<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from_________ to _________
COMMISSION FILE NUMBER 0-28706
-------
FIRST ALLIANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0721183
- ------------------------------- ---------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
17305 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92614
------------------------------------------------------------
(Address of principal executive offices including ZIP Code)
(949) 224-8500
------------------------------
(Registrant's telephone number
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of March 31, 1999, the registrant had outstanding, net of treasury
shares, 18,139,488 shares of Class A Common Stock.
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<PAGE>
FIRST ALLIANCE CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) as of
March 31, 1999 and December 31, 1998 ............................. 1
Consolidated Statements of Income (Unaudited) for the quarters
ended March 31, 1999 and 1998..................................... 2
Consolidated Statements of Comprehensive Income (Unaudited)
for the quarters ended March 31, 1999 and 1998.................... 3
Consolidated Statements of Cash Flows (Unaudited) for the quarters
ended March 31, 1999 and 1998..................................... 4
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A").................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 18
Item 2. Changes in Securities............................................. 19
Item 3. Defaults Upon Senior Securities................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............... 19
Item 5. Other Information................................................. 19
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits....................................................... 20
Reports on Form 8-K............................................... 21
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------- ---------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents................................................................ $ 16,422 $ 18,052
Restricted cash.......................................................................... 1,476 1,281
Receivable from trusts................................................................... 4,330 4,652
Loans held for sale...................................................................... 13,811 24,421
Loans receivable held for investment..................................................... 50,332 57,667
Residual interests in securities - at fair value......................................... 47,928 48,720
Mortgage servicing rights................................................................ 9,662 10,033
Property, net............................................................................ 9,203 9,733
Prepaid expenses and other assets........................................................ 2,749 3,044
--------------- ---------------
Total assets.......................................................................... $ 155,913 $ 177,603
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facilities........................................................... $ 1,315 $ 17,539
Secured term loan facility - related party............................................... 58,635 64,720
Other borrowings......................................................................... 6,545
Accounts payable and accrued liabilities................................................. 7,668 5,757
Income taxes payable..................................................................... 1,566 1,142
Deferred tax liabilities................................................................. 6,753 7,299
Notes payable............................................................................ 3,707 14
--------------- ---------------
Total liabilities..................................................................... 79,644 103,016
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; no shares outstanding......
Class A Common Stock, $.01 par value; 50,000,000 shares authorized; shares issued
and outstanding: 22,186,288 at March 31, 1999 and at December 31, 1998............... 223 223
Additional paid in capital............................................................... 65,813 65,298
Retained earnings........................................................................ 63,365 61,326
Treasury stock - at cost: 4,046,800 shares at March 31, 1999 and at December 31, 1998... (51,582) (51,582)
Accumulated other comprehensive income................................................... (1,550) (678)
--------------- ---------------
Total stockholders' equity............................................................ 76,269 74,587
--------------- ---------------
Total liabilities and stockholders' equity....................................... $ 155,913 $ 177,603
=============== ===============
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
-------------------------------
1999 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
REVENUE:
Loan origination and sale............................................................$ 14,064 $ 17,302
Interest............................................................................. 4,442 6,191
Loan servicing and other............................................................. 1,111 1,877
--------------- ---------------
Total revenue...................................................................... 19,617 25,370
--------------- ---------------
EXPENSE:
Compensation and benefits............................................................ 5,201 5,890
Advertising.......................................................................... 1,679 1,856
Professional services and other fees ................................................ 799 1,112
Facilities and insurance............................................................. 945 977
Supplies............................................................................. 400 705
Depreciation and amortization........................................................ 484 412
Interest............................................................................. 3,555 1,822
Legal................................................................................ 2,267 360
Travel and training.................................................................. 318 367
Other................................................................................ 570 202
--------------- ---------------
Total expense..................................................................... 16,218 13,703
--------------- ---------------
INCOME BEFORE INCOME TAX PROVISION...................................................... 3,399 11,667
INCOME TAX PROVISION.................................................................... 1,360 4,405
--------------- ---------------
NET INCOME $ 2,039 $ 7,262
=============== ===============
NET INCOME PER SHARE:
Basic..............................................................................$ 0.11 $ 0.35
=============== ===============
Diluted ...........................................................................$ 0.11 $ 0.35
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic.............................................................................. 18,139,488 20,799,681
Diluted ........................................................................... 18,177,191 20,925,002
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
-------------------------------
1999 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
NET INCOME...............................................................................$ 2,039 $ 7,262
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment net of income taxes of $582 and $32 for
1999 and 1998, respectively......................................................... (872) 53
--------------- ---------------
COMPREHENSIVE INCOME.....................................................................$ 1,167 $ 7,315
=============== ===============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE QUARTERS
ENDED MARCH 31,
-------------------------------
1999 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...............................................................................$ 2,039 $ 7,262
Adjustments to reconcile net income to net cash provided by
operating activities:
Capitalized residual interests and mortgage servicing rights........................ (4,465) (7,314)
Accretion of residual interest in securities........................................ (1,071) (2,820)
Collection of residual interest in securities....................................... 4,985 5,744
Deferred income taxes............................................................... 5,049
Amortization of mortgage servicing rights........................................... 1,714 853
Amortization of debt issuance costs................................................. 679
Depreciation and amortization ...................................................... 484 412
Deferred stock compensation......................................................... 42
Accretion of discounts on loans receivable.......................................... (11)
Recognition of deferred fees on loans receivable held for investment................ (462)
Provision for loan losses........................................................... 195
Foreign currency transaction gain................................................... (10)
Loss on sales of property.......................................................... 6
Changes in assets and liabilities:
Restricted cash..................................................................... (195) (172)
Receivable from trusts.............................................................. 319 (1,520)
Loans held for sale................................................................. 10,391 (5,399)
Prepaid expenses and other assets................................................... 118 331
Accounts payable and accrued liabilities............................................ 1,941 6,806
Income taxes payable................................................................ 424 (2,507)
--------------- ---------------
Net cash provided by operating activities....................................... 17,102 6,746
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments on warehouse financing receivable............................................. 9,558
Capital expenditures..................................................................... (22) (2,162)
Collections on loans receivable held for investment...................................... 6,286 76
Proceeds from sale of property........................................................... 22
--------------- ---------------
Net cash provided by investing activities....................................... 6,286 7,472
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on warehouse financing facilities......................................... (22,309) (14,689)
Repayments to other borrowings........................................................... (6,545)
Purchase of treasury stock............................................................... (8,106)
Proceeds from issuance of stock.......................................................... 227
Net (repayments) borrowings on notes payable............................................. 3,693 (9)
--------------- ---------------
Net cash used in financing activities........................................... (25,161) (22,577)
Net effect of exchange rate changes on cash.............................................. 143 21
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................ (1,630) (8,338)
CASH AND CASH EQUIVALENTS, beginning of period........................................... 18,052 14,032
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period.................................................$ 16,422 $ 5,694
=============== ===============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
-------------------------------
1999 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Interest paid............................................................................$ 2,110 $ 1,818
=============== ===============
Income taxes paid........................................................................$ 935 $ 1,903
=============== ===============
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Transfer of loans held for sale to loans receivable held for investment..................$ 219 $ -
=============== ===============
Transfer of loans held for investment to real estate owned...............................$ 55 $ 79
=============== ===============
Stock warrants issued as debt issuance costs.............................................$ 515 $ -
=============== ===============
Components of Effect of Exchange Rate Changes on Cash:
Receivable from trusts..............................................................$ 3 $ -
Loans held for sale................................................................. - (546)
Loans receivable held for investment................................................ 1,575 -
Property............................................................................ - (6)
Prepaid expenses and other assets................................................... 13 (6)
Warehouse financing facilities...................................................... - 533
Accounts payable and accrued liabilities............................................ (30) 9
Deferred tax liabilities............................................................ (546) (26)
Foreign currency transaction gain................................................... - 10
Accumulated other comprehensive income.............................................. (872) 53
--------------- ---------------
Net effect of exchange rate changes on cash.....................................$ 143 $ 21
=============== ===============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
NOTE 1. GENERAL
The accompanying unaudited consolidated financial statements, which
include the accounts of First Alliance Corporation (FACO) and its subsidiaries
(collectively the Company), have been prepared in accordance with the
instructions to Form 10-Q and include all information and footnotes required for
interim financial statement presentation. All adjustments (consisting only of
various normal accruals) necessary to present fairly the Company's consolidated
financial position, results of operations and cash flows have been made. All
significant intercompany transactions and balances have been eliminated and
certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the current period presentation. The results
of operations for the three months ended March 31, 1999 are not necessarily
indicative of the results of operations to be expected for the year ending
December 31, 1999.
The financial information provided herein, including the information under
the heading Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (MD&A), is written with the presumption that the
users of these interim consolidated financial statements have read, or have
access to, the Company's most recent filing on Form 10-K which contains the
latest available audited consolidated financial statements and notes thereto, as
of and for the period ended December 31, 1998, together with the MD&A for such
period.
HEDGING ACTIVITIES
The Company regularly securitizes and sells fixed and variable rate
mortgage loans. As part of its interest rate risk management strategy, the
Company hedges its interest rate risk related to its loans held for sale and
origination commitments by selling short or selling forward United States
Treasury Securities. For accounting purposes, short sales of United States
Treasury Securities are not considered to be a hedge. Therefore, when selling
short United States Treasury Securities, the Company has recognized realized and
unrealized gains and losses on hedging activities in the period in which they
occur. The Company classifies forward sales of United States Treasury Securities
as hedges of specific loans held for sale and commitments to fund loans to be
held for sale. The gains and losses derived from these transactions are
recognized in earnings. Gains recognized on hedging activities were $630,000 and
$90,000 for the quarters ended March 31, 1999 and 1998, respectively. The
notional amount of forward sales of United States Treasury Securities was $14
million at March 31, 1999 and deferred gain was $1,000.
The Company bears a foreign currency risk related to its $66 million
secured term loan facility, which provides long-term financing for its United
Kingdom subsidiary. This risk is a result of the Company's obligation to repay
the facility in US denominated currency, while the underlying collateral
represents loans denominated in British Pounds. The Company has hedged this risk
by entering into 24 individual foreign currency put options and 24 individual
foreign currency call options of 1 million British pounds each, which mature
monthly. The put options provide the Company the option to sell the foreign
currency to a third party at a strike price of 1.542 dollars to the British
Pound. Therefore, the Company has protected itself, to the extent of the hedged
amount, against the foreign currency exchange rate falling below the strike
price of 1.542. The call options, however, provide the third party the option to
buy the foreign currency from the Company at a strike price of 1.687 dollars to
the British Pound.
STOCK REPURCHASE PROGRAM
In April 1997 the Board of Directors approved a share repurchase program
under which the Company is authorized to purchase up to 7.5 million shares of
its Class A Common Stock. Of the 7.5 million shares authorized, the Company had
repurchased approximately 4.0 million shares as of March 31, 1999. The Company,
however, did not repurchase any shares during the fourth quarter of 1998 and the
first quarter of 1999.
6
<PAGE>
NET INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted net income per share are as follows for the quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Net income: Basic and diluted (dollars in thousands)....................................$ 2,039 $ 7,262
=============== ===============
Weighted average number of common shares
Basic................................................................................. 18,139,488 20,779,681
Effect of dilutive securities - stock options......................................... 37,703 145,321
--------------- ---------------
Diluted............................................................................... 18,177,191 20,925,002
=============== ===============
Net income per share
Basic.................................................................................$ 0.11 $ 0.35
Effect of dilutive securities - stock options......................................... - -
--------------- ---------------
Diluted...............................................................................$ 0.11 $ 0.35
=============== ===============
</TABLE>
DOMESTIC AND FOREIGN OPERATIONS
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources in assessing performance. The Company has two reporting
segments: United States operations and United Kingdom operations.
The following table represents revenue and income before income tax
provisions of the operating segments for the quarters ended March 31:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Revenue:
United States...............................................................$ 17,469 $ 24,341
United Kingdom.............................................................. 2,148 1,029
--------------- ---------------
Total...................................................................$ 19,617 $ 25,370
=============== ===============
Income (loss) before income tax provision:
United States...............................................................$ 2,992 $ 12,167
United Kingdom.............................................................. 407 (500)
--------------- ---------------
Total...................................................................$ 3,399 $ 11,667
=============== ===============
</TABLE>
7
<PAGE>
The following table represents identifiable assets of the operating segments
as of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Identifiable assets:
United States.............................................................$ 103,485 $ 119,202
United Kingdom............................................................ 52,428 58,401
---------------- ---------------
Total.................................................................$ 155,913 $ 177,603
================ ===============
</TABLE>
RISK FACTORS
As a fundamental part of its business and financial strategy, the Company
securitizes the majority of its loans, whereby the Company deposits into a trust
certain loans originated or acquired by the Company in exchange for (i) debt
instruments backed by the loans in the trust and (ii) a residual interest in the
trust. The Company then sells the debt instruments to the public. A significant
portion of the Company's revenues, income and cash flow is generated through
these securitizations. Conditions in the securitization market have deteriorated
in recent months as lenders in the sub-prime sector have suffered a significant
loss of liquidity. As a result, there can be no assurance that the Company will
be able to continue to access the securitization market on the same terms as
previously experienced. Any substantial reduction in the availability of the
securitization market for the Company's loans, or any substantial deterioration
in the terms to the Company of any securitization, would be likely to have a
material adverse effect on the Company's results of operations and financial
condition.
During the fourth quarter of 1998, the Company's $175 million, $125
million and 50 million British pounds warehouse financing facilities expired,
and were not renewed. In December 1998, the Company entered into a $150 million
warehouse financing facility and a secured term loan facility of approximately
$66 million. In March 1999, the Company entered into an additional $20 million
warehouse financing facility. The $150 million warehouse financing facility is
secured by loans originated or purchased by the Company, expires in December
1999, and bears interest at a rate ranging between 1.25% to 1.75% over one month
United States (US) dollar denominated London Interbank Offered Rate (LIBOR). As
partial consideration for the $150 million warehouse financing facility, the
Company agreed to grant the warehouse lender stock warrants that may be
exercised by the lender to purchase one percent (1%) of the Company's Common
Stock on a diluted basis, with an effective date in February 1999. The $66
million secured term loan facility, which was entered into with a company owned
by the majority stockholders of FACO, Brian and Sarah Chisick, and is secured by
United Kingdom mortgages held for investment, bears a fixed interest rate of
8.5%, and matures as the underlying pledged mortgages are liquidated. The $20
million warehouse financing facility, which is secured by loans originated or
purchased by the Company, and currently bears interest at a rate of 2.25% over
the 30-day US dollar denominated LIBOR, expires in September 1999. These
facilities contain certain affirmative and negative covenants with which the
Company was in compliance at March 31, 1999.
Although management expects that the Company will be able to maintain
these financing agreements, there can be no assurance that the Company will be
able to do so. The Company is therefore continuing to pursue other financing
agreements. To the extent that the Company is not successful in maintaining or
replacing the existing financing agreements, the Company may be forced to
curtail its loan production activity, which may lead to significantly reduced
loan sales, thereby having a material adverse effect on the Company's results of
operations and financial condition.
The Company bears a foreign currency risk related to its $66 million
secured term loan facility, which provides long-term financing for its United
Kingdom subsidiary. This risk is a result of the Company's obligation to repay
the facility in US denominated currency, while the underlying collateral
represents loans denominated in British Pounds. The Company has hedged this risk
by entering into 24 individual foreign currency put options and 24 individual
foreign currency call options of 1 million British pounds each, which mature
monthly. The put options provide the Company the option to sell the foreign
currency to a third party at a strike price of 1.542 dollars to the British
Pound. Therefore, the Company has protected itself, to the extent of the hedged
amount, against the foreign currency exchange rate falling below the strike
price of 1.542. The call options, however, provide the third party the option to
buy the foreign currency from the Company at a strike price of 1.687 dollars to
the British Pound. Consequently, the Company bears the risk between any market
fluctuation ranging from 1.687 to 1.542.
8
<PAGE>
The Company's average loan-to-value (LTV) for loan originations and
purchases has historically ranged between 60% and 65%. Consequently, the
Company's product has been susceptible to heavy solicitation for refinancing.
This has resulted in average constant prepayment rates (CPRs) experienced by the
Company to be greater than that of the industry, which in turn has negatively
affected mortgage servicing rights and the recognition of income on residual
interest. Continued increase in CPRs may have a negative impact on the Company
financial condition, result of operations, and cash flows.
In September 1998, the Company was informed by the United States
Department of Justice (DOJ) that it and the Attorneys General of Arizona,
Florida, Illinois, Massachusetts, Minnesota, New York and Washington have
initiated a joint investigation into the lending practices of the Company. That
investigation and any negative findings that may result therefrom could have a
significant adverse effect on the Company's ability to obtain new and renew
state lending licenses, which, in turn, could have a significant adverse effect
on the Company's ability to maintain or expand its retail branch network of
offices and on the Company's results of operations and financial condition. The
DOJ has agreed to limit its initial inquiry to pricing disparities, and is
currently reviewing data provided by the Company (see Item 1. Legal
Proceedings).
On March 4, 1999, the Company advised state officials of its intent to sue
the Washington State Department of Financial Institutions (the Department) and
several of its employees for damages sustained as a result of their publication
of a series of false and defamatory statements about the Company. After its
on-site examination in February 1999, the Department demanded that the Company
produce thousands of additional pages of documents, as well as records
concerning the Company's business activities outside the State of Washington.
The Company refused and attempted, unsuccessfully, to reach an agreement with
the Department on these issues. Subsequently, on May 5, 1999, the Department
threatened the Company with license revocation. The Company believes that the
matters raised therein are without merit.
The Company is also party to various legal proceedings arising out of the
ordinary course of its business (see Item 1. Legal Proceedings). Any substantial
judgment against the Company in any of these legal proceedings, or the related
legal fees that may be incurred to defend the Company in connection therewith,
could have a material adverse effect on the Company's results of operations and
financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
Beginning with the first quarter of 1998, the Company adopted Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." This statement requires that
all items that are required to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for annual periods
beginning after December 15, 1997. This statement established standards for the
method that public entities use to report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographical areas, and major customers. The
adoption of this standard did not have a material effect on the Company's
financial reporting.
In February 1998, FASB issued SFAS No. 132. "Employers' Disclosure about
Pensions and Other Postretirement Benefits." which is effective for annual and
interim periods beginning after December 15, 1997. This statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer useful
as they were under previous statements. The adoption of this standard had no
impact on the Company's current presentation of financial statements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for annual and interim
periods beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
has not yet completed its analysis of the effect this standard will have on the
Company's financial condition, results of operations or cash flows.
In October 1998, the FASB issued SFAS 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which will become effective for the first fiscal
quarter beginning after December 15, 1998. This statement requires that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities
based on its ability and intent to sell or hold those investments. The adoption
of this standard did not have a material effect on the Company's financial
reporting.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
OVERVIEW
The Company is a financial services organization principally engaged in
mortgage loan origination, purchases, sales and servicing. Loans originated by
the Company primarily consist of fixed and adjustable rate loans secured by
first mortgages on single family residences. The Company originates loans
through its retail branch network which is currently comprised of 32 offices in
the United States (eight of which are located in California, four of which are
located in New York, three of which are located in Ohio and New Jersey, two of
which are located in Illinois and Maryland, and one of which is located in each
of Arizona, Colorado, Florida, Georgia, Minnesota, Oregon, Pennsylvania, Utah,
Virginia and Washington (see Recent Developments)). In addition, the Company
purchases loans from qualified mortgage originators. The Company sells loans to
wholesale purchasers or securitizes them in trusts. A significant portion of the
Company's loan production is securitized with the Company retaining the right to
service the loans.
The Company's strategy of originating, as compared to purchasing, the
majority of its loan volume results in the generation of a significant amount of
loan origination fees. This income has historically allowed the Company to
generate positive operating cash flow. There can be no assurance, however, that
the Company's operating cash flow will continue to be positive in the future.
As a fundamental part of its business and financing strategy, the Company
securitizes the majority of its loans in trusts whereby the loans are exchanged
for regular and residual interests in the trusts. A significant portion of the
Company's income is associated with securitization activity.
In a securitization, the Company exchanges loans for regular interests and
residual interests in trusts. The regular interests are immediately sold by the
Company to the public for cash. As the holder of the residual interest, the
Company is entitled to receive certain excess cash flows. These excess cash
flows are the difference between (a) principal and interest paid by borrowers
and (b) the sum of (i) scheduled principal and interest paid to holders of the
regular interests, (ii) trustee fees, (iii) third-party credit enhancement fees,
(iv) servicing fees and (v) loan losses. The Company begins receiving these
excess cash flows after certain overcollateralization requirements, which are
specific to each securitization and are used as a means of credit enhancement,
have been met.
Gains on servicing retained sales of loans through securitization
represent the difference between the net proceeds to the Company in the
securitization and the allocated cost of loans securitized. In accordance with
SFAS No. 125, the allocated cost of the loans securitized is determined by
allocating their acquisition cost (for purchased loans) or net carrying value
(for originated loans) between the loans securitized and the residual interests
and the mortgage servicing rights retained by the Company based upon their
relative fair values. In accordance with SFAS No. 115 and SFAS No. 134, the
Company classifies the residual interests as trading securities, which are
carried at fair value. The difference between the fair value of residual
interests and their allocated cost is recorded as gain on securitization and is
included in loan origination and sale revenue.
RECENT DEVELOPMENTS
On March 4, 1999, the Company advised state officials of its intent to sue
the Washington State Department of Financial Institutions (the Department) and
several of its employees for damages sustained as a result of their publication
of a series of false and defamatory statements about the Company. After its
on-site examination in February 1999, the Department demanded that the Company
produce thousands of additional pages of documents, as well as records
concerning the Company's business activities outside the State of Washington.
The Company refused and attempted, unsuccessfully, to reach an agreement with
the Department on these issues. Subsequently, on May 5, 1999, the Department
threatened the Company with license revocation. The Company believes that the
matters raised therein are without merit.
In March 1999, the Company entered into an additional warehouse financing
facility of approximately $20 million, which is secured by loans originated and
purchased by the Company, currently bears interest at 2.25% over US denominated
LIBOR, and expires in September 1999.
10
<PAGE>
In February 1999, the Company refinanced its 40,000 square foot office
building in Irvine, California, and received proceeds of approximately $3.7
million. The loan bears an interest rate of 6.9% and matures on March 1, 2009,
at which time a principal balance of $2.5 million is due.
In December 1998, the Company discontinued both loan originations in the
United Kingdom and also the marketing efforts with regard to its real estate
secured credit card program. The discontinuation of such programs was primarily
due to results that were lower than anticipated. The Company will continue to
service for itself the existing United Kingdom loans of approximately 35 million
British pounds and service, on behalf of others, the credit card accounts of
approximately $26 million. The Company currently intends to hold the United
Kingdom loans to maturity, and therefore reclassified such from loans held for
sale to loans receivable held for investment. The Company does not believe that
the discontinuation of these programs will have a material effect on the
Company's financial condition, result of operations or cash flows.
The Company has temporarily closed three retail branch offices, one of
which is located in each of California, Georgia and Ohio, due to staffing
reorganization. The Company also did not open any new retail branch offices
during the first quarter of 1999.
<TABLE>
LOAN ORIGINATIONS AND PURCHASES
<CAPTION>
AT OR FOR THE QUARTERS
ENDED MARCH 31,
-----------------------------
1999 1998
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Loan originations and purchases:
Retail originations................................................................ $ 87,328 $ 120,800
Wholesale purchases................................................................ 3,667 28,663
-------------- --------------
Total......................................................................... $ 90,995 $ 149,463
============== ==============
Number of retail branches as of the end of the period:
United States:
California.................................................................... 8 7
Other states.................................................................. 24 23
United Kingdom..................................................................... - 4
-------------- --------------
Total......................................................................... 32 34
============== ==============
Weighted average initial interest rate................................................... 9.2% 9.5%
Weighted average initial combined loan-to-value ratio.................................... 64.6% 63.7%
Average retail origination loan size..................................................... $ 94 $ 91
</TABLE>
Total originations and purchases decreased 39% during the first quarter of
1999 as compared to the first quarter of 1998. Retail originations decreased 28%
during the first quarter of 1999 as compared to the corresponding period in
1998, primarily as a result of a reduction in retail branch offices and
tightening of the Company's underwriting guidelines. Wholesale purchases
decreased 87% primarily due to the discontinuation of the Company's wholesale
low loan-to-value (LTV) program.
<TABLE>
LOAN SALES
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
-----------------------------
1999 1998
-------------- --------------
(Dollars in thousands)
<S> <C> <C>
Securitizations........................................................................ $ 115,001 $ 110,001
Whole loan sales....................................................................... 12,579 41,286
--------------- ---------------
Total............................................................................ $ 127,580 $ 151,287
=============== ===============
</TABLE>
Loan sales, including securitizations of loans, decreased 16% for the
first quarter of 1999 as compared to the first quarter of 1998, due to decreases
in loan originations and purchases during 1999.
11
<PAGE>
COMPOSITION OF REVENUE AND EXPENSE
The following table summarizes certain components of the Company's
consolidated statements of income set forth as a percentage of total revenue for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
-------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
REVENUE:
Loan origination and sale:
Gain on sale of loans........................................................... 20.1 % 20.3 %
Net loan origination and other fees............................................. 51.6 47.9
Interest........................................................................... 22.6 24.4
Loan servicing and other .......................................................... 5.7 7.4
--------------- ---------------
Total revenue................................................................... 100.0 100.0
--------------- ---------------
EXPENSE:
Compensation and benefits.......................................................... 26.5 23.2
Advertising........................................................................ 8.6 7.3
Professional services and other fees .............................................. 4.1 4.4
Facilities and insurance........................................................... 4.8 3.9
Supplies........................................................................... 2.0 2.8
Depreciation and amortization...................................................... 2.5 1.6
Interest........................................................................... 18.1 7.2
Legal.............................................................................. 11.6 1.4
Travel and training................................................................ 1.6 1.4
Other.............................................................................. 2.9 0.8
--------------- ---------------
Total expense................................................................... 82.7 54.0
--------------- ---------------
Income before income tax provision..................................................... 17.3 46.0
Income tax provision................................................................... 6.9 17.4
--------------- ---------------
Net income............................................................................. 10.4 % 28.6 %
=============== ===============
</TABLE>
RESULTS OF OPERATIONS
REVENUE
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
----------------------------------
1999 1998
------------------ ---------------
(Dollars in thousands)
<S> <C> <C>
Loan origination and sale:
Gain on sale of loans (1)......................................................$ 3,947 $ 5,143
Net loan origination and other fees............................................ 10,117 12,159
Interest.......................................................................... 4,442 6,191
Loan servicing and other.......................................................... 1,111 1,877
------------------ ---------------
Total revenue..................................................................$ 19,617 $ 25,370
================== ===============
</TABLE>
(1) Excluding net loan origination and other fees.
12
<PAGE>
Total revenue decreased 23% or $5.8 million for the first quarter of 1999
as compared to the first quarter of 1998 primarily due to lower loan origination
and sale revenue, interest income, and loan servicing and other revenue.
Loan origination and sale revenue decreased 19% to $14.1 million in the
first quarter of 1999 from $17.3 million for the first quarter of 1998,
primarily due to a $1.2 million decrease in gain on sale of loans and a $2.0
million decrease in net loan origination and other fees.
The decrease in gain on sale of loans of $1.2 million is primarily related
to a decrease in gain from the Company's securitization and a reduction in gain
on sale from whole loan sales.
The decrease in gain from securitization is the result of a decrease in the
value of residual interest and mortgage servicing rights, partially offset by an
increase in hedging gain and a reduction of premiums paid on wholesale loans.
The value of residual interest and mortgage servicing rights decreased by $2.9
million as compared to the prior year quarter. Residual interest and mortgage
servicing rights as a percentage of loans securitized totaled 3.9% during the
first quarter of 1999 as compared to 6.7% during the same period in 1998. The
decrease in the value of residual interest and mortgage servicing rights was
primarily related to an increase in the constant prepayment rate (CPR)
assumptions, which are based on experienced empirical data and an increase in
the discount rate. The Company increased its CPRs to 30% for fixed rate loans
and 63% for adjustable rate mortgages (ARMs) during the first quarter of 1999
from 25% for fixed rate loans and 40% for ARMs during the first quarter of 1998.
The Company also increased its discount rate to 18% during the first quarter of
1999 from 15% during the same period in 1998. The reduction in the value of
residual interest was partially offset by a $0.5 million gain from hedging
activities and a reduction of $1.9 million in wholesale premium paid.
Gain on sale of wholesale loans decreased by $0.7 million, primarily due to
a decrease in whole loan sales as compared to the prior year quarter, coupled
with a reduction in premiums earned in the current quarter.
Net loan origination and other fees decreased by 17% or $2.0 million during
the first quarter of 1999 as compared to prior year quarter. Such decrease is
primarily related to a 17% decrease in the sale of retail originated loans.
Interest income decreased 28% or $1.7 million during the first quarter of
1999 as compared to the corresponding period in 1998. The decrease was primarily
related to a $1.8 million decrease in interest earned on residual interests, a
$0.5 million decrease in interest earned on loans held for sale, partially
offset by $0.6 million increase in interest earned on loans held for investment.
The decrease in residual interest is due to an increase in CPRs experienced by
the Company, while the decrease in loans held for sale interest is due to a
decrease in average balance of loans held for sale. Additionally, the increase
in interest related to loans held for investment was due to an increase in
average balance of the United Kingdom portfolio.
Loan servicing and other decreased by 41% or $0.8 million during the first
quarter of 1999 as compared to the corresponding period in 1998. This decrease
is primarily related to an increase in the amortization of mortgage servicing
rights due to an increase in CPRs experienced by the Company during the first
quarter of 1999.
13
<PAGE>
EXPENSE
The following table sets forth the components of the Company's expense for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
-------------------------------
1999 1998
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Compensation and benefits............................................................$ 5,201 $ 5,890
Advertising.......................................................................... 1,679 1,856
Professional services and other fees ................................................ 799 1,112
Facilities and insurance............................................................. 945 977
Supplies............................................................................. 400 705
Depreciation and amortization....................................................... 484 412
Interest............................................................................. 3,555 1,822
Legal................................................................................ 2,267 360
Travel and training.................................................................. 318 367
Other................................................................................ 570 202
--------------- ---------------
Total expense.....................................................................$ 16,218 $ 13,703
=============== ===============
</TABLE>
Total expense increased 18% or $2.5 million for the first quarter of 1999
as compared to the first quarter of 1998, primarily due to increase in interest
and legal expense, partially offset by decrease in compensation and benefits,
advertising, professional services and supplies.
The increase in interest expense of $1.7 million during the first quarter
of 1999 as compared to the corresponding period in 1998 is primarily related to
a $ 0.7 million increase in debt issuance costs and $0.5 million increase
related to interest expense on the secured term loan facility. Additionally, the
increase in the Company's portfolio of credit cards serviced during 1998
resulted in a $0.5 million increase in cost of funds related to the program.
The increase in legal expenses of $1.9 million during the first quarter of
1999 as compared to the corresponding period in 1998 is related to ongoing legal
matters (see Part II., Item 1. Legal Proceedings). Approximately $0.6 million of
such amount represents accruals for legal settlements.
The decrease in compensation and benefits, advertising, professional
services and supplies of 16% or $1.5 million during the first quarter of 1999 as
compared to the corresponding prior year period is primarily the result of a 28%
decrease in retail loan originations, the discontinuation of the Company's
credit card and United Kingdom origination operations in December of 1998, and
the Company's overall cost reduction strategy.
INCOME TAXES
The Company's estimated tax rate for the quarters ended March 31, 1999 and
1998 was 40.0% and 37.8%, respectively. The increase in the Company's estimated
tax rate is primarily due to a change in geographical concentration of the
Company's business.
SERVICING
The Company's servicing portfolio grew by approximately $25 million over
March 31, 1998, despite an increase in the rate of prepayments. The weighted
average coupon related to the Company's servicing portfolio as of March 31, 1999
was 9.9%, while the average servicing fee percentage recognized for the first
quarter was .53%.
14
<PAGE>
The following tables provide data on loan delinquency, real estate owned
(REO) and net losses for the Company's servicing portfolio:
<TABLE>
<CAPTION>
UNITED STATES AS OF
-----------------------------------------------------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
--------------------------- --------------------------- ---------------------------
% OF % OF % OF
(Dollars in SERVICING (Dollars in SERVICING (Dollars in SERVICING
thousands) PORTFOLIO thousands) PORTFOLIO thousands) PORTFOLIO
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Servicing Portfolio..................... $ 810,242 $ 802,034 $ 802,529
============= ============= =============
30-59 days delinquent................... $ 6,481 0.8% $ 9,144 1.1% $ 8,085 1.0%
60-89 days delinquent................... 6,044 0.7 6,097 0.8 5,473 0.7
90 days or more delinquent.............. 19,824 2.5 18,449 2.3 20,259 2.5
------------- ------------- ------------- ------------- ------------- -------------
Total delinquencies................ $ 32,349 4.0% $ 33,690 4.2% $ 33,817 4.2%
============= ============= ============= ============= ============= =============
REO (1)................................. $ 1,458 0.2% $ 2,063 0.2% $ 1,950 0.2%
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
UNITED KINGDOM AS OF
-----------------------------------------------------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
--------------------------- --------------------------- ---------------------------
% OF % OF % OF
(Dollars in SERVICING (Dollars in SERVICING (Dollars in SERVICING
Thousands) PORTFOLIO Thousands) PORTFOLIO thousands) PORTFOLIO
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Servicing Portfolio..................... $ 55,636 $ 63,629 $ 38,008
============= ============= =============
30-59 days delinquent................... $ 2,886 5.2% $ 2,421 3.8% $ 1,588 4.2%
60-89 days delinquent................... 2,634 4.7 1,697 2.7 212 0.6
90 days or more delinquent.............. 5,256 9.5 4,015 6.3 873 2.3
------------- ------------- ------------- ------------- ------------- -------------
Total delinquencies................ $ 10,776 19.4% $ 8,133 12.8% $ 2,673 7.1%
============= ============= ============= ============= ============= =============
REO (1)................................. $ - 0.0% $ - 0.0% $ - 0.0%
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
COMBINED AS OF
-----------------------------------------------------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
--------------------------- --------------------------- ---------------------------
% OF % OF % OF
(Dollars in SERVICING (Dollars in SERVICING (Dollars in SERVICING
thousands) PORTFOLIO thousands) PORTFOLIO thousands) PORTFOLIO
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Servicing Portfolio..................... $ 865,878 $ 865,663 $ 840,537
============= ============= =============
30-59 days delinquent................... $ 9,367 1.1% $ 11,565 1.3% $ 9,673 1.1%
60-89 days delinquent................... 8,678 1.0 7,794 0.9 5,685 0.7
90 days or more delinquent.............. 25,080 2.9 22,464 2.6 21,132 2.5
------------- ------------- ------------- ------------- ------------- -------------
Total delinquencies................ $ 43,125 5.0% $ 41,823 4.8% $ 36,490 4.3%
============= ============= ============= ============= ============= =============
REO (1)................................. $ 1,458 0.2% $ 2,063 0.2% $ 1,950 0.2%
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED MARCH 31,
-------------------------------
1999 1998
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Average servicing portfolio (2)......................................................... $ 865,771 $ 819,811
Net losses (3).......................................................................... $ 373 $ 230
Percentage of average servicing portfolio - annualized.................................. 0.17% 0.11%
</TABLE>
(1) Includes REO of the Company as well as REO of the securitization trusts
serviced by the Company; however, excludes private investor REO not
serviced by the Company.
(2) Average servicing portfolio balance equals the quarterly average of the
servicing portfolio computed as the average of the balances at the
beginning and end of each quarter.
(3) Net losses means actual net losses realized with respect to the disposition
of REO.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has generated positive cash flow. The Company's
sources of cash include loan sales, sales of regular interests, borrowings under
its warehouse financing facilities, distributions received from residual
interests, interest income and loan servicing income. The Company's uses of cash
include the funding of loan originations and purchases, payments of interest,
repayment of its warehouse financing facilities, capital expenditures, operating
and administrative expenses and payment of income taxes.
The loan origination and processing fees charged to the borrower are
included in the principal balance of the loan originated. The Company funds such
loans out of available cash or through its warehouse financing facilities. For
loans financed through available cash, the Company receives its loan origination
and processing fees in cash upon sale of the loan. For loans financed through
the warehouse financing facilities, the Company generally receives substantially
all of the loan origination and processing fees in cash at the time of the
warehouse financing facility borrowing.
During the fourth quarter of 1998, the Company's $175 million, $125
million and 50 million British pounds warehouse financing facilities expired,
and were not renewed. In December 1998, the Company entered into a $150 million
warehouse financing facility and a secured term loan facility of approximately
$66 million. In March 1999, the Company entered into an additional $20 million
warehouse financing facility. The $150 million warehouse financing facility is
secured by loans originated or purchased by the Company, expires in December
1999, and bears interest at a rate ranging between 1.25% to 1.75% over 30-day
United States dollar denominated LIBOR. As partial consideration for the $150
million warehouse financing facility, the Company agreed to grant the warehouse
lender stock warrants that may be exercised by the lender to purchase one
percent (1%) of the Company's Common Stock on a diluted basis, with an effective
date in February 1999. The $66 million secured term loan facility, which was
entered into with a company owned by the majority stockholders of FACO, Brian
and Sarah Chisick, and is secured by United Kingdom mortgages held for
investment, bears a fixed interest rate of 8.5%, and matures as the underlying
pledged mortgages are liquidated. The $20 million warehouse financing facility,
which is secured by loans originated or purchased by the Company, and currently
bears interest at a rate of 2.25% over the 30-day US dollar denominated LIBOR,
expires in September 1999. These facilities contain certain affirmative and
negative covenants with which the Company was in compliance at March 31, 1999.
Although management expects that the Company will be able to maintain
these financing agreements, there can be no assurance that the Company will be
able to do so. The Company is therefore continuing to pursue other financing
agreements. To the extent that the Company is not successful in maintaining or
replacing the existing financing agreements, the Company may be forced to
curtail its loan production activity, which may lead to significantly reduced
loan sales, thereby having a material adverse effect on the Company's results of
operations and financial condition.
The Company bears a foreign currency risk related to its $66 million
secured term loan facility, which provides long-term financing for its United
Kingdom subsidiary. This risk is a result of the Company's obligation to repay
the facility in US denominated currency, while the underlying collateral
represents loans denominated in British Pounds. The Company has hedged this risk
by entering into 24 individual foreign currency put options and 24 individual
foreign currency call options of 1 million British pounds each, which mature
monthly. The put options provide the Company the option to sell the foreign
currency to a third party at a strike price of 1.542 dollars to the British
Pound. Therefore, the Company has protected itself, to the extent of the hedged
amount, against the foreign currency exchange rate falling below the strike
price of 1.542. The call options, however, provide the third party the option to
buy the foreign currency from the Company at a strike price of 1.687 dollars to
the British Pound. Consequently, the Company bears the risk between any market
fluctuation ranging from 1.687 to 1.542.
In February 1999, the Company refinanced its 40,000 square foot office
building and received proceeds of approximately $3.7 million. The loan bears an
interest rate of 6.9% and matures on March 1, 2009, at which time a principal
balance of $2.5 million is due.
16
<PAGE>
In April 1997, the Board of Directors of the Company authorized the
repurchase of up to 7.5 million shares of Class A Common Stock. Of the 7.5
million shares authorized, the Company had repurchased approximately 4.0 million
shares as of March 31, 1999. The Company, however, did not repurchase any shares
during the fourth quarter of 1998 and the first quarter of 1999.
As of March 31, 1999 the Company had commitments to fund loans of $5.2
million. Historically, approximately 55% of such commitments have ultimately
been funded. Capital expenditures totaled $22,000 and $2.2 million for the three
months ended March 31, 1999 and 1998, respectively. In the first quarter of
1998, the Company's new telemarketing center was opened in a 40,000 square-foot
office building in Irvine, California which the Company purchased in July 1997.
The decrease in capital expenditures during the first quarter of 1999 was
partially due to the Company's overall cost reduction strategy. In addition,
during the first quarter of 1998, the Company incurred $1.1 million of leasehold
improvements related to the new telemarketing center.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs written using two
digits rather than four digits to define the applicable year. Any of the
Company's internal use computer programs and hardware, as well as its software,
that are date sensitive may recognize a date using the two digits "00" as the
year 1900 rather than the year 2000. Failure to correct the Year 2000 problem
could result in miscalculation of data, causing a disruption of operations
including, among other things, an inability to process loan transactions,
service its loan portfolio or engage in other normal business activities. Such
failure could materially and adversely affect the Company's results of
operations and financial condition.
The Company has implemented a formal five-step plan in order to address
the Year 2000 issue: (1) Awareness, (2) Inventory, (3) Assessment, (4)
Renovation, and (5) Testing and Implementation. The plan addresses hardware and
software purchased or leased from outside vendors, in-house developed software,
telecommunication equipment and facilities. The first four steps of the plan
have been completed and, thus far, the Company has been required to replace or
renovate only a small amount of its older computer equipment to comply with the
Year 2000 issue. The Company expects to complete the last step of the plan by
the second quarter of 1999. Because the majority of the Company's computer
software and hardware was purchased or developed recently and was designed to be
Year 2000 compliant, the Company does not expect its costs to be material in
addressing the Year 2000 issue.
The Company has initiated formal communication with its significant
outside vendors to determine the extent to which the Company may be vulnerable
to Year 2000-related risks in the event that those parties fail to properly
address their own Year 2000 issues. While the Company is not presently aware of
any significant exposure, there can be no assurance that the systems of third
parties on which the Company relies will be converted in a timely manner. A
contingency plan for outside vendors has not yet been developed for dealing with
the most reasonably likely worst case scenario, and such scenario has not yet
been clearly identified. The Company expects to complete its analysis and
contingency plan by June 30, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 1999, no material changes with regard to market risk from
the preceding fiscal year were noted.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1998, Leon Rasachack and Philip A. Ettedgui filed a class
action suit on behalf of all purchasers of the Company's Class A Common Stock
between April 24, 1997 through May 15, 1998. The suit was filed in the Superior
Court of California in the County of Orange against the Company, Brian Chisick,
Sarah Chisick and Mark Mason. The complaint alleges that the Company conspired
against those who purchased the stock during the stated class period by failing
to disclose known material adverse conditions in making certain public
statements about the Company's growth prospects. The plaintiffs in this class
action suit are seeking an unspecified amount of damages. The Company is
currently in discovery.
In September 1998, the Company was informed by the United States Department
of Justice (DOJ) that it and the Attorneys General of Arizona, Florida,
Illinois, Massachusetts, Minnesota, New York and Washington have initiated a
joint investigation into the lending practices of the Company. That
investigation and any negative findings that may result therefrom could have a
significant adverse effect on the Company's ability to obtain new and renew
state lending licenses, which, in turn, could have a significant adverse effect
on the Company's ability to maintain or expand its retail branch network of
offices and on the Company's results of operations and financial condition. The
DOJ has agreed to limit its initial inquiry to pricing disparities, and is
currently reviewing data provided by the Company.
In October 1998, the Attorney General of Massachusetts filed an action on
behalf of the Commonwealth against the Company in the Superior Court of
Massachusetts, in the County of Suffolk. The suit seeks to enjoin the Company
from charging rates, points and other terms which significantly deviate from
industry-wide standards or which are otherwise unconscionable or unlawful. The
remedies sought by the Attorney General include injunctive relief; restitution
for all consumers; civil penalties; and the costs of investigating and
prosecuting the action, including attorneys' fees. A preliminary injunction was
granted, limiting the points the Company can charge to a total of five. In
addition, the Company must advise the Attorney General before any foreclosure
actions are filed in the Commonwealth. The Company has filed a motion to vacate
the injunction. A hearing is expected in May 1999.
In November 1998, the Attorney General of Minnesota filed an action on
behalf of the State against the Company in Ramsey County District Court. The
suit alleges violations of the Minnesota Uniform Deceptive Trade Practices Act,
the Consumer Fraud Act, Truth in Lending Act and related federal regulations.
The Attorney General seeks injunctive relief, restitution, civil penalties,
attorneys' fees and costs. The Company has agreed to discontinue writing ARMs.
In December 1998, the Attorney General of the State of Illinois filed an
action on behalf of the State against the Company in the Cook County Circuit
Court. The suit alleges violations of the Illinois Consumer Fraud Act, Deceptive
Trade Practices Act and Illinois Interest Act. The Attorney General seeks
injunctive relief, restitution, civil penalties, rescission, revocation of
business licenses, attorneys' fees and costs. The Company has filed a motion to
dismiss, which will be heard sometime on May 18, 1999.
In December 1998, the American Association of Retired Persons (AARP) filed
an action against the Company and against Brian and Sarah Chisick in the
Superior Court of California, in the County of Santa Clara. The suit alleges
unfair, unlawful, fraudulent and deceptive business practices and conspiracy.
The AARP is seeking injunctive relief, restitution, revocation of licenses,
attorneys' fees and costs. On April 1, 1999, the Court struck without leave to
amend the prayer for relief seeking revocation of the Company's licenses. It
also struck the conspiracy allegations, the restitution and treble damages for
relief, with leave to amend. The AARP has until mid-May 1999 to file an amended
complaint.
The Company is also a party to various legal proceedings arising out of the
ordinary course of its business including 17 lawsuits alleging misleading
lending practices, some of which have been filed either as class actions or
under private attorney general statutes. Given the preliminary state of these
proceedings, the Company is currently unable to determine the probability or
reasonably estimate any potential loss, if any, related to the ultimate outcome
of the cases.
18
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Effective April 12, 1999, Wendy Rianda resigned as Vice President and
General Counsel of the Company.
Effective April 12, 1999, the Company appointed Craig Zimmerman as Vice
President and General Counsel of the Company.
Effective April 27, 1999, the Company appointed Dan Stevenson as a member
of the Board of Directors.
Effective April 30, 1999, Albert Lord resigned as a member of the Board of
Directors of the Company.
Effective May 10, 1999, Craig Zimmerman was terminated from his position as
Vice President and General Counsel of the Company.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Certificate of Incorporation of the Company (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Commission File No. 333-3633)
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Commission File No.
333-3633)
4.1 1996 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
4.1.1 Form of Incentive Stock Option Agreement for use with 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 0-28706)
4.1.2 Form of Non-qualified Stock Option Agreement for use with 1996 Stock
Incentive Plan (Incorporated by reference to Exhibit 4.1.2 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996, Commission File No. 0-28706)
10.1 Warehouse Financing Facility dated October 29, 1993 (Incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-1, Commission File No. 333-3633)
10.2 Form of Pooling and Servicing Agreement (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1,
Commission File No. 333-3633)
10.3 Corporate Headquarters Lease (Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.4 S Distribution Notes (Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.5 Mason Employment Agreement (Incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S1, Commission File No.
333-3633)
10.5.1 Mason Loan (Incorporated by reference to Exhibit 10.5.1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1996,
Commission File No. 0-28706)
10.6 Form of Directors' and Officers' Indemnity Agreement (Incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement on
Form S-1, Commission File No. 333-3633)
10.7 Master Repurchase Agreement dated as of October 31, 1997 between
Nationscapital Mortgage Corporation and the Company (Incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, Commission File No. 0-28706)
10.8 Master Repurchase Agreement dated as of October 31, 1997 between Coast
Security Mortgage Inc. and the Company (Incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, Commission File No. 0-28706)
10.9 Chisick Employment Agreement (Incorporated by reference to Exhibit 10.9
to the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.10 Reimbursement Agreement (Incorporated by reference to Exhibit 10.10 to
the Company's Registration Statement on Form S-1, Commission File No.
333-3633)
10.11 Warehouse Financing Facility dated September 5, 1996 (Incorporated by
reference to Exhibit 10.11 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1996, Commission File No.
0-28706)
10.12 Interim Warehouse and Security Agreement dated as of February 15, 1997
between Nationscapital Mortgage Corporation and the Company
(Incorporated by reference to Exhibit 10.12 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1997, Commission File
No. 0-28706)
10.13 Interim Warehouse and Security Agreement dated as of February 15, 1997
between Coast Security Mortgage Inc. and the Company (Incorporated by
reference to Exhibit 10.13 to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 1997, Commission File No. 0-28706)
10.14 Smith Loan (Incorporated by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1997,
Commission File No. 0-28706)
20
<PAGE>
10.15 Building Purchase and Sale Agreement between Amresco Residential
Mortgage Corporation and the Company (Incorporated by reference to
Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997, Commission File No. 0-28706)
10.16 Warehouse Credit Facility Agreement dated August 18, 1997 between
Prudential Securities Credit Corporation and the Company (Incorporated
by reference to Exhibit 10.16 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997, Commission File No.
0-28706)
10.17 Master Repurchase Agreement dated as of October 27, 1997 between First
Union National Bank and the Company (Incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, Commission File No. 0-28706)
10.18 Amendment to Warehouse Credit Facility Agreement dated August 18, 1997
between Prudential Securities Credit Corporation and the Company
(Incorporated by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1998, Commission File
No. 0-28706)
10.19 Master Repurchase Agreement dated as of December 30, 1998 between Lehman
Commercial Paper Inc. and the Company (Incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, Commission File No. 0-28706)
10.20 Deed of Trust Note dated as of February 19, 1999, between The Ohio
National Life Insurance Company and the Company *
27 Financial Data Schedule *
- ----------------
* Filed herewith.
(b) Reports on Form 8-K:
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST ALLIANCE CORPORATION
REGISTRANT
Date: May 12, 1999 /s/ BRIAN CHISICK
---------------------- ----------------------------------------
Brian Chisick
President and Chief Executive Officer
Date: May 12, 1999 /s/ FRANCISCO NEBOT
---------------------- -------------------------------
Francisco Nebot
Executive Vice President
Principal Financial Officer
DEED OF TRUST NOTE
------------------
$3,700,000.00 Irvine, California February 19, 1999
1. AGREEMENT TO PAY. FOR VALUE RECEIVED, FIRST ALLIANCE MORTGAGE
COMPANY, a California corporation ("BORROWER"), hereby promises to pay to the
order of THE OHIO NATIONAL LIFE INSURANCE COMPANY, an Ohio corporation
("LENDER"), in the manner hereinafter provided, the principal sum of THREE
MILLION SEVEN HUNDRED THOUSAND AND NO/100 DOLLARS ($3,700,000.00), or so much
thereof as may be advanced, with interest on the principal amount outstanding
from time to time from date of disbursement until maturity at the rate of six
and nine tenths percent (6 9/10%) per annum, payable on the first day of each
and every month of the term hereof in lawful money of the United States of
America, as follows:
(a) Interest only shall be due on the first day of the month
following the date ("DISBURSEMENT DATE") on which the principal sum of
the loan evidenced by this Note is disbursed for the period of time
commencing with the Disbursement Date through the end of the month in
which the Disbursement Date occurs.
(b) Commencing on the first day of the second month after the
Disbursement Date, monthly installments of principal and interest shall
be due and payable in the amount of TWENTY EIGHT THOUSAND FOUR HUNDRED
SIXTY FIVE AND NO/100 DOLLARS ($28,465.00) each, such payments to
continue monthly thereafter on the first day of each succeeding month
until the first day of March, 2009, when the balance of said principal
sum with all accrued and unpaid interest thereon shall be due and
payable.
(c) Interest hereunder shall be calculated on a year of 360 days and
a month of 30 days but accrued on the actual number of days elapsed.
The monthly payments of combined principal and interest of this Note
are based on a twenty (20) year amortization that results in the final
installment being a balloon payment of the entire unpaid principal
balance and accrued but unpaid interest.
2. ALLOCATION OF PAYMENTS. All such monthly payments on account of the
indebtedness evidenced by this Note as first set forth above shall be applied,
in the following order, to: (a) Late Charges (as defined in paragraph 5 hereof),
interest at the Default Rate (as defined in paragraph 6 hereof) and prepayment
premiums, (b) interest at the rate set forth in paragraph 1 hereof on the unpaid
principal balance, and (c) the payment of the monthly installment attributable
to principal based upon an amortization schedule of twenty (20) years.
3. PLACE OF PAYMENT. Each and all of said payments of principal and
interest shall be made payable at the office of GMAC Commercial Mortgage
Corporation, P.O. Box 100116, Pasadena, California 91189-0116, or at such place
as Lender may, from time to time, in writing appoint.
- 1 -
<PAGE>
4. PREPAYMENT PRIVILEGES AND RESTRICTIONS.
(a) Borrower shall have no right to prepay the principal sum, or any
part thereof, or any interest thereon, except as set forth in this
Note. There is hereby reserved to Borrower the right and privilege of
prepaying the entire principal balance (but not less than the entire
principal balance) and all accrued and unpaid interest thereon at any
time on payment of a premium equal to the greater of (i) one percent
(1%) of the then outstanding principal balance of this Note, or (ii)
the "Discounted Yield Maintenance Prepayment Fee". In addition,
Borrower shall have the right to prepay without premium the entire
principal balance and all accrued and unpaid interest thereon during
the last 90 days of the term of this loan.
(b) The "DISCOUNTED YIELD MAINTENANCE PREPAYMENT FEE" shall mean an
amount calculated by applying the Treasury Security rate to the amount
of principal so prepaid from the date of such prepayment to the date of
the maturity of this Note and shall be equal to the positive difference
between the interest rate of this Note and the Treasury Yield, divided
by 12, multiplied by the then outstanding principal balance of this
Note to arrive at the monthly payment differential. The present value
of the series of the monthly payment differentials for the number of
whole and partial months from the prepayment date to the maturity date
of this Note using the Treasury Yield as the discount rate compounding
monthly shall then be calculated. The resulting sum of the discounted
monthly prepayment differentials will be the Discounted Yield
Maintenance Prepayment Fee.
(c) As used herein, the term "TREASURY YIELD" means, with respect to
any prepayment, the per annum yield to maturity of Treasury Securities
as published in the Wall Street Journal on the seventh (7th) business
day prior to the date of prepayment. As used herein, the term "TREASURY
SECURITY" means, with respect to any prepayment, U.S. Treasury bills,
notes or bonds, as the case may be, having a coupon interest rate and
maturity rate most closely equivalent to the maturity date of this
Note.
(d) All such elective prepayments as above set forth may be made
only on the first business day of a calendar month and on sixty (60)
days prior written notice to Lender.
(e) In case a default shall occur hereunder, a tender of payment by
Borrower, or its successors or assigns, or anyone on its or their
behalf, of the amount necessary to satisfy the entire indebtedness
evidenced hereby prior to a foreclosure sale shall constitute an
evasion of the prepayment provisions of this Note and constitute a
voluntary prepayment, and in such case any such tender of payment shall
include a prepayment premium calculated in accordance with this
paragraph 4.
- 2 -
<PAGE>
(f) No prepayment premium shall be charged as a result of the
application of insurance proceeds or condemnation awards to the unpaid
principal of this Note.
5. LATE CHARGES. If any payment due hereunder is not received by Lender
within three (3) business days of the date such payment is due, Borrower shall
pay a late charge (the "LATE CHARGE") of five percent (5%) of each such late
payment (which late charge shall be due and payable retroactively as of the
first date on which such payment was due) as compensation to Lender for the
additional costs and expenses of administering, collecting and accounting for
such late payment, and the payment of such late charge shall not be credited
against the principal balance hereunder or any accrued or unpaid interest.
Borrower and Lender agree that the Late Charge represents a reasonable sum
considering the circumstances existing on the date of this Note and represents a
fair and reasonable estimate of the costs Lender will incur by reason of late
payment. Borrower and Lender further agree that proof of actual damages
resulting from late payment would be both costly and inconvenient. The Late
Charge is intended solely to compensate Lender for such costs and shall not be
construed as a "penalty" or unreasonable liquidated damages within the meaning
of California Civil Code ss. 1671. This paragraph 5 shall not release Borrower
from the obligation to make payments on or before the date on which they are
due, nor does this paragraph 5 in any way affect or limit the rights and
remedies of Lender pursuant to this Note, or any other documents securing or
executed in connection with this Note, or otherwise.
6. DEFAULT. If (i) default be made in the payment of any interest
herein provided for, or the principal sum evidenced hereby, or any part thereof,
or any other sums payable pursuant to the terms of this Note or the Deed of
Trust (as hereinafter defined) or pursuant to any other document executed as
security for this Note, or (ii) default be made in the performance of any
non-monetary covenant or agreement contained in this Note or in the Deed of
Trust or any other document executed as security for this Note, at the time when
performance is required by any such document, and such non-monetary default is
not cured within twenty (20) days after written notice of such default is given
by Lender to Borrower, or, if such default by its nature cannot be cured within
twenty (20) days, within sixty (60) days after written notice of such default is
given by Lender to Borrower (provided that Borrower commences such cure within
twenty (20) days and diligently prosecutes such cure thereafter), then or at any
time thereafter while Borrower remains in default thereunder, at the option of
Lender which shall be communicated by written notice to Borrower, the whole of
the principal sum then remaining unpaid hereunder, together with all interest
accrued and unpaid thereon, shall immediately become due and payable without
notice. From and after the maturity of this Note, either according to its terms
or as the result of a declaration of maturity made by Lender, and after the due
date for the payment of any other sum payable hereunder irrespective of any
declaration of maturity, the entire principal sum remaining unpaid hereunder,
and every other sum payable hereunder after its due date, shall bear interest at
the rate of eleven and nine tenths percent (11 9/10%) per annum (the "DEFAULT
RATE"). Failure to exercise such option or any other rights to which Lender may,
in the event of any such default, be entitled shall not constitute a waiver of
the right to exercise such option or any other rights in the event of any
subsequent default, whether of the same or different nature.
- 3 -
<PAGE>
7. COSTS OF ENFORCEMENT. In the event that this Note is placed in the
hands of an attorney-at-law for collection after maturity, or upon default, or
in the event that proceedings at law, in equity, or bankruptcy, receivership or
other legal proceedings are instituted or threatened in connection herewith, or
if Lender is made a party to any such proceeding or in the event that this Note
is placed in the hands of an attorney-at-law to enforce any of the rights or
requirements contained herein or in the Deed of Trust or any other document
executed in connection with this Note, Borrower hereby agrees to pay all
reasonable costs of collecting or attempting to collect this Note and all costs
of protecting or enforcing such rights, including, without limitation,
reasonable attorneys' fees (whether or not suit is brought), in addition to all
principal, interest and other amounts payable hereunder; all of which shall be
secured by the Deed of Trust and any other document securing payment hereof.
8. WAIVER. To the extent permitted by law, Borrower, all endorsers and
guarantors, and all persons liable or to become liable on this Note: waive
presentment, protest and demand, and notice of protest, demand and dishonor and
nonpayment of this Note; waive all applicable appraisement, valuation and
exemption rights; consent to any and all renewals and extensions in the time of
payment hereof; and agree that at any time and from time to time without notice,
the terms of payment herein may be modified or the security described in any
document securing this Note released, in whole or in part, or increased, changed
or exchanged by agreement between Lender and any owner of the property affected
by such document securing this Note, without in anyway affecting the liability
of any party to this instrument or any person liable or to become liable with
respect to any indebtedness evidenced hereby.
9. LENDER'S ACTIONS. The remedies of Lender as provided herein or in
any document executed in connection with this Note, shall be cumulative and
concurrent, and may be pursued singularly, successively or together, at the sole
discretion of Lender, and may be exercised as often as occasion therefor shall
arise. Failure of Lender, for any period of time or on more than one occasion,
to exercise its option to accelerate the maturity of this Note shall not
constitute a waiver of the right to exercise the same at any time thereafter or
in the event of any subsequent default. No act of omission or commission of
Lender, including specifically any failure to exercise any right, remedy or
recourse, shall be deemed to be a waiver or release of the same and any such
waiver or release is to be effected only through a written document executed by
Lender and then only to the extent specifically recited therein. A waiver or
release with reference to any one event shall not be construed as a waiver or
release of any subsequent event or as a bar to any subsequent exercise of
Lender's rights or remedies hereunder. Except as otherwise specifically required
herein, notice of the exercise of any right or remedy granted to Lender by this
Note is not required to be given.
10. SECURITY DOCUMENTS. This Note is secured by certain
documents and instruments including that certain Deed of Trust, Security
Agreement and Fixture Filing with Assignment of Rents (the "DEED OF TRUST") of
even date herewith encumbering certain real property in the County of Los
Angeles, California (the "PROPERTY"). The Deed of Trust and such other documents
and instruments securing this Note shall hereinafter be collectively referred to
as the "SECURITY DOCUMENTS".
- 4 -
<PAGE>
11. ACCELERATION ON TRANSFER. Lender shall have the right, at its
option, to declare the entire unpaid principal balance of this Note and all
accrued but unpaid interest thereon, immediately due and payable, if, without
Lender's prior written consent (which consent shall not be unreasonably withheld
and may be conditioned on (i) reasonable consideration, (ii) full and complete
disclosure to Lender of all pertinent information affecting any of the following
events, and (iii) such additional requirements as Lender shall reasonably
require) any of the following events occur: (a) Borrower, or its successors in
interest, convey, transfer or assign the Property or any part thereof, or any
interest therein, whether by deed, contract of sale, lease with option to buy,
or otherwise; or (b) Borrower, or its successors in interest, further encumber
or alienate the Property or any part thereof; or (c) Borrower, or its successors
in interest, suffer their title to the Property or any interest therein to be
divested, whether voluntarily or involuntarily; or (d) Borrower, or its
successors in interest, change or permit to be changed the character or use of
the Property; or (e) suit be commenced to condemn the Property as being unfit
for use or occupancy or to abate as a nuisance activities or conditions found
thereon or for the partition or sale of the Property; or (f) if Borrower is a
corporation: any of the Borrower's capital stock shall be sold, assigned or
transferred, or if Borrower is a partnership: a transfer of any general
partnership interests. If any of the events enumerated in the preceding
subparagraphs (a) to (f), inclusive, occur and if Lender consents to the same,
such consent shall not be deemed or construed as a waiver, and the consent of
Lender shall be required on all successive occurrences. In the event that Lender
approves a transfer of ownership of the Property, Borrower shall pay to Lender a
fee equal to one percent (1%) of the then outstanding principal balance of the
this Note. In addition, a management contract in form and substance acceptable
to Lender will be required with a company approved by Lender. Borrower shall be
solely responsible for the payment of any and all legal and administrative
expenses of Lender required to consummate the necessary documentation, including
but not limited to financial statements, credit reports, proposed instrument of
conveyance, an updated title examination showing no adverse title consequences
since the original funding thereof, and such formal opinions of counsel as
Lender, in its sole discretion, shall require.
12. NOTICES. All notices required or permitted to be given hereunder to
Borrower shall be given in the manner and to the address of Borrower provided in
the Deed of Trust for notices to the trustor.
13. TIME. Time is of the essence of this Note and each of the
provisions hereof.
14. CAPTIONS. The captions to the paragraphs of this Note are for
convenience only and shall not be deemed part of the text of the respective
paragraphs and shall not vary, by implication or otherwise, any of the
provisions of this Note.
15. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of California.
- 5 -
<PAGE>
16. INTEREST LIMITATION. In no event shall the interest paid, or agreed
to be paid, to Lender, exceed the maximum amount permissible under applicable
law. If the performance or fulfillment of any provision hereof or of any of the
Security Documents or any agreement between Borrower and Lender shall result in
interest exceeding the limit for interest prescribed by law, then the amount of
such interest shall be reduced to such limit. If, from any circumstances
whatsoever, Lender should receive as interest an amount which would exceed the
highest lawful rate, the amount which should be excessive interest shall be
applied to the reduction of the principal balance owing hereunder (or, at the
option of the Lender, be paid over to Borrower) and not to the payment of
interest.
17. SURVIVAL. If any provision hereof, or if any of the Security
Documents, shall, for any reason and to any extent, be invalid or unenforceable,
then the remainder of this Note or the Security Documents, shall not be affected
thereby but instead shall be enforceable to the maximum extent permitted by law.
18. CONSTRUCTION. The term "Borrower" as used herein shall include the
original Borrower and any party who may subsequently become liable for the
payment hereof, with the consent of Lender, provided that Lender may, at its
option, consider the original Borrower alone as Borrower unless Lender has
consented in writing to the substitution of another party as Borrower. The term
"Lender" as used herein shall mean Lender or, if this Note is transferred, the
then holder of this Note. In this Note, whenever the context so requires, the
masculine gender includes the feminine and/or neuter, and vice versa, and the
singular number includes the plural and vice versa.
- 6 -
<PAGE>
IN WITNESS WHEREOF, Borrower has executed this Note as of the
day and year first above written.
FIRST ALLIANCE MORTGAGE
COMPANY, a California corporation
By:_______________________________________
Francisco Nebot, its Chief Financial
Officer
- 7 -
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 16,422
<SECURITIES> 0
<RECEIVABLES> 4,330
<ALLOWANCES> 0
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<CURRENT-ASSETS> 37,312
<PP&E> 9,203
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0
0
<COMMON> 223
<OTHER-SE> 76,046
<TOTAL-LIABILITY-AND-EQUITY> 155,913
<SALES> 14,064
<TOTAL-REVENUES> 19,617
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