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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 September 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 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documentsand
reports required to be filed by Section 12, 13 or 15 (d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No X
--- ---
As of November 10, 2000, the registrant had outstanding, net of treasury
shares, 17,864,788 shares of Class A Common Stock.
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FIRST ALLIANCE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Statement of Net Assets Available for Liquidation
(Unaudited) as of September 30, 2000................................................ 1
Consolidated Statement of Financial Condition as of December 31, 1999............... 2
Consolidated Statements of Change in Net Assets (Unaudited) for
the periods of July 1, 2000 to September 30, 2000 and April 1, 2000
to September 30, 2000............................................................... 3
Consolidated Statements of Income (Unaudited) for the three and
nine months ended September 30, 1999................................................ 4
Consolidated Statements of Comprehensive Income (Unaudited)
for the three and nine months ended September 30, 1999.............................. 5
Consolidated Statement of Cash Flows (Unaudited) for the nine
months ended September 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")...................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 21
Item 2. Changes in Securities............................................................... 22
Item 3. Defaults Upon Senior Securities..................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................................. 22
Item 5. Other Information................................................................... 22
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits................................................................ 23
Reports on Form 8-K..................................................... 24
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF NET ASSETS AVAILABLE FOR LIQUIDATION
(DOLLARS IN THOUSANDS)
SEPTEMBER 30,
2000
--------------
(UNAUDITED)
ASSETS
Cash and cash equivalents.................................. $ 19,847
Restricted cash............................................ 8,096
Loans receivable........................................... 65,272
Residual interests in securities - at fair value........... 39,661
Property, net.............................................. 6,394
Income taxes receivable.................................... 4,981
Prepaid expenses and other assets.......................... 4,193
--------------
Total assets............................................ $ 148,444
--------------
LIABILITIES
Warehouse financing facilities............................. $ 60,273
Reserve for estimated costs during the period of
liquidation.............................................. 10,313
Accrued contingent liabilities............................. 7,570
Accounts payable and accrued liabilities................... 8,423
Income taxes payable....................................... 744
Notes payable.............................................. 4,556
--------------
Total liabilities....................................... $ 91,879
--------------
NET ASSETS AVAILABLE FOR LIQUIDATION $ 56,565
==============
See notes to consolidated financial statements.
1
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FIRST ALLIANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION1
(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
==============
------------------------
(1) Condensed from audited consolidated financial statements.
See notes to consolidated financial statements.
2
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FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGE IN NET ASSETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2000
-------------- --------------
<S> <C> <C>
REVENUE:
Loan origination and sale.................................. $ 463 $ 1,184
Interest................................................... 3,840 7,611
Loan servicing and other................................... 857 2,348
-------------- --------------
Total revenue............................................ 5,160 11,143
-------------- --------------
EXPENSE:
Compensation and benefits.................................. 1,462 3,781
Advertising................................................ - (111)
Professional services and other fees ...................... 796 1,256
Facilities and insurance................................... 457 945
Supplies................................................... 72 86
Depreciation and amortization.............................. 167 347
Interest................................................... 2,023 4,181
Legal...................................................... 1,465 2,479
Travel and training........................................ 2 4
Liquidation costs.......................................... (3,604) 2,628
Adjustment to liquidation basis............................ - (661)
Other...................................................... 42 45
-------------- --------------
Total expense............................................ 2,882 14,980
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION..................... 2,278 (3,837)
INCOME TAX PROVISION.......................................... (861) (5,434)
-------------- --------------
CHANGE IN NET ASSETS.......................................... $ 1,417 $ (9,271)
============== ==============
NET ASSETS AT BEGINNING OF PERIOD............................. $ 55,148 $ 65,836
============== ==============
NET ASSETS AT SEPTEMBER 30, 2000.............................. $ 56,565 $ 56,565
============== ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------
1999 1999
-------------- --------------
<S> <C> <C>
REVENUE:
Loan origination and sale................................ $ 15,173 $ 40,132
Interest................................................. 2,745 10,915
Loan servicing and other................................. 635 3,578
-------------- --------------
Total revenue.......................................... 18,553 54,625
-------------- --------------
EXPENSE:
Compensation and benefits................................ 6,434 17,165
Advertising.............................................. 1,609 5,380
Professional services and other fees .................... 673 2,042
Facilities and insurance................................. 1,655 3,621
Supplies................................................. 550 1,363
Depreciation and amortization............................ 663 1,617
Interest................................................. 2,265 9,141
Legal.................................................... 1,474 5,186
Travel and training...................................... 434 1,096
Other.................................................... 355 1,204
-------------- --------------
Total expense.......................................... 16,112 47,815
-------------- --------------
INCOME BEFORE INCOME TAX PROVISION............................ 2,441 6,810
INCOME TAX PROVISION.......................................... 976 2,725
-------------- --------------
NET INCOME.................................................... $ 1,465 $ 4,085
============== ==============
NET INCOME PER SHARE:
Basic.................................................... $ .08 $ .23
============== ==============
Diluted ................................................. $ .08 $ .22
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic.................................................... 18,139,488 18,139,488
Diluted ................................................. 18,139,488 18,156,453
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
-------------- --------------
<S> <C> <C>
NET INCOME.................................................... $ 1,465 $ 4,085
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment net of income
taxes of $249 and $1,089 for the three and nine
months ended September 30, 1999, respectively......... (373) (1,633)
Less: Reclassification adjustment for foreign
currency transaction loss, net of income taxes
of $1,592 for the three and nine months ended
September 30, 1999.................................... 2,388 2,388
-------------- --------------
COMPREHENSIVE INCOME.......................................... $ 3,480 $ 4,840
============== ==============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1999
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 4,085
Adjustments to reconcile net income to net cash provided by
operating activities:
Capitalized residual interests and mortgage servicing rights............ (13,406)
Accretion of residual interest in securities............................ (3,141)
Collection of residual interest in securities........................... 15,164
Amortization of mortgage servicing rights............................... 4,835
Amortization of debt issuance costs..................................... 2,037
Amortization of goodwill................................................ 78
Depreciation and amortization .......................................... 1,539
Recognition of deferred fees on loans receivable held for investment.... (794)
Provision for loan losses............................................... 383
Loss on sales of real estate owned and property......................... 38
Gain on sale of United Kingdom loan portfolio.......................... (1,263)
Changes in assets and liabilities:
Receivable from trusts.................................................. 1,262
Loans held for sale..................................................... (6,943)
Prepaid expenses and other assets....................................... 33
Accounts payable and accrued liabilities................................ 2,519
Deferred taxes/income taxes payable..................................... (4,000)
--------------
Net cash provided by operating activities........................... 2,426
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash deposited for restricted cash........................................... (1,186)
Capital expenditures......................................................... (165)
Proceeds from sale of property............................................... 62
Collections on loans held for investment..................................... 13,500
Proceeds from sale of United Kingdom loan portfolio.......................... 44,039
Payments for acquisition of Coast Security Mortgage, less cash acquired...... (2,641)
--------------
Net cash provided by investing activities........................... 53,609
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on warehouse financing facilities................ (12,054)
Repayment of secured term loan facility from sale of United Kingdom
loan portfolio............................................................. (50,964)
Repayments to other borrowings............................................... (6,545)
Net borrowings (repayments) on notes payable................................. 3,635
--------------
Net cash (used in) financing activities............................. (65,928)
--------------
Net effect of exchange rate changes on cash.................................. 2,823
--------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................... (7,070)
CASH AND CASH EQUIVALENTS, beginning of period............................... 18,052
--------------
CASH AND CASH EQUIVALENTS, end of period..................................... $ 10,982
==============
</TABLE>
(Continued)
6
<PAGE>
FIRST ALLIANCE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1999
--------------
<S> <C>
SUPPLEMENTAL INFORMATION:
Interest paid................................................................ $ 8,282
==============
Income taxes paid............................................................ $ 6,653
==============
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans held for sale to loans receivable held for investment...... $ 687
==============
Transfer of loans held for investment to real estate owned................... $ 55
==============
Stock warrants issued as debt issuance costs................................. $ 515
==============
Notes payable issued in connection with Coast Security Mortgage acquisition.. $ 1,000
==============
Components of Effect of Exchange Rate Changes on Cash:
Receivable from trusts.................................................. $ 3
Loans receivable held for investment.................................... 1,576
Property................................................................ 2
Prepaid expenses and other assets....................................... 11
Accounts payable and accrued liabilities................................ (15)
Deferred taxes/income taxes payable..................................... 491
Accumulated other comprehensive income.................................. 755
--------------
Net effect of exchange rate changes on cash......................... $ 2,823
==============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
FIRST ALLIANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Such reclassifications had no effect on net income.
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 Available for Liquidation," 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.
Accordingly, the Company recorded an estimate of liquidation expenses to be
incurred during the liquidation period of approximately $19.7 million, of which
approximately $7.7 million was recorded on March 31, 2000. The Company arrived
at this estimate using certain assumptions, including assumption as the timing
of asset disposition. There is no assurance, however, that actual liquidation
expenses 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 Available for Liquidation 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.
Liquidation basis accounting 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 period of April 1, 2000 through September 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 Available
for Liquidation. Obtaining proceeds of less than the value stated on the
Company's Consolidated Statement of Net Assets Available for Liquidation may
have a material adverse effect on the Company's Consolidated Statement of Net
Assets Available for Liquidation.
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 footnote 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 September
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 March 2000 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
September 30, 2000 was approximately $5.5 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
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 plan of liquidation 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 Available for Liquidation. 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 repurchased approximately 84,500 shares during the
first quarter of 2000 at an average price of $2.93 per share. Cumulatively, as
of September 30, 2000 the Company has repurchased approximately 4.3 million
shares of Common Stock for a cost of approximately $52.3 million.
SALE OF REAL AND PERSONAL PROPERTY
During the month of October, the Company filed a motion for authority to
sell real and personal property free and clear of liens and encumbrances. Among
the property of the Company's Chapter 11 estate is (i) a fee simple ownership
interest in the improved real property located at 17200 Jamboree Boulevard,
Irvine, California and (ii) the personal property located on that premises. The
real property is encumbered by a first-priority lien in the approximate amount
of $3.5 million. The purchase price is $6.2 million for the real property, and
an additional $160,000 for the personal property contained therein. A hearing on
this motion was approved by the court on November 13, 2000.
10
<PAGE>
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 loss of $252,000
was recognized on hedging activities for the quarter ended September 30, 2000,
as compared to a loss of $106,000 for the corresponding period in 1999. The
notional amount of forward sales of United States Treasury Securities was $20
million at September 30, 2000.
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 plan of liquidation to be submitted eventually to the Bankruptcy
Court, no assurance can be given that the Bankruptcy Court will confirm the
Company's plan of liquidation.
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 Available for Liquidation," 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
expenses 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.
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 Available for Liquidation.
Obtaining proceeds of less than the value stated on the Company's Consolidated
Statement of Net Assets Available for Liquidation may have a material adverse
effect on the Company's Consolidated Statement of Net Assets Available for
Liquidation.
11
<PAGE>
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 Available for Liquidation.
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 Available for Liquidation.
12
<PAGE>
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. This
statement was amended by SFAS No. 137 issued in June 1999 which amended the
effective date of SFAS No. 133 such that it shall be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 was
further amended by SFAS No. 138, issued in June 2000. The adoption of these
standards will not have a material effect on the Company's Consolidated
Statement of Net Assets Available for Liquidation.
In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement, which is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after March 31, 2001, replaces SFAS
No. 125 and revises the standards for accounting for securitization and other
transfers of financial assets and collateral and requires certain disclosures.
The Company has not yet completed its analysis of the effect this standard will
have on the Company's Consolidated Statement of Net Assets Available for
Liquidation.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The discussion in this item should be read in conjunction with the
condensed financial statements and the notes thereto included in Item 1 of this
report on Form 10-Q. The discussion in this item contains forward-looking
statements relating to future events or financial results, such as statements
indicating that "Company/management believes", "Company/management expects",
"Company/management intends" that certain events may occur or certain trends may
continue. All these forward-looking statements involve risks and uncertainties.
Other forward-looking statements include statements about liquidity and capital
needs and other statements about future matters. These statements should not be
relied on too heavily; although they reflect the good faith judgment of
management, they involve future events that might not occur. Management can only
base such statements on facts and factors that it currently knows. Actual
results could differ materially from those in these forward-looking statements
as a result of various factors, including those set forth under "Risk Factors"
and elsewhere in this report on Form 10-Q.
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 Available for Liquidation," 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 expenses 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 Available for Liquidation may be adversely
affected.
Liquidation basis accounting 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
0assets. 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
Available for Liquidation. Obtaining proceeds of less than the value stated on
the Company's Consolidated Statement of Net Assets Available for Liquidation may
have a material adverse effect on the Company's Consolidated Statement of Net
Assets Available for Liquidation.
Prior to the Bankruptcy Filing, the Company reported the results of its
operations and its asset and liability amounts using accounting principles
14
<PAGE>
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.
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 September 30, 2000, the Company's investment in residual interest totaled
$39.7 million.
15
<PAGE>
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.
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 holdback 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 liquidation 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 Available for Liquidation. The
Company's source of future loan servicing revenues has significantly diminished
as a result of this sale.
16
<PAGE>
During the month of October, the Company filed a motion for authority to
sell real and personal property free and clear of liens and encumbrances. Among
the property of the Company's Chapter 11 estate is (i) a fee simple ownership
interest in the improved real property located at 17200 Jamboree Boulevard,
Irvine, California and (ii) the personal property located on that premises. The
real property is encumbered by a first-priority lien in the approximate amount
of $3.5 million. The purchase price is $6.2 million for the real property, and
an additional $160,000 for the personal property contained therein. A hearing on
this motion was approved by the court on November 13, 2000.
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan originations and purchases:
Retail originations.................................. $ - $ 124,229 $ 69,510 $ 311,051
Coast Security Mortgage.............................. - 28,085 16,548 28,085
Loans by mail........................................ - 7,292 5,257 8,688
Wholesale purchases.................................. - 1,174 563 9,632
-------------- -------------- -------------- --------------
Total.............................................. $ - $ 160,780 $ 91,878 $ 357,456
============== ============== ============== ==============
Number of active retail branches as of the end of the period:
United States: -
California......................................... - 12
Other states....................................... - 28
-------------- --------------
Total.............................................. - 40
============== ==============
Weighted average initial interest rate.................. - 8.8% 9.8% 9.0%
Weighted average initial combined loan-to-value ratio... - 68.2% 69.8% 66.5%
Average loan size....................................... $ - $ 114.0 $ 121.0 $ 105.0
LOAN SALES
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Securitizations........................................ - $ 120,001 - $ 324,987
Domestic whole loan sales.............................. - 20,827 - 46,237
United Kingdom whole loan sales........................ - 47,028 $ 24,544 47,028
-------------- -------------- -------------- --------------
Total............................................. - $ 187,856 $ 24,544 $ 418,252
============== ============== ============== ==============
</TABLE>
The decrease in both loan originations and purchases and loan sales during
the three and nine months ended September 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.
17
<PAGE>
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 (July 1, 2000 to September 30, 2000 and April 1, 2000 to September
30, 2000) is presented below, rather than a description of the Company's results
of operations for the three and nine months ended September 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.
During the period of July 1, 2000 through September 30, 2000, the Company
reported a $1.4 million increase in net assets available for liquidation. The
Company generated operating revenues of $5.2 million, of which $3.8 million is
attributable to interest from residual interest, loans receivable and
investments. The Company's operating expenses (excluding interest expense)
during the period of July 1, 2000 through September 30, 2000 were $0.9 million.
During such period, the Company reversed liquidation 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.
During the period from April 1, 2000 through September 30, 2000, the
Company reported a $9.3 million decrease in net assets available for
liquidation. The Company generated operating revenues of $11.1 million, of which
$7.6 million is attributed to interest from residual interest, loans receivable,
and investments. Additionally, the Company generated $2.3 million of revenue
from loan servicing and other. The Company's operating expenses (excluding
interest expense) during the period of April 1, 2000 through September 30, 2000
were $10.8 million, mainly attributed to a $12.0 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 $9.4 million in 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 $5.4 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 $56.6 million at September
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
----------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999 SEPTEMBER 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................. $ 70,899 $ 892,327 $ 864,948
============== ============== ==============
30-59 days delinquent............... $ 565 0.8% $ 5,889 0.7% $ 5,512 0.6%
60-89 days delinquent............... 167 0.2 3,320 0.4 4,740 0.6
90 days or more delinquent.......... 1,467 2.1 21,699 2.4 19,612 2.3
-------------- -------------- -------------- -------------- -------------- --------------
Total delinquencies.............. $ 2,199 3.1% $ 30,908 3.5% $ 29,864 3.5%
============== ============== ============== ============== ============== ==============
REO (1)............................. $ 85 0.1% $ 1,141 0.1% $ 965 0.1%
============== ============== ============== ============== ============== ==============
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Average servicing portfolio (2)......................... $ 802,961 $ 862,274 $ 853,001 $ 863,595
Net losses (3).......................................... $ 297 $ 352 $ 687 $ 1,105
Percentage of average servicing
portfolio - annualized (4)........................... 0.44% 0.16% 0.14% 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, except for the three and nine months
ended September 30, 2000, in which case July 31, 2000 is used as the ending
balance. As of July 31, 2000, the Company transferred all loans serviced
for others to a third party servicer (see Note 1. General, "Sale of
Servicing Rights Portfolio and Other Assets."
(3) Net losses means actual net losses realized with respect to the disposition
of REO as of July 31, 2000.
(4) For the three and nine months ended September 30, 2000, the annualized
percentages are based as of July 31, 2000.
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").
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 September 30, 2000, the Company had unrestricted cash and cash equivalents
of $19.8 million.
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 plan of liquidation 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 Available for Liquidation. The
Company's source of future loan servicing revenues has significantly diminished
as a result of this sale.
19
<PAGE>
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") 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 holdback 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 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 Available for Liquidation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On July 14, 2000 the Company sold its approximately $714 million servicing
rights portfolio (see Note 1. General , "Sale of Servicing Rights Portfolio").
Management expects the liquidation process with respect to the remaining
assets and liabilities of the Company 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.
No other material changes with regard to market risk from the preceding
fiscal year were noted.
20
<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
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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.
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.
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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)
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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)
10.21 Servicing Rights Purchase Agreement dated July 1, 2000 between Ocwen
Federal Bank FSB and the Company*
10.22 Consent Agreement dated July 14, 2000 between Wells Fargo Bank,
Minnesota, National Association, The Chase Manhattan Bank, The Bank of
New York, MBIA Insurance Corporation, Ocwen Federal Bank FSB, and the
Company*
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 began 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 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.
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(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.
(10) A current report on Form 8-K was filed on September 22, 2000
by First Alliance Corporation. Under Item 5. "Other Events",
First Alliance Corporation reported that it had filed its
August Monthly Operating Reports as required to be filed with
the Bankruptcy Court and Office of the United States Trustee.
(11) A current report on Form 8-K was filed on October 19, 2000 by
First Alliance Corporation. Under Item 5. "Other Events",
First Alliance Corporation reported that it had filed its
September Monthly Operating Reports as required to be filed
with the Bankruptcy Court and Office of the United States
Trustee.
25
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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: November 15, 2000 /S/ BRIAN CHISICK
-------------------- ------------------------------------------------
Brian Chisick
Chairman and Chief Executive Officer
Date: November 15, 2000 /S/ FRANCISCO NEBOT
-------------------- ------------------------------------------------
Francisco Nebot
President and Chief Financial Officer
Principal Financial Officer
26
