<PAGE>
================================================================================
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 June 30, 2000
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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 October 24, 2000, the registrant had outstanding, net of treasury
shares, 17,864,788 shares of Class A Common Stock.
================================================================================
<PAGE>
FIRST ALLIANCE CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Net Assets Available for Liquidation
(Unaudited) as of June 30, 2000.................................... 1
Consolidated Statement of Financial Condition as of
December 31, 1999.................................................. 2
Consolidated Statement of Change in Net Assets (Unaudited)
for the period of April 1, 2000 to June 30, 2000................... 3
Consolidated Statements of Income (Unaudited) for the three
and six months ended June 30, 1999................................. 4
Consolidated Statements of Comprehensive Income (Unaudited)
for the three and six months ended June 30, 1999................... 5
Consolidated Statement of Cash Flows (Unaudited) for the
six months ended June 30, 1999..................................... 6
Notes to Consolidated Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A")..................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 19
Item 2. Changes in Securities.............................................. 20
Item 3. Defaults Upon Senior Securities.................................... 20
Item 4. Submission of Matters to a Vote of Security Holders................ 20
Item 5. Other Information.................................................. 20
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits................................................. 21
b. Reports on Form 8-K...................................... 22
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF NET ASSETS AVAILABLE FOR LIQUIDATION
(DOLLARS IN THOUSANDS)
JUNE 30, 2000
-------------
(UNAUDITED)
ASSETS
Cash and cash equivalents..................................... $ 14,443
Restricted cash............................................... 4,104
Receivable from trusts........................................ 3,865
Loans held for sale, net...................................... 71,906
Loans receivable held for investment.......................... 530
Residual interests in securities - at fair value.............. 42,046
Mortgage servicing rights..................................... 6,643
Property, net................................................. 6,561
Deferred taxes................................................ 4,981
Prepaid expenses and other assets............................. 2,870
-------------
Total assets............................................... $ 157,949
-------------
LIABILITIES
Warehouse financing facilities................................ $ 68,763
Reserve for estimated costs during the period of
liquidation................................................ 13,917
Accrued contingent liabilities................................ 7,588
Accounts payable and accrued liabilities...................... 5,196
Income taxes payable.......................................... 2,757
Notes payable................................................. 4,580
-------------
Total liabilities.......................................... $ 102,801
-------------
NET ASSETS AVAILABLE FOR LIQUIDATION $ 55,148
============
See notes to consolidated financial statements.
1
<PAGE>
FIRST ALLIANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
1999
--------------
ASSETS
Cash and cash equivalents...................................... $ 14,496
Restricted cash................................................ 3,238
Receivable from trusts......................................... 3,607
Loans held for sale, net....................................... 19,782
Loans receivable held for investment
(net of allowance of $263)................................. 1,521
Residual interests in securities - at fair value............... 48,222
Mortgage servicing rights...................................... 8,673
Property, net.................................................. 8,099
Goodwill (net of accumulated amortization of $157)............. 3,019
Prepaid expenses and other assets.............................. 1,497
--------------
Total assets............................................... $ 112,154
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facility................................... $ 14,122
Accrued contingent liabilities................................. 7,535
Accounts payable and accrued liabilities....................... 3,135
Income taxes payable........................................... 3,631
Notes payable.................................................. 4,626
--------------
Total liabilities.......................................... 33,049
--------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value; 1,000,000 shares authorized:
no shares outstanding......................................
Class A Common Stock, $0.01 par value; 75,000,000 shares authorized;
shares issued and outstanding: 22,186,288.................. 223
Additional paid in capital..................................... 65,813
Retained earnings.............................................. 65,154
Treasury stock - at cost: 4,237,000 shares..................... (52,085)
--------------
Total stockholders' equity................................. 79,105
--------------
Total liabilities and stockholders' equity................. $ 112,154
==============
See notes to consolidated financial statements.
2
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF CHANGE IN NET ASSETS
FOR THE PERIOD OF APRIL 1, 2000 TO JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NET ASSETS AS OF APRIL 1, 2000..................................... $ 65,836
==========
REVENUE:
Loan origination and sale..................................... 721
Interest...................................................... 3,771
Loan servicing and other...................................... 1,491
----------
Total revenue............................................... 5,983
----------
EXPENSE:
Compensation and benefits..................................... 2,319
Advertising................................................... (111)
Professional services and other fees ......................... 460
Facilities and insurance...................................... 488
Supplies...................................................... 14
Depreciation and amortization................................. 180
Interest...................................................... 2,158
Legal......................................................... 1,014
Travel and training........................................... 2
Liquidation costs............................................. 6,232
Adjustment to liquidation basis............................... (661)
Other......................................................... 3
----------
Total expense............................................... 12,098
----------
(LOSS) BEFORE INCOME TAX PROVISION................................. (6,115)
INCOME TAX PROVISION............................................... (4,573)
----------
NET CHANGE......................................................... (10,688)
==========
NET ASSETS AS OF JUNE 30, 2000..................................... $ 55,148
==========
See notes to consolidated financial statements.
3
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1999
-------------------- ------------------
(UNAUDITED)
<S> <C> <C>
REVENUE:
Loan origination and sale................................ $ 10,895 $ 24,956
Interest................................................. 3,728 8,170
Loan servicing and other................................. 1,832 2,947
-------------------- ------------------
Total revenue.......................................... 16,455 36,073
-------------------- ------------------
EXPENSE:
Compensation and benefits................................ 5,530 10,731
Advertising.............................................. 2,092 3,771
Professional services and other fees .................... 570 1,369
Facilities and insurance................................. 1,021 1,967
Supplies................................................. 413 813
Depreciation and amortization............................ 470 954
Interest................................................. 3,321 6,876
Legal.................................................... 1,445 3,712
Travel and training...................................... 344 662
Other.................................................... 277 846
-------------------- ------------------
Total expense.......................................... 15,483 31,701
-------------------- ------------------
INCOME BEFORE INCOME TAX PROVISION.............................. 972 4,372
INCOME TAX PROVISION............................................ (389) (1,749)
-------------------- ------------------
NET INCOME...................................................... $ 583 $ 2,623
==================== ==================
NET INCOME PER SHARE:
Basic.................................................... $ 0.03 $ 0.14
==================== ==================
Diluted ................................................. $ 0.03 $ 0.14
==================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic.................................................... 18,139,488 18,139,488
Diluted ................................................. 18,152,679 18,164,935
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1999
-------------------- ------------------
(UNAUDITED)
<S> <C> <C>
NET INCOME...................................................... $ 583 $ 2,623
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment net of income taxes
of $259 and $840 for the three and six months ended
June 30, 1999, respectively................................ (388) (1,260)
-------------------- ------------------
COMPREHENSIVE INCOME............................................ $ 195 $ 1,363
==================== ==================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
1999
------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 2,623
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Capitalized residual interests and mortgage
servicing rights.................................... (7,695)
Accretion of residual interest in securities............ (2,126)
Collection of residual interest in securities........... 10,022
Amortization of mortgage servicing rights............... 3,306
Amortization of debt issuance costs..................... 1,358
Depreciation and amortization .......................... 954
Recognition of deferred fees on loans receivable
held for investment................................. (797)
Provision for loan losses............................... 313
Loss on sales of real estate owned and property......... 66
Changes in assets and liabilities:
Receivable from trusts.................................. 967
Loans held for sale..................................... 7,701
Prepaid expenses and other assets....................... 400
Accounts payable and accrued liabilities................ 3,787
Deferred taxes/income taxes payable..................... (4,391)
------------------
Net cash provided by operating activities........... 16,488
------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash deposited for restricted cash........................... (684)
Capital expenditures......................................... (56)
Collections on loans receivable held for investment.......... 13,340
Proceeds from sale of property............................... 22
------------------
Net cash provided by investing activities........... 12,622
------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on warehouse
financing facilities......................................... (22,751)
Repayments to other borrowings............................... (6,545)
Net borrowings (repayments) on notes payable................. 3,670
------------------
Net cash (used in) financing activities............. (25,626)
------------------
Net effect of exchange rate changes on cash.................. 425
------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................... 3,909
CASH AND CASH EQUIVALENTS, beginning of period............... 18,052
------------------
CASH AND CASH EQUIVALENTS, end of period..................... $ 21,961
==================
See notes to consolidated financial statements.
6
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
1999
------------------
(UNAUDITED)
SUPPLEMENTAL INFORMATION:
Interest paid................................................ $ 3,509
==================
Income taxes paid............................................ $ 6,139
==================
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
==================
Stock warrants issued as debt issuance costs................. $ 515
==================
Components of Effect of Exchange Rate Changes on Cash:
Receivable from trusts.................................. $ 3
Loans receivable held for investment.................... 2,482
Property................................................ (2)
Prepaid expenses and other assets....................... 22
Accounts payable and accrued liabilities................ (56)
Deferred taxes/income taxes payable..................... (764)
Accumulated other comprehensive income.................. (1,260)
------------------
Net effect of exchange rate changes on cash......... $ 425
==================
See notes to consolidated financial statements.
7
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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 statements 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.
FINANCIAL STATEMENT PRESENTATION
On March 23, 2000, FACO, along with several of its subsidiaries, filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Filing") in the United States Bankruptcy Court for the Central
District of California. The Company's filing is expected to facilitate the
reorganization, marketing, sale and liquidation of the Company's remaining
business and assets. The Company has closed all of its loan origination
operations, including its branches, and laid off over 350 employees throughout
the United States. The affected offices were located in California, New York,
New Jersey, Illinois, Arizona, Colorado, Maryland, Oregon, Utah and Washington.
For financial statement presentation purposes only, March 31, 2000 will be
considered the effective date of the Bankruptcy Filing.
As a result of the Bankruptcy Filing and management's intention to market
and sell the assets of the Company, the financial statement presentation has
been revised to the liquidation basis of accounting. Accordingly, the
"Consolidated Statement of Financial Condition" has been replaced with the
"Consolidated Statement of Net Assets," while the "Consolidated Statement of
Operations" has been replaced with the "Consolidated Statement of Change in Net
Assets." Liquidation basis accounting also requires the Company to provide for
all liabilities related to expenses, including general and administrative, to be
incurred during the liquidation period. Therefore, on March 31, 2000, the
Company recorded an estimate of liquidation expenses to be incurred during the
liquidation period of approximately $7.7 million. The Company arrived at this
estimate using certain assumptions, including assumption as the timing of asset
disposition. In June 2000, the Company reevaluated its original assumptions
based on a better assessment of the bankruptcy process and the timing of the
liquidating plan of reorganization. Based on this analysis, the Company
estimated an additional $10.5 million of expenses needed to be accrued. The
additional expense resulting from the June reassessment is primarily
attributable to a longer than anticipated liquidation process resulting in
higher compensation and operating expenses, and greater legal and professional
services expense than originally expected. There is no assurance, however, that
actual liquidation expense will not exceed management's estimates. In the event
that actual liquidation expenses exceed management's estimates, the Company's
Consolidated Statement of Net Assets may be adversely affected. Management
expects the liquidation process to continue for approximately twelve months. No
assurance, however, can be given that the Company will be able to completely
liquidate its assets and settle its liabilities within the time expected.
In addition, liquidation basis accounting also requires assets to be
valued at their estimated net realizable value and liabilities to be estimated
as amounts to be paid in settlement of the entity's obligation. Estimated net
realizable value represents management's best estimate as to fair market value
of the assets, net of selling expenses, and without consideration to the unknown
impact that the Bankruptcy Filing or the outcome of any litigation may have on
the value of the assets. Therefore, on March 31, 2000 the Company recorded a
valuation adjustment to the cost basis of certain assets and liabilities of
approximately $5.3 million. During the three months ended June 30, 2000, the
Company managed to settle certain lease obligations with its landlords, which
reduced the Company's original estimates and resulted in a $0.7 million
favorable liquidation basis adjustment. There can be no assurance that the
Company will be successful in selling the assets at the net realizable value,
which has been recorded in the Consolidated Statement of Net Assets. Obtaining
proceeds of less than the value stated on the Company's Consolidated Statement
of Net Assets may have a material adverse effect on the Company's Consolidated
Statement of Net Assets.
8
<PAGE>
Prior to the Bankruptcy Filing, the Company reported the results of its
operations and its asset and liability amounts using accounting principles
applicable to going concern entities. Therefore, financial statements presented
for the period prior to the Bankruptcy Filing are not comparable to financial
statements presented subsequent to the Bankruptcy Filing, which applies the
liquidation basis of accounting.
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 filings on Forms 8-K and Form 10-K which
contains the latest available audited consolidated financial statements and
notes thereto, as of and for the period ended December 31, 1999, together with
the MD&A for such period. Certain information and footnoted disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
The changes in net assets for the period from April 1, 2000 to June 30,
2000 are not indicative of the changes to be expected for the full year.
DEFAULTS
Parties to several of the Company's agreements, including the Company's
pooling and servicing agreements and warehouse financing facility agreement
contend the Company is in default thereunder for, among other reasons, the
Company's Bankruptcy Filing. The Company contends that such agreements are not
in default, pursuant to, among other things, 11 USC ss.365(b)(2) (see "Risk
Factors" below for further discussion).
SECURITIZATION
Among other factors, and as a result of the Bankruptcy Filing, the Company
was unable to execute its scheduled $85 million securitization, which
consequently prevented the Company from recording a gain on sale and recognizing
net deferred origination fees associated with the earmarked loans. The Company's
balance of unrecognized net deferred origination fees as of June 30, 2000 was
approximately $6.2 million.
RESIGNATION OF ACCOUNTANTS
On April 5, 2000, Deloitte & Touche LLP resigned as the Company's
independent auditors. The audit report of Deloitte & Touche LLP on the financial
statements for the two years ended December 31, 1999 and 1998 contained no
adverse opinion or disclaimer of opinion and was not qualified or modified as to
audit scope or accounting principles. Also, for the two years ended December 31,
1999 and 1998 and the subsequent interim period preceding such resignation,
there were no disagreements with Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure or any reportable events.
DELISTING FROM NASDAQ
The NASDAQ-Amex Market Group, a NASD Company, delisted the Company's
common stock from the NASDAQ National Market as of the opening of business on
April 20, 2000 due to (i) the uncertainty regarding the timing of effectiveness
for a plan of bankruptcy reorganization; (ii) the uncertainty regarding the
specific terms of the planned bankruptcy reorganization; (iii) the Company's
failure to satisfy NASDAQ's continued listing requirements; (iv) concerns
regarding the residual equity interest of the existing listed securities
holders; and (v) the Company's March 23, 2000 filing under Chapter 11 of the
U.S. Bankruptcy Code and associated public interest concepts set forth under
Marketplace Rules 4450(f) and 4430(a)(3). The Company's stock is currently
quoted on NASD's "pink sheets." The Company currently has 17,864,788 outstanding
shares of common stock.
9
<PAGE>
APPOINTMENT OF ACCOUNTANTS
On June 22, 2000, the Board of Directors and the Audit Committee of the
Company approved the engagement of Hein + Associates LLP ("Hein") as the
Company's principal independent public accountants. Prior to such appointment,
the Company had not consulted with Hein regarding the application of accounting
principles to a specified transaction or the type of audit opinion that might be
rendered on the Company's financial statements.
SALE OF SERVICING RIGHTS PORTFOLIO AND OTHER ASSETS
On July 14, 2000, the Company received authorization from the United
States Bankruptcy Court for the sale of its approximately $714 million servicing
rights portfolio and agreed to a price of $7.9 million. In addition, the Company
was reimbursed for servicing advances, totaling approximately $3.2 million.
Proceeds from such sale are subject to certain holdback provisions totaling
approximately $5.7 million. This transaction allowed the Company to enter into a
"Consent Agreement" with the trustees and bond insurers, whereby the Company
will be deemed to have satisfied the events of default under the Company's
pooling and servicing agreements triggered as a result of the Bankruptcy Filing,
subject to monetary holdbacks provisions contained in the agreement. The
Company's ability to recover any portion of the holdback is partially contingent
on the outcome of the Company's liquidating plan of reorganization and claims
asserted in connection therewith. This transaction provides the Company the
ability to completely exit the business of loan servicing for others, except
with respect to the Company's servicing of its wholly owned loans. The Company
does not expect the sale transaction itself to have a material adverse effect on
the Company's Consolidated Statement of Net Assets. The Company's source of
future loan servicing revenues has significantly diminished as a result of this
sale.
CREDIT CARD AGREEMENT
In February 1997, the Company entered into an affinity real estate secured
credit card agreement with Fidelity Federal Bank, a Federal Savings Bank
("Fidelity"). Under the terms of this agreement, Fidelity would fund the
affinity credit card balance and would pay the Company for its solicitation
services, customer services and collection efforts. In June 1999, Fidelity
notified the Company of its intent to terminate the program by February 24,
2000. The Company disputed the terms of the obligation to purchase the
outstanding balance of the credit cards, and the parties have sought arbitration
of the dispute. In addition, on February 25, 2000, the Company received written
notification that the servicing agreements would terminate on August 23, 2000 in
accordance with the notice requirements of the agreements. Consequently, the
Company transferred the credit card servicing to Fidelity in September 2000.
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 Common Stock. The Company did not repurchase any shares during the current
quarter; however did repurchase approximately 84,500 shares at an average price
of $2.93 per share during the first quarter of 2000. Cumulatively, as of June
30, 2000 the Company has repurchased approximately 4.3 million shares of Common
Stock for a cost of approximately $52.3 million.
HEDGING ACTIVITIES
Between the time of loan funding and loan sale or securitization, the
Company has exposure to interest rate risk relating to its fixed rate loans.
This is a result of the loans having an interest rate which is fixed based on
the prevailing rates at the time of funding, whereas a fluctuation in rates may
occur between that time and the time of loan sale or securitization. If market
interest rates were to rise between the funding and loan sale or securitization,
the fixed rate loans would, in turn, decrease in value. The Company mitigates
the risk associated with fixed rate mortgage 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 recognizes 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. A gain of $96,000
was recognized on hedging activities for the quarter ended June 30, 2000, as
compared to a gain of $462,000 for the corresponding period in 1999. The
notional amount of forward sales of United States Treasury Securities was $24
million at June 30, 2000.
10
<PAGE>
NET (LOSS) INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted net income (loss) per share are as follows for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss): Basic and diluted (dollars in thousands) $ (10,688) $ 583 $ (25,203) $ 2,623
=============== =============== =============== ===============
Weighted average number of common shares:
Basic..................................................... 17,864,788 18,139,488 17,884,506 18,139,488
Effect of dilutive securities - stock options............. - 13,191 - 25,447
--------------- --------------- --------------- ---------------
Diluted................................................... 17,864,788 18,152,679 17,884,506 18,164,935
=============== =============== =============== ===============
Net income (loss) per share:
Basic..................................................... $ (0.60) $ 0.03 $ (1.41) $ 0.14
=============== ===============
Effect of dilutive securities - stock options............. - -
--------------- ---------------
Diluted................................................... $ 0.03 $ 0.14
=============== ===============
</TABLE>
RISK FACTORS
On March 23, 2000, FACO and several of its subsidiaries filed voluntary
petitions under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Central District of California.
The Company's filing is expected to facilitate the liquidation and sale of
the Company's remaining business and assets and operation of those assets
pending any such sale. As of the date of the Company's voluntary bankruptcy
petition, the United States Bankruptcy Court for the Central District of
California assumed jurisdiction and control over the assets of the Company. As a
debtor in possession, the Company is authorized to operate its business, subject
to the supervision of the Bankruptcy Court.
No assurance can be given that the Company will remain a
debtor-in-possession and that a trustee will not be appointed to operate the
Company's business. In addition, although the Company has begun the process of
formulating a liquidating plan of reorganization to be submitted eventually to
the Bankruptcy Court, no assurance can be given that the Bankruptcy Court will
confirm the Company's liquidating plan of reorganization.
The fact that the Company filed a voluntary bankruptcy petition may affect
the Company's ability to maintain certain present business arrangements and may
also affect the Company's ability to successfully negotiate future business
arrangements. Among the relationships that may be materially affected by the
Company's commencement of a bankruptcy case is the Company's relationship with
its warehouse financing facility lender and the Company's relationships with
other suppliers of goods and services vital to the Company's financing and
business operations.
As a result of the Bankruptcy Filing and management's intention to market
and sell the assets of the Company, the financial statement presentation has
been revised to the liquidation basis of accounting. Accordingly, the
"Consolidated Statement of Financial Condition" has been replaced with the
"Consolidated Statement of Net Assets," while the "Consolidated Statement of
Operations" has been replaced with the "Consolidated Statement of Change in Net
Assets." Liquidation basis accounting also requires the Company to provide for
all liabilities related to expenses, including general and administrative, to be
incurred during the liquidation period. Therefore, the Company recorded and
accrued an estimate of liquidation expenses to be incurred using certain
assumptions, including assumptions as to the timing of asset disposition. There
is no assurance, however, that actual liquidation expense will not exceed
management's estimates. In the event that actual liquidation expenses exceed
management's estimates, the Company's Statement of Net Assets may be adversely
affected.
11
<PAGE>
It is management's intention to market for sale all of the remaining
assets of the Company. There can be no assurance, however, that the Company will
be successful in selling the assets at the net realizable value which has been
recorded in the Consolidated Statement of Net Assets. Obtaining proceeds of less
than the value stated on the Company's Consolidated Statement of Net Assets may
have a material adverse effect on the Company's Consolidated Statement of Net
Assets.
The Bankruptcy filing may have triggered an event of default under various
agreements entered into by the Company, though the Company contends that they
are not, pursuant to, among other things, 11 USC ss.365(b)(2). Such agreements
include the Company's pooling and servicing agreements. However, in conjunction
with the sale of the servicing rights portfolio (see Note 1. General "Sale of
Servicing Rights Portfolio and Other Assets") the Company entered into a
"Consent Agreement" with the trustees and bond insurers, whereby the Company
will be deemed to have satisfied the events of default under the Company's
pooling and servicing agreements subject to monetary holdbacks provisions
contained in the agreement. The Company's ability to recover any portion of the
holdback is partially contingent on the outcome of the Company's liquidating
plan of reorganization.
The Bankruptcy Filing may have also created an event of default under the
Company's warehouse financing facility, though the Company contends that it does
not, pursuant to, among other things, 11 USC ss.365(b)(2). Notwithstanding the
pendency of the bankruptcy case, the warehouse lender may be able to exercise
its remedies under the agreement and require the Company to repay the entire
warehouse financing facility. This may force the Company to accelerate the sale
of its loans which secure the facility at a price less favorable than otherwise
obtained, thereby having a material adverse effect on the Company's Consolidated
Statement of Net Assets.
In February 1997, the Company entered into an affinity real estate secured
credit card agreement with Fidelity Federal Bank, a Federal Savings Bank
("Fidelity"). Under the terms of this agreement, Fidelity would fund the
affinity credit card balance and would pay the Company for its solicitation
services, customer services and collection efforts. In June 1999, Fidelity
notified the Company of its intent to terminate the program by February 24,
2000. The Company disputed the terms of the obligation to purchase the
outstanding balance of the credit cards, and the parties have sought arbitration
of the dispute. In addition, on February 25, 2000, the Company received written
notification that the servicing agreements would terminate on August 23, 2000 in
accordance with the notice requirements of the agreements. Consequently, the
Company transferred the credit card servicing to Fidelity in September 2000.
In addition to being a party to various legal proceedings arising out of
the ordinary course of business, the Company has also been involved with several
lawsuits which have targeted its lending practices (see Part II., Item 1. "Legal
Proceedings"). Any substantial judgment against the Company in connection
therewith may have a material adverse effect on the Company's Consolidated
Statement of Net Assets.
RECENT ACCOUNTING PRONOUNCEMENTS
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, 2000. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
adoption of this standard will not have a material effect on the Company's
Consolidated Statement of Net Assets.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
OVERVIEW
The Company was a financial services organization principally engaged in
mortgage loan origination, purchases, sales and servicing. Loans originated by
the Company primarily consisted of fixed and adjustable rate loans secured by
first mortgages on single family residences. The Company originated loans from
its retail branch network, Loan by Mail division and Coast Security Mortgage, a
company which it purchased during 1999. The Company also purchased loans from
qualified mortgage originators. The Company would then sell such loans to
wholesale purchasers or securitize them in a trust. A significant portion of the
Company's loan production was securitized with the Company retaining the right
to service the loans.
On March 23, 2000, FACO, along with several of its subsidiaries, filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code. The
Company's filing is expected to facilitate the liquidation of the Company's
remaining business and assets, and operation of those assets pending any such
sale. The Company closed all of its loan origination operations, including its
branches, and laid off over 350 employees throughout the United States. The
affected offices were located in California, New York, New Jersey, Illinois,
Arizona, Colorado, Maryland, Oregon, Utah and Washington.
As a result of the Bankruptcy Filing and management's intention to market
and sell the assets of the Company, the financial statement presentation has
been revised to the liquidation basis of accounting. Accordingly, the
"Consolidated Statement of Financial Condition" has been replaced with the
"Consolidated Statement of Net Assets," while the "Consolidated Statement of
Operations" has been replaced with the "Consolidated Statement of Change in Net
Assets." Liquidation basis accounting also requires the Company to provide for
all liabilities related to expenses, including general and administrative, to be
incurred during the liquidation period. Therefore, the Company has recorded and
accrued an estimate of liquidation expenses to be incurred using certain
assumptions, including assumptions as to the timing of asset disposition. There
is no assurance, however, that actual liquidation expense will not exceed
management's estimates. In the event that actual liquidation expenses exceed
management's estimates, the Company's Consolidated Statement of Net Assets may
be adversely affected.
In addition, liquidation basis accounting also requires assets to be
valued at their estimated net realizable value and liabilities to be estimated
as amounts to be paid in settlement of the entity's obligation. Estimated net
realizable value represents management's best estimate as to fair market value
of the assets, net of selling expenses, and without consideration to the unknown
impact that the Bankruptcy Filing or the outcome of any litigation may have on
the value of the assets. Therefore, the Company has recorded a valuation
adjustment to the cost basis of certain assets and liabilities. There can be no
assurance, however, that the Company will be successful in selling the assets at
the net realizable value, which has been recorded in the Consolidated Statement
of Net Assets. Obtaining proceeds of less than the value stated on the Company's
Consolidated Statement of Net Assets may have a material adverse effect on the
Company's Consolidated Statement of Net Assets.
Prior to the Bankruptcy Filing, the Company reported the results of its
operations and its asset and liability amounts using accounting principles
applicable to going concern entities. Therefore, financial statements presented
for the period prior to the Bankruptcy Filing are not comparable to for
financial statements presented subsequent to the Bankruptcy Filing, which
applies the liquidation basis of accounting.
REVENUE
The three primary components of the Company's revenues historically have
been loan origination and sale, loan servicing and other and interest income.
These revenue-generating sources have diminished significantly due to the
Bankruptcy Filing and sale of assets of the Company.
13
<PAGE>
Loan origination and sale revenue consisted of gain on sale of loans and
the recognition of net origination fees. The Company's strategy of originating,
as compared to purchasing, the majority of its loan volume resulted in the
generation of a significant amount of loan origination fees. Revenue from loan
origination fees has historically allowed the Company to generate positive
operating cash flow.
Loan servicing and other fee income represent management servicing fees
and other ancillary fees, including prepayment penalties received from servicing
loans and income generated from the Company's credit card operations, which was
discontinued in late 1998. Mortgage servicing rights are amortized against loan
servicing and other fee income over the period of estimated net future servicing
fee income.
Interest and other income is primarily comprised of three components: (i)
interest on loans held for sale during the warehousing period and loans
receivable held for investment, (ii) interest on residual interests, and (iii)
interest from investments.
As a fundamental part of its business and financing strategy, the Company
securitized the majority of its loans. In a typical securitization, the Company
sold loans to a special purpose entity, established for the limited purpose of
buying the assets from the Company and transferring the assets to a trust. The
trust issues interest-bearing securities, referred to as regular interest, which
are collateralized by the underlying mortgages. The proceeds from the sale of
the securities were used to purchase the assets from the Company. In addition to
the cash proceeds received in connection with the securitization, the Company
retained a residual interest in the trust.
RESIDUAL INTEREST
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. At origination, the Company classified the residual
interests as trading securities, which are carried at fair value.
As the holder of the residual interest, the Company is entitled to receive
certain excess cash flows. These excess cash flows ("spread") 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. In
order to arrive at the fair value of the residual interest, the Company
estimates the excess future cash flows by taking into consideration, among other
factors, certain assumptions regarding prepayment speeds and credit losses.
Furthermore, such cash flows are discounted at a rate which the Company believes
is an appropriate risk-adjusted market rate of return. To the Company's
knowledge, there is no active market for the sale of the residual interest. As
of June 30, 2000, the Company's investment in residual interest totaled $42.0
million.
MORTGAGE SERVICING RIGHTS
Upon securitization or sale of servicing retained loans, the Company
capitalized the right associated with the servicing of mortgage loans based on a
fair value analysis of the mortgage servicing rights. The Company determined the
fair value of mortgage servicing rights based on the present value of estimated
net future cash flows related to servicing income. Such cash flow projections
incorporate assumptions, including servicing costs, prepayment rates and
discount rates, consistent with those an unrelated third party would utilize to
value such mortgage servicing rights. These assumptions are similar to those
used by the Company to value residual interests. The Company periodically
evaluated capitalized mortgage servicing rights for impairment, which is
measured as the excess of unamortized cost over fair value. This review is
performed on a disaggregated basis by loan type.
14
<PAGE>
On July 14, 2000, the Company received authorization from the United
States Bankruptcy Court for the sale of its approximately $714 million servicing
rights portfolio and agreed to a price of $7.9 million. In addition, the Company
was reimbursed for servicing advances, totaling approximately $3.2 million.
Proceeds from such sale are subject to certain holdback provisions totaling
approximately $5.7 million. This transaction allowed the Company to enter into a
"Consent Agreement" with the trustees and bond insurers, whereby the Company
will be deemed to have satisfied the events of default under the Company's
pooling and servicing agreements triggered as a result of the Bankruptcy Filing,
subject to monetary holdbacks provisions contained in the agreement. The
Company's ability to recover any portion of the holdback is partially contingent
on the outcome of the Company's liquidating plan of reorganization and claims
asserted in connection therewith. This transaction provides the Company the
ability to completely exit the business of loan servicing for others, except
with respect to the Company's servicing of its wholly owned loans. The Company
does not expect the sale transaction itself to have a material adverse effect on
the Company's Consolidated Statement of Net Assets. The Company's source of
future loan servicing revenues has significantly diminished as a result of this
sale.
Gains on servicing released whole loan sales equal the difference between
the net proceeds to the Company from the sale and the loans acquisition cost
(for purchased loans) or net carrying value (for originated loans). The net
carrying value of originated loans is equal to the principal balance less net
deferred origination fees.
RECENT DEVELOPMENTS
On April 5, 2000, Deloitte & Touche LLP resigned as the Company's
independent auditors. The audit report of Deloitte & Touche LLP on the financial
statements for the two years ended December 31, 1999 and 1998 contained no
adverse opinion or disclaimer of opinion and was not qualified or modified as to
audit scope or accounting principles. Also, for the two years ended December 31,
1999 and 1998 and the subsequent interim period preceding such resignation,
there were no disagreements with Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure or any reportable events.
The NASDAQ-Amex Market Group, a NASD Company, delisted the Company's
common stock from the NASDAQ National Market as of the opening of business on
April 20, 2000 due to (i) the uncertainty regarding the timing of effectiveness
for a plan of bankruptcy reorganization; (ii) the uncertainty regarding the
specific terms of the planned bankruptcy reorganization; (iii) the Company's
failure to satisfy NASDAQ's continued listing requirements; (iv) concerns
regarding the residual equity interest of the existing listed securities
holders; and (v) the Company's Bankruptcy Filing under Chapter 11 of the U.S.
Bankruptcy Code and associated public interest concepts set forth under
Marketplace Rules 4450(f) and 4430(a)(3). The Company's stock is currently
quoted on NASD's "pink sheets." The Company currently has 17,864,788 outstanding
shares of common stock.
On June 22, 2000, the Board of Directors and the Audit Committee of the
Company approved the engagement of Hein + Associates LLP ("Hein") as the
Company's principal independent public accountants. Prior to such appointment,
the Company had not consulted with Hein regarding the application of accounting
principles to a specified transaction or the type of audit opinion that might be
rendered on the Company's financial statements.
On July 14, 2000, the Company received authorization from the United
States Bankruptcy Court for the sale of its approximately $714 million servicing
rights portfolio and agreed to a price of $7.9 million. In addition, the Company
was reimbursed for servicing advances, totaling approximately $3.2 million.
Proceeds from such sale are subject to certain holdback provisions totaling
approximately $5.7 million. This transaction allowed the Company to enter into a
"Consent Agreement" with the trustees and bond insurers, whereby the Company
will be deemed to have satisfied the events of default under the Company's
pooling and servicing agreements triggered as a result of the Bankruptcy Filing,
subject to monetary holdbacks provisions contained in the agreement. The
Company's ability to recover any portion of the holdback is partially contingent
on the outcome of the Company's liquidating plan of reorganization and claims
asserted in connection therewith. This transaction provides the Company the
ability to completely exit the business of loan servicing for others, except
with respect to the Company's servicing of its wholly owned loans. The Company
does not expect the sale transaction itself to have a material adverse effect on
the Company's Consolidated Statement of Net Assets. The Company's source of
future loan servicing revenues has significantly diminished as a result of this
sale.
15
<PAGE>
LOAN ORIGINATIONS AND PURCHASES
The following table summarizes loan origination and purchase activity for
the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan originations and purchases:
Retail originations.................................. $ - $ 99,494 $ 69,510 $ 186,822
Coast Security Mortgage.............................. - 16,548
Loans by mail........................................ - 1,396 5,257 1,396
Wholesale purchases.................................. - 4,791 563 8,458
---------------- ---------------- ---------------- ----------------
Total.............................................. $ - $ 105,681 $ 91,878 $ 196,676
================ ================ ================ ================
Number of active retail branches as of the end of the period:
United States:
California......................................... - 9
Other states....................................... - 21
---------------- ----------------
Total.............................................. - 30
================ ================
Weighted average initial interest rate.................. 9.0% 9.8% 9.1%
Weighted average initial combined loan-to-value ratio... 65.8% 69.8% 65.2%
Average loan size....................................... $ - $ 104.9 $ 121.0 $ 99.9
</TABLE>
LOAN SALES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securitizations......................................... $ - $ 89,985 $ - $ 204,986
Whole loan sales........................................ - 12,831 24,544 25,410
---------------- ---------------- ---------------- ----------------
Total............................................. $ - $ 102,816 $ 24,544 $ 230,396
================ ================ ================ ================
</TABLE>
The decrease in both loan originations and purchases and loan sales during
the quarter and six months ended June 30, 2000, as compared to the corresponding
prior year period is attributable to the Company's Bankruptcy Filing which
resulted in the closure of the Company's entire loan origination operations and
the Company's inability to execute its scheduled $85 million securitization.
RESULTS OF OPERATIONS (CHANGES IN NET ASSETS)
As a result of the Bankruptcy Filing, the Company's intent to liquidate
the remaining businesses and assets, and the adoption of liquidation based
accounting, a discussion of material factors affecting the Company's changes in
net assets (April 1, 2000 to June 30, 2000) is presented below, rather than a
description of the Company's results of operations for the three and six months
ended June 30, 2000 and 1999. Please refer to the Company's March 31, 2000 Form
10-Q for a discussion of operating results for the first quarter of 2000 and
1999.
16
<PAGE>
During the period from April 1, 2000 through June 30, 2000, the Company
reported a $10.7 million decrease in net assets available for liquidation. The
Company generated operating revenue of $5.9 million, of which $3.8 million is
attributed to interest from residual interest, loans held for sale, and
investments. Additionally, the Company generated $1.5 million of revenue from
loan servicing and other.
The Company's operating expenses were $12.1 million, mainly attributed to
a $10.5 million increase in liquidation costs/accrual resulting from the
Company's estimate of expenses, including general and administrative, to be
incurred during the estimated liquidation period. During such period, the
Company reversed $4.3 million of expenses, which it contemplated in its
liquidation accrual and also reported in the various expense line items of the
Consolidated Statement of Change in Net Assets.
The net assets of the Company were also affected by a $4.6 million
adjustment to its tax provision. This adjustment was primarily based on the
Company's assessment of recoverability of prior years' tax payments and its
limitations arising from the excess inclusion attributed to the Company's
residual interest assets.
The Company's net assets in liquidation were $55 million at June 30, 2000.
SERVICING
The following tables provide data on loan delinquency, real estate owned
(REO) and net losses for the Company's servicing portfolio:
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 1999
--------------------------- --------------------------- ---------------------------
% 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..................... $ 815,756 $ 892,327 $ 859,599
============= ============= =============
30-59 days delinquent................... $ 3,837 0.5% $ 5,889 0.7% $ 8,169 0.9%
60-89 days delinquent................... 3,205 0.4 3,320 0.4 5,999 0.7
90 days or more delinquent.............. 24,323 2.9 21,699 2.4 28,899 3.4
------------- ------------- ------------- ------------- ------------- -------------
Total delinquencies.................. $ 31,365 3.8% $ 30,908 3.5% $ 43,067 5.0%
============= ============= ============= ============= ============= =============
REO (1) ............................... $ 1,465 0.2% $ 1,141 0.1% $ 933 0.1%
============= ============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average servicing portfolio (2)........................... $ 858,876 $ 862,739 $ 878,019 $ 864,255
Net losses (3)............................................ 262 $ 380 390 $ 753
Percentage of average servicing portfolio - annualized.... 0.12% 0.18% 0.09% 0.17%
</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.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash include proceeds from liquidation of assets,
distributions received from residual interests, interest income and loan
servicing income. The Company's source of loan servicing income has been
substantially reduced as a result of the Company's servicing rights portfolio
sale in July 2000 (see Note 1. General "Sale of Servicing Rights Portfolio and
other Assets"). The Company's uses of cash include payments to creditors,
payments of interest, repayment of its warehouse financing facilities,
administrative expenses, and payment of income taxes. All such payments are on a
post petition basis only or unless otherwise approved by the court. As a result
of the Bankruptcy Filing, the closure of the Company's loan origination
operations and the servicing rights portfolio sale, the Company has lost a
significant source of cash flow. As of June 30, 2000, the Company had cash and
cash equivalents of $14.4 million. The Company, however, believes that its
current cash position coupled with its future net cash flows will be adequate to
support the Company's operations for the next 12 months.
In connection with the Bankruptcy Filing, it is management's intention to
market for sale and operate pending such sale all of the Company's remaining
assets. Proceeds from the sale of assets that are security for the Company's
obligations to its secured creditors will first be used to repay such secured
creditors, which include the Company's warehouse financing facility and a note
payable related to the financing of the Company's telemarketing facility in
Irvine, California. Any proceeds available after the satisfaction of the secured
obligations from the sale of such creditors' collateral, and proceeds from the
sale of the Company's free and clear assets will be utilized to repay unsecured
creditors with allowed claims with the remaining proceeds available for the
shareholders. There can be no assurance, however, that the Company will be
successful in selling the assets at a value which will allow the Company to
fulfill all of its debt obligations. All repayments mentioned above will be in
accordance with United States Bankruptcy law, pursuant to appropriate orders of
the United States Bankruptcy Court.
On July 14, 2000, the Company received authorization from the United
States Bankruptcy Court for the sale of its approximately $714 million servicing
rights portfolio and agreed to a price of $7.9 million. In addition, the Company
was reimbursed for servicing advances, totaling approximately $3.2 million.
Proceeds from such sale are subject to certain holdback provisions totaling
approximately $5.7 million. This transaction allowed the Company to enter into a
"Consent Agreement" with the trustees and bond insurers, whereby the Company
will be deemed to have satisfied the events of default under the Company's
pooling and servicing agreements triggered as a result of the Bankruptcy Filing,
subject to monetary holdbacks provisions contained in the agreement. The
Company's ability to recover any portion of the holdback is partially contingent
on the outcome of the Company's liquidating plan of reorganization and claims
asserted in connection therewith. This transaction provides the Company the
ability to completely exit the business of loan servicing for others, except
with respect to the Company's servicing of its wholly owned loans. The Company
does not expect the sale transaction itself to have a material adverse effect on
the Company's Consolidated Statement of Net Assets. The Company's source of
future loan servicing revenues has significantly diminished as a result of this
sale.
The Bankruptcy filing may have triggered an event of default under
various agreements entered into by the Company, though the Company contends that
they are not, pursuant to, among other things, 11 USC ss.365(b)(2). Such
agreements include the Company's pooling and servicing agreements. However, in
conjunction with the sale of the servicing rights portfolio (see Note 1.
General, "Sale of Servicing Rights Portfolio and Other Assets") the Company
entered into a "Consent Agreement" with the trustees and bond insurers, whereby
the Company will be deemed to have satisfied the events of default under the
Company's pooling and servicing agreements subject to monetary holdbacks
provisions contained in the agreement. The Company's ability to recover any
portion of the holdback is partially contingent on the outcome of the Company's
plan of reorganization/liquidation.
The Bankruptcy Filing may have created an event of default under the
Company's warehouse financing facility, though the Company contends that they
are not, pursuant to, among other things, 11 USC ss.365(b)(2). Notwithstanding
the pendency of the bankruptcy case, the warehouse lender may be able to
exercise its remedies under the agreement and require the Company to repay the
entire warehouse financing facility. This may force the Company to accelerate
the sale of its loans, which secure the facility, at a price less favorable than
might otherwise be obtained, thereby having a material adverse effect on the
Company's Consolidated Statement of Net Assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management expects the liquidation process to continue for approximately
twelve months. No assurance, however, can be given that the Company will be able
to completely liquidate its assets and settle its liabilities within the time
expected.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2000, the Federal Trade Commission filed an action against the
Company in the United States District Court for the Central District of
California. The action alleges that the Company failed to substantiate
advertising claims regarding cost savings to consumers of debt consolidation
loans, misrepresented the terms of the loans to consumers, and violated
Regulation Z regarding a consumer booklet. The action seeks injunctive relief
and rescission or restitution on behalf of certain borrowers. The Company has
not yet been required to respond to this action.
In May 2000, Jacqueline Bowser and Irene Huston filed a class action
lawsuit against the Company. The complaint seeks rescission based upon fraud and
violation of the Truth-in-Lending Act and Home Ownership and Equity Protection
Act. The complaint was filed as an adversary proceeding in the Company's
consolidated bankruptcy case. In June 2000, Vincent Aiello and other borrowers
filed a similar action in the Bankruptcy Court. The Company has moved to strike
portions of these actions, and has further asked the Court to stay any
prosecution of these actions, pending the claims resolution process in the
Bankruptcy Court.
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's motion to dismiss
the complaint was granted as to three of the four claims. The Company and the
State were discussing settlement prior to the Bankruptcy Filing. In July 2000,
the Florida Attorney General commenced an action in Broward Circuit Court
seeking similar relief to that sought in Illinois. The Company is defending that
action.
In December 1998, the American Association of Retired Persons ("AARP")
filed an action against the Company and against Brian Chisick, Chairman and
Chief Executive Officer of the Company and his wife Sarah 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. The case was in the discovery stage, and the parties were discussing
settlement prior to the Bankruptcy Filing.
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, seeking an injunction against 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 filed a motion to vacate the
injunction, which was denied without prejudice. The case was in the discovery
stage prior to the Company's Bankruptcy Filing.
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. The
joint 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 agreed to limit its initial inquiry to pricing disparities, and was
reviewing data provided by the Company, which is cooperating with the
investigation.
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 state action was in the discovery
stage prior to the Company's Bankruptcy Filing.
19
<PAGE>
In February 1997, the Company entered into an affinity real estate secured
credit card agreement with Fidelity Federal Bank, a Federal Savings Bank
("Fidelity"). Under the terms of this agreement, Fidelity would fund the
affinity credit card balance and would pay the Company for its solicitation
services, customer services and collection efforts. In June 1999, Fidelity
notified the Company of its intent to terminate the program by February 24,
2000. The Company disputed the terms of the obligation to purchase the
outstanding balance of the credit cards, and the parties have sought arbitration
of the dispute. In addition, on February 25, 2000, the Company received written
notification that the servicing agreements would terminate on August 23, 2000 in
accordance with the notice requirements of the agreements. Consequently, the
Company transferred the credit card servicing to Fidelity in September 2000.
The Company is also a party to various legal proceedings arising out of
the ordinary course of its business including a number of lawsuits alleging
misleading lending practices, some of which were filed either as class actions
or under private attorney general statutes.
As a result of the Chapter 11 filing, most of these actions against the
Company have been stayed pursuant to 11 USC ss.362(a).
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 September 25, 2000, Daniel L. Perl resigned as a member of the
Board of Directors of the Company.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
3.1 Amended Certificate of Incorporation of the Company
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 S-1, 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 10.7 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
10.8 Master Repurchase Agreement dated as of October 31, 1997 between Coast
Security Mortgage Inc. and the Company
10.9 Chisick Employment Agreement (Incorporated by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1, Commission File
No. 333-3633)
10.10 Reimbursement Agreement (Incorporated by reference to Exhibit 10.11 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 10.12 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)
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)
21
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
10.16 (pound)25,000,000 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
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 30, 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
10.20 Deed of Trust Note dated as of February 19, 1999 between the Ohio
National Life Insurance Company and the Company (incorporated by
reference to Exhibit 10.20 to the Company's quarterly report on Form
10-Q for the period ended March 31, 1999, Commission File No. 0-28706)
27 Financial Data Schedule*
----------------
* Filed herewith.
(b) Reports on Form 8-K:
(1) A current report on Form 8-K was filed on April 11, 2000 by
First Alliance Corporation. Under Item 4. "Change in
Registrant's Certifying Accountants," First Alliance reported
that Deloitte & Touche LLP had resigned as the Company's
independent auditors.
(2) A current report on Form 8-K was filed on April 17, 2000 by
First Alliance Corporation. Under Item 5. "Other Events,"
First Alliance reported that its common stock had been
delisted from the NASDAQ National Market System.
(3) A current report on Form 8-K was filed on May 30, 2000 by
First Alliance Corporation. Under Item 5. "Other Events,"
First Alliance Corporation reported that it had begun price
quotation and is now listed on the OTC Bulletin Board under
the symbol "FACOQ".
(4) A current report on Form 8-K was filed on May 30, 2000 by
First Alliance Corporation. Under Item 5. "Other Events,"
First Alliance Corporation reported that it had filed its
April Monthly Operating Reports as required to be filed with
the Bankruptcy Court and Office of the United States Trustee.
(5) A current report on Form 8-K was filed on June 9, 2000 by
First Alliance Corporation. Under Item 5. "Other Events,"
First Alliance Corporation reported that it terminated the
employment of Jeffrey Smith, Executive Vice President and
Chief Operating Officer.
(6) A current report on Form 8-K was filed on June 23, 2000 by
First Alliance Corporation. Under Item 4. "Change in
Registrant's Accountant," First Alliance Corporation reported
that it engaged Hein + Associates LLP as the Company's
principal independent public accountants.
(7) A current report on Form 8-K was filed on June 26, 2000 by
First Alliance Corporation. Under Item 5. "Other Events,"
First Alliance Corporation reported that it had filed its May
Monthly Operating Reports as required to be filed with the
Bankruptcy Court and Office of the United States Trustee.
(8) A current report on Form 8-K was filed on July 24, 2000 by
First Alliance Corporation. Under Item 5. "Other Events,"
First Alliance Corporation reported that it had filed its
June Monthly Operating Reports as required to be filed with
the Bankruptcy Court and Office of the United States Trustee.
(9) A current report on Form 8-K was filed on August 17, 2000 by
First Alliance Corporation. Under Item 5. "Other Events,"
First Alliance Corporation reported that it had filed its
July Monthly Operating Reports as required to be filed with
the Bankruptcy Court and Office of the United States Trustee.
22
<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: October 26, 2000 /S/ BRIAN CHISICK
---------------- ------------------------------------
Brian Chisick
Chairman and Chief Executive Officer
Date: October 26, 2000 /S/ FRANCISCO NEBOT
---------------- -------------------------------------
Francisco Nebot
President and Chief Financial Officer
Principal Financial Officer
