----------
Net interest income......................... 1,730,000 2,314,000 2,232,000 201,000
Provision for loan losses................... 217,000 468,000 2,064,000 3,347,000**
Other income................................ 1,143,000 1,091,000 1,149,000 2,619,000
Other expense............................... 3,684,000 4,738,000 4,139,000 3,336,000
---------- ---------- ---------- ----------
Net loss.................................... $(1,028,000) $(1,801,000) $(2,822,000) $(3,863,000)
========== ========== ========== ==========
</TABLE>
- ---------------
* The increase in the provision for loan losses is primarily a result of an
increased general reserve. Management represents that it was not practical to
determine whether or not a portion of these additional provisions should have
been recorded in earlier quarters.
** The substantial increase in the provision for loan losses is due to an
increase in the level of non-performing loans and the high level of
chargeoffs. 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> 134
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 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
F-31
<PAGE> 135
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-32
<PAGE> 136
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1994
(UNAUDITED)
------------------------------------------------
REQUIRED ACTUAL
---------------------- ----------------------
AMOUNT (RATIO) AMOUNT (RATIO)
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Tier 1 capital (to average
assets)....................... $3,216,000 (4.0%) $3,112,000 (3.9%)
Tier 1 capital (to risk-weighted
assets)....................... 2,301,000 (4.0%) 3,112,000 (5.4%)
Total capital (to risk-weighted
assets)....................... 4,602,000 (8.0%) 3,831,000 (6.7%)
</TABLE>
In addition, Pacific Thrift received an Order to Cure Deficiency of Net
Worth (Order) from the DOC in connection with a $1,414,000 deficiency in its
capital as of December 31, 1994. The Order requires that Pacific Thrift increase
its capital to a level where the ratio of its outstanding thrift certificates
compared to capital does not exceed the permitted ratio of 15 to 1. Based on the
applicable section of the California Financial Code, failure to increase its
capital within 120 days would require the DOC to take possession of the property
and business of Pacific Thrift. See Subsequent Events, Note 20.
Settlement with Department of Housing and Urban Development
In April 1993, Pacific Thrift was notified by the Mortgagee Review Board of
the Department of Housing and Urban Development (HUD) of certain alleged
violations of certain requirements in the origination of 59 loans selected
during its examination of Title I loan origination activities. Pacific Thrift
was advised that HUD intended to seek civil money penalties and was considering
an administrative action. Pacific Thrift filed a response to the allegations
affirming its compliance with HUD requirements. On September 15, 1993, HUD and
Pacific Thrift entered into a settlement agreement in which Pacific Thrift
agreed not to seek claims for insurance on 24 loans that violated the
prohibition against subordinating Title I loans to non-Title I loans, as well as
on three loans in which the proceeds were used for ineligible purposes. HUD did
not impose any penalties or take any other action.
20. EVENTS SUBSEQUENT TO DECEMBER 31, 1994
During February 1995, Pacific Thrift submitted its original capital
restoration plan to the FDIC, but the FDIC denied approval of the plan and
required certain modifications. During March 1995, Pacific Thrift submitted a
revised capital restoration plan, including a guarantee by the Partnership and,
in May 1995, the revised capital restoration plan was incorporated by reference
in a new C&D (see below).
In May 1995, Pacific Thrift was informed by the FDIC that, based on
unaudited financial information in the Consolidated Report of Condition and
Income (Call Report) filed for the first quarter of 1995, Pacific
F-33
<PAGE> 137
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-34
<PAGE> 138
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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> 139
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
SCHEDULE I
CONSOLIDATING SCHEDULE -- FINANCIAL POSITION
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>
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> 140
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> 141
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 PACIFICAMERICA ELIMINATING ENTRIES
MORTGAGE AND LOAN RECONVEYANCE PUBLISHING MONEY -------------------------
COMPANY COMPANY COMPANY COMPANY CENTER, INC. DR CR CONSOLIDATED
------------ ----------- ------------ ----------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents... $ 609,000 $ 9,550,000 $ 283,000 $ 47,000 $ -- $ -- $ -- $10,489,000
Accounts
receivable... 1,000 126,000 2,925,000 285,000 -- -- -- 3,337,000
Accrued
interest
receivable... 357,000 546,000 -- -- -- -- -- 903,000
Loans
receivable... 3,332,000 40,576,000 -- -- -- -- -- 43,908,000
Loans held
for sale... 3,000,000 9,577,000 -- -- -- -- -- 12,577,000
Receivable
from
related
party...... 417,000 116,000 -- -- -- -- 186,000 347,000
Excess yield
receivable... -- 2,725,000 -- -- -- -- -- 2,725,000
Other real
estate..... 1,408,000 1,748,000 -- -- -- -- -- 3,156,000
Property and
equipment... 48,000 1,269,000 115,000 20,000 -- -- 54,000 1,398,000
Goodwill..... 1,808,000 -- -- -- -- -- -- 1,808,000
Other
assets..... 90,000 1,665,000 44,000 6,000 104,000 -- -- 1,909,000
Investment in
subsidiaries... 7,970,000 -- -- -- -- 4,485,000 12,455,000 --
----------- ----------- ---------- -------- -------- ---------- ----------- -----------
$19,040,000 $67,898,000 $3,367,000 $ 358,000 $ 104,000 $ 4,485,000 $12,695,000 $82,557,000
=========== =========== ========== ======== ======== ========== =========== ===========
LIABILITIES
AND
PARTNERS'
CAPITAL
Thrift
certificates
payable
Full-paid
certificates... $ -- $35,881,000 $ -- $ -- $ -- $ -- $ -- $35,881,000
Installment
certificates... -- 24,275,000 -- -- -- -- -- 24,275,000
----------- ----------- ---------- -------- -------- ---------- ----------- -----------
-- 60,156,000 -- -- -- -- -- 60,156,000
Accounts
payable and
accrued
expenses... 694,000 769,000 2,444,000 132,000 -- 21,000 -- 4,018,000
Accrued
interest
payable.... 170,000 103,000 -- -- -- -- -- 273,000
Payable to
related
party...... 345,000 -- -- -- 101,000 165,000 -- 281,000
Mortgage
notes
payable.... 560,000 51,000 -- -- -- -- -- 611,000
Notes
payable.... 6,771,000 -- -- -- -- -- -- 6,771,000
Note payable
to related
party...... 600,000 -- -- -- -- -- -- 600,000
Partnership
withdrawals
payable.... 1,120,000 -- -- -- -- -- -- 1,120,000
----------- ----------- ---------- -------- -------- ---------- ----------- -----------
10,260,000 61,079,000 2,444,000 132,000 101,000 186,000 -- 73,830,000
----------- ----------- ---------- -------- -------- ---------- ----------- -----------
Commitments
and
contingencies
Partners'
capital
Common
stock.... -- 3,000,000 -- -- -- 3,000,000 -- --
Additional
paid-in
capital... -- 8,304,000 -- -- 3,000 8,307,000 -- --
Accumulated
deficit... -- (4,485,000) -- -- -- -- 4,485,000 --
Partners'
capital... 8,780,000 -- 923,000 226,000 -- 1,202,000 -- 8,727,000
----------- ----------- ---------- -------- -------- ---------- ----------- -----------
8,780,000 6,819,000 923,000 226,000 3,000 12,509,000 4,485,000 8,727,000
----------- ----------- ---------- -------- -------- ---------- ----------- -----------
$19,040,000 $67,898,000 $3,367,000 $ 358,000 $ 104,000 $12,695,000 $ 4,485,000 $82,557,000
=========== =========== ========== ======== ======== ========== =========== ===========
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-38
<PAGE> 142
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 PACIFICAMERICA ELIMINATING ENTRIES
MORTGAGE AND LOAN RECONVEYANCE PUBLISHING MONEY ---------------------
COMPANY COMPANY COMPANY COMPANY CENTER, INC. DR CR CONSOLIDATED
----------- ----------- ------------ ----------- -------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST
INCOME
Loans
receivable....... $ 1,872,000 $ 7,013,000 $ -- $ -- $ -- -- $ -- $ 8,885,000
Deposits
with
financial
institutions. 10,000 682,000 -- -- -- -- -- 692,000
----------- ----------- ---------- -------- -------- -------- ---------- -----------
Total
interest
income......... 1,882,000 7,695,000 -- -- -- -- -- 9,577,000
----------- ----------- ---------- -------- -------- -------- ---------- -----------
INTEREST
EXPENSE
Thrift
certificates
greater
than
$100,000....... -- 7,000 -- -- -- -- -- 7,000
Other
thrift
certificates. -- 3,813,000 -- -- -- -- -- 3,813,000
Notes
payable....... 1,379,000 -- -- -- -- -- -- 1,379,000
----------- ----------- ---------- -------- -------- -------- ---------- -----------
Total
interest
expense........ 1,379,000 3,820,000 -- -- -- -- -- 5,199,000
----------- ----------- ---------- -------- -------- -------- ---------- -----------
Net interest
income......... 503,000 3,875,000 -- -- -- -- -- 4,378,000
Provision for
loan
losses......... 1,894,000 1,395,000 -- -- -- -- -- 3,289,000
----------- ----------- ---------- -------- -------- -------- ---------- -----------
Net interest
income
(expense)
after
provision
for loan
losses......... (1,391,000) 2,480,000 -- -- -- -- -- 1,089,000
----------- ----------- ---------- -------- -------- -------- ---------- -----------
NONINTEREST
INCOME
Trust and
reconveyance
fees......... -- -- 3,248,000 -- -- -- -- 3,248,000
Other
income....... 139,000 353,000 -- 577,000 -- -- 53,000 1,122,000
Gain on
sale of
loans........ -- 8,895,000 -- -- -- -- -- 8,895,000
Loan
servicing
fees......... -- 351,000 -- -- -- 351,000 -- --
Equity in
income of
subsidiaries. 4,016,000 -- -- -- -- 4,016,000 -- --
----------- ----------- ---------- -------- -------- --------- ---------- -----------
4,155,000 9,599,000 3,248,000 577,000 -- 4,367,000 53,000 13,265,000
----------- ----------- ---------- -------- -------- --------- ---------- -----------
NONINTEREST
EXPENSE
Salaries
and
employee
benefits....... 392,000 5,608,000 1,712,000 146,000 -- -- -- 7,858,000
General and
administra-
tive......... 1,192,000 4,002,000 927,000 152,000 -- -- -- 6,273,000
Related
party
fees......... 1,363,000 -- -- -- -- -- 351,000 1,012,000
Operations
of other
real
estate....... 1,120,000 92,000 -- -- -- -- -- 1,212,000
Depreciation
and
amortization. 529,000 446,000 26,000 -- -- -- 82,000 919,000
----------- ----------- ---------- -------- -------- -------- ---------- -----------
4,596,000 10,148,000 2,665,000 298,000 -- -- 433,000 17,274,000
----------- ----------- ---------- -------- -------- -------- ---------- -----------
INCOME (LOSS)
BEFORE
INCOME
TAXES
(BENEFIT)....... (1,832,000) 1,931,000 583,000 279,000 -- ,367,000 486,000 (2,920,000)
INCOME TAXES
(BENEFIT)....... 1,000 (1,224,000) 1,000 -- -- -- -- (1,222,000)
----------- ----------- ---------- -------- -------- -------- ---------- -----------
NET INCOME
(LOSS)......... $(1,833,000) $ 3,155,000 $ 582,000 $ 279,000 $ -- ,367,000 $486,000 $(1,698,000)
=========== =========== ========== ======== ======== ======== ========== ===========
</TABLE>
See independent auditors' report and notes to consolidated financial statements.
F-39
<PAGE> 143
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> 144
PACIFICAMERICA MONEY CENTER, INC.
(FORMERLY PACIFIC UNITED GROUP, INC.)
(A WHOLLY OWNED SUBSIDIARY OF
PRESIDENTIAL MORTGAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995
MARCH 31, -------------
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Deferred offering costs (Note 2)................................... $ 104,000 $ 104,000
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Due to Presidential Mortgage Company............................. $ 101,000 $ 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 30
Additional paid-in capital....................................... 2,970 2,970
-------- --------
Total stockholder's equity......................................... 3,000 3,000
-------- --------
$ 104,000 $ 104,000
======== ========
</TABLE>
See accompanying notes to the balance sheet.
F-41
<PAGE> 145
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> 146
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER TO SELL OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 12
Use of Proceeds....................... 16
Capitalization........................ 17
Dividend Policy....................... 18
Market For Common Stock............... 18
Management's Discussion and Analysis
of Financial Condition And Results
of Operations....................... 19
Certain Pro Forma Information......... 34
Change in and Disagreements With
Accountants......................... 38
Business.............................. 40
Supervision and Regulation............ 59
Beneficial Ownership of Common
Stock............................... 71
Management............................ 74
Certain Transactions.................. 88
Description of Capital Stock.......... 90
Shares Eligible For Future Sale....... 95
Registration of Certain Shares For
Resale.............................. 96
Underwriting of the Public Offering... 97
Legal Matters......................... 98
Experts............................... 98
Available Information................. 98
Glossary.............................. 99
Index to Financial Statements......... 101
</TABLE>
---------------------
UNTIL JULY 19, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
763,661 SHARES
LOGO
PACIFICAMERICA
MONEY CENTER, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
JUNE 24, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 147
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following expenses are estimated for the Restructuring Plan, the Rights
Offering and the Public Offering.
Restructuring Expenses
<TABLE>
<S> <C>
Legal................................................... $100,000
Fairness Opinion........................................ 165,000
Accounting.............................................. 70,000
Printing & Postage...................................... 20,000
Soliciting Agent........................................ 15,000
Transfer Agent.......................................... 14,000
Registration, Listing and Filing Fees................... 16,000
Miscellaneous........................................... 20,000
--------
Total Restructuring Expenses.................... $400,000
========
</TABLE>
Offering Expenses in Connection with Rights Offering and Public Offering
<TABLE>
<S> <C>
Selling Commissions....................................... $531,000
Reimbursed Underwriting Expenses.......................... 85,000
Legal..................................................... 100,000
Accounting................................................ 74,000
Printing & Postage........................................ 15,000
Transfer Agent............................................ 5,000
Registration, Listing and Filing Fees..................... 9,000
--------
Total Offering Expenses......................... $819,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Corporation's Certificate of Incorporation provides that the directors
will not be personally liable to the Corporation or to any Stockholder for the
breach of a fiduciary responsibility, to the full extent that such limitation or
elimination of liability is permitted under Delaware law.
The Bylaws provide that the Corporation will indemnify its directors and
officers to the full extent permitted under the Delaware law. Pursuant to the
Bylaws and Delaware law, the Corporation will indemnify each director and
officer against any liability and related expenses (including attorneys' fees)
incurred in connection with any proceeding in which he or she may be involved by
reason of serving in such capacity so long as the director or officer acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interest of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
A director and officer is also entitled to indemnification against expenses
incurred in any action or suit by or in the right of the Corporation to procure
a judgment in its favor by reason of serving in such capacity if he or she acted
in good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the Corporation, except that no such indemnification will be
made if the director or officer is judged to be liable to the Corporation,
unless the applicable court of law determines that despite the adjudication of
liability the director or officer is reasonably entitled to indemnification for
such expenses.
II-1
<PAGE> 148
The Bylaws authorize the Corporation to advance funds to a director or
officer for costs and expenses (including attorneys' fees) incurred in a suit or
proceeding upon receipt of an undertaking by such director or officer to repay
such amounts if it is ultimately determined that he or she is not entitled to be
indemnified.
The Corporation will enter into agreements with the Corporation's directors
and executive officers, indemnifying them to the fullest extent permitted by
Delaware law. Stockholders may have more limited recourse against such persons
than would apply absent these provisions.
The Corporation intends to obtain insurance policies indemnifying the
directors and officers against certain civil liabilities, including liabilities
under the federal securities laws, which might be incurred by them in such
capacity.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
There have been no sales of securities by the Registrant within the past
three years.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the amount of unsubscribed securities to be purchased by
others, and the terms of any subsequent reoffering thereof. If any public
offering is to be made on terms differing from those set forth on the cover page
of the Prospectus, a post-effective amendment will be filed to set forth the
terms of such offering.
The undersigned Registrant hereby undertakes as follows: That prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (h)(1) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415 will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
<PAGE> 149
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement
2.1 Restructuring Plan of Presidential Mortgage Company (the "Partnership"),
incorporated by reference to Exhibit 2.1 of Registration Statement on Form S-4 of
the Registrant, as filed November 24, 1995 and declared effective May 14, 1996 (the
"S-4 Registration Statement")
3.1 Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
3.3 Fifth Amended and Restated Certificate and Agreement of Limited Partnership of the
Registrant (the "Partnership Agreement"), dated as of September 7, 1989,
incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement
on Form S-2, as filed with the Securities and Exchange Commission August 15, 1989,
as amended by Amendment No. One thereto, as filed with the Securities and Exchange
Commission on October 10, 1989 (Registration No. 33-30517) (the "1989 Registration
Statement").
3.4 Certificate of Limited Partnership of the Registrant on Form LP-1, as filed with the
California Secretary of State and currently in effect, incorporated by reference to
Exhibit 3.2 of the Registration Statement on Form S-11, filed with the Securities
and Exchange Commission on November 13, 1984, as amended on February 4 and March 1,
1985, and declared effective on March 6, 1985 (Registration No. 2-94289) (the "1984
Registration Statement").
3.5 First Amendment to the Partnership Agreement dated as of May 15, 1993, incorporated
by reference to Exhibit 3.3 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993, as filed with the Securities and Exchange Commission
on November 27, 1994 (the "1993 Annual Report").
3.6 Second Amendment to the Partnership Agreement dated as of January 1, 1994,
incorporated by reference to Exhibit 3.4 of the 1993 Annual Report.
4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the
S-4 Registration Statement.
4.2 General Partner Warrant Agreement and Warrant, incorporated by reference to Exhibit
4.2 of the S-4 Registration Statement.
4.3 Subscriber Warrant Agreement and Warrant, incorporated by reference to Exhibit 4.3
of S-4 Registration Statement.
5.1 Opinion of Jeffer, Mangels, Butler & Marmaro regarding validity of securities being
registered*
10.1 Employment Agreement by and between the Registrant and Joel R. Schultz*
10.2 Employment Agreement by and between the Registrant and Richard D. Young*
10.3 Employment Agreement by and between the Registrant and Kenneth A. Carmona*
10.4 Employment Agreement by and between the Registrant and Norman A. Markiewicz*
10.5 Employment Agreement by and between the Registrant and Richard B. Fremed*
10.6 Employment Agreement by and between Pacific Thrift and Loan Company, Inc. and Frank
Landini, incorporated by reference to Exhibit 10.6 of S-4 Registration Statement.
10.7 Form of Indemnification Agreement by and between the Registrant and each of its
directors and executive officers*
10.8 Stock Option Plan, dated January 1, 1996, subject to completion of Restructuring
Plan*
10.9 Stock Purchase Plan, dated January 1, 1996, subject to completion of Restructuring
Plan*
</TABLE>
II-3
<PAGE> 150
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.10 Supplemental Executive Retirement Plan, dated January 1, 1996, subject to completion
of Restructuring Plan*
10.11 Employment Agreement, dated May 9, 1984, by and among Pacific and Loan Association
and the Registrant, as employers, and Joel R. Schultz, as employee, as currently in
effect only with the Registrant, incorporated by reference to Exhibit 10.2 of the
1984 Registration Statement.
10.12 Employment Agreement, dated May 9, 1984, by and among Pacific and Loan Association
and the Registrant, as employers, and Norman A. Markiewicz, as employee, as
currently in effect only with the Registrant, incorporated by reference to Exhibit
10.3 of the 1984 Registration Statement.
10.13 Loan Agreement (the "Loan Agreement"), dated as of August 28, 1990, as amended and
restated May 20, 1992, and as further amended and restated as of September 28, 1994,
by and among National Westminster Bank USA ("Fleet"), as Agent and a participating
Bank, the banks signatory thereto (the "Banks"), and the Registrant, incorporated by
reference to Exhibit 10.4 of the 1993 Annual Report.
10.14 Letter Agreement to amend Loan Agreement, dated October 26, 1995*
10.15 Agreement for Purchase of Limited Partnership Interests of Consolidated Reconveyance
Company and Lenders Posting and Publishing Company, dated as of July 1, 1990,
incorporated by reference to Exhibit 10.6 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990, as filed with the Securities and Exchange
Commission on March 31, 1991.
10.16 Master Loan Purchase Agreement dated as of June 21, 1995 by and between Pacific
Thrift and Loan Company and Aames Capital Corporation, incorporated by reference to
Exhibit 10.7 of the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1994, as filed with the Securities and Exchange Commission on July 26,
1995.
10.17 Amendment to Loan Agreement dated November 28, 1995.*
16.2 Letter of Ernst & Young regarding termination dated September 27, 1995, incorporated
by reference to the Partnership's Report on Form 8-K dated September 12, 1995, as
filed with the Securities and Exchange Commission on September 28, 1995.
21.1 Subsidiaries of the Registrant*
23.1 Consent of Attorney, included in legal opinion filed as Exhibit 5.1 hereof.*
23.2 Consent of Independent Certified Public Accountants, BDO Seidman, LLP.
23.3 Consent of Independent Certified Public Accountants, Ernst & Young LLP.*
24.1 Power of attorney, incorporated by reference to Power of Attorney set forth on page
7 of Part II of the Registration Statement filed November 24, 1995.
</TABLE>
- ---------------
* Indicates previously filed.
(B) Financial Statement Schedules
None.
II-4
<PAGE> 151
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on June 24, 1996.
(Registrant)
PACIFICAMERICA MONEY CENTER, INC.
By: /s/ Joel R. Schultz
------------------------------------
Joel R. Schultz
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- --------------
<C> <S> <C>
/s/ Joel R. President, Chief Executive June 24, 1996
Schultz Officer, and Director
- ------------------------------
Joel R. Schultz
/s/ Charles J. Chief Financial and June 24, 1996
Siegel Accounting Officer
- ------------------------------
Charles J. Siegel
/s/ Richard D. Young Senior Executive Vice June 24, 1996
- ------------------------------ President and Director
Richard D. Young
/s/ Russell G. Director June 24, 1996
Allison
- ------------------------------
Russell G. Allison
</TABLE>
II-5
<PAGE> 152
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBIT VOLUME
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PACIFICAMERICA MONEY CENTER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE> 153
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- -------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Underwriting Agreement....................................................
2.1 Restructuring Plan of Presidential Mortgage Company (the "Partnership"),
incorporated by reference to Exhibit 2.1 of Registration Statement on Form
S-4 of the Registrant, as filed November 24, 1995 and declared effective
May 14, 1996 (the "S-4 Registration Statement")...........................
3.1 Certificate of Incorporation of the Registrant*...........................
3.2 Bylaws of the Registrant*.................................................
3.3 Fifth Amended and Restated Certificate and Agreement of Limited
Partnership of the Registrant (the "Partnership Agreement"), dated as of
September 7, 1989, incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-2, as filed with the
Securities and Exchange Commission August 15, 1989, as amended by
Amendment No. One thereto, as filed with the Securities and Exchange
Commission on October 10, 1989 (Registration No. 33-30517) (the "1989
Registration Statement"). ................................................
3.4 Certificate of Limited Partnership of the Registrant on Form LP-1, as
filed with the California Secretary of State and currently in effect,
incorporated by reference to Exhibit 3.2 of the Registration Statement on
Form S-11, filed with the Securities and Exchange Commission on November
13, 1984, as amended on February 4 and March 1, 1985, and declared
effective on March 6, 1985 (Registration No. 2-94289) (the "1984
Registration Statement"). ................................................
3.5 First Amendment to the Partnership Agreement dated as of May 15, 1993,
incorporated by reference to Exhibit 3.3 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, as filed with the
Securities and Exchange Commission on November 27, 1994 (the "1993 Annual
Report"). ................................................................
3.6 Second Amendment to the Partnership Agreement dated as of January 1, 1994,
incorporated by reference to Exhibit 3.4 of the 1993 Annual Report. ......
4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit
4.1 of the S-4 Registration Statement. ...................................
4.2 General Partner Warrant Agreement and Warrant, incorporated by reference
to Exhibit 4.2 of the S-4 Registration Statement. ........................
4.3 Subscriber Warrant Agreement and Warrant, incorporated by reference to
Exhibit 4.3 of S-4 Registration Statement. ...............................
5.1 Opinion of Jeffer, Mangels, Butler & Marmaro regarding validity of
securities being registered*..............................................
10.1 Employment Agreement by and between the Registrant and Joel R. Schultz*...
10.2 Employment Agreement by and between the Registrant and Richard D.
Young*....................................................................
10.3 Employment Agreement by and between the Registrant and Kenneth A.
Carmona*..................................................................
10.4 Employment Agreement by and between the Registrant and Norman A.
Markiewicz*...............................................................
10.5 Employment Agreement by and between the Registrant and Richard B.
Fremed*...................................................................
10.6 Employment Agreement by and between Pacific Thrift and Loan Company, Inc.
and Frank Landini, incorporated by reference to Exhibit 10.6 of S-4
Registration Statement. ..................................................
10.7 Form of Indemnification Agreement by and between the Registrant and each
of its directors and executive officers*..................................
10.8 Stock Option Plan, dated January 1, 1996, subject to completion of
Restructuring Plan*.......................................................
10.9 Stock Purchase Plan, dated January 1, 1996, subject to completion of
Restructuring Plan*.......................................................
10.10 Supplemental Executive Retirement Plan, dated January 1, 1996, subject to
completion of Restructuring Plan*.........................................
</TABLE>
<PAGE> 154
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- -------------------------------------------------------------------------- ------------
<C> <S> <C>
10.11 Employment Agreement, dated May 9, 1984, by and among Pacific and Loan
Association and the Registrant, as employers, and Joel R. Schultz, as
employee, as currently in effect only with the Registrant, incorporated by
reference to Exhibit 10.2 of the 1984 Registration Statement..............
10.12 Employment Agreement, dated May 9, 1984, by and among Pacific and Loan
Association and the Registrant, as employers, and Norman A. Markiewicz, as
employee, as currently in effect only with the Registrant, incorporated by
reference to Exhibit 10.3 of the 1984 Registration Statement. ............
10.13 Loan Agreement (the "Loan Agreement"), dated as of August 28, 1990, as
amended and restated May 20, 1992, and as further amended and restated as
of September 28, 1994, by and among National Westminster Bank USA
("Fleet"), as Agent and a participating Bank, the banks signatory thereto
(the "Banks"), and the Registrant, incorporated by reference to Exhibit
10.4 of the 1993 Annual Report. ..........................................
10.14 Letter Agreement to amend Loan Agreement, dated October 26, 1995*.........
10.15 Agreement for Purchase of Limited Partnership Interests of Consolidated
Reconveyance Company and Lenders Posting and Publishing Company, dated as
of July 1, 1990, incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990, as filed with the Securities and Exchange Commission on March 31,
1991. ....................................................................
10.16 Master Loan Purchase Agreement dated as of June 21, 1995 by and between
Pacific Thrift and Loan Company and Aames Capital Corporation,
incorporated by reference to Exhibit 10.7 of the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1994, as filed with
the Securities and Exchange Commission on July 26, 1995. .................
10.17 Amendment to Loan Agreement dated November 28, 1995.* ....................
16.2 Letter of Ernst & Young regarding termination dated September 27, 1995,
incorporated by reference to the Partnership's Report on Form 8-K dated
September 12, 1995, as filed with the Securities and Exchange Commission
on September 28, 1995. ...................................................
21.1 Subsidiaries of the Registrant*...........................................
23.1 Consent of Attorney, included in legal opinion filed as Exhibit 5.1
hereof.*..................................................................
23.2 Consent of Independent Certified Public Accountants, BDO Seidman, LLP. ...
23.3 Consent of Independent Certified Public Accountants, Ernst & Young
LLP.*.....................................................................
24.1 Power of attorney, incorporated by reference to Power of Attorney set
forth on page 7 of Part II of the Registration Statement filed November
24, 1995..................................................................
</TABLE>
- ---------------
* Indicates previously filed.
<PAGE> 1
EXHIBIT 1.1
763,661 Shares
(subject to increase of up to additional 114,549 shares
in the event of an oversubscription)
PACIFICAMERICA MONEY CENTER, INC.
(A DELAWARE CORPORATION)
Common Stock
($0.01 par value per share)
UNDERWRITING AGREEMENT
June 24, 1996
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
PacificAmerica Money Center, Inc., a Delaware corporation (the
"Company"), confirms its agreement with you whereby the Company proposes to
issue and sell to you an aggregate of 763,661 shares (the "Firm Common Shares")
of its authorized but unissued common stock, $0.01 par value per share (the
"Common Stock"). In addition, the Company agrees to grant to you an option to
purchase up to an aggregate of 114,549 additional shares of Common Stock (the
"Optional Common Shares") as provided in Section 1 hereof. The Firm Common
Shares and, to the extent such option is exercised, the Optional Common Shares
are hereinafter collectively referred to as the "Common Shares."
You have advised the Company that you propose to make a public offering
of the Common Stock on the effective date of the Registration Statement (as
hereinafter defined) or as soon thereafter as in your judgment is advisable (the
"Offering").
The Company hereby confirms its agreement with you as follows:
1. Purchase, Sale and Delivery of Common Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, (i) the Company agrees to issue and sell
to you an aggregate of 763,661 of the Firm Common Shares and (ii) you
1
<PAGE> 2
agree, to purchase from the Company such Firm Common Shares. The purchase price
per share to be paid by you to the Company shall be $9.35 per share, except with
regard to shares sold by you to officers, directors or employees of Presidential
Mortgage Company, a California limited partnership (the "Partnership"), for
which the purchase price per share shall be $10.00 per share.
The closing of the transactions contemplated by this Agreement shall be
held at 9:00 a.m. at the offices of Jeffer, Mangels, Butler & Marmaro LLP, Los
Angeles, California (or such other place as may be agreed upon by the Company
and the Representative) on the third (or, if the purchase set forth in the above
paragraph is determined after 4:30 p.m., Washington, D.C. time, the fourth)
business day following the first date that any of the Common Shares are released
by you for sale to the public (the "First Closing Date"); provided, however,
that if the Prospectus (as hereinafter defined) is at any time prior to the
First Closing Date recirculated to the public, the First Closing Date shall
occur upon the later of the third (or, if the purchase set forth in the above
paragraph is determined after 4:30 p.m., Washington, D.C. time, the fourth)
business day following the first date that any of the Common Shares are released
by you for sale to the public or the date that is 48 hours after the date that
the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by or
on behalf of the Company to you, for your account against payment by you for
your account of the purchase price therefor by wire transfer or certified or
official bank check payable in next day funds to the order of the Company. The
certificates for the Firm Common Shares shall be registered in such names and
denominations as you shall have requested at least two full business days prior
to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at any office of
U.S. Stock Transfer Corporation designated by you. Time shall be of the essence,
and delivery at the time and place specified in this Agreement is a further
condition to your obligation.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to you an option to purchase any amount up to
an aggregate of 114,549 Optional Common Shares at the purchase price per share
to be paid for the Firm Common Shares, for use solely in covering any
over-allotments made for your account in the sale and distribution of the Firm
Common Shares. The option granted hereunder may be exercised at any time (but
not more than once) within 30 days after the first date that any of the Common
Shares are released by you for sale to the public, upon notice by you to the
Company setting forth the aggregate number of Optional Common Shares as to which
you are exercising the option, the names and denominations in which the
certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which may not
be earlier than the First Closing Date), being herein referred to as the "Second
Closing Date," shall be determined by you, but if at any time other than the
First
2
<PAGE> 3
Closing Date shall not be earlier than three nor later than five full business
days after delivery of such notice of exercise. Certificates for the Optional
Common Shares will be made available for checking and packaging on the business
day preceding the Second Closing Date at any office of U.S. Stock Transfer
Corporation designated by you. The manner of payment for and delivery of the
Optional Common Shares shall be the same as for the Firm Common Shares purchased
from the Company as specified in the two preceding paragraphs. At any time
before lapse of the option, you may cancel such option by giving written notice
of such cancellation to the Company.
Subject to the terms and conditions hereof, you agree to make a public
offering of the Common Shares as soon after the effective date of the
Registration Statement (as hereafter defined) as in your judgment is advisable
and at the public offering price set forth on the cover page of, and on the
terms set forth in, the Prospectus.
2. Representations and Warranties of the Company. The Company
represents and warrants to you as of the date hereof as follows:
(a) A registration statement on Form S-1 (File No. 333-01395) with
respect to the Common Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations of the Securities and Exchange Commission (the
"Commission") promulgated thereunder (the "Rules and Regulations"), and has been
filed with the Commission. The Company has prepared and has filed or proposes to
file prior to the effective date of such registration statement an amendment or
amendments to such registration statement, which amendment or amendments have
been or will be similarly prepared. There has been delivered to you one signed
copy of such registration statement and amendments, together with two copies of
each exhibit filed therewith. Conformed copies of such registration statement
and amendments (but without exhibits) and of the related Preliminary Prospectus
(as defined below) have been delivered to you in such reasonable quantities as
you have requested. The Company will also file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, or (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus, or such
final prospectus, shall include all Rule 430A Information (as defined below)
and, except to the extent that you shall agree to a modification, shall be in
all substantive respects in the form furnished to you prior to the date and time
that this Agreement was executed and delivered by the parties hereto or, to the
extent not completed at such date and time, shall contain only such specific
additional information and other changes (beyond that contained in the latest
Preliminary Prospectus) as the Company shall have previously advised you in
writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date, shall also mean such registration
statement as so amended; provided, however, that such term shall
3
<PAGE> 4
also include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes effective
as provided by Rule 430A of the Rules and Regulations. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the preceding
paragraph and any preliminary prospectus included in the Registration Statement
at the time it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Common Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no filing pursuant
to Rule 424(b) of the Rules and Regulations is required, shall mean the form of
final prospectus included in the Registration Statement at the time such
registration statement becomes effective. The term "Rule 430A Information" means
information with respect to the Common Shares and the offering thereof permitted
to be omitted from the Registration Statement when it becomes effective,
pursuant to Rule 430A of the Rules and Regulations.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and the most recent Preliminary
Prospectus has conformed in all material respects to the requirements of the Act
and the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will conform to the requirements of the Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, no representation or warranty
contained in this subsection 2(b) shall be applicable to information contained
in or omitted from any Preliminary Prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
you or any Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing in the
State of California and in all other jurisdictions in which such qualification
is required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure to so qualify would not have a
material adverse effect on the financial condition, results of operations or
business of the Company, Pacific Thrift (as defined below) and the other
Subsidiaries (as defined below), taken as a whole.
4
<PAGE> 5
(d) The only subsidiaries of the Company are Pacific Thrift and Loan
Company, a California corporation ("Pacific Thrift"); Consolidated Reconveyance
Company, a California limited partnership; Consolidated Reconveyance
Corporation, a Washington corporation; Lenders Posting and Publishing Company, a
California limited partnership; and PacificAmerica Mortgage, Inc., a Delaware
corporation ("PacificAmerica Mortgage") (individually, a
"Subsidiary" and collectively, the "Subsidiaries").
(e) Pacific Thrift has been duly incorporated and is validly existing
as an industrial loan company in good standing under the laws of the State of
California, and each of the other Subsidiaries has been duly incorporated or
organized as a limited partnership, as applicable, and is validly existing as a
corporation or limited partnership, as applicable, in good standing under the
laws of the jurisdiction of its respective incorporation or organization. All of
the issued and outstanding capital stock or limited partnership interests, as
applicable, of each of the Subsidiaries has been duly authorized and validly
issued, is fully paid and nonassessable, and is owned by the Company in each
case free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity, except for the security interest therein held by
Fleet Bank, N.A.
(f) Each of the Subsidiaries has full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus; each of the Subsidiaries is in possession of and is operating
in compliance in all material respects with all authorizations, licenses,
permits, consents, certificates, orders and other governmental authorizations
material to or required for the conduct of its business, all of which are valid
and in full force and effect, and has received no notice of any proceeding or
action relating to the revocation or modification of any such authorization,
license, permit, consent, certificate, order or other governmental
authorization; each of the Subsidiaries is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
ownership or leasing of properties or the conduct of its business requires such
qualification, except for jurisdictions in which the failure to so qualify would
not have a material adverse effect on the financial condition, results of
operations or business of the Company and the Subsidiaries, taken as a whole;
and neither the Company nor any of the Subsidiaries has received notice of any
proceeding in any such jurisdiction revoking, limiting or curtailing, or seeking
to revoke, limit or curtail, such power and authority or qualification.
(g) The deposits of Pacific Thrift are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to legally applicable limits, and no
proceedings for the termination or revocation of such insurance are pending or,
to the best knowledge of the Company, threatened, and no approvals by or filings
with the California Department of Corporations ("DOC"), FDIC or Board of
Governors of the Federal Reserve System ("Federal Reserve Board"), except such
as have already been obtained and are in effect, are necessary to consummate the
Offering.
(h) The Company has, and upon consummation of the Offering will have,
an authorized capitalization as set forth under the heading "Description of
Capital Stock" in the
5
<PAGE> 6
Prospectus. All of the issued and outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable. Except as described in the Prospectus, no Common Stock is issued
and outstanding and no stockholder of the Company or other person has any right,
option or warrant to acquire any Common Stock. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the Company and
the related notes thereto included in the Prospectus, the Company does not have
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights to be granted and exercised
thereunder set forth in the Prospectus, accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(i) The Common Shares to be sold by the Company hereunder have been
duly authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be validly issued, fully paid and nonassessable, and
will conform to the description thereof contained in the Prospectus. No
preemptive rights or other rights to subscribe for or purchase exist with
respect to sale of the Common Shares by the Company pursuant to this Agreement.
The certificates used to evidence shares of Common Stock are in due and proper
form.
(j) No approval, consent or authority of the stockholders of the
Company or the Board of Directors of the Company or any governmental agency or
any other third party will be required for the issuance and sale of the Common
Shares to be sold by the Company as contemplated herein or the entering into of
this Agreement, except such as have already been obtained.
(k) The Company has full legal right, power and authority to enter into
this Agreement and to perform the transactions contemplated hereby. This
Agreement has been duly and validly authorized by the Company and upon due
execution and delivery by the Company and the other parties thereto will
constitute the valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to limitations imposed by
general principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity) and subject to any bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other laws, now
or hereafter in effect, relating to or limiting creditors' rights generally. The
making and performance of this Agreement by the Company and the consummation of
the transactions herein contemplated will not violate any provisions of the
Certificate of Incorporation or Bylaws, or other organizational document of the
Company or any of the Subsidiaries, and will not conflict with, result in the
breach or violation of, or constitute, either by itself or upon notice or the
passage of time or both, a default under any agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which the
Company or any of the Subsidiaries is a party or by which the Company, any of
the Subsidiaries or any of their respective properties may be bound or affected,
any statute or any authorization, judgment, decree, order, rule or regulation of
any
6
<PAGE> 7
court or any regulatory body, administrative agency or other governmental body
applicable to the Company, any of the Subsidiaries or any of their respective
properties, except where any violation, conflict, breach or default, whether
individually or in the aggregate, would not have a material adverse effect on
the condition (financial or otherwise), business, properties, result of
operations, management or prospects of the Company or the Subsidiaries, taken as
a whole (hereinafter, a "Material Adverse Effect"). No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby,
except for compliance with the Act, the Blue Sky laws applicable to the public
offering of the Common Shares by the Underwriter and the clearance of such
offering with the National Association of Securities Dealers, Inc. (the "NASD").
(l) The accountants, BDO Seidman LLP and Ernst & Young LLP, each of
whom certified portions of the financial statements and supporting schedules
included in the Registration Statement, are both independent public accountants
within the meaning of the Code of Ethics of the American Institute of Certified
Public Accountants; and such accountants are, with respect to the Company and
each of the Subsidiaries, independent certified public accountants as required
by the Act and the Rules and Regulations.
(m) The financial statements and schedules of the Company, and the
related notes thereto, included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company as of the
respective dates of such financial statements and schedules, and the
consolidated results of operations and changes in financial position of the
Company for the respective periods covered thereby. Such statements, schedules
and related notes have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis as certified by the
independent accountants named in subsection 2(l). No other financial statements
or schedules are required to be included in the Registration Statement. The
other financial, statistical and pro forma information and related notes
included in the Registration Statement and the Prospectus (i) present fairly the
information shown therein on a basis consistent (except as otherwise noted
therein) with the audited financial statements of the Company included therein
and (ii) are in compliance in all material respects with the requirements of the
Act.
(n) Neither the Company nor any of the Subsidiaries are (i) in
violation or default of any provision of their respective Certificate of
Incorporation or Articles of Incorporation, as the case may be, or Bylaws or
other organizational documents or (ii) except as disclosed in the Prospectus and
except as to defaults which individually or in the aggregate would not have a
Material Adverse Effect, in breach of or default with respect to any provision
of any agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a party
or by which it or any of its properties are bound and, except as to defaults
which individually or in the aggregate would not have a Material Adverse Effect,
there does not exist any state of facts which constitutes an event of default on
the part of the Company as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default.
7
<PAGE> 8
(o) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations which have not been
described or filed as required. The contracts so described in the Prospectus are
in full force and effect on the date hereof; the descriptions thereof or
references thereto are correct in all material respects; and except as to
defaults that individually or in the aggregate would not be material to the
Company, neither the Company, any of the Subsidiaries, nor, to the knowledge of
the Company, any other party is in material breach of or default under any of
such contracts.
(p) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the knowledge of the
Company, threatened to which the Company or any of the Subsidiaries is or may be
a party or of which property owned or leased by the Company or any of the
Subsidiaries is or may be the subject, which actions, suits or proceedings
might, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or are likely to result in a
Material Adverse Effect, and no labor disturbance by any employee of the Company
or any of the Subsidiaries exists or is imminent which might be expected to
affect adversely the Company's condition, properties, business, results of
operations or prospects. Except as disclosed in the Prospectus, no enforcement
proceeding, whether formal or informal, has been commenced against the Company
or any of the Subsidiaries by the FDIC, the DOC or, to the Company's knowledge,
any other governmental authority, nor have any such proceedings been instituted,
threatened or recommended. Except as disclosed in the Prospectus, neither the
Company, any of the Subsidiaries, nor any of their respective officers or
directors is a party or subject to the provisions of any regulatory action,
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body affecting the business of the
Company or any of the Subsidiaries.
(q) Except as disclosed in the Prospectus, the Company and each of the
Subsidiaries have good and marketable title to all of their respective
properties and assets, free and clear of all liens, charges, encumbrances or
restrictions, except such as would not materially adversely affect the value of
such properties and assets and would not interfere with the use made or proposed
to be made of such properties and assets by the Company or a Subsidiary; all of
the leases and subleases material to the business of the Company or any of the
Subsidiaries or under which the Company or any of the Subsidiaries holds
properties described in the Prospectus are in full force and effect; and the
Company and the Subsidiaries have no notice of any material claim of any sort
which has been asserted by anyone adverse to the rights of the Company or a
Subsidiary as owner or as lessee or sublessee under any of the leases or
subleases mentioned above, or materially affecting or questioning the rights of
the Company or a Subsidiary to the continued possession of the leased or
subleased premises under any such lease or sublease. Except as disclosed in the
Prospectus and other than such leases and properties as are immaterial in the
aggregate, the Company and the Subsidiaries own or lease all properties as are
necessary to their respective operations as now conducted or as proposed to be
conducted.
8
<PAGE> 9
(r) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) neither the Company nor any of
the Subsidiaries has incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material verbal or written agreement
or other transaction whether or not arising in the ordinary course of business
or which could result in a material reduction in the future earnings of the
Company; (ii) there has not been any material increase in the consolidated
long-term debt of the Company or in the aggregate dollar or principal amount of
the assets held by the Company, PacificAmerica Mortgage or Pacific Thrift which
are classified as substandard, doubtful or loss or loans which are 90 days or
more past due or real estate acquired by foreclosure; (iii) there has not been
any material adverse change in the condition (financial or otherwise), business,
properties, results of operations or prospects of the Company or any of the
Subsidiaries, other than changes resulting from changes in the economy
generally; (iv) there has not been any material adverse change in the aggregate
dollar amount of the deposits or consolidated net worth or spread of the Company
or Pacific Thrift; (v) there has been no material adverse change in the
relationship between the Company or any of its Subsidiaries and their respective
insurance carriers, including, without limitation, cancellation or other
termination of a fidelity bond or any other type of insurance coverage; (vi)
there has been no material change in the management of the Company or any of the
Subsidiaries compared to the information disclosed in the Prospectus; (vii)
neither the Company nor any of the Subsidiaries have sustained any material loss
or interference with their respective businesses or properties from fire, flood,
windstorm, earthquake, accident or other calamity, whether or not covered by
insurance; (viii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock and the Company is not in
default in the payment of principal or interest on any outstanding debt
obligations; and (ix) there has not been any change in the capital stock of the
Company (other than upon the sale of the Common Shares hereunder and pursuant to
the Restructuring and the Rights Offering, as described in the Prospectus).
(s) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and the Subsidiaries have sufficient trademarks, trade
names, patent rights, copyrights, licenses, approvals and governmental
authorizations to conduct their respective businesses as now conducted; the
expiration of any trademarks, trade names, patent rights, copyrights, licenses,
approvals or governmental authorizations would not have a Material Adverse
Effect; and the Company has no knowledge of any material infringement by it of
trademark, trade name rights, patent rights, copyrights, licenses, trade secret
or other similar rights of others, and, to the Company's knowledge, there is no
claim being made against the Company or any of the Subsidiaries regarding
trademark, trade name, patent, copyright, license, trade secret or other
infringement which could have a Material Adverse Effect.
(t) Neither the Company nor any of the Subsidiaries have been advised
or have any reason to believe that the Company or any of the Subsidiaries is not
conducting business in compliance with all applicable laws, rules and
regulations; except as disclosed in the Prospectus or where failure to be so in
compliance would not have a Material Adverse Effect or where it is already in
the process of complying.
9
<PAGE> 10
(u) Except as disclosed in the Prospectus, neither the Company nor any
of the Subsidiaries is in violation of any directive from the FDIC, the DOC or
any other governmental authority, including the Memorandum of Understanding
issued by the FDIC dated April 1, 1996 (the "MOU"), and the Company and the
Subsidiaries are in compliance with all federal and state laws and regulations
that regulate or relate to its business, including, without limitation, the
Financial Institutions Recovery, Reform and Enforcement Act of 1989 ("FIRREA"),
the Federal Deposit Insurance Act (the "FDIA"), the National Housing Act (the
"NHA"), the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the California Industrial Loan Law and all other applicable laws and
regulations where the failure to comply would have a Material Adverse Effect.
(v) The Company and the Subsidiaries have filed or caused to be filed
all material federal, state and foreign income and franchise tax returns and
have paid all taxes shown as due thereon; and the Company has no knowledge of
any tax deficiency which has been asserted or threatened in writing against the
Company or any of the Subsidiaries which would have a Material Adverse Effect on
the Company or any of the Subsidiaries.
(w) Neither the Company nor any of the Subsidiaries is an "investment
company" within the meaning of the Investment Company Act of 1940, as amended
(the "Investment Company Act").
(x) The Company has not distributed any offering material in connection
with the offering and sale of the Common Shares other than the Preliminary
Prospectus, the Prospectus, the Registration Statement and the other materials
permitted by the Act.
(y) The Company and the Subsidiaries maintain insurance of the types
and in the amounts generally deemed adequate for their businesses, including,
but not limited to, insurance covering real and personal property owned or
leased by the Company or the Subsidiaries against theft, forgery, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(z) Neither the Company nor any of the Subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasipublic duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof, the effect of which would have a Material Adverse
Effect.
(aa) All material transactions between the Company or the Subsidiaries
and their respective officers and directors and their affiliates have been
accurately disclosed in the Prospectus; and the terms of such transactions are
fair to the Company or the Subsidiaries, as the case may be.
10
<PAGE> 11
(ab) Except as disclosed in the Prospectus, the Company has not: (i)
placed any securities within the last 18 months; (ii) had any material dealings
with any member of the NASD or any person related to or associated with such
member, other than discussions and meetings relating to the proposed Offering
and routine purchases and sales of U.S. Government and agency securities and
other assets; (iii) entered into a financial or management consulting agreement
except as contemplated hereunder and except for the engagement letter with the
Representative, dated July 12, 1995; or (iv) engaged any intermediary between
the Representative and the Company in connection with the Offering, and no
person is being compensated in any manner for such service.
(ac) The Company has not taken, directly or indirectly, any action
designed to cause or result in, or which has constituted or which reasonably
might be expected to constitute, the stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Common Stock.
(ad) The Company has not relied upon you or your legal counsel for any
legal, tax or accounting advice in connection with the Offering (except with
respect to the qualification of the Shares for offering and sale under the
securities laws of certain states).
(ae) To their respective knowledge, none of the Company or any of the
Subsidiaries is in violation of any Federal, state, local or foreign law or
regulation relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products ("Materials of
Environmental Concern"), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern (collectively, "Environmental Laws"), which
violation includes, but is not limited to, noncompliance with any permits or
other governmental authorizations required for the operation, as now conducted
or proposed to be conducted (as described in the Prospectus), of the business of
the Company or any of the Subsidiaries under applicable Environmental Laws, or
noncompliance with the terms and conditions thereof, and none of the Company or
any of the Subsidiaries has received any communication (written or oral),
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that the Company or any of the Subsidiaries is in violation of any
such Environmental Laws, and there are no circumstances known to the Company
that are reasonably likely to lead to such violation in the future. In addition,
except as set forth in the Prospectus, there is no claim, action, cause of
action, investigation or notice (written or oral) by any person or entity
alleging potential liability for investigatory costs, cleanup costs,
governmental responses costs, natural resources damages, property damages,
personal injuries, attorney's fees or penalties arising out of, based on or
resulting from (a) the presence or release into the environment of any Material
of Environmental Concern at any location owned, controlled, leased, subject to
an option to lease or purchased or operated by the Company or any of the
Subsidiaries, now or in the past, or (b) circumstances forming the basis of any
violation or alleged violation of
11
<PAGE> 12
any Environmental Law (collectively, "Environmental Claims"), pending or
threatened against the Company or any of the Subsidiaries or, to the best
knowledge of the Company, against any person or entity whose liability for any
Environmental Claim the Company or any of the Subsidiaries has retained or
assumed either contractually or by operation of law, except as set forth in the
Prospectus or as would not result in a Material Adverse Effect. There are no
actions, activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that could result in a violation of any
Environmental Law or form the basis of any potential Environmental Claim against
the Company or any of the Subsidiaries or against any person or entity whose
liability for any Environmental Claim the Company or any of the Subsidiaries has
retained or assumed either contractually or by operation of law.
(af) None of the Company or any of the Subsidiaries has violated any
Federal, state or local law relating to discrimination in the hiring, promotion
or pay of employees, any applicable wage or hour laws, or any provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA"), or the rules and
regulations promulgated thereunder. There is (i) no significant unfair labor
practice complaint pending against the Company or any of the Subsidiaries or, to
the best knowledge of the Company, threatened against any of them, before the
National Labor Relations Board or any state or local labor relations board, and
no significant grievance or significant arbitration proceeding arising out of or
under any collective bargaining agreement is so pending against the Company or
any of the Subsidiaries and, to the best knowledge of the Company, threatened
against any of them, (ii) no labor dispute in which the Company or any of the
Subsidiaries is involved nor, to the best knowledge of the Company, is any labor
dispute imminent, other than routine disciplinary and grievance matters; the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal customers or vendors and (iii) no union
representation question existing with respect to the employees of the Company or
any of the Subsidiaries and, to the best knowledge of the Company, no union
organizing activities are taking place, except (with respect to any matter
specified in clause (i), (ii) or (iii) above, singly or in the aggregate) such
as would not have a Material Adverse Effect.
Any certificate signed by any officer of the Company and delivered to
you or to your counsel shall be deemed a representation and warranty by the
Company to you as to the matters covered thereby. Any certificate delivered by
the Company to its counsel for purposes of enabling such counsel to render the
opinions referred to in Section 6(c) will also be furnished to the Underwriter
and its counsel and shall be deemed to be additional representations and
warranties by the Company to the Underwriter as to the matters covered thereby
and the Underwriter and its counsel are entitled to rely thereon.
3. Representations and Warranties of the Underwriter. You represent and
warrant to the Company as of the date hereof that the information set forth in
the Prospectus (i) on the cover page of the Prospectus with respect to price,
underwriting discounts and commissions and terms of the Offering, (ii) on the
inside cover page with respect to stabilization and (iii) under the caption
"Underwriting of Public Offering" in the Prospectus was furnished to the
12
<PAGE> 13
Company by you and on your behalf for use in connection with the preparation of
the Registration Statement and the Prospectus and is complete and correct in all
material respects.
4. Covenants of the Company. The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereto, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. The Company will not file any
amendment or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus of which you
have not first been furnished with a copy a reasonable time prior to such filing
or to which you reasonably object or which is not in compliance with the Act or
the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration Statement
or the Prospectus which in your reasonable judgment may be necessary or
advisable to enable you to continue the distribution of the Common Shares and
will use its best efforts to cause the same to become effective as promptly as
possible. The Company will fully and completely comply with the provisions of
Rule 430A of the Rules and Regulations with respect to information omitted from
the Registration Statement in reliance upon such Rule.
(c) The Company will, if requested by you, prepare a Term Sheet that
complies with the requirements of Rule 434 under the Rules and Regulations, and
the Company will provide you with copies of such Term Sheet and the form of
Prospectus used in reliance on Rule 434, in such number as you may reasonably
request. The Company will timely file the Term Sheet, if any, with the
Commission pursuant to and in accordance with subparagraph (7) of Rule 424(b).
The Company will advise you promptly of any such filing pursuant to Rule 424(b)
and shall provide evidence satisfactory to you of such timely filing.
(d) If, at any time during the nine-month period referred to in Section
10(a)(3) of the Act during which a prospectus relating to the Common Shares is
required to be delivered
13
<PAGE> 14
under the Act, any event occurs, as a result of which the Prospectus, including
any amendments or supplements, would include an untrue statement of a material
fact, or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances then
existing, not misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements, to comply with the Act or
the Rules and Regulations, the Company will promptly advise you thereof and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment or
supplement which will effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible; and, in case you are
required to deliver a Prospectus after such nine-month period, the Company upon
request, but at your expense, will promptly prepare such amendment or amendments
to the Registration Statement and such Prospectus or Prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of the
Act.
(e) As soon as practicable, but not later than 45 days after the end of
the first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
11(a) of the Act.
(f) During such period as a Prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company, at
its expense, but only for the nine-month period referred to in Section 10(a)(3)
of the Act, will furnish to you or mail to your order copies of the Registration
Statement, the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and in such
reasonable quantities as you may request, for the purposes contemplated by the
Act.
(g) The Company shall cooperate with you and your counsel to qualify or
register the Common Shares for sale under (or obtain exemptions from the
application of) the Blue Sky laws of such jurisdictions as you designate, will
comply with such laws and will continue such qualifications, registrations and
exemptions in effect so long as reasonably required for the distribution of the
Common Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise you promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any jurisdiction
or any initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any order suspending such qualification, registration
or exemption, the Company, with your cooperation, will use its best efforts to
obtain the withdrawal thereof.
(h) The Company shall promptly prepare and file with the Commission,
from time to time, such reports as may be required to be filed by the Act and
the Exchange Act
14
<PAGE> 15
including, without limitation, reports with respect to the sale of the Common
Shares and the application of the proceeds thereof as may be required in
accordance with Rule 463 under the Act.
(i) During the period of five years after the date of this Agreement,
the Company will furnish to you: (i) at the same time as such are furnished to
its stockholders, copies of the Annual Report of the Company containing the
consolidated balance sheet of the Company and Subsidiaries as of the close of
such fiscal year and consolidated statements of income, stockholders' equity and
cash flows for the year then ended and the opinion thereon of the Company's
independent public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the NASD or any securities exchange; (iii) as soon
as available, copies of any report or communication of the Company mailed
generally to holders of its Common Stock; (iv) as soon as practicable after the
filing thereof, of each non-confidential report or other statement or document
filed by the Company with the Commission, or with any national securities
exchange or quotation system on which any securities of the Company may be
listed or quoted; and (v) from time to time, such other non-confidential
information concerning the Company as the Underwriter may reasonably request.
(j) During the period of 180 days after the first date that any of the
Common Shares are released by you for sale to the public, the Company will not,
without your prior written consent (which consent may be withheld at your sole
discretion), issue, offer, sell, grant options to purchase or otherwise dispose
of any of the Company's equity securities or any other securities convertible
into or exchangeable with its Common Stock or other equity security, other than
options or other awards granted under the Company's 1995 Stock Option Plan,
Employee Savings Plan or Stock Purchase Plan, and the Subscriber Warrants and
General Partner Warrants described in the Prospectus.
(k) The Company will apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(l) To the extent required by law, or applicable rules and regulations,
the Company will promptly take all steps necessary to register its Common Stock
under Section 12(g) of the Exchange Act.
(m) The Company will use its best efforts to list, subject to notice of
issuance, the Common Shares as a National Market System security on the Nasdaq
Stock Market.
(n) The Company will use its best efforts to ensure that Pacific Thrift
will maintain a system of internal accounting controls as required under
applicable law and the rules and regulations of the FDIC.
15
<PAGE> 16
(o) The Company will not, directly or indirectly, distribute prior to
the First Closing Date any offering material in connection with the offering and
sale of the Common Shares other than the Preliminary Prospectus, the Prospectus,
the Registration Statement and the other materials permitted by the Act.
(p) The Company will not take, directly or indirectly, any action
designed to cause or result in, or which will or might be expected to
constitute, the stabilization or manipulation of the price of the Common Stock
to facilitate the sale or resale of the Common Shares.
(q) The Company will not rely upon you or your legal counsel for any
legal, tax or accounting advice in connection with the Offering, except with
respect to the qualification of the Common Shares for offering and sale under
the securities laws of certain states.
You may, in your sole discretion, waive in writing the performance by
the Company of any one or more of the foregoing covenants or extend the time for
their performance.
5. Payment of Expenses; Financial Advisory Fee.
(a) Whether or not the transactions contemplated hereunder are
consummated or this Agreement remains effective or is terminated, the Company
agrees to pay all costs, fees and expenses incurred in connection with the
performance of its obligations hereunder and in connection with the transactions
contemplated hereby, including without limiting the generality of the foregoing,
(i) all expenses incident to the issuance and delivery of the Common Shares
(including all printing and engraving costs), (ii) all fees and expenses of the
registrar and transfer agent of the Common Stock, (iii) all necessary issue,
transfer and other stamp taxes in connection with the issuance and sale of the
Common Shares, (iv) all fees and expenses of the Company's counsel and the
Company's independent accountants, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement, each Preliminary Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments and
supplements provided for herein, (vi) all filing fees, attorney's fees and
expenses incurred by the Company or the Underwriter in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Common Shares for offer and sale under
the Blue Sky laws up to a maximum of $10,000, (vii) the filing fee of the
National Association of Securities Dealers, Inc., (viii) all the costs and
expenses incurred by the Company in making road show presentations with respect
to the Offering, (ix) all costs of preparing, printing and distributing bound
volumes of the transaction documents for the Underwriter and its counsel, and
(x) all other fees, costs and expenses referred to in Item 13 of the
Registration Statement. Except as provided in this Section 5, and Section 8
hereof, the Underwriter shall pay all of its own expenses, including the fees
and disbursements of its own counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and the Blue Sky memorandum
referred to above).
16
<PAGE> 17
(b) Whether or not the transactions contemplated hereunder are
consummated or this Agreement remains effective or is terminated, in addition to
payment of the expenses set forth in Section 5(a), the Company agrees to
reimburse you for your actual accountable out-of-pocket expenses incurred in
connection with the proposed sale of the Common Stock (including, without
limitation, attorneys' fees, printing expenses and travel expenses) up to a
maximum amount of $85,000. You shall submit a detailed statement of your actual
expenses to the Company at the First Closing Date or from time-to-time before or
within 30 days after the First Closing Date, and the Company shall reimburse you
therefor in full within 14 days of receipt of such statement or statements. For
purposes of this Section 5, you shall be deemed to have incurred expenses when
they are billed, regardless of whether such expenses have been paid.
(c) At the closing time on the First Closing Date and, if applicable,
the Second Closing Date, the Company shall pay to you a fee (the "Financial
Advisory Fee") in consideration of the financial advisory services provided to
the Company and its affiliates by you in connection with the transactions
contemplated in the Prospectus and this Agreement. The Financial Advisory Fee
shall be equal to 1.0% of (i) the gross proceeds from the sale of the Common
Shares hereunder, plus (ii) the gross proceeds from the sale of Common Stock
pursuant to the exercise of rights issued in a rights offering conducted by the
Company concurrently with the Offering (the "Rights Offering"). Payment of the
Financial Advisory Fee with respect to the Firm Common Shares shall be made on
the First Closing Date, payment of the Financial Advisory Fee with respect to
the Optional Common Shares shall be made on the Second Closing Date, if
applicable, and payment of the Financial Advisory Fee with respect to the shares
issued in the Rights Offering shall be made on the closing date of the Rights
Offering. Payment of the Financial Advisory Fee shall be made by immediately
available funds in the form of one or more federal funds checks or a wire
transfer to an account designated by you.
6. Conditions to the Obligations of the Underwriter. Your obligations
to purchase and pay for the Firm Common Shares on the First Closing Date and the
Optional Common Shares on the Second Closing Date shall be subject to the
accuracy in all material respects of the representations and warranties on the
part of the Company herein set forth as of the date hereof and as of the First
Closing Date or the Second Closing Date, as the case may be, to the accuracy in
all material respects of the statements of Company officers made pursuant to the
provisions hereof, to the performance in all material respects by the Company of
its obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., Washington, D.C. Time, on the date of this Agreement, or at such
later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such closing date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted
17
<PAGE> 18
or shall be pending or, to the knowledge of the Company or you, shall be
contemplated by the Commission; and any request of the Commission for inclusion
of additional information in the Registration Statement, or otherwise, shall
have been complied with to your reasonable satisfaction.
(b) You shall be reasonably satisfied that since the respective dates
as of which information is given in the Registration Statement and Prospectus,
(i) there shall not have been any change in the capital stock of the Company,
except as contemplated in the Prospectus for the Restructuring and the Rights
Offering, or any material change in the consolidated indebtedness (other than as
disclosed in the Prospectus) of the Company, (ii) except as set forth or
contemplated by the Registration Statement or the Prospectus, no material verbal
or written agreement or other transaction shall have been entered into by the
Company, which is not in the ordinary course of business and which could result
in a material reduction in the future earnings of the Company, (iii) no loss or
damage (whether or not insured) to the property of the Company shall have been
sustained which materially and adversely affects the condition (financial or
otherwise), business, results of operations or prospects of the Company, (iv) no
legal or governmental action, suit or proceeding affecting the Company which is
material to the Company or which affects or may affect the transactions
contemplated by this Agreement shall have been instituted or threatened, (v) no
enforcement proceeding, whether formal or informal, shall have been commenced
against the Company or any of the Subsidiaries by the FDIC, the DOC or any other
governmental agency, nor shall any such proceeding have been instituted,
threatened or recommended, except for the MOU as disclosed in the Prospectus,
and (vi) there shall not have been any material change in the condition
(financial or otherwise), business, management, results of operations or
prospects of the Company which makes it impractical or inadvisable in the
judgment of the Underwriter to proceed with the public offering or purchase the
Common Shares as contemplated hereby.
(c) There shall have been furnished to you, in form and substance
satisfactory to you except as otherwise expressly provided below:
(i) The favorable opinion of Jeffer, Mangels, Butler & Marmaro
LLP, counsel for the Company, addressed to the Underwriter and dated
as of the First Closing Date or the Second Closing Date, as the case
may be, and in form and substance satisfactory to counsel for the
Underwriter, to the effect that:
(1) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware.
(2) The Company and each of the Subsidiaries have
full corporate power and authority to own their respective
properties and to conduct their businesses as described in the
Registration Statement and Prospectus, and the Company has
full corporate power and authority to enter into and perform
its obligations under this Agreement.
18
<PAGE> 19
(3) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in
the State of California and in each jurisdiction in which the
failure to so qualify would have a material adverse effect
upon the financial condition, results of operations or
business of the Company and the Subsidiaries, taken as a
whole.
(4) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under
"Capitalization."
(5) The Common Shares have been duly and validly
authorized for issuance and sale and, when issued and
delivered by the Company against payment, will be duly and
validly issued, fully paid and nonassessable.
(6) The issuance of the Common Shares is not subject
to preemptive or other similar rights arising by operation of
law or, to the best of such counsel's knowledge, otherwise.
(7) (A) Pacific Thrift has been duly chartered, and
at all times since the date hereof and at the First Closing
Date or Second Closing Date, as the case may be, validly
existing and in good standing under the laws of the State of
California as a thrift and loan company with full corporate
power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration
Statement and the Prospectus; and (B) each of the other
Subsidiaries has been duly incorporated (or organized with
respect to the Subsidiaries that are limited partnerships) and
at all times since the date hereof and at the First Closing
Date or Second Closing Date, as the case may be, validly
existing as a corporation or limited partnership, as
applicable, in good standing under the laws of the
jurisdiction of its incorporation or organization, as
applicable, with full corporate or partnership power and
authority to own, lease and operate its properties and to
conduct its business as described in the Registration
Statement and the Prospectus.
(8) Each of the Subsidiaries is duly qualified as a
foreign corporation to transact business in each jurisdiction
in which the failure to so qualify would have a material
adverse effect upon its financial condition, results of
operations or business.
(9) The deposit accounts of Pacific Thrift are
insured by the FDIC up to the applicable limits.
19
<PAGE> 20
(10) The activities of Pacific Thrift are permissible
activities of California thrift and loan companies under
California law and the rules, regulations, resolutions and
practices of the DOC.
(11) All of the issued and outstanding capital stock
or limited partnership interests, as applicable, of each of
the Subsidiaries is duly authorized, validly issued and fully
paid and nonassessable, and upon completion of the
Restructuring, all such capital stock will be owned of record,
and to the best of such counsel's knowledge, beneficially, by
the Company free and clear of any security interest, mortgage,
pledge, lien, encumbrance, or legal or equitable claim, except
for the security interest of Fleet Bank, N.A.
(12) The execution and delivery of this Agreement,
the issuance of the Common Shares by the Company and the
consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action
of the Company; the consummation of the transactions described
in the Prospectus as constituting the "Restructuring" have
been duly and validly authorized by all necessary actions of
the general and limited partners of Presidential Mortgage
Company, a California limited partnership; this Agreement
constitutes the legal, valid and binding agreement of the
Company, enforceable in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited
under applicable law (it being understood that such counsel
may avail itself of customary exceptions concerning the effect
of bankruptcy, insolvency or similar laws and the availability
of equitable remedies); and, to the best of such counsel's
knowledge, the execution and delivery of this Agreement, the
incurrence of the obligations herein set forth and the
consummation of the transactions contemplated herein will not
conflict with or constitute a breach of, or default under, and
no event has occurred which, with notice or lapse of time or
both, would constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance
that, individually or in the aggregate, would have a material
adverse effect upon the financial condition, results of
operations or business of the Company pursuant to any
contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Company or any of the
Subsidiaries is a party or by which it may be bound, or to
which any of the property or assets of the Company or any of
the Subsidiaries is subject, nor will such execution or
delivery result in any violation of the provisions of the
Certificate of Incorporation, Articles of Incorporation,
Bylaws or Agreement of Limited Partnership, as the case may
be, of the Company or any of the Subsidiaries.
20
<PAGE> 21
(13) The Registration Statement is effective under
the Act and, to the best of such counsel's knowledge, no stop
order suspending the effectiveness of the Registration
Statement has been issued under the Act or proceedings
therefor initiated or threatened by the Commission.
(14) No further approval, authorization, consent or
other order of any federal or state board or body is required
in connection with the execution and delivery of this
Agreement or the issuance of the Common Shares, except as may
be required under the securities or Blue Sky laws of various
jurisdictions, as to which no opinion need be rendered.
(15) At the time the Registration Statement became
effective, the Registration Statement (other than the
financial statements and statistical and financial data
included therein, as to which no opinion need be rendered)
complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations.
(16) The Common Stock conforms to the description
thereof contained in the Prospectus, and the form of
certificate used to evidence the Common Stock is in due and
proper form and complies with all applicable statutory
requirements.
(17) To the best of such counsel's knowledge, there
are no legal or governmental proceedings pending or threatened
against or affecting the Company or any of the Subsidiaries
which are required, individually or in the aggregate, to be
disclosed in the Registration Statement or Prospectus, other
than those disclosed therein.
(18) The information contained in the Prospectus
under "Risk Factors," "Supervision and Regulation,"
"Description of Capital Stock," "1995 Stock Option Plan,"
"Retirement Plan," "Stock Purchase Plan," "Supplemental
Executive Retirement Plan," "Limitation of Liability and
Indemnification of Directors" and "Director and Officer
Indemnification," to the extent that such information
constitutes matters of law, summaries of legal matters,
documents or proceedings, or legal conclusions, has been
reviewed by such counsel and is correct in all material
respects.
(19) To the best of such counsel's knowledge, there
are no contracts, indentures, mortgages, loan agreements,
notes, leases or other instruments required to be described or
referred to in the Registration Statement or Prospectus or to
be filed as exhibits thereto, other than those described or
referred to therein or filed as exhibits thereto, and the
descriptions thereof or references thereto are correct in all
material respects.
21
<PAGE> 22
(20) To the best of such counsel's knowledge, the
Company and each of the Subsidiaries hold all licenses,
permits and other governmental authorizations currently
required for the conduct of their respective businesses under
the federal laws of the United States, the laws of the State
of California and the Delaware General Corporation Law, as
described in the Registration Statement and Prospectus, except
for such licenses, approvals or authorizations the failure of
which to hold would not result in a material adverse change in
the financial condition, results of operations or the business
of the Company and the Subsidiaries, taken as a whole; all
such licenses, permits and other governmental authorizations
are in full force and effect, and the Company and the
Subsidiaries operate their respective businesses in all
material respects in compliance therewith.
(ii) Such opinion of Manatt, Phelps & Phillips, LLP, counsel
for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, with respect to the incorporation of
the Company, the sufficiency of all corporate proceedings and other
legal matters relating to this Agreement, the validity of the Common
Shares, the Registration Statement and the Prospectus and other related
matters as you may reasonably require, and such counsel shall have
received such documents and shall have exhibited to them such papers
and records as they may reasonably request for the purpose of enabling
them to pass upon such matters. In connection with such opinion, such
counsel may also rely as to certain matters on the opinion of Jeffer,
Mangels, Butler & Marmaro LLP and on representations or certificates of
officers of the Company and governmental officials.
(iii) A certificate of the Company executed by the Chairman of
the Board or President and the Chief Financial or Accounting Officer,
dated the First Closing Date or the Second Closing Date, as the case
may be, to the effect that:
(1) The representations and warranties of the Company
set forth in Section 2 of this Agreement are true and correct
in all material respects and the Company has complied in all
material respects with all the agreements and satisfied all
the conditions on its part to be performed or satisfied on or
prior to such Closing Date.
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending
the effectiveness of the Registration Statement has been
issued; and to the best of the knowledge of the respective
signers, no proceedings for that purpose have been instituted
or are pending or contemplated under the Act.
22
<PAGE> 23
(3) Neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto includes
any untrue statement of a material fact or omits to state any
material fact required to be stated therein, or necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(4) Since the initial date on which the Registration
Statement was filed with the Commission, no agreement, written
or oral, transaction or event has occurred which should have
been set forth in an amendment to the Registration Statement
or in a supplement to or amendment of any prospectus, which
has not been disclosed in such a supplement or amendment.
(5) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus and except as disclosed in or contemplated by the
Prospectus, the Company has not sustained a material loss or
damage by strike, fire, flood, windstorm, earthquake, accident
or other calamity (whether or not insured).
(iv) At the time of the execution of this Agreement, a letter
dated as of the date hereof from BDO Seidman LLP, independent
accountants, in form and substance satisfactory to you, to the effect
that (1) they are independent certified public accountants with respect
to the Company within the meaning of the Act and the Rules and
Regulations; (2) it is their opinion that the consolidated financial
statements and supporting schedules included in the Registration
Statement and covered by their opinions therein comply as to form in
all material respects with the applicable accounting requirements of
the Act and the Rules and Regulations; (3) based upon limited
procedures as agreed upon by you and BDO Seidman LLP and set forth in
detail in such letter, nothing has come to their attention which causes
them to believe that (A) the unaudited financial statements and
supporting schedules of Presidential Mortgage Company ("Presidential")
and the Subsidiaries included in the Registration Statement, if any, do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or are
not presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements included in the Registration Statement and
the Prospectus, (B) at a specified date not more than five days prior
to the date of this Agreement, there has been any increase in the
consolidated long-term or short-term debt, or any decrease in
consolidated total assets, allowance for loan losses, total deposits or
net worth of the Company and the Subsidiaries, in each case as compared
with the amounts shown in the financial statements included in the
Registration Statement or, (C) during the period from December 31, 1995
to a date not more than five days prior to the date of this Agreement,
there were any decreases, as compared with the corresponding period in
the preceding year, in net interest income, net interest income after
provision for loan losses, or net income of Pacific Thrift,
23
<PAGE> 24
except in all instances for increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may
occur; and (4) in addition to the examination referred to in their
opinions and the limited procedures referred to in clause (3) above,
they have carried out certain specified procedures, not constituting an
audit, with respect to certain amounts, percentages and financial
information which are included in the Registration Statement and
Prospectus and which are specified by you, and have found such amounts,
percentages and financial information to be in agreement with the
relevant accounting, financial and other records of the Company and the
Subsidiaries identified in such letter.
(v) On the First Closing Date and the Second Closing Date (in
the event of a second closing), a letter addressed to you, from BDO
Seidman LLP, independent accountants, the first one to be dated the
First Closing Date and the second one (in the event of a second
closing) to be dated the Second Closing Date, to the effect that they
reaffirm their statements made in the letter furnished to you pursuant
to Section 6(c)(iv) of this Agreement.
(vi) On or before the First Closing Date, letters from each
director and executive officer of the Company, in form and substance
satisfactory to you, confirming that for a period of ninety (90) days
after the first date that any of the Common Shares are released by you
for sale to the public, such person will not directly or indirectly
sell, offer to sell, contract to sell or otherwise dispose of any
shares of Common Stock or any right to acquire such shares without the
prior written consent of the Representative, which consent may be
withheld at the sole discretion of the Representative.
(d) As of the First Closing Date and the Second Closing Date, as the
case may be, the Common Stock shall have been approved for quotation on the
Nasdaq National Market upon notice of issuance.
(e) As of the First Closing Date and the Second Closing Date, as the
case may be, (i) there shall not have occurred any material adverse change in
the financial markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis the effects of
which, in the judgment of the Representative, are so material and adverse as to
make it impracticable to market the Common Shares or to enforce contracts,
including subscriptions or orders, for the sale of the Common Shares, and (ii)
trading generally on either the American Stock Exchange or the New York Stock
Exchange shall not have been suspended, and minimum or maximum prices for
trading shall not have been fixed, or maximum ranges for prices for securities
have been required, by either of said Exchanges or by order of the Commission or
any other governmental authority, and a banking moratorium shall not have been
declared by either Federal or New York State authorities.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Manatt, Phelps & Phillips LLP, counsel for the Representative. The
Company shall furnish you with such
24
<PAGE> 25
manually signed or conformed copies of such opinions, certificates, letters and
documents as you reasonably request.
If any condition to the Underwriter's obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon written notification by you as
Representative to the Company without liability on the part of any Underwriter
or the Company, except for the expenses to be paid or reimbursed by the Company
pursuant to Section 5 hereof and except to the extent provided in Section 8
hereof.
7. Effectiveness of Registration Statement. Each party to this
Agreement will use its best efforts to cause the Registration Statement to
become effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Underwriter
and each person, if any, who controls the Underwriter, as the case may be,
within the meaning of the Act against any losses, claims, damages, liabilities
or expenses, joint or several, to which the Underwriter or such controlling
person may become subject, under the Act, the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or other federal or state law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of the Company), insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof
as contemplated below) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or based upon written information supplied by the Company
filed in any state or jurisdiction to register or qualify any or all of the
Common Shares or to claim an exemption therefrom, or provided to any state or
jurisdiction to exempt the Company as a broker-dealer or its officers, directors
and employees as broker-dealers or agents under the securities laws thereof
(collectively, the "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in any of them
not misleading, or arise from any theory of liability whatsoever relating to or
arising from or based upon the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based in whole or in part upon any inaccuracy in the representations
and warranties of the Company contained herein or any failure of the Company to
perform its obligations hereunder or under law; and will reimburse the
Underwriter and each such controlling person for any legal and other expenses as
such expenses are reasonably incurred by the Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the
25
<PAGE> 26
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 3 hereof; provided,
further, that the foregoing indemnity with respect to any Preliminary Prospectus
shall not inure to the benefit of the Underwriter from whom the person asserting
any such loss, claim, damage or liability purchased the Common Shares that are
the subject thereof if such person did not receive a copy of the Prospectus (or
the Prospectus as supplemented) at or prior to the confirmation of the sale to
such person in any case where such delivery is required by the Act and the
untrue statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as supplemented).
In addition to its other obligations under this Section 8(a), the Company agrees
that, as an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, or any inaccuracy
in the representations and warranties of the Company herein or failure to
perform its obligations hereunder, all as described in this Section 8(a), it
will reimburse the Underwriter (and, to the extent applicable, each controlling
person) on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriter (and, to the extent applicable each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the Underwriter (and, to the extent applicable each controlling
person) shall promptly return it to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from time
to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate").
Any such interim reimbursement payments which are not made to the Underwriter
within 30 days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
(b) You will indemnify and hold harmless the Company, each of its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of the Act, against
any losses, claims, damages, liabilities or expenses to which the Company or any
such director, officer, or controlling person may become subject, under the Act,
the Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such
settlement is effected with your written consent), insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof as
contemplated below) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each such case to the extent, but only to
the extent, that such untrue
26
<PAGE> 27
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 3 hereof; and will
reimburse the Company or any such director, officer, or controlling person for
any legal and other expense reasonably incurred by the Company or any such
director, officer, or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. In addition to the other obligations under this
Section 8(b), you agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in this Section 8(b) which relates to information furnished to the
Company pursuant to Section 3 hereof, it will reimburse the Company (and, to the
extent applicable, each officer, director, controlling person) on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of your obligation to reimburse the Company
(and, to the extent applicable, each officer, director, controlling person) for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director or controlling person)
shall promptly return it to you together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which you
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof,
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party for indemnity,
contribution or otherwise except to the extent the indemnifying party is
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be a conflict between the positions of
the indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action
27
<PAGE> 28
on behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of its election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence or (ii) the indemnifying party shall not have employed
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action, in each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying party (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel representing the indemnified parties who are parties to such
action; provided, however, if an indemnified party in any such action shall have
concluded that there may be legal defenses or rights available to it which are
different from, in actual or potential conflict with, or additional to those
available to other indemnified parties, such party shall have the right to
select an additional law firm to act as its separate counsel).
(d) If the indemnification provided for in this Section 8 is required
by its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under subsections (a), (b) or
(c) of this Section 8 in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of any losses, claims, damages, liabilities or expenses referred to herein (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and you from the offering of the Common Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
you in connection with the statements or omissions or inaccuracies in the
representations and warranties herein which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand,
and you, on the other hand, shall be deemed to be in the same respective
proportions as the total proceeds (net of underwriting commissions, but before
deducting expenses) from the offering of the Common Stock received by the
Company and the total underwriting commissions received by you to the aggregate
public offering price of the Common Stock. The relative fault of the Company and
you shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact or the inaccurate or the alleged inaccurate
representation and/or warranty relates to information supplied by the Company or
you and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include, subject
to the limitations set forth in subsection (c) of this Section 8, any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
subsection (c) of this Section 8 with respect
28
<PAGE> 29
to notice of commencement of any action shall apply if a claim for contribution
is to be made under this subsection (d); provided, however, that no additional
notice shall be required with respect to any action for which notice has been
given under subsection (c) for purposes of indemnification. The Company and you
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined solely by pro rata allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to in this paragraph. Notwithstanding the provisions of this Section 8,
you shall not be required to contribute any amount in excess of the amount of
the total underwriting discounts and commissions received by you in connection
with the Common Shares underwritten by you and distributed to the public. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of fraudulent misrepresentation.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 8(a) and 8(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration
must be commenced by service of a written demand for arbitration or written
notice of intention to arbitrate, therein electing the arbitration tribunal. In
the event the party demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party responding to said
demand or notice is authorized to do so. Such an arbitration would be limited to
the operation of the interim reimbursement provisions contained in Sections 8(a)
and 8(b) hereof and would not resolve the ultimate propriety or enforceability
of the obligation to reimburse expenses which is created by the provisions of
such Sections 8(a) and 8(b) hereof.
9. Effective Date. This Agreement shall become effective immediately as
to Sections 5, 8, 10 and 11 and, as to all other provisions, (i) if at the time
of execution of this Agreement the Registration Statement has not become
effective, at 4:30 p.m., California Time, on the first full business day
following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 4:30 p.m., California Time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine as indicated by notice to the
Company or by release of any of the Common Shares for sale to the public. For
the purposes of this Section 9, the Common Shares shall be deemed to have been
so released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams offering
the Common Shares for sale to securities dealers, whichever may occur first.
10. Termination. Without limiting the right to terminate this Agreement
pursuant to any other provision hereof:
29
<PAGE> 30
(a) This Agreement may be terminated by the Company by notice to you,
or by you by notice to the Company, at any time prior to the time this Agreement
shall become effective as to all of its provisions, and any such termination
shall be without liability on the part of the Company to you (except for the
expenses to be paid or reimbursed by the Company pursuant to Section 5 hereof
and except to the extent provided in Section 8 hereof) or of you to the Company
(except to the extent provided in Section 8 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if trading in the Company's Common
Stock or other securities shall have been suspended by the Commission or any
securities exchange or market or additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over-the-counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or market, or a general
banking moratorium shall have been established by federal, New York or
California authorities, (ii) if an outbreak of major hostilities or other
national or international calamity or any substantial change in political,
financial or economic conditions shall have occurred or shall have accelerated
or escalated to such an extent, as, in your judgment, to affect materially and
adversely the marketability of the Common Shares, (iii) if any adverse event
shall have occurred or shall exist which makes untrue or incorrect in any
material respect any statement or information contained in the Registration
Statement or Prospectus or which is not reflected in the Registration Statement
or Prospectus but should be reflected therein in order to make the statements or
information contained therein in light of the circumstances under which they
were made, not misleading in any material respect, or (iv) if there shall be any
action, suit or proceeding pending or threatened, or there shall have been any
development or prospective development involving particularly the business or
properties or securities of the Company or the transactions contemplated therein
which, in your reasonable judgment, is reasonably likely to materially and
adversely affect the Company's business or earnings and makes it impracticable
or inadvisable to offer or sell the Common Shares. Any termination pursuant to
this subsection (b) shall be without liability on your part to the Company or on
the part of the Company to you, except for expenses to be paid or reimbursed by
the Company pursuant to Section 5 hereof (which shall not be required to be paid
upon termination pursuant to clause (i) or (ii) above) and except to the extent
provided in Section 8 hereof.
11. Representations and Indemnities to Survive Delivery. The respective
indemnities, agreements, representations, warranties and other statements of the
parties hereto and of their respective officers set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on your behalf, the Company or any of your or their
respective partners, officers or directors or any controlling person, as the
case may be, and will survive delivery of and payment for the Common Shares sold
hereunder and any termination of this Agreement.
30
<PAGE> 31
12. Notices. All communications hereunder shall be in writing and, if
sent to you shall be mailed, delivered or telegraphed and confirmed to you at
Friedman, Billings, Ramsey & Co., Inc., 1001 Nineteenth Street North, Arlington,
Virginia 22209 Attention: James C. Neuhauser, with a copy to Manatt, Phelps &
Phillips, LLP, 11355 West Olympic Boulevard, Los Angeles, California 90064,
Attention: Paul H. Irving, Esq.; and if sent to the Company shall be mailed,
delivered or telegraphed and confirmed to the Company at 21031 Ventura
Boulevard, Woodland Hills, California 91364, Attention: Joel R. Schultz,
President, with a copy to Jeffer, Mangels, Butler & Marmaro, LLP, 2121 Avenue of
the Stars, 10th Floor, Los Angeles, California 90067, Attention: Catherine De
Bono Holmes, Esq. The Company or you may change the address for receipt of
communications hereunder by giving notice to the other.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto, and to the benefit of the officers and
directors and controlling persons referred to in Section 8, and in each case
their respective successors, personal representatives and assigns, and no other
person will have any right or obligation hereunder. Notwithstanding the
foregoing, this Agreement shall not be assignable by the parties. The term
"successors" shall not include any purchaser of the Common Shares from you as
such, merely by reason of such purchase.
14. Partial Unenforceability. The invalidity or unenforceability of any
section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other section, paragraph or provision hereof. If any
section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make the remainder of
this Agreement valid and enforceable.
15. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws (and not the laws pertaining to conflicts
of laws) of the State of California.
16. General. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
31
<PAGE> 32
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement between the Company and you, all in
accordance with its terms.
Very truly yours,
PACIFICAMERICA MONEY CENTER, INC.
By:_________________________________________
Name: Joel R. Schultz
Title: President and Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted by us in
Los Angeles, California as of the date first above written.
FRIEDMAN, BILLING, RAMSEY & CO., INC.
By:_________________________
Name:
Title:
32
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PacificAmerica Money Center, Inc.
Woodland Hills, California
We hereby consent to the inclusion in Amendment No. 3 to the Form S-1 of
our reports dated February 29, 1996 relating to the consolidated financial
statements of Presidential Mortgage Company and Subsidiaries, Inc. and
PacificAmerica Money Center, Inc.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
June 24, 1996
