<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1996
REGISTRATION NO. 333-3633
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST ALLIANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6162 95-2944875
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
17305 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92714-6203
(714) 224-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MARK K. MASON
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
FIRST ALLIANCE CORPORATION
17305 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92714-6203
(714) 224-8403
(FACSIMILE) (714) 224-6696
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
<TABLE>
<S> <C>
DHIYA EL-SADEN, ESQ. BRUCE R. HALLETT, ESQ.
GIBSON, DUNN & CRUTCHER LLP BROBECK, PHLEGER & HARRISON LLP
333 SOUTH GRAND AVENUE 4675 MACARTHUR COURT, SUITE 1000
LOS ANGELES, CALIFORNIA 90071 NEWPORT BEACH, CALIFORNIA 92660-1846
(213) 229-7196 (714) 752-7535
(FACSIMILE) (213) 229-7520 (FACSIMILE) (714) 752-7522
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
FIRST ALLIANCE CORPORATION
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(A) AND ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS
- ----------------------------------------------- -----------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors..... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Prospectus Summary; Use of Proceeds
5. Determination of Public Offering Price... Outside Front Cover Page; Underwriting
6. Dilution................................. Dilution; Risk Factors
7. Selling Security Holders................. Not Applicable
8. Plan of Distribution..................... Outside Front Cover Page; Underwriting
9. Description of Securities to be Regis-
tered.................................... Prospectus Summary; Description of Capi-
tal Stock
10. Interests of Named Experts and Counsel... Legal Matters; Experts
11. Information With Respect to the Regis-
trant.................................... Prospectus Summary; Risk Factors; The
Company; Prior S Corporation Status and
Reincorporation; Use of Proceeds;
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Principal
Stockholders; Certain Transactions;
Description of Capital Stock; Shares
Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Lia-
bilities................................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT IS +
+DECLARED EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY , 1996
PROSPECTUS
3,500,000 SHARES
FIRST ALLIANCE CORPORATION
CLASS A COMMON STOCK
----------
All of the shares of the Class A Common Stock, $.01 par value per share (the
"Class A Common Stock"), offered hereby (the "Public Offering") are being sold
by First Alliance Corporation (together with its subsidiaries, the "Company").
Prior to the Public Offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the Public Offering price will
range from $17.00 to $19.00 per share. See "Underwriting" for information
relating to the factors considered in determining the Public Offering price.
The Class A Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "FACO."
The Company has two classes of common stock. The Class A Common Stock, which
is offered hereby, has one vote per share, and the Class B common stock, $.01
par value per share (the "Class B Common Stock"), has four votes per share. See
"Description of Capital Stock." Upon completion of the Public Offering and
assuming the Underwriters' over-allotment option is not exercised, the issued
and outstanding shares of Class A Common Stock and Class B Common Stock that
will be held by certain of the executive officers and directors of the Company
and related parties will have approximately 92.5% of the combined voting power
of all outstanding shares of capital stock of the Company.
SEE "RISK FACTORS" ON PAGES 7 THROUGH 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
THE ATTORNEY GENERAL OF THE STATE OF
NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS
OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS
UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total(3)....................................... $ $ $
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated to be $920,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase from the Company up to 525,000
additional shares of Class A Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares of Class A Common Stock are offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or part. It is
expected that delivery of the shares of Class A Common Stock will be made
against payment therefor at the offices of Friedman, Billings, Ramsey & Co.,
Inc., Arlington, Virginia, the representative of the several Underwriters (the
"Representative"), or in book entry form through the book entry facilities of
the Depository Trust Company on or about , 1996.
----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996.
<PAGE>
FIRST ALLIANCE CORPORATION
RETAIL BRANCH OFFICE LOCATIONS
[UNITED STATES MAP SHOWING BRANCH OFFICE LOCATIONS]
Irvine, CA; Long Beach, CA; Oakland, CA; Encino, CA; West Covina, CA; San
Jose, CA; Atlanta, GA; Bellevue, WA; Denver, CO; Oakbrook Terrace, IL;
Arlington Heights, IL; Miami, FL; Ft. Lauderdale, FL; Portland, OR; Beachwood,
OH; Phoenix, AZ; Salt Lake City, UT; Wayne, PA; Little Falls, NJ
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER THE
COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
----------------
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING". CERTAIN CAPITALIZED FINANCIAL TERMS USED HEREIN ARE DEFINED IN
THE FINANCIAL GLOSSARY ON PAGE 67. THIS PROSPECTUS GIVES EFFECT TO THE
REORGANIZATION OF THE COMPANY, PURSUANT TO WHICH, IMMEDIATELY PRIOR TO THE
CLOSING OF THE PUBLIC OFFERING, FIRST ALLIANCE MORTGAGE COMPANY, A CALIFORNIA
CORPORATION ("FAMCO"), WILL BECOME A WHOLLY-OWNED SUBSIDIARY OF A NEWLY-FORMED
DELAWARE CORPORATION, FIRST ALLIANCE CORPORATION (THE "COMPANY"). ALL
REFERENCES TO THE COMPANY SHALL BE DEEMED TO INCLUDE THE COMPANY AND ITS
SUBSIDIARIES.
The Company originates, purchases, sells and services non-conventional
mortgage loans secured primarily by first mortgages on single family
residences. The Company focuses on a distinct segment of the home equity
lending market by narrowly targeting its marketing efforts at homeowners
believed by management of the Company, based on historic customer profiles, to
be pre-disposed to using the Company's products and services while satisfying
its underwriting guidelines. The Company originates loans through its
centralized telemarketing operations, its direct mailing campaigns and its
expanding retail branch network of 19 offices located in 12 states. Since
January 1, 1996, the Company has opened 3 new retail branch offices in
Pennsylvania, Ohio and New Jersey. The Company intends to continue to expand
its retail branch network in selected states on a nationwide basis and
currently plans to open at least four new retail branches per year. The Company
has also recently organized a subsidiary to pursue retail and wholesale loan
originations and purchases in the United Kingdom. The Company also purchases
loans from other originators.
The Company's customers, who principally use the loans from the Company to
consolidate indebtedness or to finance other consumer needs rather than to
purchase homes, consist of two primary groups. The first category of the
Company's customers are individuals who are unable to obtain mortgage financing
from banks, savings and loan institutions and other companies that have
historically provided loans to individuals with favorable credit
characteristics ("Conventional Lending Institutions"). These individuals often
have impaired or unsubstantiated credit characteristics and/or unverifiable
income and respond favorably to the Company's marketing. The Company's second
category of customers consists of individuals who could qualify for loans from
Conventional Lending Institutions but instead choose to use the Company's
products and services. See "Business--Underwriting." The Company's experience
has shown that these individuals are attracted by the Company's high degree of
personalized service and timely response to loan applications. Each category of
customers has historically been willing to pay the Company's loan origination
fees and interest rates that are typically higher than the fees and rates
charged by Conventional Lending Institutions.
The Company has historically generated positive cash flow due principally to
the magnitude of its retail loan origination fees. For the quarter ended March
31, 1996 and the years ended December 31, 1995, 1994 and 1993, the Company's
weighted average retail loan origination and processing fees as a percentage of
gross loans originated in the retail branches were 14.8%, 15.3%, 15.6% and
17.8%, respectively. The loan origination fee charged to the borrower is
included in the principal balance of the loan originated. The Company then
borrows approximately the principal amount of the loan (subject to collateral
valuation) under its Warehouse Financing Facility and disburses to the borrower
the loan amount less the loan origination fee. Thus, the Company generally
receives cash in the amount of the loan origination and processing fee at the
time of the Warehouse Financing Facility borrowing and prior to the time the
Company recognizes such fee for accounting purposes as a component of loan
origination and sale revenue, which occurs upon the sale of the loan.
The Company's ability to fund and subsequently Securitize loans has
significantly improved its financial performance and enabled it to offer new
and enhanced loan products. The Company's significant expansion of its retail
branch network and the ability to Securitize its loans have contributed
significantly to the increase in the Company's loan origination volume to
$216.6 million in 1995 from $93.6 million in 1992. Since 1992, the Company has
Securitized $826.8 million of loans through ten public and two private
"AAA/Aaa" rated Securitizations. While the Company anticipates Securitizing a
majority of its loan originations in 1996 and thereafter, the Company will
continue to sell those loans which are originated through its proprietary
marketing system that do not satisfy the Company's criteria for Securitization.
Such loans are sold on a servicing released basis to unaffiliated wholesale
purchasers on either a bulk or flow-through basis. These wholesale loan sales
enable the Company to realize a return on all loans generated by its marketing
efforts by retaining loan origination fees without the associated credit risk.
Additionally, the Company continues to sell a small number of loans to private
investors and service the loans that it has previously sold through
Securitizations as well as those to private investors. As of March 31, 1996,
the Servicing Portfolio consisted of 8,787 loans with an outstanding balance of
$611.7 million.
3
<PAGE>
THE PUBLIC OFFERING
<TABLE>
<C> <S>
Class A Common Stock offered by the Company: 3,500,000 shares
Capital Stock to be Outstanding after the Public Offering:
Class A Common Stock....................... 3,500,000 shares(1)
Class B Common Stock....................... 10,750,000 shares(2)
----------
Total.................................... 14,250,000 shares
==========
Voting Rights............................... Each share of Class A Common
Stock is entitled to one vote and
each share of Class B Common
Stock is entitled to four votes
on most matters requiring a
shareholder vote. See
"Description of Capital Stock-
Common Stock."
Use of Proceeds............................. The Company intends to use
between $42 million and $47
million of the net proceeds to
repay, immediately after the
Closing Date (or as soon
thereafter as is practicable),
the principal and interest
outstanding under the
S Distribution Notes. See "Prior
S Corporation Status." To the
extent that the balance of the
net proceeds exceeds the amount
due under the S Distribution
Notes, such excess will be used
initially to repay any
outstanding borrowings on the
Company's Warehouse Financing
Facility, then to fund costs
associated with the Company's
retail branch network and United
Kingdom expansions and for
general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market Symbol for the
Class A Common Stock....................... FACO
Risk Factors................................ See "Risk Factors" for a
discussion of certain material
factors that should be considered
in connection with an investment
in the Class A Common Stock
offered hereby.
</TABLE>
- --------
(1) Excludes 750,000 shares of Class A Common Stock reserved for issuance upon
the exercise of options available for grants under the Company's Stock
Incentive Plan. None of the options has been granted to date. See
"Management-1996 Stock Incentive Plan" and "Description of Capital Stock."
(2) Class B Common Stock is convertible into Class A Common Stock on a one for
one basis at the option of the holder and in certain other circumstances.
See "Description of Capital Stock."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The financial data set forth below should be read in conjunction with the
Financial Statements of the Company and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ------------------
1993 1994 1995 1995(5) 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Loan origination and sale.... $ 22,489 $ 27,902 $ 35,493 $ 1,086 $ 9,371
Loan servicing and other
fees........................ 8,989 9,106 8,543 1,977 2,243
Interest..................... 4,452 8,650 14,668 2,871 3,158
Other........................ 20 144 176 29 38
-------- -------- -------- -------- --------
Total revenue............... 35,950 45,802 58,880 5,963 14,810
Total expense................ 24,987 30,568 27,860 6,263 6,950
-------- -------- -------- -------- --------
Income (loss) before income
tax provision (benefit)..... 10,963 15,234 31,020 (300) 7,860
Income tax provision
(benefit)................... 222 363 478 (5) 118
-------- -------- -------- -------- --------
Net income (loss)............ $ 10,741 $ 14,871 $ 30,542 $ (295) $ 7,742
======== ======== ======== ======== ========
Dividends declared(1)........ $ 5,853 $ 17,341 $ 12,205 $ 2,874 $ 15,101
PRO FORMA INCOME STATEMENT
DATA(2):
Income (loss) before income
tax provision (benefit)..... $ 10,963 $ 15,234 $ 31,020 $ (300) $ 7,860
Income tax provision
(benefit)................... 4,403 6,200 12,772 (123) 3,233
-------- -------- -------- -------- --------
Net income (loss)............ $ 6,560 $ 9,034 $ 18,248 $ (177) $ 4,627
======== ======== ======== ======== ========
LOANS ORIGINATED OR
PURCHASED(6):
Retail Branch Originations... $148,718 $151,338 $200,371 $ 32,298 $ 56,693
Portfolio Refinancing
Originations................ 47,189 70,501 16,195 9,045 5,586
Wholesale purchases.......... 84,034 91,826 24,078 10,602 13,455
-------- -------- -------- -------- --------
Total....................... $279,941 $313,665 $240,644 $ 51,945 $ 75,734
======== ======== ======== ======== ========
LOANS SOLD(6):
Securitizations.............. $141,795 $350,331 $167,974 $ -- $ 52,420
Wholesale.................... -- -- 51,542 3,528 21,536
Private...................... 70,554 22,857 13,709 4,032 438
-------- -------- -------- -------- --------
Total....................... $212,349 $373,188 $233,225 $ 7,560 $ 74,394
======== ======== ======== ======== ========
SERVICING PORTFOLIO(3):
Private investor loans....... $150,657 $ 87,659 $ 65,404 $ 78,422 $ 61,431
Securitized loans(7)......... 234,913 468,026 548,387 497,560 550,287
-------- -------- -------- -------- --------
Total....................... $385,570 $555,685 $613,791 $575,982 $611,718
======== ======== ======== ======== ========
FINANCIAL RATIOS AND OTHER
DATA:
Number of retail branch
offices(3).................. 11 13 17 14 18
Weighted average interest
rate on loan originations
and purchases............... 9.5% 8.7% 10.3% 10.8% 9.2%
Weighted average initial
combined loan-to-value
ratio:
Retail Branch and Portfolio
Refinancing Originations... 52.4% 54.4% 58.6% 55.4% 60.4%
Wholesale purchases......... 61.6% 60.5% 66.5% 64.0% 70.4%
Average retail loan size..... $ 53.6 $ 66.1 $ 68.8 $ 58.3 $ 80.5
Weighted average loan
origination and processing
fees as a percent of gross
loans originated as
applicable:
Retail Branch Originations.. 17.8% 15.6% 15.3% 16.1% 14.8%
Portfolio Refinancing
Originations:.............. 2.5% 7.5% 13.0% 13.3% 5.6%
Total delinquencies as a
percentage of Servicing
Portfolio at end of period . 4.0% 4.3% 5.8% 4.7% 6.3%
Real estate acquired through
foreclosure ("REO") as a
percentage of Servicing
Portfolio at end of
period(4)................... .9% .6% 1.3% .7% 1.4%
REO losses as a percentage of
average Servicing Portfolio
during the period(4)........ .02% .01% .03% -- .08%
Pre-tax income (loss) as a
percentage of total revenue. 30.5% 33.3% 52.7% (5.0)% 53.1%
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------- ---------------
1993 1994 1995 1995(5) 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 4,387 $ 5,298 $ 4,019 $ 1,809 $ 2,206
Loans held for sale(5)................. 74,196 18,676 24,744 58,631 26,325
Residual Interests..................... 6,879 11,645 19,705 12,283 20,732
Total assets........................... 99,855 48,226 66,987 86,792 71,355
Total borrowings(5).................... 68,773 14,839 19,356 59,733 22,038
Stockholders' equity................... 26,454 23,984 42,321 20,815 34,962
</TABLE>
- --------
(1) Historical dividends are not necessarily indicative of dividends expected
to be declared in the future. See "Dividend Policy."
(2) Amounts reflect adjustments for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation.
(3)As of the end of the applicable period.
(4) Includes REO of the Company as well as REO of the REMIC Trusts and serviced
by the Company; however, excludes private investor REO not serviced by the
Company.
(5) The Company did not close a Securitization during the quarter ended March
31, 1995. As such, Loan origination and sale revenue for the quarter is
significantly lower and the balance of Loans held for sale and total
borrowings are significantly higher than if a Securitization were closed
within the quarter.
(6) Principal balance of loans.
(7) Includes Loans held for sale and loans receivable held for investment of
the Company.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
SHARES OF CLASS A COMMON STOCK OFFERED BY THIS PROSPECTUS.
DECLINE OF COLLATERAL VALUE MAY ADVERSELY AFFECT LOAN-TO-VALUE RATIOS
The Company's business may be adversely affected by declining real estate
values. Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the loan-to-
value ratios of loans previously made by the Company, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of a
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. Because of the Company's
focus on borrowers who are unable to obtain mortgage financing from
conventional mortgage sources, the actual rates of delinquencies, foreclosures
and losses on such loans could be higher under adverse economic conditions
than those currently experienced in the mortgage lending industry in general.
Any sustained period of such increased delinquencies, foreclosures or losses
could adversely affect the Company's results of operations and financial
condition.
CREDIT IMPAIRED BORROWERS MAY RESULT IN INCREASED DELINQUENCY RATES
The Company focuses its marketing efforts on borrowers who may be unable to
obtain mortgage financing from conventional mortgage sources. Loans made to
such borrowers may entail a higher risk of delinquency and higher losses than
loans made to borrowers who utilize conventional mortgage sources. As of March
31, 1996 and December 31, 1995, total delinquent loans as a percentage of the
Company's Servicing Portfolio were 6.3% and 5.8%, respectively, as compared to
4.2% and 4.5% for the portfolios of the mortgage banking industry as a whole
according to the Mortgage Bankers Association. While the Company employs
underwriting criteria and collection methods to mitigate the higher risks
inherent in loans made to these borrowers, no assurance can be given that such
criteria or methods will afford adequate protection against such risks. In the
event that pools of loans sold and serviced by the Company experience higher
delinquencies, foreclosures or losses than anticipated, the Company's results
of operations or financial condition could be adversely affected.
IMPACT OF REGULATION AND LEGISLATION
The Company's business is subject to extensive regulation, supervision and
licensing by Federal, state and local governmental authorities and is subject
to various laws, regulations and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations. The
Company's consumer lending activities are subject to the Truth-in-Lending Act
(including the Home Ownership and Equity Protection Act of 1994), the Fair
Housing Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Real Estate Settlement Procedures Act ("RESPA"), the Home Mortgage
Disclosure Act and the Fair Debt Collection Practices Act and regulations
promulgated thereunder, as well as other Federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of, and examinations by, state regulatory
authorities with respect to originating, processing, underwriting, selling,
Securitizing and servicing loans. These rules and regulations, among other
things, (i) impose licensing obligations on the Company, (ii) establish
eligibility criteria for mortgage loans, (iii) prohibit discrimination, (iv)
provide for inspections and appraisals of properties, (v) require credit
reports on loan applicants, (vi) regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, (vii) mandate certain disclosures and notices to borrowers
and (viii) in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to termination or
suspension of the Company's servicing rights without compensation to the
Company, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Recent Federal legislation, the Riegle Community Development and Regulatory
Improvement Act (the "Riegle Act"), has focused additional regulation on
mortgage loans having relatively higher origination fees
7
<PAGE>
and interest rates, such as those made by the Company, and the Company expects
its business to be the focus of additional Federal and state legislation,
regulation and possible enforcement in the future.
The Company's placement of insurance covering improvements on real property
that secures the Company's loan to a borrower is subject to state and federal
statutes and regulations applicable to "force placed" insurance. The Company
receives a fee in connection with its placement of such insurance in
California, which activity is not required to be licensed. Historically the
Company also received a fee in connection with the placement of such insurance
outside California. While the Company does not believe, based on the advice of
regulatory counsel, that it was required to be licensed in connection with
such activity, a state insurance regulator or a court could take a different
interpretation. The rules and regulations governing force placed insurance
impose certain disclosure and notice requirements on the Company prior to
effecting such insurance coverage, impose limitations on the Company's ability
to accept or reject insurance coverage offered by a borrower and impose
restrictions on the fees and costs which the Company may charge the borrower
with respect to such insurance. The Company's sale of credit life insurance
and credit disability insurance in the state of California is subject to
statutes and regulations in that state applicable to insurance producers.
Failure to comply with any of the foregoing state and federal requirements
could lead to imposition of civil penalties on the Company, class action
lawsuits and administrative enforcement actions.
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead
to regulatory investigations or enforcement actions and private causes of
action, such as class action lawsuits, with respect to the Company's
compliance with the applicable laws and regulations. As a mortgage lender, the
Company has been, and expects to continue to be, subject to regulatory
enforcement actions and private causes of action from time to time with
respect to its compliance with applicable laws and regulations.
Although the Company utilizes systems and procedures to facilitate
compliance with these legal requirements and believes that it is in compliance
in all material respects with applicable Federal, state and local laws, rules
and regulations, there can be no assurance that more restrictive laws, rules
and regulations will not be adopted in the future, or that existing laws and
regulations will not be interpreted in a more restrictive manner, that could
make compliance more difficult or expensive. See "Business--Regulation."
ELIMINATION OF DEDUCTIBILITY OF MORTGAGE INTEREST COULD ADVERSELY AFFECT
RESULTS OF OPERATIONS
Members of Congress, government officials and political candidates have from
time to time suggested the elimination of the mortgage interest deduction for
Federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans
are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantages of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for loans of the kind offered by the Company.
RISK OF LITIGATION
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and investors who have purchased loans from the
Company arising from, among other things, losses that are claimed to have been
incurred as a result of alleged breaches of fiduciary obligations,
misrepresentations, errors and omissions of employees, officers and agents of
the Company (including its appraisers), incomplete documentation and failures
by the Company to comply with various laws and regulations applicable to its
business. The Company believes that liability with respect to any currently
asserted claims or legal actions is not likely to be material to the Company's
consolidated results of operations or financial condition; however, any
8
<PAGE>
claims asserted in the future may result in legal expenses or liabilities that
could have a material adverse effect on the Company's results of operations
and financial condition and could distract members of management from the
operations of the Company.
FLUCTUATIONS IN INTEREST RATES MAY ADVERSELY AFFECT PROFITABILITY
The profitability of the Company is likely to be adversely affected during
any period of rapid changes in interest rates. A substantial and sustained
increase in interest rates could adversely affect the spread between the rate
of interest received by the Company on its loans and the interest rates
payable under the Warehouse Financing Facility during the Warehousing Period
or the pass-through rate for Regular Interests issued in Securitizations. Such
rate increases could also affect the ability of the Company to originate and
purchase loans. A significant decline in interest rates could decrease the
size of the Company's Servicing Portfolio by increasing the level of loan
prepayments.
An effective hedging strategy is complex and no hedging strategy can
completely insulate the Company from interest rate risks. The nature and
timing of hedging transactions may impact the effectiveness of hedging
strategies. Poorly designed strategies or improperly executed transactions may
increase rather than mitigate risk. In addition, hedging involves transaction
and other costs, and such costs could increase as the period covered by the
hedging protection increases or in periods of rising and fluctuating interest
rates. Therefore, the Company may be prevented from effectively hedging its
interest rate risks, which could have a material adverse effect on the
Company's results of operations and financial condition. See "Business--
Financing and Sale of Loans--Interest Rate Risk Management."
DEPENDENCE ON SECURITIZATIONS AND IMPACT ON QUARTERLY OPERATING RESULTS
Gain on sale of loans generated by the Company's Securitizations represents
a significant portion of the Company's revenues and net income. Furthermore,
the Company relies significantly on Securitizations to generate cash proceeds
for repayment of its Warehouse Financing Facility and enable the Company to
originate and purchase additional loans. Several factors affect the Company's
ability to complete Securitizations, including conditions in the securities
markets generally, conditions in the Asset-Backed Securities markets
specifically, the credit quality of the Company's Servicing Portfolio and the
Company's ability to obtain credit enhancement. Any substantial reductions in
the size or availability of the Securitization market for the Company's loans
could have a material adverse effect on the Company's results of operations
and financial condition.
The Company's revenues and net income have fluctuated in the past and are
expected to fluctuate in the future principally as a result of the timing and
size of its Securitizations. Several factors affecting the Company's business
can cause significant variations in its quarterly results of operations. In
particular, variations in the volume of the Company's loan originations and
purchases, the differences between the Company's cost of funds and the average
interest rates of originated or purchased loans, the effectiveness of the
Company's hedging strategies, the pass-through rate for Regular Interests
issued in Securitizations, and the timing and size of Securitizations can
result in significant increases or decreases in the Company's revenues from
quarter to quarter. A delay in closing a Securitization during a particular
quarter would postpone recognition of gain on sale of loans. In addition,
unanticipated delays in closing a Securitization could also increase the
Company's exposure to interest rate fluctuations by increasing the Warehousing
Period for its loans. If the Company were unable to profitably Securitize a
sufficient number of its loans in a particular reporting period, the Company's
revenues for such period would decline and would result in lower net income
and possibly a net loss for such period, and could have a material adverse
effect on the Company's results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LOSS OF HISTORICAL LOAN ORIGINATION FEES COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS
The Company has historically generated positive cash flow due, in large
part, to its customary loan origination fees. Net loan origination fees
constituted 52.3%, 43.1%, 61.9% and 51.6% of the Company's total
9
<PAGE>
revenues for the first quarter of 1996 and for the years 1995, 1994 and 1993,
respectively. Weighted average loan origination and processing fees as a
percentage of gross loans originated in the retail branches for those periods
were 14.8%, 15.3%, 15.6% and 17.8%, respectively. Any reduction in the amount
of the Company's loan origination fees, whether by reason of regulation,
competition or otherwise, will negatively impact the Company's cash flow and
could have a material adverse effect on the Company's results of operations
and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LOSS OF FUNDING SOURCES COULD ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company funds substantially all of the loans which it originates or
purchases through borrowings under the Warehouse Financing Facility and
internally generated funds. These borrowings are in turn repaid with the
proceeds received by the Company from selling such loans through loan sales or
Securitizations. Any failure to renew or obtain adequate funding under the
Warehouse Financing Facility, or other borrowings, or any substantial
reduction in the size of or pricing in the markets for the Company's loans,
could have a material adverse effect on the Company's results of operations
and financial condition. To the extent that the Company is not successful in
maintaining or replacing existing financing, it would have to curtail its loan
production activities or sell loans earlier than is optimal, thereby having a
material adverse effect on the Company's results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
IMPAIRMENT OF VALUE OF RESIDUAL INTERESTS AND MORTGAGE SERVICING RIGHTS
The Company records gains on sale of loans through Securitization based in
part on the fair value of the Residual Interests received in the REMIC Trust
by the Company and on the fair value of retained mortgage servicing rights
related to such loans. The fair values of such Residual Interests and retained
mortgage servicing rights are in turn based in part on market interest rates
and projected loan prepayment and credit loss rates. Increases in interest
rates or higher than anticipated rates of loan prepayments or credit losses of
these or similar securities may require the Company to write down the value of
such Residual Interests and mortgage servicing rights and result in a material
adverse impact on the Company's results of operations and financial condition.
The Company is not aware of an active market for the Residual Interests. No
assurance can be given that the Residual Interests could in fact be sold at
their carrying value, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Accounting
Considerations."
LOSS OF CREDIT ENHANCEMENT COULD RESULT IN INCREASED INTEREST COSTS
In order to gain access on favorable terms to the public Securitization
market, the Company has relied on credit enhancement to achieve a "AAA/Aaa"
rating for the Regular Interests in its Securitizations. The credit
enhancement has generally been in the form of an insurance policy issued by
the Certificate Insurer insuring the repayment of Regular Interests in each of
the REMIC Trusts sponsored by the Company. The Certificate Insurer is not
required to insure future Securitizations nor is the Company restricted in its
ability to obtain credit enhancement from providers other than the Certificate
Insurer or to use other forms of credit enhancement. There can be no assurance
that the Company will be able to obtain credit enhancement in any form from
the Certificate Insurer or any other provider of credit enhancement on
acceptable terms or that future Securitizations will be similarly rated. A
downgrading of Regular Interests already outstanding or the Certificate
Insurer's credit rating or its withdrawal of credit enhancement could result
in higher interest costs for future Securitizations. Such events could have a
material adverse effect on the Company's results of operations and financial
condition.
STRONG OR INCREASED COMPETITION COULD ADVERSELY AFFECT RESULTS OF OPERATIONS
Competition in the mortgage financing business is intense. The mortgage
financing market is highly fragmented and has been serviced by mortgage
brokers, mortgage banking companies, commercial banks, credit unions, thrift
institutions, and finance companies. Many of these competitors have greater
financial resources and
10
<PAGE>
may have significantly lower costs of funds than the Company. Even after the
Company has made a loan to a borrower, the Company's competitors may seek to
refinance the Company's loan in order to take additional cash out of the
property or reduce payments. Furthermore, the profitability of the Company and
other similar lenders is attracting additional competitors into this market,
with the possible effect of reducing the Company's ability to charge its
customary origination fees and interest rates. In addition, as the Company
expands into new geographic markets, it will face competition from lenders
with established positions in these locations. There can be no assurance that
the Company will be able to continue to compete successfully in the markets it
serves. Such an event could have a material adverse effect on the Company's
results of operations and financial condition. See "Business--Competition."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 85.8% of the dollar volume of the Servicing Portfolio at, and
approximately 43.0% of the dollar volume of loans originated or purchased by
the Company during the year ended, December 31, 1995 were secured by
properties located in California. Although the Company is expanding its retail
branch network outside California, the Company's Servicing Portfolio and loan
originations and purchases are likely to remain concentrated in California for
the foreseeable future. Consequently, the Company's results of operations and
financial condition are dependent upon general trends in the California
economy and its residential real estate market. The California economy has
experienced a slowdown or recession over the last several years that has been
accompanied by a sustained decline in the California real estate market.
Residential real estate market declines may adversely affect the values of the
properties securing loans such that the principal balances of such loans,
together with any primary financing on the mortgaged properties, will equal or
exceed the value of the mortgaged properties. In addition, California
historically has been vulnerable to certain natural disaster risks, such as
earthquakes and erosion-caused mudslides, which are not typically covered by
the standard hazard insurance policies maintained by borrowers. Uninsured
disasters may adversely impact borrowers' ability to repay loans made by the
Company. The existence of adverse economic conditions or the occurrence of
such natural disasters in California could have a material adverse effect on
the Company's results of operations and financial condition.
ABILITY OF THE COMPANY TO IMPLEMENT ITS GROWTH STRATEGY
The Company's growth strategy is dependent upon its ability to increase its
loan origination volume through the growth of its retail branch network while
maintaining its customary origination fees, interest rate spreads and
underwriting criteria with respect to such increased loan origination and
purchase volume. Implementation of this strategy, which includes nationwide
and international geographic expansion, will depend in large part on the
Company's ability to: (i) expand its retail branch network in markets with a
sufficient concentration of borrowers meeting the Company's underwriting
criteria; (ii) obtain adequate financing on favorable terms to fund its growth
strategy; (iii) profitably Securitize its loans in the secondary market on a
regular basis; (iv) hire, train and retain skilled employees; and (v) continue
to expand in the face of increasing competition from other mortgage lenders.
The Company's failure with respect to any or all of these factors could impair
its ability to successfully implement its growth strategy which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business--Current Markets and Expansion Plans."
LOAN DELINQUENCIES AND DEFAULTS MAY REDUCE VALUE OF RESIDUAL INTERESTS
After a loan has been originated or purchased by the Company, the loan is
held as part of the Servicing Portfolio and is subject to sale or
Securitization. During the period a loan is so held, the Company is at risk
for loan delinquencies and defaults. Following the sale of the loan on a
servicing released basis, the Company's loan delinquency and default risk with
respect to such loan is limited to those circumstances in which it is required
to repurchase such loan due to a breach of a representation or warranty in
connection with the loan sale. On Securitized loans, the Company also has this
risk of loan delinquency or default to the extent that losses are paid out of
reserve accounts or by reducing the over-collateralization to the extent that
funds are available. Such
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<PAGE>
losses may result in a reduction in the value of the Residual Interests held
by the Company and could have a material adverse effect on the Company's
results of operations and financial condition. See "Business--Loans--Loan
Sales."
TERMINATION OF SERVICING RIGHTS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
At March 31, 1996, approximately 84.8% of the dollar volume of the Company's
Servicing Portfolio consisted of loans Securitized by the Company and sold to
REMIC Trusts. The Company's form of pooling and servicing agreement for each
of these REMIC Trusts provides that the Certificate Insurer insuring the
senior interests in the related REMIC Trust may terminate the Company's
servicing rights under particular circumstances. With respect to six of the
Company's Securitizations (with loan balances of $280.5 million at March 31,
1996), the Certificate Insurer may terminate the servicing rights of the
Company if, among other things, the number of loans in the REMIC Trust that
are delinquent 91 days or more (including foreclosures and REO properties)
exceeds 10.0% of the total number of loans in the REMIC Trust for four
consecutive months.
With respect to the Company's five most recent Securitizations, the
Certificate Insurer may terminate the servicing rights of the Company if,
among other things, (i) the three month average of the quotient of the
principal balance of all loans that are delinquent 91 days or more (including
foreclosures and REO properties) divided by the pool principal balance for the
related period exceeds 7.0%; (ii) the annual cumulative realized losses for
any year exceed 2.0% of the average pool principal balance for the same year;
or (iii) with respect to the two transactions completed in 1995, if within the
first five years of the REMIC Trust, the cumulative losses exceed 5.75% of the
original principal balance of the REMIC Trust or if cumulative losses after
year five exceed 8.63% of the original principal balance of the REMIC Trust.
The Company's two most recent Securitizations include language that modifies
the cumulative loss figures to 6.63% within the first five years and 9.94%
after year five.
At March 31, 1996, none of the REMIC Trusts exceeded the foregoing
delinquency or loss calculations. There can be no assurance that delinquency
and loss rates with respect to the Company's Securitized loans will not exceed
these rates in the future or, if exceeded, that the servicing rights would not
be terminated. Any termination of servicing rights could have a material
adverse effect on the Company's results of operations and financial condition.
See "Business--Loan Servicing."
ANTI-TAKEOVER EFFECT OF CAPITAL STRUCTURE; VOTING CONTROL OF COMPANY
The Company has two classes of authorized Common Stock, Class A Common
Stock, which is offered hereby, and Class B Common Stock. While the holder of
each share of Class A Common Stock is entitled to one vote per share, the
holder of each share of Class B Common Stock is entitled to four votes per
share. The Class A Common Stock and the Class B Common Stock generally vote
together as a single class. Brian Chisick and his wife, Sarah Chisick, and the
grantor trusts for which they have the beneficial voting interests
(collectively, the "Chisick Family") are the beneficial owners of
substantially all of the outstanding Class B Common Stock. As a result, upon
completion of the Public Offering (assuming the Underwriters' over-allotment
option is not exercised), the Chisick Family will hold approximately 91.6% of
the aggregate voting power of the Company, which will allow it to control all
actions to be taken by the stockholders, including the election of all
directors to the Board of Directors. The Board of Directors is expected to be
comprised entirely of designees of the Chisick Family. This voting control may
have the effect of discouraging offers to acquire the Company because the
consummation of any such acquisition would require the consent of the Chisick
Family. In addition, the Board of Directors is authorized to issue shares of
preferred stock from time to time with such rights and preferences as the
Board may determine; such preferred stock could be issued in the future with
terms and conditions that could further discourage offers to acquire the
Company. See "Principal Stockholders" and "Description of Capital Stock."
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<PAGE>
ANTI-TAKEOVER EFFECT OF DELAWARE LAW
The Company is a Delaware corporation and is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prevents an "interested stockholder" (defined generally as a
person owning 15% or more of the Company's outstanding voting stock) from
engaging in a "business combination" with the Company for three years
following the date that person became an interested stockholder unless the
business combination is approved in a prescribed manner. This statute could
make it more difficult for a third party to acquire control of the Company.
See "Description of Capital Stock--Certain Provisions of Delaware Law."
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Brian Chisick, Chief Executive Officer and President of
the Company. Although the Company has been able to hire and retain other
qualified and experienced management personnel, the loss of Brian Chisick's
services for any reason could have a material adverse effect on the Company.
The Company has entered into an employment agreement with Brian Chisick. The
Company does not carry "key man" life insurance on the life of Brian Chisick.
See "Management--Executive Compensation--Employment Agreements."
ENVIRONMENTAL LIABILITIES
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans that are in default. There is a risk
that hazardous substances or waste, contaminants, pollutants or sources
thereof could be discovered on such properties after acquisition by the
Company. In such event, the Company may be required by law to remove such
substances from the affected properties at its sole cost and expense. There
can be no assurance that (i) the cost of such removal would not substantially
exceed the value of the affected properties or the loans secured by the
properties, (ii) the Company would have adequate remedies against the prior
owner or other responsible parties or (iii) the Company would not find it
difficult or impossible to sell the affected properties either prior to or
following such removal.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Public Offering, there has been no public market for the Class
A Common Stock. There can be no assurance that an active trading market will
develop or that the purchasers of the Class A Common Stock will be able to
resell their Class A Common Stock at prices equal to or greater than the
Public Offering price. The Public Offering price of the Class A Common Stock
was determined through negotiations between the Company and the Representative
of the Underwriters and may not reflect the market price of the Class A Common
Stock after the Public Offering. See "Underwriting" for a discussion of
factors considered in determining the Public Offering price. The trading price
of the Class A Common Stock could be subject to wide fluctuations in response
to quarterly variations in changes in financial estimates by securities
analysts and other events or facts. These broad market fluctuations may
adversely affect the market price of the Class A Common Stock. See
"Underwriting."
RESTRICTIONS ON FUTURE SALES BY STOCKHOLDERS; EFFECT ON SHARE PRICE OF SHARES
AVAILABLE FOR FUTURE SALE
Shares of Class B Common Stock are not being offered hereby. The Chisick
Family is the record and beneficial holder of substantially all of the
outstanding shares of Class B Common Stock and will be subject to certain
lock-up restrictions with respect to its ability to sell or otherwise dispose
of any of its shares of Class B Common Stock (which shares, upon transfer by
the Chisick Family to unrelated parties, convert to Class A Common Stock)
without the prior written consent of the Representative of the Underwriters
and the Company. When such lock-up restrictions lapse (180 days after the
consummation of the Public Offering), such shares of Class B Common Stock may
be sold in the public market or otherwise disposed of, subject to compliance
with applicable securities laws. The Company's Certificate of Incorporation
authorizes the issuance of 25,000,000
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<PAGE>
shares of Class A Common Stock and 15,000,000 shares of Class B Common Stock.
Upon completion of the Public Offering, there will be outstanding 3,500,000
shares of Class A Common Stock and 10,750,000 shares of Class B Common Stock
(assuming no exercise of the Underwriters' over-allotment option). Sales of a
substantial number of shares of Class B Common Stock, or the perception that
such sales could occur, could adversely affect prevailing market prices for
the Class A Common Stock. See "Shares Eligible for Future Sale."
DILUTION
Purchasers of the Class A Common Stock will experience immediate and
substantial dilution in net tangible book value per share of Class A Common
Stock of $13.59 per share based upon an assumed initial public offering price
of $18.00 per share. See "Dilution."
NO CASH DIVIDENDS
Following the Public Offering, the Company intends to retain its earnings,
if any, for use in its business and does not anticipate declaring or paying
any cash dividends in the foreseeable future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources" and "Dividend Policy."
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<PAGE>
THE COMPANY
FAMCO was founded in 1971 and was incorporated in California in 1975.
Immediately prior to the consummation of the Public Offering, FAMCO will
become a wholly-owned subsidiary of the Company (the "Reorganization"). The
Company has been actively involved in the mortgage lending business since its
founding. The Company is owned by the Chisick Family and Mark K. Mason.
Approximately 186 of the Company's 322 employees are located at the corporate
headquarters. The balance of the employees work in 19 retail branch offices,
six of which are located in California, two of which are located in each of
Illinois and Florida and one of which is located in each of Oregon,
Washington, Colorado, Utah, Arizona, Georgia, New Jersey, Pennsylvania and
Ohio.
The Company maintains its principal office at 17305 Von Karman Avenue,
Irvine, California 92714-6203. Its telephone number is (714) 224-8500.
PRIOR S CORPORATION STATUS
Since May 1, 1988, the Company has elected to be treated for Federal income
and certain state tax purposes as an S corporation under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable state
laws. As a result, earnings of the Company during such period have been
included in the taxable income of the Chisick Family for Federal and state
income tax purposes, and the Company has not been subject to income tax on
such earnings, other than California franchise tax. Prior to the date of the
consummation of the Public Offering (the "Closing Date"), the Chisick Family
expects to revoke the Company's S corporation status. The Company has made
distributions to its shareholders of notes (the "S Corporation Distribution")
which includes all of its previously earned and undistributed S corporation
earnings through the Closing Date (estimated to be between $42.0 million and
$47.0 million prior to considering the S Corporation Distribution). The S
Corporation Distribution was comprised of promissory notes bearing interest
rates ranging from 5.61% to 5.88% per annum (the "S Distribution Notes"). See
"Use of Proceeds." On and after the Closing Date, the Company will no longer
be treated as an S corporation and, accordingly, will be fully subject to
Federal and state income taxes.
The Chisick Family has agreed to reimburse the Company for any increase in
the Company's Federal or state(s) income tax liability for 1996 and future
years that may be triggered as a result of possible Internal Revenue Service
and state taxing authority audit adjustments ("Audit Adjustments") to the
Company's taxable income for the years during which the Company was an S
corporation. Conversely, the Company has agreed to reimburse the Chisick
Family for any decrease in the Company's Federal or state(s) income tax
liability for 1996 and future years that may be triggered as a result of
possible Audit Adjustments to the Company's taxable income for the years
during which the Company was an S corporation. The Company's reimbursement
right is embodied in the Reimbursement Agreement, and the Chisick Family's
reimbursement right is embodied in the S Distribution Notes.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Class A Common Stock offered by the Company hereby are estimated to be
approximately $58.3 million, based on an assumed Public Offering price of
$18.00 per share, the midpoint of the price range shown on the cover of this
Prospectus. The Company intends to use between $42.0 million and $47.0 million
of such net proceeds to repay, immediately after the Closing Date (or as soon
thereafter as is practicable), the principal and interest outstanding under
the S Distribution Notes. The S Distribution Notes bear interest at rates
ranging from 5.61% to 5.88% per annum and have maturity dates ranging from
March 30, 1999 through April 30, 1999. The S Distribution Notes were issued by
the Company to distribute to the shareholders the previously earned and
undistributed S corporation earnings. To the extent that the balance of the
net proceeds exceeds the amount due under the S Distribution
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<PAGE>
Notes, such excess will be used initially to repay any outstanding borrowings
on the Company's Warehouse Financing Facility, the Company's $125 million
secured 90-day revolving line of credit used to finance loan originations and
purchases which matures on September 30, 1996 and then to fund costs
associated with the Company's retail branch network and United Kingdom
expansions and for general corporate purposes. The annual interest rate
currently applicable to borrowing under the Company's Warehouse Financing
Facility is equal to the sum of 0.875% plus the 30 day London Interbank
Offered Rate ("LIBOR"). See "Prior S Corporation Status."
DIVIDEND POLICY
The Company intends, after payment of the S Distribution Notes, to retain
its earnings, if any, for use in its business and does not anticipate
declaring or paying any cash dividends in the foreseeable future. Purchasers
of shares of Class A Common Stock in the Public Offering will not receive any
portion of the S Distribution Notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation-Liquidity and Capital
Resources."
DILUTION
The net tangible book value of the Company's Common Stock (which, for
purposes of this discussion, shall include both the Class A Common Stock and
the Class B Common Stock) as of March 31, 1996 was $35 million or
approximately $2.45 per share. Net tangible book value per share represents
the amount of the Company's stockholders' equity, less intangible assets,
divided by shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Public
Offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Public Offering. Shares used in the
computation of per share amounts below include 10,642,500 shares outstanding
at March 31, 1996, 107,500 shares of restricted stock issued to an officer of
the Company and 3,500,000 shares to be issued in the Offering. See
"Management-- Executive Compensation." After giving effect to the
S Distribution Notes, the establishment of net deferred tax assets upon
conversion to a C Corporation and the sale by the Company of 3,500,000 shares
of Class A Common Stock in the Public Offering and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company at March 31, 1996 would have been $62.9 million or $4.41 per share.
This represents an immediate increase in net tangible book value of $4.09 per
share to existing stockholders and an immediate dilution in net tangible book
value of $13.59 per share to purchasers of Class A Common Stock in the Public
Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed Public Offering price per share (1)..................... $18.00
Net tangible book value per share as of March 31, 1996........ $ 2.45
Decrease attributable to issuance of S Distribution Notes..... (2.36)
Increase attributable to establishment of net deferred tax
assets....................................................... 0.23
------
Net tangible book value per share before the Public Offering.. 0.32
Increase per share attributable to new investors.............. 4.09
------
Pro forma net tangible book value per share after the Public
Offering (2)................................................... 4.41
------
Dilution per share to new investors............................. $13.59
======
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and commissions and
estimated expenses of the Public Offering payable by the Company.
(2) Excludes 750,000 shares of Common Stock issuable upon exercise of options
to be granted pursuant to the Stock Incentive Plan. See "Management--1996
Stock Incentive Plan."
16
<PAGE>
The following table summarizes, on a pro forma as adjusted basis as of March
31, 1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share of
Common Stock paid by the existing stockholders and the new investors in the
Public Offering:
<TABLE>
<CAPTION>
SHARES OWNED AVERAGE
AFTER THE PUBLIC OFFERING TOTAL CONSIDERATION PRICE
------------------------------------------------ PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------------- ------------------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 10,750,000 75.4% $ 2,936,000 4.5% $ 0.27
New Investors........... 3,500,000 24.6 63,000,000 95.5 18.00
--------------- ---------- ----------- -----
Total................. 14,250,000 100.0% $65,936,000 100.0%
=============== ========== =========== =====
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and Warehouse Financing
Facility of FAMCO at March 31, 1996 and as adjusted as of that date to give
effect to (i) an S corporation distribution of notes with total principal
amounts equal to the FAMCO's previously earned and undistributed S corporation
earnings at March 31, 1996; (ii) $3,237,000 of net deferred tax assets that
would have been recorded had FAMCO's S corporation status been revoked as of
March 31, 1996; and (iii) the grant of 107,500 shares of restricted Class B
Common Stock of the Company to an officer of the Company; and as further
adjusted to reflect (i) the reorganization pursuant to which FAMCO will become
a wholly-owned subsidiary of the Company; (ii) the sale of 3,500,000 shares of
Class A Common Stock by the Company in the Public Offering and the application
of the estimated net proceeds therefrom; and (iii) the vesting of 24.6% of the
restricted Class B Common Stock. See "Prior S Corporation Status," "Use of
Proceeds" and "Management--Executive Compensation." This information below
should be read in conjunction with the Company's audited Financial Statements
and the Notes thereto which are included elsewhere herein. See also "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Capital
Stock."
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Warehouse Financing Facility................... $20,015 $20,015 --
------- ------- -------
Long-term debt:
S Distribution Notes......................... -- 33,626 --
Notes payable................................ 1,023 1,023 $ 1,023
------- ------- -------
Total...................................... 1,023 34,649 1,023
------- ------- -------
Stockholders' equity:
Preferred Stock, $.01 par value per share;
1,000,000 shares authorized; no shares
outstanding................................. -- -- --
Common Stock, no par value; 15,000,000 shares
authorized; 10,642,500 shares issued and
outstanding (actual); 10,750,000 shares
issued and outstanding (as adjusted)........ 42 2,936 --
Class A Common Stock, $.01 par value per
share; 25,000,000 shares authorized; no
shares issued and outstanding (actual and as
adjusted); 3,500,000 shares issued and
outstanding (as further adjusted)(1)........ -- -- 35
Class B Common Stock, $.01 par value per
share; 15,000,000 shares authorized; no
shares issued and outstanding (actual and as
adjusted); 10,750,000 shares issued and
outstanding (as further adjusted)........... -- -- 107
Additional paid in capital................... 61,094
Retained earnings(2)......................... 34,920 3,237 2,844
Deferred stock compensation.................. (1,600) (1,207)
------- ------- -------
Total stockholders' equity................. 34,962 4,573 62,873
------- ------- -------
Total capitalization....................... $35,985 $39,222 $63,896
======= ======= =======
</TABLE>
- --------
(1) Does not include 750,000 shares of Class A Common Stock issuable upon
exercise of options available to be granted pursuant to the Stock
Incentive Plan. See "Management--1996 Stock Incentive Plan."
(2) No adjustment has been made to give effect to the Company's previously
earned and undistributed S corporation earnings for the period April 1,
1996 through the Closing Date, which earnings were distributed as part of
the S Corporation Distribution. See "Prior S Corporation Status."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995(5) 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Loan origination and
sale................... $ 16,661 $ 20,006 $ 22,489 $ 27,902 $ 35,493 $ 1,086 $ 9,371
Loan servicing and other
fees................... 5,344 7,145 8,989 9,106 8,543 1,977 2,243
Interest................ 2,038 2,285 4,452 8,650 14,668 2,871 3,158
Other................... 116 32 20 144 176 29 38
-------- -------- -------- -------- -------- -------- --------
Total revenue.......... 24,159 29,468 35,950 45,802 58,880 5,963 14,810
Total expense........... 14,885 18,805 24,987 30,568 27,860 6,263 6,950
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income tax provision
(benefit).............. 9,274 10,663 10,963 15,234 31,020 (300) 7,860
Income tax provision
(benefit).............. 262 268 222 363 478 (5) 118
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 9,012 $ 10,395 $ 10,741 $ 14,871 $ 30,542 $ (295) $ 7,742
======== ======== ======== ======== ======== ======== ========
Dividends declared(1)... $ 4,991 $ 3,987 $ 5,853 $ 17,341 $ 12,205 $ 2,874 $ 15,101
PRO FORMA INCOME
STATEMENT DATA(2):
Income (loss) before
income tax provision
(benefit).............. $ 9,274 $ 10,663 $ 10,963 $ 15,234 $ 31,020 $ (300) $ 7,860
Income tax provision
(benefit).............. 3,724 4,282 4,403 6,200 12,772 (123) 3,233
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 5,550 $ 6,381 $ 6,560 $ 9,034 $ 18,248 $ (177) $ 4,627
======== ======== ======== ======== ======== ======== ========
LOANS ORIGINATED OR
PURCHASED(6):
Retail Branch
Originations........... $ 88,249 $ 93,596 $148,718 $151,338 $200,371 $ 32,298 $ 56,693
Portfolio Refinancing
Originations........... -- -- 47,189 70,501 16,195 9,045 5,586
Wholesale purchases..... -- 13,622 84,034 91,826 24,078 10,602 13,455
-------- -------- -------- -------- -------- -------- --------
Total.................. $ 88,249 $107,218 $279,941 $313,665 $240,644 $ 51,945 $ 75,734
======== ======== ======== ======== ======== ======== ========
LOANS SOLD(6):
Securitizations......... $ -- $ 39,024 $141,795 $350,331 $167,974 $ -- $ 52,420
Wholesale............... -- -- -- -- 51,542 3,528 21,536
Private................. 86,217 69,298 70,554 22,857 13,709 4,032 438
-------- -------- -------- -------- -------- -------- --------
Total.................. $ 86,217 $108,322 $212,349 $373,188 $233,225 $ 7,560 $ 74,394
======== ======== ======== ======== ======== ======== ========
SERVICING PORTFOLIO(3):
Private investor loans.. $194,024 $191,497 $150,657 $ 87,659 $ 65,404 $ 78,422 $ 61,431
Securitized loans(7).... 14,988 48,724 234,913 468,026 548,387 497,560 550,287
-------- -------- -------- -------- -------- -------- --------
Total.................. $209,012 $240,221 $385,570 $555,685 $613,791 $575,982 $611,718
======== ======== ======== ======== ======== ======== ========
FINANCIAL RATIOS AND
OTHER DATA:
Number of retail branch
offices(3)............. 10 11 11 13 17 14 18
Weighted average
interest rate on loan
originations and
purchases.............. 14.1% 13.6% 9.5% 8.7% 10.3% 10.8% 9.2%
Weighted average initial
combined loan-to-value
ratio:
Retail Branch and
Portfolio Refinancing
Originations.......... 49.0% 46.6% 52.4% 54.4% 58.6% 55.4% 60.4%
Wholesale purchases.... -- 61.4% 61.6% 60.5% 66.5% 64.0% 70.4%
Average retail loan
size................... $ 35.6 $ 35.9 $ 53.6 $ 66.1 $ 68.8 $ 58.3 $ 80.5
Weighted average loan
origination and
processing fees as a
percent of gross loans
originated as
applicable:
Retail Branch
Originations.......... 21.7% 22.2% 17.8% 15.6% 15.3% 16.1% 14.8%
Portfolio Refinancing
Originations.......... -- -- 2.5% 7.5% 13.0% 13.3% 5.6%
Total delinquencies as a
percentage of Servicing
Portfolio at end of
period................. 2.7% 5.0% 4.0% 4.3% 5.8% 4.7% 6.3%
REO as a percentage of
Servicing Portfolio at
end of period(4)....... .3% .6% .9% .6% 1.3% .7% 1.4%
REO losses as a
percentage of average
Servicing Portfolio
during the period(4)... -- .02% .02% .01% .03% -- .08%
Pre-tax income (loss) as
a percentage of total
revenue................ 38.4% 36.2% 30.5% 33.3% 52.7% (5.0)% 53.1%
</TABLE>
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
--------------------------------------- ---------------
1991 1992 1993 1994 1995 1995(5) 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 2,777 $ 1,111 $ 4,387 $ 5,298 $ 4,019 $ 1,809 $ 2,206
Loans held for sale(5).. 10,914 10,080 74,196 18,676 24,744 58,631 26,325
Residual Interests...... -- 2,792 6,879 11,645 19,705 12,283 20,732
Total assets............ 20,973 24,517 99,855 48,226 66,987 86,792 71,355
Total borrowings(5)..... 4,319 966 68,773 14,839 19,356 59,733 22,038
Stockholders' equity.... 15,158 21,566 26,454 23,984 42,321 20,815 34,962
</TABLE>
- --------
(1) Historical dividends are not necessarily indicative of dividends expected
to be declared in the future. See "Dividend Policy."
(2) Amounts reflect adjustments for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation.
(3) As of the end of the applicable period.
(4) Includes REO of the Company as well as REO of the REMIC Trusts and
serviced by the Company; however, excludes private investor REO not
serviced by the Company.
(5) The Company did not close a Securitization during the quarter ended March
31, 1995. As such, Loan origination and sale revenue for the quarter is
significantly lower and the balance of Loans held for sale and total
borrowings are significantly higher than if a Securitization were closed
within the quarter.
(6) Principal balance of loans.
(7) Includes Loans held for sale and loans receivable held for investment of
the Company.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data," the financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
GENERAL
Overview
The Company originates, purchases, sells and services non-conventional
mortgage loans secured primarily by first mortgages on single family
residences. The Company focuses on a distinct segment of the home equity
lending market by narrowly targeting its marketing efforts at homeowners
believed by management of the Company, based on historic customer profiles, to
be pre-disposed to using the Company's products and services while satisfying
its underwriting guidelines. The Company originates loans through its retail
branch network of 19 offices, six of which are located in California, two of
which are located in each of Illinois and Florida and one of which is located
in each of Oregon, Washington, Colorado, Utah, Arizona, New Jersey, Ohio,
Georgia and Pennsylvania. In addition, the Company purchases loans from
affiliated and qualified mortgage bankers that the Company has selected based
upon the quality of their origination process and has recently begun to
originate loans referred by unaffiliated brokers.
Prior to 1992, the Company sold its loans to private investors on a
servicing retained basis. Since that time, the Company has sold the majority
of its loans in the secondary market primarily through Securitization and
recently, to a lesser extent, through wholesale loan sales in which the
Company does not retain servicing rights. The Company's underwriting
guidelines require threshold credit criteria and combined loan-to-value limits
for loans sold through Securitizations. Accordingly, the Company sells on a
servicing released loan basis those loans which do not meet its risk criteria
for Securitization. The Company retains the right to service loans which it
has Securitized.
The Company's strategy of originating, as compared to purchasing, the
majority of its loan volume results in the generation of a significant amount
of loan origination fees. This income has allowed the Company to generate
positive operating cash flow. There can be no assurance, however, that the
Company's operating cash flow will continue to be positive in the future.
Certain Accounting Considerations
As a fundamental part of its business and financing strategy, the Company
sells the majority of its loans in Securitizations to REMIC Trusts in exchange
for Regular and Residual Interests. A significant portion of the Company's
income is derived by recognizing gains on sales of loans made pursuant to
these Securitizations. The Company records gains on sales of loans differently
for wholesale servicing released loan sales and for servicing retained sales
of loans through Securitization or to private investors.
Purchased loans are carried on the books of the Company at their acquisition
cost, while the net carrying value on the Company's books of originated loans
is equal to their principal balance less Net Deferred Origination Fees.
Gains on wholesale servicing released loan sales equal the difference
between the net proceeds to the Company from such sales and the loans'
acquisition cost (for purchased loans) or net carrying value (for originated
loans).
Gains on servicing retained sales of loans through Securitizations equal the
difference between the net proceeds to the Company in the Securitization and
the allocated cost of loans Securitized. Such net proceeds received in
Securitizations consist of the fair value of Regular Interests (determined by
the cash price for which they are then sold to the public) and the fair value
of the Residual Interests retained by the Company (determined
21
<PAGE>
as described below), net of transaction costs. The allocated cost of the loans
Securitized is determined by taking their acquisition cost (for purchased
loans) or net carrying value (for originated loans), and allocating such cost
or carrying value between the loans Securitized and the mortgage servicing
rights retained with respect thereto based upon their relative fair values.
The net proceeds of a Securitization consist of the Regular and Residual
Interests received by the Company. The Regular Interests are immediately sold
for cash by the Company. As the holder of the Residual Interests, the Company
is entitled to receive certain excess cash flows. These excess cash flows are
calculated as the difference between (a) principal and interest paid by
borrowers and (b) the sum of (i) pass-through interest and principal to be
paid to the holders of the Regular Interests, (ii) trustee fees, (iii) third-
party credit enhancement fees, (iv) servicing fees and (v) estimated loan pool
losses. The Company's right to receive this excess cash flow begins after
certain reserve requirements have been met, which are specific to each
Securitization and are used as a means of credit enhancement.
The Company carries Residual Interests at fair value. As such, the carrying
value of these securities is impacted by changes in market interest rates and
prepayment and loss experiences of these and similar securities. The Company
determines the fair value of the Residual Interests utilizing prepayment and
credit loss assumptions appropriate for each particular Securitization. To the
Company's knowledge, there is no active market for the sale of these Residual
Interests. The range of values attributable to the factors used in determining
fair value is broad. Accordingly, the Company's estimate of fair value is
subjective. Prepayments are expressed through a market convention known as a
constant prepayment rate ("CPR"). In its past Securitizations, the Company has
experienced a CPR on the Securitized loans ranging from 4.1% to 37.9%. Non-
conventional mortgage loans, and the Company's loans, historically prepay at a
faster rate than conventional mortgage loans. For the three years ended March
31, 1996, conventional fixed rate mortgage loans in the form of Federal
National Mortgage Association 30 year fixed rate mortgage pools have had CPRs
ranging from below 1.0% to almost 10.0%. At origination the Company utilized
prepayment assumptions ranging from 25.0% to 30.0%, estimated loss factor
assumptions of 0.5% and weighted average discount rates of 18.0%, 23.6% and
26.6%, for the years ended December 31, 1995, 1994 and 1993, respectively, to
value Residual Interests. Based upon the historical performance of its loans,
the Company expects its Securitized pools to have average lives of three to
five years. As of March 31, 1996, the Company's investments in Residual
Interests totaled $20.7 million.
To determine the fair value of the mortgage servicing rights, the Company
projects net cash flows expected to be received over the life of the loans.
Such projections assume certain servicing costs, prepayment rates and credit
losses. These assumptions are similar to those used by the Company to value
the Residual Interests. As of March 31, 1996, mortgage servicing rights
totaled $4.6 million.
There can be no assurance that the Company's estimates used to determine the
fair value of mortgage servicing rights will remain appropriate for the life
of each Securitization. If actual loan prepayments or credit losses exceed the
Company's estimates, the carrying value of the Company's mortgage servicing
rights may have to be written down through a charge against earnings. The
Company will not write up such assets to reflect slower than expected
prepayments, although slower prepayments may increase future earnings as the
Company will receive cash flows in excess of those anticipated. Fluctuations
in interest rates may also result in a write- down of the Company's mortgage
servicing rights in subsequent periods. The Company has never written down the
book value of its mortgage servicing rights for such reasons.
The three primary components of the Company's revenues are loan origination
and sale revenue, loan servicing and other fees and interest income. Loan
origination and sale revenue consists of gain on sale of loans and other fees.
A significant portion of gain on sale of loans is the recognition of Net
Deferred Origination Fees, which equaled $25.4 million, or 71.5% of loan
origination and sale revenue, during the year ended December 31, 1995.
22
<PAGE>
Loan servicing and other fee income represents fee income and other
ancillary fees received for servicing the loans. Mortgage servicing rights are
amortized against loan servicing and other fees over the period of estimated
net future servicing fee income.
As such, the carrying value of these securities is impacted by changes in
market interest rates and prepayment and loss experiences of these securities
and the overall market.
Interest income is comprised of two primary components: (i) interest on
loans held for sale during the Warehousing Period and (ii) the effective yield
on the Residual Interests. The Company recognizes interest income on a level
yield basis over the expected lives of the Securitized loans. As of each
reporting date the Company analyzes Residual Interests and new effective
yields are calculated which are used to accrue interest income in the
subsequent period.
Loan Origination and Purchases
The Company's ability to Securitize loans in the secondary market, and to
utilize the associated Warehouse Financing Facility pending such
Securitization, has allowed it to increase the overall return on loans sold.
Additionally, secondary market acceptance of 30 year fully amortizing fixed
and adjustable rate mortgages for the Company's customer base has allowed the
Company to offer loan products with more favorable payment terms to borrowers.
The Company believes that the wider array of loan products allowed by
increased secondary market liquidity, in conjunction with the expansion of its
retail branch network, have contributed significantly to the Company's
increased loan origination volume since 1992.
Retail Branch Originations have increased 127.1% to $200.4 million for 1995
from $88.2 million for 1991, and, in conjunction with Portfolio Refinancing
Originations and wholesale purchases, total loan originations and purchases
increased by 255.4% to a high of $313.0 million in 1994 from $88.2 million in
1991. In 1995, the Company ceased purchasing loans from one affiliated lender,
due to the lender's termination of lending operations. This lender was
providing the majority of the Company's wholesale loan purchase volume at that
time. See "Business-Loan Origination and Acquisition Through Brokers and
Lenders."
The Company's Portfolio Refinancing Originations consist primarily of loans
originated by the Company's centralized marketing and sales efforts. Such
efforts focus on preserving the Company's existing portfolio through
refinancing loans to borrowers who have inquired about prepaying their
existing loans. Loan origination fees for Portfolio Refinancing Originations
are less than fees for Retail Branch Originations as customary fees are waived
or reduced as an incentive to refinance with the Company. The Company does not
earn loan origination fees on loan purchases.
23
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Loan originations and
purchases:
Retail Branch
Originations......... $ 88,249 $ 93,596 $148,718 $151,338 $200,371 $ 32,298 $ 56,693
Portfolio Refinancing
Originations......... -- -- 47,189 70,501 16,195 9,045 5,586
Wholesale purchases... -- 13,622 84,034 91,826 24,078 10,602 13,455
-------- -------- -------- -------- -------- -------- --------
Total originations.. $ 88,249 $107,218 $279,941 $313,665 $240,644 $ 51,945 $ 75,734
======== ======== ======== ======== ======== ======== ========
Number of retail
branches as of the end
of the period
California.............. 10 11 11 11 7 10 7
Other States............ -- -- -- 2 10 4 11
-------- -------- -------- -------- -------- -------- --------
Total............... 10 11 11 13 17 14 18
======== ======== ======== ======== ======== ======== ========
Weighted average loan
origination and
processing fees as a
percent of gross loans
originated as
applicable:
Retail Branch
Originations......... 21.7% 22.2% 17.8% 15.6% 15.3% 16.1% 14.8%
Portfolio Refinancing
Originations......... -- -- 2.5% 7.5% 13.0% 13.3% 5.6%
Wholesale purchases... -- -- -- -- -- -- --
Average retail loan
size................... $ 35.6 $ 35.9 $ 53.6 $ 66.1 $ 68.8 $ 58.3 $ 80.5
Weighted average
interest rate.......... 14.1% 13.6% 9.5% 8.7% 10.3% 10.8% 9.2%
Servicing Portfolio as
of the end of the
period................. $209,012 $240,221 $385,570 $555,685 $613,791 $575,982 $611,718
</TABLE>
Loan Sales
The Company sells substantially all of the loans it originates or purchases,
either through loan sales or Securitizations. During the 1996 quarter 1995,
1994, 1993 and 1992, the Company sold $74.4, $233.2 million, $373.2 million,
$212.3 million and $108.3 million of loans, respectively. The volume of loans
sold decreased $140.0 million, or 37.5%, in 1995 from 1994 primarily because
of decreased Portfolio Refinancing Originations and wholesale loan purchases
due to curtailment of certain loan origination and purchase programs as well
as the timing of loan sales during such years. Of the loan sales in such
periods, 70.5%, 72.0%, 93.9%, 66.8%, and 36.0 %, respectively, were through
Securitizations.
Loan Servicing
Since its inception, the Company has generally sold loans, whether to
private investors or through Securitizations, and retained the right to
service the loans. Additionally, in 1995, the Company began selling loans on a
servicing released basis to other mortgage bankers. At December 31, 1995, the
Servicing Portfolio consisted of 8,809 loans with an aggregate principal
balance of $613.8 million. Revenue associated with loan servicing amounted to
14.5% of total revenues for the year ended December 31, 1995.
24
<PAGE>
Composition of Revenue and Expense
The following table summarizes certain components of the Company's
statements of operations set forth as a percentage of total revenue for the
periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
DECEMBER 31, MARCH 31,
-------------------- -----------------
1993 1994 1995 1995 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Loan Origination and Sale:
Gain (loss) on sale of loans
(excluding net loan origination
and other fees).................. 5.7% (3.4)% 15.3% -- % 9.5%
Net loan origination and other
fees............................. 56.8 64.3 45.0 18.2 53.8
Loan servicing and other fees....... 25.0 19.9 14.5 33.2 15.1
Interest............................ 12.4 18.9 24.9 48.1 21.3
Other............................... 0.1 0.3 0.3 0.5 0.3
----- ----- ----- ------- -------
Total revenue..................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------- -------
Expense:
Compensation and benefits........... 30.2 20.9 17.7 46.6 21.6
Professional services............... 3.6 3.3 1.2 4.4 1.8
Advertising......................... 8.2 7.2 7.4 18.0 6.3
Subservicing and other fees......... 1.8 2.2 2.1 4.5 1.3
Rents............................... 2.3 2.1 2.2 4.8 2.5
Supplies............................ 2.2 1.8 1.7 4.1 2.3
Depreciation and amortization of
property........................... 1.3 1.1 1.5 2.4 0.9
Interest............................ 5.9 8.2 7.1 10.3 5.2
Legal............................... 8.5 15.6 2.5 3.5 1.0
Other............................... 5.5 4.3 3.9 6.4 4.0
----- ----- ----- ------- -------
Total expense..................... 69.5 66.7 47.3 105.0 46.9
----- ----- ----- ------- -------
Net income (loss) before income tax
provision (benefit).................. 30.5 33.3 52.7 (5.0) 53.1
Income tax provision (benefit)........ 0.6 0.8 0.8 (0.1) 0.8
----- ----- ----- ------- -------
Net income (loss)..................... 29.9% 32.5 % 51.9% (4.9)% 52.3%
===== ===== ===== ======= =======
</TABLE>
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995
Revenue
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED
MARCH 31,
--------------
1995 1996
------ -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Loan origination and sale:
Gain (loss) on sale of loans(1)............................... $ -- $ 1,404
Net loan origination and other fees........................... 1,086 7,967
Loan servicing and other fees................................... 1,977 2,243
Interest........................................................ 2,871 3,158
Other........................................................... 29 38
------ -------
Total revenue............................................... $5,963 $14,810
====== =======
</TABLE>
- --------
(1) Excluding net loan origination and other fees.
25
<PAGE>
Total revenue increased to $14.8 million for the quarter ended March 31,
1996 from $6.0 million for the quarter ended March 31, 1995. The increase was
principally in loan origination and sale revenue due to the closing of a
Securitization of $52.4 million in loans in the quarter ended March 31, 1996.
No Securitizations were closed in the quarter ended March 31, 1995.
Loan origination and sale revenue increased to $9.4 million for the quarter
ended March 31, 1996 from $1.1 million for the quarter ended March 31, 1995.
For the quarter ended March 31, 1995, the Company did not realize any gain
(loss) on sale of loans (excluding net loan origination and other fees) on
loan sales of $7.6 million. For the quarter ended March 31, 1996, loan sales
totaled $74.4 million and the weighted average gain on sales of loans as a
percentage of loan principal balances was 1.9%, including recognition of $1.0
million of capitalized mortgage servicing rights. The increase in loan sales
was primarily due to an increase in volume of wholesale loan sales, which
increased from $3.5 million in the quarter ended March 31, 1995, to $21.5
million in the quarter ended March 31, 1996, and the closing of a
Securitization of $52.4 million in the quarter ended March 31, 1996. No
Securitizations were closed in the quarter ended March 31, 1995. Loans held
for sale totaled $26.3 million and $58.6 million at March 31, 1996 and March
31, 1995, respectively.
Loan origination fees are deferred and recognized only upon sale of the
loan. Net loan origination and other fees increased $6.9 million from $1.1
million for the quarter ended March 31, 1995 to $8.0 million for the quarter
ended March 31, 1996 due to the increased volume of loan sales.
Loan servicing and other fees increased $0.3 million in the quarter ended
March 31, 1996 as compared to the quarter ended March 31, 1995, primarily due
to an increase in prepayment penalties of $0.5 million, or 88.1%, resulting
from an increase in overall portfolio prepayments for which the Company
receives prepayment penalties. This increase in prepayments is the result of
an increasing servicing portfolio and a change in 1994 in the terms of loans
originated by the Company that has enabled the Company to collect prepayment
fees on a greater percentage of adjustable rate loans.
Interest income represents the recognition of the yield on Residual
Interests in securities retained by the Company, interest earned on loans
originated or purchased during the Warehousing Period from their origination
or purchase until their sale, and interest earned on loans receivable held for
investment. Interest income increased $0.3 million in the quarter ended March
31, 1996 as compared to the quarter ended March 31, 1995 primarily due to an
increase in interest income from Residual Interests of $0.8 million, offset by
a decrease in interest earned on loans held for sale of $0.4 million and
interest earned on loans receivable held for investment of $0.3 million. The
58.7% increase in interest income from Residual Interests was primarily due to
the growth of the Company's portfolio of Residual Interests from an average of
$12.0 million in the quarter ended March 31, 1995 to $20.2 million for the
quarter ended March 31, 1996 as a result of net Residual Interests originated.
Interest income on loans held for sale decreased 35.8% in the quarter ended
March 31, 1996, as a result of a decrease in average interest rates on loans
held for sale and a decrease in the average balance of loans held for sale.
The decrease in the interest income from loans receivable held for investment
was principally the result of a decrease of 37.6% in the average gross balance
of loans held for investment.
26
<PAGE>
Expense
The following table sets forth the components of the Company's expenses for
the periods indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED
MARCH 31,
-----------------------
1995 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Compensation and benefits............................... $2,780 $3,196
Professional services................................... 264 269
Advertising............................................. 1,071 940
Subservicing and other fees............................. 266 192
Rent.................................................... 285 370
Supplies................................................ 246 335
Depreciation and amortization of property............... 144 139
Interest................................................ 613 763
Legal................................................... 206 146
Other................................................... 388 600
----------- -----------
Total expense......................................... $6,263 $6,950
=========== ===========
</TABLE>
Total expense increased 11.0% to $7.0 million for the quarter ended March
31, 1996 from $6.3 million for the quarter ended March 31, 1995. The increase
is primarily due to expenses associated with the increases in the Company's
loan origination volume.
Compensation and benefits increased by $0.4 million and advertising expense
decreased by $0.1 million in the quarter ended March 31, 1996 as compared to
the the quarter ended March 31, 1995, primarily as a result of the increased
loan origination volume in the quarter ended March 31, 1996 and the Company's
decisions to reduce the use of outside telemarketing services in 1996 and
increase the number of employees in its internal telemarketing operations.
Interest expense increased 24.5% to $0.8 million in the quarter ended March
31, 1996 as compared to the quarter ended March 31, 1995, primarily as a
result of a 47.8% increase in the average outstanding balance of the Warehouse
Financing Facility, offset by a 15.2% decrease in the average interest rate
charged on such Facility.
Other expenses increased by $0.2 million in the quarter ended March 31, 1996
as compared to the quarter ended March 31, 1995, primarily as a result of
expenses incurred in the moving of the Company's administrative offices in
February 1996 and increased travel and employee relocation expenses as the
Company continues to expand its retail branch operations outside of
California.
Income Taxes
Since May 1, 1988, the Company has elected to be treated for Federal income
and certain state tax purposes as an S corporation under Subchapter S of the
Code and comparable state laws. As a result, the Company's provisions for
income taxes have in the past reflected modest corporate level state income or
franchise taxes for those states in which the Company operates. The taxable
income of the Company during such periods has been included in the individual
taxable income of its shareholders for Federal and state income tax purposes.
Immediately prior to the Closing Date, the Chisick Family will revoke the
Company's S corporation status and, after the Closing Date, the Company will
be fully subject to Federal and state taxes. At that time, the Company's
effective income tax rate will approximate the Federal and composite state
income and franchise tax rates (net of Federal benefit).
A corporation will be treated as a Personal Holding Company ("PHC") if (i)
five or fewer individuals own more than 50% of the value of the stock of such
corporation (the "PHC Ownership Test"), and (ii) at least 60% of such
corporation's adjusted ordinary gross income is from dividends, interest,
rents, royalties, annuities and certain other sources (the "PHC Income Test").
Under the Code, a PHC will be subject to tax (the "PHC Tax") equal to 39.6% of
such PHC's undistributed income. The PHC Tax is in addition to the corporate
income tax imposed on a PHC.
27
<PAGE>
Prior to the Closing, the Company was an S corporation and therefore was not
subject to the PHC Tax. After the Closing, as a result of the Chisick Family's
ownership in the Company, the Company will meet the PHC Ownership Test. The
Company does not anticipate that it will meet the PHC Income Test in the
future, and therefore does not anticipate being treated as a PHC. Additionally,
the Company intends to monitor carefully its sources of income and to structure
its affairs so as to avoid being a PHC.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Revenue
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan origination and sale:
Gain (loss) on sale of loans(1)..................... $ 2,056 $(1,547) $ 8,982
Net loan origination and other fees................. 20,433 29,449 26,511
Loan servicing and other fees......................... 8,989 9,106 8,543
Interest.............................................. 4,452 8,650 14,668
Other................................................. 20 144 176
------- ------- -------
Total revenue..................................... $35,950 $45,802 $58,880
======= ======= =======
</TABLE>
- --------
(1) Excluding net loan origination and other fees.
Total revenues increased 28.6% to $58.9 million for 1995 from $45.8 million
for 1994, which in turn represented an increase of 27.4% from $36.0 million
for 1993. The increases in both years were primarily due to increased loan
origination and sale revenue and increased interest income from Residual
Interests.
Loan origination and sale revenue increased 27.2% to $35.5 million for 1995
from $27.9 million for 1994, which in turn represented an increase of 24.1%
from $22.5 million in 1993.
Gain (loss) on sales of loans (excluding net loan origination and other
fees) increased to a gain of $9.0 million in 1995 from a loss of $1.5 million
in 1994. This increase was due primarily to increased premiums on loan sales
which was partially offset by a decrease in the volume of loans sold. The
weighted average gain (loss) on sales of loans as a percentage of loan
principal balances increased to a weighted average gain on sale of loans of
3.9% in 1995 from a weighted average loss on sale of loans in 1994 of 0.4%.
Such increase was primarily the combined result of (i) increased interest rate
spreads (the difference between the weighted average loan interest rates for
the Securitized pools and the weighted average pass-through rates paid to
holders of the Regular Interests less servicing, trustee and insurance fees
and estimated credit losses) in Residual Interests created in 1995
Securitizations over 1994 Securitizations, which increased to 2.04% in 1995
from a weighted average initial interest rate spread of 1.20% in 1994
primarily as a result of more stable interest rates during 1995; (ii)
decreased levels of initial required REMIC overcollateralization, which
decreased from $2.8 million, or .81% of the related Regular Interests
balances, in 1994 to $0.1 million or .04% of the related Regular Interests
balances in 1995 Securitizations; and (iii) recognition of $3.9 million of
capitalized mortgage servicing rights originated during 1995 due to the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 122 in
1995 (accordingly no such assets were recognized in 1994). The 1995 volume of
loans sold decreased $140.0 million, or 37.5%, to $233.2 million, from $373.2
million in 1994 primarily as a result of decreased Portfolio Refinancing
Originations and wholesale loan purchases due to the curtailment of certain
loan
28
<PAGE>
origination programs and the timing of loan sales during such years. At
December 31, 1995, 1994 and 1993, loans held for sale totaled $24.7 million,
$18.7 million and $74.2 million, respectively.
Gain (loss) on sales of loans (excluding net loan origination and other
fees) decreased in 1994 by $3.6 million to a loss of $1.5 million from a gain
of $2.1 million in 1993 due primarily to decreased premiums received over the
principal balance recognized on loan sales which was partially offset by a
increase in the volume of loans sold. The weighted average gain (loss) on
sales of loans as a percentage of loan principal balances decreased to a
weighted average loss on sale of loans of 0.4% in 1994 from a weighted average
gain on sale of loans in 1993 of 1.0%. Such decrease was primarily the
combined result of (i) decreased interest rate spreads in Residual Interests
created in 1994 Securitizations from 1993 Securitizations, which decreased
from a weighted average initial interest spread of 3.24% in 1993 to 1.20% in
1994 primarily as a result of sharply rising interest rates during 1994; (ii)
increased levels of initial required REMIC Trust overcollateralization, which
increased from $0.7 million, or .52% of the related Regular Interests
balances, in 1993 Securitizations to $2.8 million, or .81% of related Regular
Interests balances, in 1994 Securitizations; and (iii) recognition of
$1.0 million of capitalized excess servicing receivables associated with sales
of loans to private investors originated in 1993 (no such assets were
recognized in 1994).
Included in gain on sales of loans (excluding net loan origination and other
fees) in 1995 and 1994 are losses of $255,000 and gains of $800,000,
respectively, resulting from the Company's hedging of interest rate risk
related to loans held for sale during such periods. The Company did not
initiate its hedging activities until 1994. The Company from time to time
hedges against the impact of rapid changes in interest rates on the value of
such loans from the time the Company commits to fund or purchase such loans
until the date of their securitization or sale. During 1995 and 1994, hedging
transactions were limited to selling short United States Treasury securities
and prefunding loan originations in its Securitizations. The timing, nature
and quantity of such hedging transactions is determined by the management of
the Company based on various factors, including market conditions and the
expected volume of commitments to fund or purchase mortgage loans.
Loan origination fees are deferred and recognized only upon sale of the
loan. While Retail Branch Originations increased in 1995 over 1994 net loan
origination and other fees decreased $2.9 million, or 10.0%, to $26.5 million
for 1995 primarily due to lower sales of Retail Branch Originations in 1995.
The volume of sales of such loans decreased in 1995 due to the postponement
until 1994 of a significant volume of 1993 Retail Branch Originations held for
sale at year end 1993. Retail Branch Originations generally carry higher loan
origination fees than Portfolio Refinancing Originations. The Company does not
earn loan origination fees on wholesale loan purchases.
Net loan origination and other fees increased $9.0 million, or 44.1%, to
$29.4 million for 1994 due to higher sales of Retail Branch Originations in
1994. Retail loan originations did not increase materially in 1994 over 1993,
however, the volume of retail loan sales increased in 1994 due to the sale in
1994 of a significant volume of 1993 retail loan originations held for sale at
year end 1993.
Loan servicing and other fees decreased $0.6 million, or 6.2%, in 1995 as
compared to 1994 primarily due to a decrease in loan servicing fees of $0.4
million and an increase of $0.2 million in compensating interest paid by the
Company as servicer with respect to prepayments of Securitized loans. This
decrease was partially offset by an increase in prepayment penalty fees of
$0.2 million. Loan servicing fees decreased in 1995 due to a decrease in the
weighted average servicing rate earned on the Company's Servicing Portfolio
which was partially offset by an increase in the dollar volume of the
Company's Servicing Portfolio. The weighted average servicing rate decreased
from 1.10% in 1994 to 0.82% in 1995 primarily as a result of the amortization
of prepayments of the portfolio of loans sold to private investors that
generally carry higher servicing rates than Securitized loans. The Company's
average outstanding Servicing Portfolio balance increased to $584.7 million in
1995 from $470.6 million in 1994. In conjunction with the servicing of
Securitized loan pools, the Company is required to remit one entire month's
interest to the REMIC Trust for all loans which are paid off prior to their
maturity. This amount includes both actual interest collected and
"compensating interest" which together equal one full month of interest on the
prior month's loan balance. The increase in compensating interest offsetting
loan servicing
29
<PAGE>
Loan servicing and other fees increased $0.1 million, or 1.3%, in 1994 as
compared to 1993. This increase was primarily due to an increase in prepayment
penalties of $0.4 million which was partially offset by an increase in
compensating interest of $0.2 million. Prepayment penalties increased during
1994, notwithstanding an aggregate decrease in Servicing Portfolio
prepayments, due to an increase in the proportion of prepayments of
Securitized loans versus private investor loans. The Company retains all
prepayment penalties for Securitized loans serviced and only a portion of such
for private investor serviced loans. In 1994, prepayments of Securitized loans
comprised 46.7% of total prepayments as compared to 17.2% in 1993. The
increase in compensating interest offsetting loan servicing revenue is due to
the 152.6% increase in Securitized loans paid off during 1994 as compared to
1993.
Interest income increased $6.0 million, or 69.6%, in 1995 as compared to
1994. Interest income from Residual Interests in securities increased $4.0
million in 1995 due to the combined effect of growth in the Company's
portfolio of Residual Interests, which increased from an average of $10.3
million in 1994 to $14.5 million in 1995, and an increase in the weighted
average effective yield on Residual Interests. The increase in the effective
yield in Residual Interests is primarily due to the favorable performance of
the Residual Interests acquired in 1993 and 1994 as compared to assumptions
for loss, prepayment and delinquency rates used in computing their fair value
at origination. Interest income from loans held for sale increased $0.9
million in 1995 due to an increase in the weighted average interest rate on
loans originated and purchased which increased from approximately 8.7% in 1994
to 10.3% in 1995. The average balance of loans held for sale did not change
significantly, even though total loan originations decreased, due to a longer
Warehousing Period in 1995. Interest on loans receivable held for investment
increased $1.0 million from 1994 to 1995 due to increases in the average
balance of loans receivable held for investment and the accretion of related
purchase discounts.
Interest income increased $4.2 million, or 94.3%, in 1994 as compared to
1993. Interest income from Residual Interests increased $2.2 million in 1994
due to growth of Residual Interests, which increased from an average of $4.1
million in 1993 to $10.3 million in 1994, and an increase in the weighted
average effective yield on Residual Interests. Interest income from loans held
for sale increased $1.5 million in 1994 primarily due to a 43.2% increase in
the average balance of loans held for sale. This increase was partially offset
by a decrease in the weighted average interest rate on loans held for sale as
the weighted average interest rate on loans originated and purchased decreased
from approximately 9.5% in 1993 to 8.7% in 1994. Interest on loans receivable
held for investment increased $0.3 million from 1993 to 1994 due primarily to
increases in the average balance of loans receivable held for investment.
Expense
The following table sets forth the components of the Company's expenses
during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Compensation and benefits.............................. $10,847 $ 9,559 $10,395
Professional services.................................. 1,288 1,521 697
Advertising............................................ 2,958 3,316 4,345
Subservicing and other fees............................ 659 1,019 1,212
Rent................................................... 815 974 1,278
Supplies............................................... 791 831 992
Depreciation and amortization of property.............. 483 514 907
Interest............................................... 2,106 3,744 4,167
Legal.................................................. 3,044 7,162 1,491
Other.................................................. 1,996 1,928 2,376
------- ------- -------
Total expense........................................ $24,987 $30,568 $27,860
======= ======= =======
</TABLE>
30
<PAGE>
Total expense decreased 8.9% to $27.9 million for 1995 from $30.6 million in
1994, which in turn represented an increase of 22.3% from $25.0 million for
1993. The decrease in 1995 was primarily due to decreases in legal expense and
professional services offset by increases in compensation and benefits,
advertising and interest expense. The increase in 1994 was due primarily to
increases in legal and interest expense offset by a decrease in compensation
and benefits.
Compensation and benefits expense increased by 8.7% to $10.4 million for
1995 from $9.6 million for 1994, which in turn represented a decrease of 11.9%
from $10.8 million in 1993. The 1995 increase primarily relates to an 11%
increase in average employee headcount, which was partially offset by a $0.2
million decrease in health insurance costs related to the Company's conversion
of employee coverage to a more affordable health maintenance organization
program. The 1994 decrease in compensation and benefits expense is primarily
due to a bonus paid to Mr. Chisick of $3.0 million in 1993 and was offset by
an increase in other compensation and benefits that was the combined result of
a 10% increase in average employee headcount during 1994 and compensation
increases for existing employees.
Professional services expense decreased $0.8 million, or 54.2%, in 1995 as
compared to 1994. In 1994, certain of the Company's Portfolio Refinancing
Origination programs included the utilization of outside consultants.
Advertising expense increased $1.0 million, or 31.0%, in 1995 over 1994
primarily as a result of the increase in the number of retail branch offices.
Retail Branch Originations increased $49.0 million, or 32.4%, in 1995 over
1994.
Sub-servicing and other fees incurred by the Company increased by $0.2
million, or 18.9%, during 1995 as compared to 1994, and by $0.4 million, or
54.6%, during 1994 as compared to 1993. From the introduction of adjustable
rate mortgages in 1993 until February 1996, the Company contracted with a
third party to sub-service such loans. In the first quarter of 1996, the
Company terminated the third party and now services all adjustable and fixed
rate loans in its Servicing Portfolio. In 1995, 1994 and 1993, the Company's
average portfolio of adjustable rate loans serviced was $275.1 million, $242.3
million and $33.6 million, respectively.
Rent expense increased by $0.3 million, or 31.2%, during 1995 as compared to
1994. In addition to scheduled rent increases on existing properties, the
Company entered into leases on nine new retail branch offices related to the
national expansion of the retail branch network during 1995.
Depreciation and amortization of property increased $0.4 million, or 76.5%,
in 1995 over 1994. This increase is primarily related to the write off in 1995
of the remaining book value of the Company's loan servicing system of $0.2
million due to implementation of a new software system.
Interest expense increased $0.4 million, or 11.3%, in 1995 as compared to
1994 due to increases in interest expense on the Warehouse Financing Facility
of $0.3 million and interest expense related to stockholder notes payable of
$0.2 million. Increased interest expense associated with the Warehouse
Financing Facility was due to an increase in the weighted average interest
rate on the Warehouse Financing Facility, which increased to 7.10% in 1995
from 5.96% in 1994 and which was partially offset by a decrease in the average
balance outstanding. Increased interest expense associated with stockholder
notes payable was due to an increase in the average balance outstanding during
1995.
Interest expense increased $1.6 million, or 77.8%, in 1994 as compared to
1993 due to an increase in interest expense on the Warehouse Financing
Facility of $2.1 million which was partially offset by a decrease in interest
expense related to stockholder notes payable of $0.6 million. Increased
interest expense associated with the Warehouse Financing Facility was due to a
140.9% increase in the average balance outstanding. Decreased interest expense
associated with stockholder notes payable was due to an decrease in the
average balance outstanding during 1994.
31
<PAGE>
Legal expense decreased $5.7 million during 1995 as compared to 1994, and
increased $4.1 million in 1994 as compared to 1993. The Company was named as
the defendant in a class action suit filed in December of 1989. During 1994
and 1993, the Company recorded legal expenses and estimated settlement costs
of $7.0 million and $2.3 million, respectively, related to this matter. See
"Legal Proceedings." Additionally the Company incurred approximately $0.4
million in legal fees in 1994 as the plaintiff in litigation which fees were
offset by a $1.3 million judgment in favor of the Company.
Other expense increased $0.4 million, or 23.2%, during 1995 as compared to
1994. Such increase is primarily due to an increase in travel expenses of $0.3
million during 1995 related to the Company's national retail branch network
expansion.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow. The Company's
sources of cash flow include loan sales, loans sold through Securitizations,
net interest income and borrowings under its Warehouse Financing Facility. At
origination of a loan, the Company includes the loan origination fee in the
principal balance. The Company then borrows approximately the principal amount
of the loan (subject to collateral valuation limitations) under the Warehouse
Financing Facility and disburses to the borrower the loan amount less the loan
origination fee. Thus, the Company receives cash in the amount of the loan
origination fee at the time of the Warehouse Financing Facility funding and
prior to the time the Company recognizes such fee as a component of gain on
sale of loans, which occurs upon the sale of the loan. The magnitude of the
Company's loan origination fees is a significant factor in the Company's
historical positive operating cash flow.
The Company's uses of cash include the funding of loan originations and
purchases, payment of interest expenses, repayment of the Warehouse Financing
Facility, funding of initial overcollateralization requirements for
Securitizations, operating and administrative expenses, income taxes and
capital expenditures. Capital expenditures totaled $1.0 million, $0.9 million
and $0.6 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Prepaid expenses and other assets increased $2.3 million from
$1.6 million at December 31, 1994 to $3.9 million at December 31, 1995. A $0.5
million balance outstanding under a line of credit extended to a related party
loan broker at December 31, 1995 did not exist at December 31, 1994 and
receivables related to Residual Interest distributions and interest on loans
increased by $0.9 million. In addition, refundable deposits and deposits on
property acquisitions increased by $0.5 million.
The Company's sale of loans through Securitizations has generally resulted
in gains on Securitization recognized by the Company. Substantially all of the
proceeds of a Securitization, net of fees and costs of the Securitization, are
used to repay the Warehouse Financing Facility. Additionally, in a
Securitization, the Company receives Residual Interests and capitalizes
mortgage servicing rights, each of which creates non-cash taxable income. The
value of the mortgage servicing rights capitalized represents the present
value of estimated net cash flows to be received in the future and constitutes
a non-cash gain on which the Company is required to pay income tax. Therefore,
the income tax payable and the expenses related to the Securitization on these
factors negatively impact the Company's cash flow. For the years ended
December 31, 1995, 1994, and 1993, the Company recognized gain on sale of
loans through Securitization, including the recognition of Net Deferred
Origination Fees, of $26.7 million, $25.0 million and $14.0 million,
respectively. The Company anticipates that the majority of future loan sales
will be through Securitization.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans, are essential to the continuation of the
Company's ability to originate and purchase loans. During 1995, 1994 and 1993,
the Company used cash in the approximate amounts of $213.9 million, $289.3
million and $257.9 million, respectively, for new loan originations and
purchases. During the same periods, the Company received cash of proceeds from
the sale of loans and Regular Interests in securities of $232.3 million,
$368.0 million and $209.5 million, respectively. After utilizing available
working capital, the Company borrows money to fund its loan originations and
purchases, and repays these borrowings as the loans are sold. Upon the sale of
loans and the subsequent repayment of borrowings, the Company's working
capital and Warehouse
32
<PAGE>
Financing Facility then become available to fund additional loan originations
and purchases. The Company's Warehouse Financing Facility is secured by loans
originated or purchased by the Company and currently bears interest at the
rate of .875% over 30 day LIBOR. Amounts borrowed under the Warehouse
Financing Facility and not used to originate or purchase loans that are
included in a Securitization in which the lender under the Warehouse Financing
Facility is the underwriter are subject to an additional fee equal to 25 basis
points of such borrowings. The Warehouse Financing Facility contains
affirmative, negative and financial covenants typical of such credit
facilities. This Warehouse Financing Facility is renewable by the lender on a
quarterly basis and currently expires on the sooner of the closing of a
Securitization or September 30, 1996. This Warehouse Financing Facility was
originated in 1993 and has been renewed in varying amounts over the last 3
years. Management expects, although there can be no assurance, that the
Company will be able to maintain this Warehouse Financing Facility (or obtain
replacement or additional financing) in the future.
As indicated above, the Company's ability to continue to originate and
purchase loans is dependent, in part, upon its ability to sell the loans in
the secondary market in order to generate cash proceeds for new originations
and purchases. The value of and market for the Company's loans are dependent
upon a number of factors, including general economic conditions, interest
rates and governmental regulations. Adverse changes in such factors may affect
the Company's ability to sell loans for acceptable prices within a reasonable
period of time. A prolonged, substantial reduction in the size of the
secondary market for loans of the type originated or purchased by the Company
may adversely affect the Company's ability to sell loans in the secondary
market with a consequent adverse impact on the Company's results of
operations, financial condition and ability to fund future originations and
purchases.
As a result of the Company's treatment as an S corporation for Federal and
state income tax purposes, the Company historically has made distributions to
its shareholders for the payment of income taxes on the earnings of the
Company and to provide them with a return on their investment. The Company
paid dividends, including amounts for taxes of $12.2 million, $17.3 million
and $5.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Prior to the Closing Date, the Chisick Family will revoke the
Company'sS corporation status. The Company anticipates that, after payment of
the S Distribution Notes, any earnings will be retained for the foreseeable
future in the operations of the business. "See Prior S Corporation Status" and
"Dividend Policy."
The Company believes that cash flow from operations, the net proceeds of the
Public Offering, the net proceeds from Securitizations and the availability
under the Warehouse Financing Facility will be sufficient to fund operating
needs, capital expenditures and payment of the S Distribution Notes for the
ensuing 12 months.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122 "Accounting for Mortgage Servicing Rights." SFAS No. 122 amends SFAS
No. 65 "Accounting for Certain Mortgage Banking Activities," to require that
mortgage banking entities recognize as a separate asset rights to service
mortgage loans for others. Mortgage banking entities that acquire or originate
loans and subsequently sell or Securitize those loans with retained servicing
rights are required to allocate the total cost of the loans to the mortgage
servicing rights and the mortgage loans. As a result of the adoption of SFAS
No. 122, in the future the Company will recognize a greater amount of revenue
at the time a loan is sold and a lesser amount of revenue during the time such
loan is serviced. The Company is also required on an ongoing basis to assess
the servicing rights for impairment based upon the fair value of those rights.
SFAS No. 122 was adopted by the Company as of January 1, 1995, and resulted in
additional income of approximately $3.9 million, included in loan origination
and sale revenue, for the year ended December 31, 1995.
In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which encourages companies to account for stock compensation
awards based on their fair value at the date the awards are granted. SFAS No.
123 does not require the application of the fair value method and allows for
the continuance of current accounting method, which requires accounting for
stock compensation awards based on their intrinsic value as
33
<PAGE>
of the grant date. However, SFAS No. 123 requires proforma disclosure of net
income and, if presented, earnings per share, as if the fair value based
method of accounting defined in this Statement had been applied. The
accounting and disclosure requirements of this statement are effective for
financial statements for fiscal years beginning after December 15, 1995,
though earlier adoption is encouraged. The Company, at this time, has not
determined whether or not to adopt the recognition provisions of SFAS No. 123
with respect to the Stock Incentive Plan.
34
<PAGE>
BUSINESS
GENERAL
The Company originates, purchases, sells and services non-conventional
mortgage loans secured primarily by first mortgages on single family
residences. The Company focuses on a distinct segment of the home equity
lending market by narrowly targeting its marketing efforts at homeowners
believed by management of the Company, based on historic customer profiles, to
be pre-disposed to using the Company's products and services and satisfying
its underwriting guidelines. The Company does not market to individuals
seeking to buy a home because it is unlikely such individuals would meet the
Company's loan-to-value requirements. The Company originates loans through its
centralized telemarketing operations, its direct mailing campaigns and its
expanding retail branch network of 19 offices currently located in 12 states.
The Company also purchases loans from certain related party originators, and
has recently begun to originate loans referred by other third party brokers.
The Company's customers, who principally use the loans from the Company to
consolidate indebtedness or to finance other consumer needs rather than to
purchase homes, consist of two primary groups. The first category of the
Company's customers are individuals who are unable to obtain mortgage
financing from banks, savings and loan institutions and other companies that
have historically provided loans to individuals with favorable credit
characteristics ("Conventional Lending Institutions"). These individuals often
have impaired or unsubstantiated credit characteristics and/or unverifiable
income and respond favorably to the Company's marketing. The Company's second
category of customers consists of individuals who could qualify for loans from
Conventional Lending Institutions but instead choose to use the Company's
products and services. The Company's experience has shown that these
individuals are attracted to the Company's high degree of personalized service
and timely response to loan applications. Each category of customers has
historically been willing to pay the Company's loan origination fees and
interest rates, which are typically higher than the fees and rates charged by
Conventional Lending Institutions.
The Company believes its concentrated marketing effort on a potential
customer pool that, based on historic customer profiles, displays a
statistical pre-disposition for being consumers of the Company's products and
services and satisfying the Company's underwriting guidelines provides a more
efficient use of its marketing expenditures and leads to a higher marketing
success rate than a broad indiscriminate marketing approach aimed at a wide
array of homeowners. To produce these potential customer pools, the Company
utilizes a proprietary marketing methodology that generally consists of the
subjective analysis and comparison of certain statistical characteristics of
its traditional customers. See "Business--Marketing and Sales--Marketing."
Management of the Company applies this analysis to information obtained from a
number of outside sources with respect to new or existing markets to develop a
list of homeowners who display characteristics that make them likely customers
for the Company's products and services and acceptable underwriting risks. The
Company then focuses its telemarketing and mailing efforts on these identified
homeowners.
The Company's ability to fund and subsequently Securitize loans in the
secondary market has significantly improved its financial performance and
allowed it to offer new and enhanced loan products. These benefits of
Securitization, in conjunction with the Company's retail branch network
expansion, have contributed significantly to the increase in the Company's
loan origination volume to $216.6 million in 1995 from $93.6 million in 1992.
The Company sells substantially all of its loans in the secondary market
either through Securitization or, to a lesser extent, loan sales. Since the
Company's initial use of Securitization in 1992 and through June 30, 1996, the
Company has effected the majority of its loan sales through Securitizations;
during such period $826.8 million of loans were Securitized and sold by the
Company. The Company anticipates selling a significant portion of its loan
origination volume during 1996 and thereafter through Securitizations. The
Company intends to hold the residual interests in its Securitizations until
their maturity. Accordingly, the Company's policy has been to require
threshold credit criteria and combined loan-to-value limits for loans included
in the REMIC Trusts. The Company sells a smaller amount of its loans through
servicing released sales of whole loans that do not meet the Company's risk
criteria for inclusion in the REMIC Trusts. When the marketing representatives
of the Company originate a potential loan that does not meet the underwriting
35
<PAGE>
guidelines of the Company, the Company sells the loan to unaffiliated
companies on a servicing-released basis, allowing the Company to generate
origination fees without incurring credit risk. The Company continues to
service the loans that it has sold through Securitizations and to private
investors.
The Company's loan originations during the years ended December 31, 1995,
1994 and 1993 were $216.6 million, $221.8 million and $ 195.9 million,
respectively. The Company's retail loan originations during the year ended
December 31, 1995 had an average principal balance of $68,800, a weighted
average initial interest rate of 10.3%, and a weighted average initial
combined loan-to-value ratio of 58.6%.
The Company is a holding company that owns, directly or indirectly, all of
the outstanding capital stock of (i) FAMCO, (ii) First Alliance Services,
Inc., a company recently formed to provide financial, accounting and computer
services to the Company and others, and (iii) two corporations recently
organized under the laws of the United Kingdom to facilitate the Company's
proposed expansion. Immediately prior to the consummation of the Public
Offering, the Chisick Family will contribute to the Company the newly-formed
corporations described above and will receive no consideration therefor,
except as a stockholder of the Company.
MARKETING AND SALES
Marketing
The Company's marketing efforts are designed to identify, locate and focus
on individuals who, based on the Company's historic customer profiles, display
a statistical pre-disposition for being a consumer of the Company's products
and services and satisfying the Company's underwriting guidelines. Based on
the experience of management, the Company believes its focused marketing
effort provides a more efficient use of its marketing expenditures and leads
to a higher marketing success rate than a broad indiscriminate marketing
approach aimed at a wide array of homeowners.
The Company utilizes a proprietary marketing methodology. Under this
proprietary marketing methodology, management subjectively analyzes the
Company's historical customer base to find characteristics common to its
customers. These common characteristics are integrated with information
obtained from a number of outside sources with respect to the homeowner pool
in new or existing markets. The characteristics of individual homeowners and
their properties in the homeowner pool are compared with the characteristics
common to the Company's historical base to identify and locate homeowners and
their properties ("Targeted Homeowners") displaying characteristics that make
them likely to be customers for the Company's products and services and to
satisfy its underwriting guidelines.
In general, the factors analyzed by the Company in identifying Targeted
Homeowners include prior consumer finance borrowing, home value, the amount of
equity in the home and the length of time a homeowner has owned the home.
Credit problems, a lack of a significant credit history and prior borrowings
from consumer finance companies indicate a homeowner is unlikely to be able to
obtain loans from Conventional Lending Institutions, and thus is a more likely
candidate for the Company's products and services. Similarly, the Company's
experience indicates that a longer ownership period usually results in
significant equity in the home for the homeowner, creating an opportunity for
a loan that will satisfy the Company's conservative loan-to-value
requirements.
Management continually refines the Company's proprietary marketing
methodology. The Company uses statistical models from time to time, but
management may adjust the variables to more accurately identify potential
customers in a given market. The Company continually monitors the performance
of its marketing campaigns in evaluating the effectiveness of its methodology
in identifying Targeted Homeowners in each market.
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<PAGE>
While the Company has utilized mass marketing in the past, management has
decided that focusing its marketing efforts on Targeted Homeowners produces a
greater yield for its marketing expenditures and leads to more opportunities
for loan origination. The majority of the Targeted Homeowners who become
customers of the Company generally use the proceeds of their loans from the
Company to consolidate outstanding mortgage and consumer debt, lower their
monthly payments or make home improvements, and rarely purchase homes with the
proceeds of such loans.
Targeted Marketing
By focusing its marketing efforts on Targeted Homeowners who, based on the
Company's historic customer profile, are statistically pre-disposed to satisfy
the Company's underwriting guidelines, the Company eliminates from its
marketing efforts many homeowners and subject properties that would not
satisfy such guidelines. The Company's marketing personnel, including
telemarketing staff, appraisers, loan officers, branch managers and
headquarters personnel are trained to be aware of the Company's underwriting
guidelines and, as described below, review each loan lead to eliminate
Targeted Homeowners whose overall qualifications and properties would not
satisfy such guidelines.
Mailing Campaigns and Telemarketing
The Company's mailing and telemarketing campaigns focus on the Targeted
Homeowners generated by the Company's proprietary marketing methodology. The
Company targets the communities surrounding its 19 retail branch offices by
utilizing many different mailing campaigns focusing on the multiple benefits
of the Company's services and loan products. The Company distributes over 1
million pieces of mail monthly. All of the Company's mailing campaigns
originate from its mail processing center in Orange, California. The Company's
mailing campaigns result in over 4,000 inbound loan inquiry calls from
Targeted Homeowners monthly. The Company continually monitors the
effectiveness of each of its mailing campaigns and will continue, modify or
discontinue a particular mailing campaign based on the results of such
monitoring.
The Company's telemarketing department handles both inbound and outbound
calls from and to Targeted Homeowners and existing customers. Substantially
all of the inbound calls are from Targeted Homeowners responding to the
Company's mailing campaigns. The Company monitors the effectiveness of each
mailing campaign by tracking which campaign is the source of each inbound
call. The outbound telemarketing department uses computerized predictive
dialers to continually solicit the Targeted Homeowners and the Company's
current customers. Telemarketing representatives also place follow up calls to
prospective borrowers who have previously set and canceled appointments to
have a Company appraiser visit and inspect the subject property and obtain
information about the applicant (an "Appraisal Appointment"), failed to show
up for an appointment with a loan officer in a retail branch office to prepare
loan documents (a " Sales Appointment") or declined a loan program offered to
them by the Company.
The Company understands its practice to be different from that of its
competitors in that the centralized telemarketing department at the Company's
facilities in southern California handles all screening and produces all
initial Appraisal Appointments with the Targeted Homeowners. The centralized
telemarketing department, not the retail branch office personnel, is
responsible for converting loan inquiries into appointments. The Company
believes its centralized telemarketing practice creates greater operating
efficiencies by allowing task specialization and periodic reallocation of
telemarketing resources to meet geographic needs.
The telemarketing representative's responsibility is to sell the benefits of
the Company's products and services, obtain information from the Targeted
Homeowner about themselves, the subject property, the equity in the subject
property and the purpose of the loan, and, assuming this initial information
satisfies the Company's underwriting guidelines, to schedule an Appraisal
Appointment. By focusing on the equity in the subject property, the
telemarketing phase screens out Targeted Homeowners and properties whose
characteristics would not satisfy the Company's underwriting guidelines.
37
<PAGE>
Individual telemarketing representatives are rated and compensated based on
the number of Appraisal Appointments set. The Company monitors the performance
of its telemarketing staff on a weekly and monthly basis.
Appraisal
The Company's valuation process occurs throughout the loan application
process. In some cases, the first stage valuation occurs immediately after a
telemarketing representative sets an Appraisal Appointment. Staff at the
Company's headquarters gathers publicly available information with respect to
recent sales of comparable properties in the same area as the subject
property. The value of the subject property is verified by the comparable
sales data. Only inquiries of applicants that satisfy this stage of the
initial underwriting process will be verified and forwarded to the respective
branches for Appraisal Appointments.
The property is appraised typically within two days of the initial
telemarketing contact and provides a valuable marketing opportunity. This
appraisal is the applicant's first face-to-face contact with the Company's
representatives and the Company stresses to its appraisers the importance of
the marketing aspect of their positions. The appraiser's responsibilities are
to obtain additional information and required documentation about the
applicant, perform a complete appraisal of the subject property, and schedule
a Sales Appointment. The appraiser gathers and delivers to the branch office
the applicant's relevant documents, including the current mortgage documents,
if any, evidence of ownership to the subject property and information
regarding other bills to be refinanced with the new loan.
Appraisers at the Company's headquarters, not third party fee appraisers,
perform a review of the property appraisal on the following loan applications:
(i) all properties with a market value above $150,000, (ii) all loans with a
loan-to-value ratio of equal to or greater than 62%, (iii) all loan
applications prepared by a new branch office for the first 90 days of its
existence, (iv) all income properties, and (v) all non-California loans with a
loan-to-value ratio equal to or greater than 55% or with values less than
$100,000 not otherwise reviewed.
Unlike many of its competitors, the Company does not use independent fee-
based appraisers. Instead, the Company recruits, hires and trains its own
field and desk appraisers. In connection with the Securitization of the
Company's loans, independent appraisers have conducted appraisals of a sample
of the subject properties that are the collateral for the Securitized loans.
The appraisals performed by the Company's appraisers have been within 1.5% of
the aggregate appraisal values on Securitization pools to date as calculated
by the independent appraisers.
The Company hires certified appraisers in those states which require such
designation. Individual appraisers are rated and incented based on the number
of Sales Appointments set and the ongoing quality of the appraisals performed.
The Company monitors the performance of its appraisers on a weekly and monthly
basis.
Loan Production
The retail branch offices are responsible for the sales process that, if
successful, converts the Sales Appointments set by the appraisers into
packaged and underwritten loan files to be submitted to the Company's quality
control department. Each Sales Appointment allows the sales personnel to
clearly determine the applicant's need for financing, tailor a loan program to
fit the applicant's financial needs, continue to underwrite the loan package
and provide to the applicant a choice of loan products and a detailed
explanation thereof.
The loan officer utilizes a loan origination software system developed by
the Company to preliminarily determine an applicant's qualification for the
various products of the Company, and the terms that will be applicable to such
products. The loan origination system incorporates the Company's underwriting
guidelines with respect to the relevant collateral, credit quality, character,
and capacity to repay. For over a decade, the Company has relied upon a
proprietary credit scoring system in its underwriting process. Prior to each
Sales Appointment, the retail branch loan officer or branch manager will run a
credit report for each applicant and determine the applicant's overall credit
score. All accounts on an applicant's credit report, including mortgage
38
<PAGE>
loans, are reviewed and assigned a value based on the performance of the
account. Based upon applicants' credit scores, they are preliminarily
designated as an "A", "B", "C" or "D" risk. This designation is reviewed by
the Company's centralized quality control department before the final
underwriting phase. See "Business--Underwriting."
Once an applicant has agreed to the terms of the proposed loan, loan
documents reflecting such terms are executed by such applicant in two distinct
phases in accordance with the requirements of the Home Ownership Equity
Protection Act of 1994 and forwarded to the Company's centralized quality
control department.
The typical retail branch office consists of a branch manager, one to two
loan officers, one to two appraisers and one to two loan processors. The
Company generally recruits and hires its managers and loan officers in the
location of the branch office. The Company focuses on the professional sales
experience of candidates for loan officer positions. Candidates are required
to submit evidence of substantial recent personal income from sales
employment. The interviewing process includes a panel interview that requires
candidates to perform a simulated loan presentation utilizing the Company's
proprietary sales script. Loan officer and branch manager candidates are
required to successfully complete four weeks of sales and technical
underwriting training to learn the Company's sales presentation and procedures
prior to their placement in a retail branch. Existing retail branch office
sales personnel return to corporate headquarters quarterly for continuing
sales training.
Loan officers and branch managers are rated and compensated based on the
number of loans signed, approved by the loan committee and closed. The Company
strives to develop its loan officers and to promote the most qualified loan
officers to branch managers. The Company monitors the performance of its loan
officers and branch managers on a weekly and monthly basis.
Repeat Business and Preservation of Loan Portfolio
A significant number of the Company's borrowers are repeat borrowers of the
Company. Once a loan is funded, the Company maintains a relationship with its
borrowers to ensure borrower satisfaction and to respond to any future
borrowing needs. For the quarter ended March 31, 1996 and the full year 1995,
34.3% and 13.4%, respectively, of the total volume of loan originations were
to repeat borrowers.
Many competitors in the Company's markets obtain publicly available
information with respect to the Company's borrowers and solicit such borrowers
for additional borrowing or refinancing. The Company's portfolio refinancing
programs have allowed it to retain a significant number of borrowers who might
otherwise have obtained additional borrowing or refinanced their existing
mortgages with the Company's competitors.
LOAN ORIGINATION AND ACQUISITION THROUGH BROKERS AND LENDERS
The Company has historically augmented its loan production by purchasing
loans from other affiliated, unaffiliated and related party brokers and
lenders. Currently, the Company purchases loans originated by Nationscapital
Mortgage Corporation ("Nationscapital") and Coast Security Mortgage ("Coast
Security"), which are beneficially owned by the sons of Brian and Sarah
Chisick. Additionally, the Company funds loans originated by unaffiliated loan
brokers. The Company has entered into mortgage loan purchase agreements with
each originator which require specified minimum levels of experience in
origination of non-conventional mortgage loans and provide representations,
warranties and buy-back provisions identical to the representations and
warranties required of the Company for the Securitization of its own loan
originations.
Historically, the Company has made wholesale loan purchases from other
affiliated, unaffiliated and related party brokers and lenders to augment the
volume of the Company's loan sales and securitization activity. Recently, the
Company has decided to limit its acquisition of loans from brokers and lenders
to those loans which meet its criteria for Securitization due to
dissatisfaction with the profitability of wholesale purchase and sales of
loans.
39
<PAGE>
During 1994 and 1995, the Company purchased the majority of its wholesale
loan purchase volume from a subsidiary of First Alliance Securities
Corporation, a company wholly-owned by Brian and Sarah Chisick. These
purchases were made pursuant to agreements similar to those entered into with
unaffiliated sellers of loans to the Company. In 1995, First Alliance
Securities Corporation and its subsidiary permanently terminated their lending
operations.
UNDERWRITING
The Company believes its underwriting process begins with the marketing of
its products and services. The Company has designed its marketing programs to
screen out each time information is gathered during its marketing efforts
those homeowners and subject properties that do not meet the Company's
underwriting guidelines. As an integral part of its marketing programs, the
Company trains its telemarketing representatives, appraisers and loan officers
to assess each loan application and subject property against the Company's
underwriting guidelines.
The main underwriting and quality control functions are centralized at the
Company's headquarters. The most significant of the Company's underwriting
functions at headquarters are performed by senior management. The Company
maintains a quality control department and a loan committee. Each loan
application file is reviewed by the Company's loan committee. The loan
committee works in conjunction with the quality control department to provide
a final review of the underwriting and the terms of the potential loan. The
Company strives to process each loan application received from its retail
branch network as quickly as possible in accordance with the Company's loan
application approval procedures. Accordingly, most loan applications receive
decisions within three days of receipt and are funded within ten days of
approval.
Each retail branch office submits executed initial applications to the
quality control department. The quality control department reviews in its
entirety every loan file originated by the retail branch offices as well as
wholesale originators. Loan files are reviewed for completeness, accuracy, and
compliance with the Company's underwriting criteria and applicable
governmental regulations. Based on their initial review, quality control
personnel inform branch office personnel of additional requirements that must
be fulfilled to complete the loan file, such as additional proof of income.
After a full review by quality control personnel, each initial loan
application file is forwarded to the loan committee for approval. These
documents are again subjected to a full review. Loans that clearly conform to
the Company's underwriting guidelines are approved at the first level. Loans
that present certain underwriting issues are forwarded to senior underwriting
personnel.
The decision of the loan committee to approve a loan is based upon a number
of factors, including the appraised value of the property, the applicant's
creditworthiness and the Company's perception of the applicant's ability to
repay the loan. With respect to the value of the collateral, generally, loans
secured by first mortgages are limited to a maximum of 75% loan-to-value
ratio; however, the Company will originate loans with a loan-to-value ratio of
up to 85% for loans expected to be sold. Loans secured by second mortgages are
limited to a maximum of 70% loan-to-value ratio. With respect to
creditworthiness, the Company has established classifications with respect to
the credit profiles of loans and subject properties based on certain of the
applicant's characteristics. Each loan application is placed into one of the
Company's four ratings ("A" through "D," with subratings within those
categories), depending upon the following three primary factors: (i) an
applicant's credit score under the Company's proprietary credit scoring
system, which uses information obtained from national credit bureau reports,
(ii) loan-to-value ratios and (iii) debt-to-income ratios. Terms of loans made
by the Company vary depending upon the classification of the application.
Applications with lower classifications generally are subject to higher
interest rates. A loan application must obtain the following thresholds with
respect to each of the three primary factors to be included in the particular
ratings shown below:
<TABLE>
<CAPTION>
"A" "B" "C" "D"
------ ----- ----- ----
<S> <C> <C> <C> <C>
Borrower Credit Score 100-87 86-64 63-36 35-0
Maximum of Loan-to-Value 75% 73% 72% 65%
Maximum of Debt-to-Income Ratio 40% 49% 59% 65%
</TABLE>
40
<PAGE>
While the Company primarily analyzes the three factors noted above, the
Company also reviews other factors to determine whether an application will be
subject to a higher interest rate than the interest rate applicable to the
rating under which such application has initially been placed. These include
factors such as an unsubstantiated employment history, a recent foreclosure
proceeding, a number of recent delinquent payments on an existing mortgage, a
recent bankruptcy filing, the presence of a senior mortgage or zoning
restrictions on the subject property or a loan-to-value ratio in excess of
71%. Based on this analysis, the loan committee approves, rejects or
restructures the proposed loan.
The following table reflects the risk classification for the Company's loan
originations and purchases for the periods indicated.
CLASSIFICATION OF LOAN ORIGINATIONS AND PURCHASES FOR THE QUARTER ENDED
MARCH 31, 1996
<TABLE>
<CAPTION>
LOAN TOTAL % OF WEIGHTED
CLASSIFICATION (AMOUNT IN THOUSANDS) TOTAL AVERAGE COUPON
-------------- --------------------- ----- --------------
<S> <C> <C> <C>
"A" Risk......................... $41,065 54.2% 8.6%
"B" Risk......................... 16,382 21.6 9.3
"C" Risk......................... 12,345 16.3 10.0
"D" Risk......................... 5,942 7.9 11.1
------- -----
Total.......................... $75,734 100.0% 9.2%
======= =====
</TABLE>
CLASSIFICATION OF LOAN ORIGINATIONS AND PURCHASES FOR THE YEAR ENDED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
LOAN TOTAL % OF WEIGHTED
CLASSIFICATION (AMOUNT IN THOUSANDS) TOTAL AVERAGE COUPON
-------------- --------------------- ----- --------------
<S> <C> <C> <C>
"A" Risk......................... $129,922 54.0% 9.8%
"B" Risk......................... 48,793 20.3 10.4
"C" Risk......................... 42,488 17.7 11.3
"D" Risk......................... 19,441 8.0 11.9
-------- -----
Total.......................... $240,644 100.0% 10.3%
======== =====
</TABLE>
LOAN ORIGINATIONS AND PURCHASES
The following table highlights certain selected information relating to the
origination of loans by the Company during the periods shown.
LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
FOR THE
QUARTER
FOR THE YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
-------------------- ------------
1994 1995 1995 1996
--------- --------- ----- -----
<S> <C> <C> <C> <C>
Type of property securing loan:
Single family.................. 92.4% 95.0% 96.3% 95.9%
Multi family................... 5.4 2.7 2.4 2.2
Planned Unit Development and
Other......................... 2.2 2.3 1.3 1.9
--------- --------- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0%
========= ========= ===== =====
Type of mortgage securing loan:
First mortgage................. 95.4% 94.5% 90.2% 98.6%
Second mortgage................ 4.4 5.4 9.4 1.4
Third mortgage................. .2 .1 0.4 --
--------- --------- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0%
========= ========= ===== =====
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
FOR THE
QUARTER
FOR THE YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ----------
1994 1995 1995 1996
--------- --------- ---- ----
<S> <C> <C> <C> <C>
Weighted average interest rate..... 8.7% 10.3% 10.8% 9.2%
Weighted average initial combined
loan-to-value ratio(1)............ 56.2% 59.4% 57.1% 62.2%
</TABLE>
- --------
(1) The loan-to-value ratio of a loan secured by a senior mortgage is
determined by dividing the amount of the loan by the appraised value of
the mortgaged property at origination. The combined loan-to-value ratio of
a loan secured by any junior mortgage is determined by taking the sum of
the loan secured by such mortgage and any senior mortgages and dividing by
the appraised value of the mortgaged property at origination.
FINANCING AND SALE OF LOANS
The Company finances the origination and purchase of loans with borrowings
under the Warehouse Financing Facility and internally generated cash flows.
See "Liquidity and Capital Resources" for a discussion of the basis for
positive operating cash flows. Securitization allows the Company to manage its
credit risk and cash flow and diversify its exposure to the potential
volatility of the capital markets. In addition, the Company sells on a
servicing released basis those loans that do not meet its criteria for
Securitization. Following the Public Offering, the Company will continue to
rely on these sources of capital, in addition to the proceeds of the Public
Offering, to finance its operations.
Warehouse Financing Facilities
The Company has a secured revolving line of credit of up to $125 million.
Under the Warehouse Financing Facility, the Company may borrow and repay
during the 90-day revolving period up to $125 million. Advances under the
Warehouse Financing Facility bear interest at 0.875% over 30 day LIBOR.
Amounts borrowed under the Warehouse Financing Facility and not used to
originate or purchase loans that are included in a Securitization in which the
lender under the Warehouse Financing Facility is the underwriter are subject
to an additional fee equal to 25 basis points of such borrowings. The
Warehouse Financing Facility contains affirmative, negative and financial
covenants typical of such credit facilities.
The Company recently executed a letter of intent with another lender with
respect to a supplemental warehousing facility (the "Supplemental Warehousing
Facility") in the amount of $25 million. Advances under the Supplemental
Warehousing Facility will bear interest at 0.80 % over 30 to 90 day LIBOR.
Securitization
The Company's Securitization program is an integral part of the Company's
business plan because it allows the Company to increase its loan origination
and purchase volume, more efficiently service its Servicing Portfolio and
reduce the risks associated with interest rate fluctuations. Since the
Company's initial use of Securitization in 1992 and up through June 30, 1996,
the Company has sold $826.8 million of loans through ten publicly underwritten
and two privately placed Securitizations, all of which were rated "AAA/Aaa."
For the quarter ended March 31, 1996 and for the year ended December 31, 1995,
the Company Securitized $52.4 and $168.0 million or 69.2% and 69.8% of its
loan origination and purchase volume, respectively, representing 68.1% and
75.4% of the Company's loan origination and sale revenue for those periods.
The Company currently intends to complete quarterly Securitizations either in
private placements or in public offerings.
In a Securitization, the Company sells a pool of loans to a REMIC Trust in
exchange for Residual Interests and Regular Interests. While the Company
retains the Residual Interests, it immediately sells the Regular Interests and
uses the proceeds to repay borrowings under the Warehouse Financing Facility
to finance the pool of loans. The holders of the Regular Interests are
entitled to receive scheduled principal collected on the pool of Securitized
loans and interest at the pass-through interest rate on the certificate
balance. The Residual Interests held by the Company represent the subordinated
right to receive cash flows from the pool of Securitized loans
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<PAGE>
after payment of the required amounts to the holders of the Regular Interests
and the costs associated with the Securitization. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Certain
Accounting Considerations" for a discussion of the Company's accounting
treatment of the gain on sale of loans and other aspects of its
Securitizations.
To improve the level of profitability from the sale of Securitized loans,
the Company arranges for credit enhancement to achieve an improved credit
rating on the Regular Interests issued. This credit enhancement generally
takes the form of an insurance policy, issued by a monoline insurance company,
insuring the holders of the Regular Interests of timely payment of the
scheduled pass-through interest and principal. In addition, the pooling and
servicing agreements that govern the distribution of cash flows from the loan
pool included in the REMIC Trusts typically require overcollateralization as
an additional means of credit enhancement. Overcollateralization requires an
initial deposit, the sale of loans at less than par or retention in the REMIC
Trust of collections from the pool until a specified overcollateralization
amount has been attained. This retention of excess cash flow creates a faster
amortization of the scheduled balance of the Regular Interests than the
amortization of the principal balance of the Securitized loan pool. The
purpose of the overcollateralization is to provide a source of payment in the
event of higher than anticipated credit loss. Losses resulting from defaults
by borrowers on the payment of principal or interest on the loans in the
Securitized pool will reduce the overcollateralization to the extent that
funds are available and may result in a reduction in the value of the Residual
Interests held by the Company. If payment defaults exceed the amount of
overcollateralization and current excess cash flow, the insurance policy will
pay any further losses experienced by holders of the Regular Interests in the
related REMIC Trust. In the event of a shortfall, the insurance policy for
such Securitization pays interest when due and all principal.
Generally, the Company sells to the REMIC Trust, the loans at face value
except when it sells loans at less than par for overcollateralization purposes
and without recourse except that certain representations and warranties with
respect to the loans are provided by the Company. The Company may be required
either to repurchase or to replace loans that do not conform to such
representations and warranties. To date, the Company has not been required
under the pooling and servicing agreements to substitute or repurchase any
loans sold in completed Securitizations.
The Company retains the servicing rights to the loans it Securitizes. The
Company also receives prepayment and other fees on Securitized loans.
Interest Rate Risk Management
The Company's profitability is in part determined by the difference, or
"spread," between the effective rate of interest received on the loans
originated or purchased by the Company and the interest rates payable under
its Warehouse Financing Facility during the Warehousing Period or for Regular
Interests issued in Securitizations. The spread can be adversely affected
after a loan is originated or purchased and while it is held during the
Warehousing Period by increases in the interest rate demanded by investors in
Securitizations. In addition, because the loans originated or purchased by the
Company have fixed and variable rates, the Company bears the risk of narrowing
of the spread because of interest rate increases during the period from the
date the loans are originated or purchased until the closing of the sale or
Securitizations of such loans.
The Company has implemented a hedging program designed to provide a level of
protection against the impact of rapid changes in interest rates on the value
of fixed rate loans from the time the Company commits to fund or purchase such
loans to the date of their Securitization or sale. The Company does not hedge
the interest rate risk associated with holding adjustable rate mortgages
pending their sale or Securitization due to the decreased significance of such
risk because the pass-through rates for Regular Interests related to the
Company's adjustable rate mortgage pools are also adjustable although not
necessarily in the same period.
43
<PAGE>
The Company's hedging program was initiated in 1994. During the first
quarter of 1996, 1995 and 1994, hedging transactions were limited to selling
short United States Treasury securities and prefunding loan originations in
its Securitizations. United States Treasury securities are utilized by the
Company due to the liquidity of the market for such securities and the high
degree of correlation between such securities and the pass-through interest
rates for Regular Interests in the Company's fixed rate mortgage pools.
Prefunding accounts are structured in some of the Company's Securitizations
from time to time. Prefunding allows the Company to deliver loans to a REMIC
Trust after the date of its closing, allowing the Company to fix the
relationship between the interest rates charged on loans and the pass-through
rates for Regular Interests in the mortgage pools.
The Company may from time to time utilize various financial instruments in
its hedging activities. The nature and quantity of hedging transactions are
determined by the Company's management based on various factors, including
market conditions and the expected volume of mortgage loan originations and
purchases. To decrease market risk, only highly liquid instruments are
utilized in the Company's hedging activities. By their nature, however, all
such instruments involve risk, and the maximum potential loss may exceed the
value at which such instruments are carried. As is customary for these types
of instruments, the Company does not require collateral or other security from
counterparties to these instruments. The Company manages its credit exposure
to counterparties through credit approvals, credit limits and other monitoring
procedures.
Wholesale Loan Sales
Certain loans originated or purchased by the Company are not chosen for
inclusion in a REMIC Trust. These loans may include loans with higher than
acceptable loan-to-value ratios or loans that have unacceptable credit risk.
The Company will originate these loans because it earns the origination fees
and will sell such loans on a servicing released basis in order to avoid
credit risk related to such loans. During the quarter endedMarch 31, 1996 and
the year ended December 31, 1995, the Company sold $21.5 million and $51.5
million, or 28.4% and 21.4%, respectively, of its loan origination and
purchase volume through loan sales in which servicing rights are transferred.
The Company anticipates that it will continue to sell certain loans on a
wholesale basis.
Private Investor Sales
Prior to 1992, the Company sold its loan origination volume to private
investors. Since the Company's utilization of Securitization in 1992, its use
of loan sales to private investors has declined. The Company has retained the
servicing rights to the loans it has sold to private investors. The Company
does not anticipate selling more than an insignificant amount of its loan
origination or purchase volume to private investors in the future.
SERVICING
The Company retains the right to service the loans it originates and
purchases (other than loans sold through wholesale loan sales). Loan servicing
includes collecting payments from borrowers, remitting payments to investors
who have purchased the loans, investor reporting, accounting for principal and
interest, contacting delinquent borrowers, conducting foreclosure proceedings
and disposing of foreclosed properties. The Company's Servicing Portfolio
includes 8,787 loans with an outstanding balance of $611.7 million as of March
31, 1996. The Company receives servicing fees ranging from .50% to 2.5% per
annum for fixed rate loans and .50% to 1.0% per annum for adjustable rate
loans, based upon the outstanding balance of the pool of loans in a REMIC
Trust for its duties relating to the accounting for and collection of the
loans. The Company currently services only Company originated or purchased
loans and does not service outside loans. Revenue generated from loan
servicing amounted to 15.1% of total revenues for the quarter ended March 31,
1996.
The Company has recently installed a sophisticated computer-based loan
servicing software that it believes enables it to provide effective and
efficient processing of loans. The system, which is able to service fixed and
adjustable rate loans, provides the Company with, among other things, payment-
processing, cashiering, collection and reporting functions.
44
<PAGE>
The Company believes its aggressive collection practices contribute to the
relatively low loss rates on its Servicing Portfolio. The following table
illustrates the time line of the Company's collection practices, assuming (i)
the loan is originated in California and (ii) a ten day grace period applies
by contract or under applicable law:
<TABLE>
<CAPTION>
TIME EVENT
---- -----
<C> <S>
1st day of the month Borrower loan payments
due
11th day of the month Payment not received is
late
13th day of the month Notice of past due
payment mailed to
borrower
20th day of the month Foreclosure notice
mailed to borrower
26th day of the month Final notice mailed to
borrower
42 days after due date File forwarded to
foreclosure department
which records notice of
default on 45th day of
delinquency
After notice of default or similar notice is recorded Borrower informed of
status and the Company's
reinstatement period
dates
During the Company's reinstatement period Pre-foreclosure
appraisal performed
End of the Company's reinstatement period Notice of sale recorded
and trustee's sale date
scheduled Property sold
to third party or
acquired on behalf of
the Company
</TABLE>
The borrower is contacted by telephone subsequent to recording the notice of
default to inform the borrower of the situation and of the date that will
permit a sale of the subject property by the trustee. If the borrower does not
bring the loan current within the the Company's reinstatement period, a notice
of sale is published and a trustee's sale date is scheduled. During this
period of time, the Company performs a pre-foreclosure appraisal of the
property to determine whether changes in the value of the property have
occurred since the date of origination. If the loan is not reinstated, the
property is either sold to a third party at the trustee's sale or acquired on
behalf of the Company. The Company forecloses as quickly as state regulations
allow. The Company contracts on a nationwide basis with an independent
foreclosure service to facilitate the foreclosure process on properties
located outside of California. For delinquent loans originated within
California, the Company performs foreclosure procedures internally. Properties
acquired by the Company ("REO") are managed by the Company with the objective
of immediate refurbishment and sale.
In other states, the Company's collection procedures described above may
occur sooner or later depending upon state specific foreclosure regulations.
In September 1993, the Company began originating adjustable rate loans. At
that time, the Company contracted with a third party to sub-service all
adjustable rate loan originations. Over the past year, the Company's
acquisition of loan servicing software has enabled the Company to service
adjustable rate loans and, as of October 1995, the Company terminated its sub-
servicing contract with the third party. Effective February 1, 1996, the
portion of the Company's loan portfolio previously sub-serviced was
transferred to the Company.
The Company's loan servicing software also allows the Company to track and
maintain hazard insurance information. Periodic expiration reports list all
policies scheduled to expire within 30 days. When policies lapse, a letter is
issued advising the borrower of the lapse and that the Company will obtain
force placed insurance at the borrower's expense. Additionally, the Company
has a blanket insurance policy in place that provides coverage for the Company
in the event that the Company fails to obtain force placed insurance in a
timely manner upon expiration of the homeowner's policy.
45
<PAGE>
The following table provides data on delinquency experience and REO
Properties for the Company's Servicing Portfolio.
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
-------------------- -------------------- --------------------
(DOLLARS % OF (DOLLARS % OF (DOLLARS % OF
IN SERVICING IN SERVICING IN SERVICING
THOUSANDS) PORTFOLIO THOUSANDS) PORTFOLIO THOUSANDS) PORTFOLIO
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Servicing Portfolio..... $555,685 100.00% $613,791 100.00% $611,718 100.00%
-------- ------ -------- ------ -------- ------
30-59 days delinquent... $ 6,084 1.1% $ 8,339 1.4% $ 11,800 1.9%
60-89 days delinquent... 4,471 0.8 6,538 1.0 5,166 0.8
90 days or more 13,589 2.4 21,002 3.4 21,800 3.6
delinquent............. -------- ------ -------- ------ -------- ------
Total delinquencies..... $ 24,144 4.3% $ 35,879 5.8% $ 38,766 6.3%
REO (1)................. $ 3,386 0.6% $ 7,854 1.3% $ 8,677 1.4%
</TABLE>
- --------
(1) Includes REO of the Company as well as REO of the REMIC Trusts and
serviced by the Company; however, excludes private investor REO not
serviced by the Company.
The following table provides data on loan loss experience on the Company's
loans (in thousands).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE QUARTER
DECEMBER 31, 1994 DECEMBER 31, 1995 ENDED MARCH 31, 1996
------------------ ------------------ --------------------
<S> <C> <C> <C>
Average Servicing
Portfolio balance
outstanding (1) $470,628 $584,738 $612,755
Net losses (2).......... 44 169 465
As a percent of average
Servicing Portfolio
balance outstanding.... .01% .03% .08%
</TABLE>
- --------
(1) Average Servicing Portfolio balance equals the average of the Servicing
Portfolio balance at the beginning and ending period.
(2) Net losses means actual net losses realized with respect to the
disposition of the REO.
Foreclosure
Regulation and practices in the United States regarding the liquidation of
properties (e.g., foreclosure) and the rights of the mortgagor in default vary
greatly from state to state. Loans originated by the Company are secured by
mortgages, deeds of trust, trust deeds, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action and/or non-judicial sale, and is subject to
various notice and filing requirements. If foreclosure is effected by judicial
action, the foreclosure proceedings may take several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation during a statutorily prescribed reinstatement period. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorneys' fees, which may be recovered by a lender.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
junior mortgage loan unless it forecloses subject to each senior mortgage, in
which case the junior lender or purchaser at such a foreclosure sale will take
title to the property subject to the lien securing the amount due on the
senior mortgage. Moreover, if a borrower has filed for bankruptcy protection,
a lender may be stayed from exercising its foreclosure rights. Also, certain
states provide a homestead exemption that may restrict the ability of a lender
to foreclose on residential property. In such states, the Company requires the
borrower to waive his or her right of homestead. Such waivers of homestead
rights may not be enforceable in certain states.
46
<PAGE>
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the amount of the lender's lien. Such a lack
of bidding is due to several factors, including the difficulty of determining
the exact status of title to the property, the possible deterioration of the
property during the foreclosure proceedings and the requirement that the
purchaser pay for the property in cash or by cashier's check. Thus, the
foreclosing lender often purchases the property from the trustee or referee
for an amount equal to the principal amount outstanding under the loan,
accrued and unpaid interest and the expenses of foreclosure. Depending upon
market conditions, the proceeds of the subsequent resale by the Company may
not be adequate to cover the Company's investment in the property. If, after
determining that purchasing a property securing a loan will minimize the loss
associated with the defaulted loan, the Company may bid at the foreclosure
sale for such property or accept a deed in lieu of foreclosure.
Prior to a foreclosure, the Company performs a foreclosure analysis with
respect to the mortgaged property to determine the value of the mortgaged
property and the bid that the Company will make at the foreclosure sale. This
is based on (i) a current valuation of the property obtained through a drive-
by appraisal conducted by an appraiser, (ii) an estimate of the sales price of
the mortgaged property, (iii) an evaluation of the amount owed, if any, to a
senior mortgagee and for real estate taxes and (iv) an analysis of marketing
time, required repairs and other costs, such as real estate broker fees, that
will be incurred in connection with the foreclosure sale.
All foreclosures (except California) are managed by independent contractors
located in the same state as the mortgaged property. Bankruptcies filed by
borrowers are managed by local counsel retained by the Company for loans
originated in California. For those loans originated outside California,
bankruptcies filed by borrowers are managed by appropriate local counsel who
are required to provide monthly reports on each loan file.
CURRENT MARKETS AND EXPANSION PLANS
Current Markets
The Company is licensed or registered to originate loans in twelve states
through its 19 retail branch offices. The Company believes that its strategy
of originating loans through an extensive retail branch office network
represents the most profitable loan origination strategy due to the
significant level of loan origination fees earned by the Company.
Additionally, such a strategy allows the Company to maintain its underwriting
quality standards when compared to competitors using independent mortgage
brokers. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Although the Company is licensed to originate loans in twelve states, it has
historically concentrated its business in California. While this concentration
has declined, California remains a significant part of the Company's business
and has contributed 44.0% and 43.0% of the Company's total loan originations
and purchases for the quarter ended March 31, 1996 and year ended December 31,
1995, respectively. Six of the retail branch offices are in California's major
metropolitan areas. Expansion outside California began in late 1994. The
number of retail branch offices within California has declined from a
historical high of 11 in 1992 to six at June 30, 1996.
47
<PAGE>
The following table shows the geographic distribution of the Company's loan
originations and purchases for the periods indicated.
GEOGRAPHIC DISTRIBUTION OF LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
----------------------- -----------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
States
California......... 94.3% 43.0% 51.0% 44.0%
Illinois........... -- 14.1 8.7 14.7
Washington......... 3.4 14.9 23.1 11.3
Florida............ 0.1 8.1 0.4 8.2
Colorado........... 0.4 6.7 6.6 5.4
Oregon............. 0.2 5.9 5.2 6.1
Utah............... -- 2.5 0.1 4.9
Arizona............ 0.1 1.7 -- 2.8
Georgia............ 0.2 2.7 3.6 1.7
Others............. 1.3 0.4 1.3 0.9
----------- ----------- ----------- -----------
Total: .......... 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== ===========
</TABLE>
Nationwide and International Geographic Expansion
The Company intends to expand its existing retail branch network in selected
states on a nationwide basis. The Company currently plans to open at least
four new retail branches per year. The Company has also recently organized a
subsidiary under the laws of the United Kingdom to pursue retail originations
and wholesale purchases in the United Kingdom. The Company's expansion
strategy involves (i) identifying areas with demographic statistics that are
comparable to existing markets where the Company has been successful in
originating loans, (ii) understanding each new market's regulatory
requirements and tailoring the Company's loan programs and practices to comply
with such requirements and (iii) identifying and training branch managers and
loan officers for each new retail branch office.
The Company believes that its products and services are best suited for
those housing markets with home values near the national averages. After
identifying a potential new market, the Company contracts with regional or
national companies to gather publicly available information with respect to
such market and to integrate such information with the Company's proprietary
marketing methodology. These companies produce a list of Targeted Homeowners
that the Company believes, based on its historic customer profile, are more
likely to utilize the Company's products and services and satisfy the
Company's underwriting guidelines than the average homeowner. The Company then
focuses its marketing efforts in the new market on the Targeted Homeowners
identified on the list.
The Company has generally entered short term leases for the offices and
purchased the equipment and materials necessary to start a new retail branch.
The Company has usually recruited and hired the personnel required to staff
the retail branch office from the new market. Managers of new branches are
generally managers of existing branches or loan officers promoted from
existing retail branch offices. Personnel from headquarters or individuals
with previous experience at the Company's branches spend some time at the new
branch training the new personnel. The Company plans to continue these
practices in any future expansion.
COMPETITION
As a consumer finance company, the Company faces intense competition.
Traditional competitors in the financial services business include other
mortgage banking companies, mortgage brokers, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies. Many of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and
48
<PAGE>
marketing resources than the Company. Competition can take many forms
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, loan origination fees, and
interest rates. In addition, the current level of gains realized by the
Company and its existing competitors on the sale of loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales owing to increased loan origination competition.
The Company believes that it is able to compete on the basis of providing
prompt and responsive service, consistent underwriting and competitive loan
programs to borrowers whose needs are not met by Conventional Leading
Institutions.
REGULATION
The Company's business is subject to extensive regulation at both the
Federal and state level. Regulated matters include loan origination, credit
activities, maximum interest rates and finance and other charges, disclosure
to customers, the terms of secured transactions, the collection, repossession
and claims handling procedures utilized by the Company, multiple qualification
and licensing requirements for doing business in various jurisdictions and
other trade practices.
TRUTH IN LENDING. The Truth in Lending Act ("TILA") and Regulation Z
promulgated thereunder contain certain disclosure requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of loans and credit transactions in order to give them
the ability to compare credit terms. TILA also guarantees consumers a three
day right to cancel certain credit transactions including loans of the type
originated by the Company. Management of the Company believes that it is in
compliance with TILA in all material respects. If the Company were found not
to be in compliance with TILA, aggrieved borrowers could have the right to
rescind their loans and to demand, among other things, the return of finance
charges and fees paid to the Company.
In September 1994, the Riegle Act was enacted. Among other things, the
Riegle Act makes certain amendments to TILA (the "TILA Amendments"). The TILA
Amendments generally apply to mortgage loans (other than mortgage loans to
finance the acquisition or initial construction of a dwelling) with (i) total
loan origination fees and other fees upon origination in excess of the greater
of eight percent of the total loan amount or a certain dollar amount
(currently $400) or (ii) an annual percentage rate of more than ten percentage
points higher than comparably maturing U.S. treasury securities ("Covered
Loans"). The Company estimates that substantially all of the loans currently
originated or purchased by the Company are Covered Loans.
The TILA Amendments impose additional disclosure requirements on lenders
originating Covered Loans and prohibit lenders from engaging in a pattern or
practice of originating Covered Loans that are underwritten solely on the
basis of the borrower's home equity without regard to the borrower's ability
to repay the loan. As the Riegle Act became effective on October 1, 1995, the
Company believes, based on a review of its loan portfolio, that only a small
portion of loans originated in fiscal year 1995 are of the type that, unless
modified, are prohibited by the TILA Amendments. The Company will, consistent
with its practices with respect to all loans, apply to all Covered Loans
underwriting criteria that take into consideration the borrower's ability to
repay.
The TILA Amendments also prohibit lenders from including prepayment fee
clauses in Covered Loans to borrowers with a monthly debt-to-income ratio in
excess of 50% or Covered Loans used to refinance existing loans originated by
the same lender or an affiliate of such lender. The Company reported $3.2
million, $3.1 million and $2.6 million in prepayment fee revenue in fiscal
year 1995, 1994 and 1993, respectively. The Company will continue to collect
prepayment fees on loans originated prior to the October 1995 effectiveness of
the TILA Amendments and on non-Covered Loans as well as on Covered Loans in
permitted circumstances. Because compliance with the TILA Amendments was not
required until October 1995, the level of prepayment fee revenue is unlikely
to be substantially affected in fiscal year 1996, but the level of prepayment
fee revenue may decline in future years. The TILA Amendments impose other
restrictions on Covered Loans, including
49
<PAGE>
restrictions on balloon payments and negative amortization features, which the
Company does not believe will have a material impact on its operations.
OTHER LENDING LAWS. The Company is also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on certain prohibited bases, including
race, color, religion, national origin, sex, age or marital status. Regulation
B promulgated under ECOA restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. In addition,
the Company is subject to the Fair Housing Act and regulations thereunder,
which broadly prohibit certain discriminatory practices in connection with the
Company's business. The Company is also subject to the Real Estate Settlement
Procedures Act of 1974, as amended, and the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
such laws, as well as with the laws described above, may result in civil and
criminal liability.
INSURANCE REGULATORY LAWS. As a condition to funding of its loans, the
Company requires each borrower to obtain and maintain in force a policy of
insurance providing coverage for improvements on any real property securing
the borrower's loan. If the borrower fails to provide such coverage prior to
closing of the borrower's loan or if the borrower's coverage is subsequently
cancelled or nonrenewed at any time during the loan period and the borrower
fails to obtain new coverage, the Company will provide coverage on the
borrower's behalf under policies insuring the Company's interest in the
collateral. Such practice is commonly referred to a "forced placement" of
insurance. The Company receives a fee in connection with its placement of such
insurance in California, which activity is not required to be licensed.
Historically, the Company also received a fee in connection with the placement
of such insurance outside California. While the Company does not believe,
based on the advice of regulatory counsel, that it was required to be licensed
in connection with such activity, a state insurance regulator or a court could
take a different interpretation.
Insurance which is force placed is subject to regulation under TILA, the
National Flood Insurance Act, and state insurance regulatory and lender
statutes. Such laws and regulations generally impose disclosure and notice
requirements which must be satisfied prior to forced placement of coverage,
limitations on the amount of coverage that a lender may obtain to protect its
interest in the collateral and restrictions on fees and charges that the
Company may assess in connection with such insurance.
In addition, in the state of California only, the Company provides insurance
agency services with respect to credit life insurance and credit disability
insurance. The Company's sale of these insurance products in California is
subject to statutes and regulations in that state applicable to insurance
producers.
Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil penalties on the Company,
class action lawsuits and administrative enforcement actions.
UNITED KINGDOM REGULATIONS. A portion of the Company's mortgage banking
business in the United Kingdom is subject to regulations promulgated under the
United Kingdom Consumer Credit Act 1974 (the "CCA") applicable to loans made
to individuals or partnerships with principal balances of (Pounds)15,000 or
less. Loans with principal balances in excess of (Pounds)15,000 are not
currently regulated within the United Kingdom. The CCA and regulations
promulgated thereunder, among other things, impose licensing obligations on
the Company's English subsidiaries, set down certain requirements relating to
the form, content, legibility, execution and delivery of loan documents,
restrict communication with the borrower prior to completion of a transaction,
require information and notice of enforcement to be given to the borrower,
require rebates to the borrower on
50
<PAGE>
early settlement and create a cause of action for "extortionate credit
bargains." A license is required to service loans in the United Kingdom
irrespective of the size of the loan. Failure to comply with the requirements
of these rules and regulations can result in the revocation or suspension of
the license to do business and render the mortgage unenforceable in the
absence of a court order.
The Company's planned operations in the United Kingdom will involve loans
with principal balances in excess of (Pounds)15,000 and will therefore be
largely unregulated.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future.
In the course of its business, the Company has acquired and may acquire in
the future properties securing loans that are in default. Although the Company
primarily lends to owners of residential properties, there is a risk that the
Company could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after acquisition by the
Company, and may be held liable to a governmental entity or to third parties
for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. In addition,
the owner or former owners of a contaminated site may be subject to common law
claims by third parties based on damages and costs resulting from
environmental contamination emanating from such property.
EMPLOYEES
As of May 31, 1996, the Company had a total of 322 employees. The Company
has 186 employees working at its corporate headquarters. None of the Company
employees are covered by a collective bargaining agreement. The Company
considers its relations with its employees to be good.
PROPERTIES
The Company's corporate headquarters are located at 17305 Von Karman Avenue,
Irvine, California 92714-6203, where the Company leases from a partnership
beneficially owned by Brian and Sarah Chisick approximately 40,000 square feet
of office space. See "Certain Transactions--Lease of Corporate Headquarters."
The lease expires on January 31, 2003, and the Company has an option to renew
the lease for five years. The Company also leases office space for its 19
retail branch offices in 12 states. The average size of these retail branch
offices is approximately 1,700 square feet, with an annual average base rent
of approximately $32,000. The Company believes its facilities are both
suitable and adequate for the current business activities conducted at its
corporate headquarters and at its existing retail branch offices.
LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse affect
on the results of operations or financial condition of the Company.
In December 1989, Edward and Rosa Dunning filed on behalf of certain
borrowers a class action suit related to the origination of loans by the
Company. The suit was filed in the Superior Court of California in the County
of Alameda. The plaintiffs alleged that disclosure statements given to them by
the Company were insufficient under the Truth-in-Lending Act. Plaintiffs
sought declaratory and injunctive relief as well as monetary damages. The
Company, in order to avoid the cost of continued litigation and without
admitting to any wrong-doing, agreed to settle the case in December 1994. The
terms of the settlement provide cash distributions to the plaintiffs in the
amount of $6,850,000, which is to be paid out over a three-year period and
secured by a pledge of cash collateral. As of March 31, 1996, remaining future
payments to plaintiffs totaled approximately $1,833,000.
51
<PAGE>
On August 10, 1988, the California Department of Corporations filed a civil
action against the Company and certain of its officers and directors that
alleged, among other things, that the Company discriminated in its loan terms
based on the racial composition of the area in which a subject property was
located. The action sought to revoke certain licenses of the Company. The
Company settled the action without a finding or admission of wrongdoing and
the Company's licenses were not impacted. The settlement provided for total
payments by the Company of $436,000 and provided for a permanent injunction
requiring the Company to abide by the Holden Act. In February 1992, the
Department of Corporations confirmed in writing that the Company had fully
complied with the terms of the settlement.
In August 1988, the California Department of Real Estate (the "DRE") filed
an action that incorporated the allegations made by the Department of
Corporations, sought to revoke the real estate licenses of Brian Chisick and
the Company and also alleged that the Company had commingled funds. The DRE
specifically noted that the alleged commingling did not result in any loss to
any borrower or investor. The action was settled in July 1989 with no finding
or admission of wrongdoing in consideration of the payment of a total of
$20,000 to the State of California.
52
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company is divided into three classes: Class
I, Class II and Class III. After his or her initial term, each director serves
for a term ending following the third annual meeting following the annual
meeting at which such director is elected and until his or her successor is
elected. The terms of office of directors in Class I, Class II and Class III
end after the annual meetings of stockholders of the Company in 1997, 1998 and
1999, respectively. The following table sets forth the name, age and position
with the Company of each person who is an executive officer or director of the
Company or FAMCO, as the case may be. An asterisk beside an individual's title
denotes that such individual is an executive officer of FAMCO and not of First
Alliance Corporation.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY CLASS
---- --- -------------------------- -----
<C> <C> <S> <C>
Brian Chisick......................... 57 President, Chief Executive
Officer and Director of
First Alliance Corporation
and FAMCO II
Sarah Chisick......................... 55 Vice President* and
Director of First Alliance
Corporation and FAMCO II
Jeffrey W. Smith...................... 34 Executive Vice President,
Sales and Marketing
and Future Director of
First Alliance
Corporation and FAMCO I
Mark K. Mason......................... 37 Executive Vice President,
Chief Financial Officer
and Future Director of
First Alliance
Corporation and FAMCO I
Randall K. McPhillips................. 38 Vice President, Portfolio
Refinancing Operations*
John M. Michel........................ 37 Vice President, Finance*
Peggy A. Tom.......................... 54 Vice President,
Foreclosure, Legal and
Collections*
Bruce Bollong......................... 48 Vice-President,
Administration*
Patricia G. Sullivan.................. 50 Vice President, Staff
Development*
Catalina Alvarez...................... 44 Vice President, Processing
and Disbursement*
Beverly Allen......................... 43 Vice President, Loan
Servicing*
Merrill Butler........................ 71 Future Director of First
Alliance Corporation and
FAMCO III
George Gibbs, Jr. .................... 65 Future Director of First
Alliance Corporation and
FAMCO III
Albert L. Lord........................ 50 Future Director of First
Alliance Corporation and
FAMCO III
</TABLE>
Each individual named as a Future Director in the foregoing table has been
elected as a Director of the Company effective upon the completion of the
Public Offering and has consented to be named as such.
The name and business experience during the past five years of each director
and executive officer of the Company are described below.
Brian Chisick has been the Chairman of the Board, Chief Executive Officer
and President of the Company since its founding in 1971. Mr. Chisick has held
a real estate broker's license since 1971. In 1985, Mr. Chisick was Vice
President of the Mortgage Brokers Institute, a statewide trade association of
over 120 mortgage brokers and served as a member of the legislative committee
of the Mortgage Brokers Institute.
Sarah Chisick has been Vice President and a Director of the Company since
1971. Her duties have in the past included projects in the loan servicing,
foreclosure, marketing and investment departments. She is not currently
involved in the day to day operations of the Company.
53
<PAGE>
Jeffrey W. Smith has been Executive Vice President, Sales and Marketing, of
the Company since 1995. From 1984 to 1995, Mr. Smith held various positions in
the Company including, Assistant Director of Marketing, Director of Marketing
and Vice President of Marketing. Mr. Smith has agreed to become a Director of
the Company effective upon the completion of the Public Offering.
Mark K. Mason, a certified public accountant, has been Executive Vice
President and Chief Financial Officer of the Company since November 1995. From
1994 to 1995, Mr. Mason was Executive Vice President and Chief Financial
Officer of Fidelity Federal Bank, a Federal Savings Bank, where he remains a
member of the Board of Directors. From 1993 to 1994, Mr. Mason was a Senior
Manager with the international accounting firm of Deloitte & Touche LLP. From
1990 to 1993, Mr. Mason was Executive Vice President and Chief Financial
Officer of the Eadington Companies. Mr. Mason has agreed to become a Director
of the Company effective upon the completion of the Public Offering.
Randall K. McPhillips has been with the Company since 1982. Mr. McPhillips
has worked as a Loan Officer, Branch Manager, Regional Sales Manager, and
became a Vice President in 1987. Currently, Mr. McPhillips is responsible for
the Portfolio Refinancing Operations of the Company.
John M. Michel, a certified public accountant, has been Vice President,
Finance of the Company since April 1996. From 1995 to April 1996, Mr. Michel
was Senior Vice President and Director of Corporate Planning for Fidelity
Federal Bank. From 1989 to 1995, he was Vice President of Finance and
Accounting for Akins Companies, a diversified company in the residential
property development business.
Peggy A. Tom has been Vice President of the Foreclosure, Legal and
Collections departments of the Company since 1982. From 1982 to 1996, Ms. Tom
was a Director of the Company.
Bruce Bollong has been Vice President, Administration of the Company since
1995. From 1985 to 1995, Mr. Bollong was Vice President, Finance of the
Company.
Patricia G. Sullivan has been Vice President, Staff Development since
September 1993. From 1990 to 1993, Ms. Sullivan was the Company's Sales
Manager.
Catalina Alvarez has been Vice President, Processing and Disbursement, of
the Company, since 1993. From 1982 to 1993, Ms. Alvarez was manager of the
Company's Processing and Disbursement Department.
Beverly Allen has been Vice President, Loan Servicing of the Company since
1993. From 1976 to 1993, Ms. Allen was Manager, Loan Servicing.
The following future directors, Merrill Butler, George Gibbs, Jr. and Albert
L. Lord, are not affiliated with the Company.
Merrill Butler has agreed to become a Director of the Company effective upon
the completion of the Public Offering. Mr. Butler formed Merrill Butler, Inc.,
in 1983 to consult with savings and loans on real estate matters. During 1995,
Mr. Butler served on the Volunteer Executive Team organized to advise Orange
County, California after the County had declared bankruptcy. Mr. Butler was a
co-creator of the Butler Popejoy Group, a general partnership, which, from
1992 to 1994, capitalized home builders with equity funds to develop entry
level housing projects. Mr. Butler served from 1986 to 1989 as the President,
Chief Executive Officer, and, in 1988, as the Chairman of the American Real
Estate Group. From 1955 to 1983, Mr. Butler was President of his own home
building and development companies, which developed 12,500 homes, apartments,
etc., in Southern California and Arizona. Mr. Butler is also a past director
of the Federal National Mortgage Association (Fannie Mae) and a former member
of both the Advisory Committee of the Federal Home Loan Mortgage Corporation
(Freddie Mac) and the Federal Savings & Loan Advisory Council to the Federal
Home Loan Bank Board. Mr. Butler was also a United States delegate to the
United Nations for the European Economic Commission on Housing. Mr. Butler has
previously served on the Boards of Directors of Financial Corporation of
America, American Savings and Loan, The Commodore Corporation, Far Western
Bank, National Association of Home Builders and the Building Industry
Association of Southern California.
54
<PAGE>
George Gibbs, Jr. has agreed to become a Director of the Company effective
upon the completion of the Public Offering. Mr. Gibbs has been Principal and
Senior Vice President of Johnson & Higgins since 1987. Mr. Gibbs has been a
director of Fidelity Federal Bank, a Federal Savings Bank, since August 1994.
Mr. Gibbs is a past Vice President and Executive Committee member of the Los
Angeles Chamber of Commerce.
Albert L. Lord has agreed to become a Director of the Company effective upon
the completion of the Public Offering. Since January 1994, Mr. Lord has been
the President of LCL, Ltd., a financial consulting and equity investment
management company. From October 1981 to January 1994, Mr. Lord was Chief
Operating Officer and Executive Vice President for the Student Loan Marketing
Association (Sallie Mae). Mr. Lord is a director of the Student Loan Marketing
Association.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Promptly following the closing of the Public Offering, the
Board of Directors will establish an audit committee (the "Audit Committee").
The Audit Committee, among other things, will make recommendations to the
Board concerning the engagement of independent public accountants; monitor and
review the quality and activities of the Company's internal audit function and
those of its independent accountants; and monitor the adequacy of the
Company's operating and internal controls as reported by management and the
independent or internal auditors. The members of the Audit Committee are
anticipated to be Messrs. Lord, Gibbs and Smith.
Compensation Committee. Promptly following the closing of the Public
Offering, the Board of Directors will establish a compensation committee (the
"Compensation Committee"). The Compensation Committee, among other things,
will review salaries, benefits and other compensation, excluding stock based
compensation, of Directors, officers and other employees of the Company and
make recommendations to the Board. The members of the Compensation Committee
are anticipated to be Messrs. Gibbs, Butler and Chisick. Mr. Chisick will not
vote on any matters affecting his or Mrs. Chisick's compensation.
Stock Incentive Committee. Promptly following the closing of the Public
Offering, the Board of Directors will establish a stock incentive committee
(the "Stock Incentive Committee"). The Stock Incentive Committee will be
authorized to make stock based compensation grants under a stock incentive
plan to be adopted (See "Management--1996 Stock Incentive Plan"). The members
of the Stock Incentive Committee are anticipated to be Mr. and Mrs. Chisick.
Except for grants that are approved by a majority of the disinterested members
of the Compensation Committee, no member of the Stock Incentive Committee will
be eligible to participate in the Stock Incentive Plan.
NON-EMPLOYEE DIRECTORS COMPENSATION
Non-employee directors of the Company receive an annual retainer of $15,000,
a committee chair retainer of $1,500, a meeting fee of $1,000 and are
reimbursed for reasonable expenses incurred in connection with attendance at
Board of Directors' meetings or committee meetings. A meeting fee of $500 will
be paid to non-employee directors for telephonic meetings of 30 minutes or
less. Immediately prior to the effective date of the Registration Statement of
which this Prospectus constitutes a part, the Company intends to grant options
to its non-employee directors under the 1996 Stock Incentive Plan to purchase
an aggregate of 112,500 shares of Class A Common Stock at an exercise price
equal to the offering price. See "Management--1996 Stock Incentive Plan."
55
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and long-
term compensation earned by the Company's chief executive officer and each of
the four other most highly compensated executive officers whose annual salary
and bonus during the fiscal years presented exceeded $100,000 (the "Named
Executive Officers").
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
--------------------------- ------ -------- ----------
<S> <C> <C> <C>
Brian Chisick.................................... 1995 $288,000 $ 500,000
President & CEO 1994 288,000 --
1993 288,000 3,000,000
Randall K. McPhillips............................ 1995 332,118 10,000
Vice President, Portfolio Refinancing 1994 373,920 110,000
1993 245,536 50,000
Jeffrey W. Smith................................. 1995 167,259 30,000
Executive Vice President, Marketing 1994 155,780 45,000
1993 122,984 20,000
Patricia G. Sullivan............................. 1995 166,232 10,000
Vice President, Staff Development 1994 166,232 20,000
1993 157,003 26,000
Bruce E. Bollong................................. 1995 120,083 10,000
Vice President, Administration 1994 133,356 20,000
1993 109,808 20,000
</TABLE>
- --------
Employment Agreements
Chisick Agreement
The Company has entered into an employment agreement with Mr. Chisick
providing for an initial term of three years, subject to automatic three-year
renewal unless either party provides notice of an intention not to renew.
Under this Agreement, Mr. Chisick will receive an annual salary of $395,000,
subject to annual increases (but not decreases) and bonuses as may be
determined by the Board of Directors, as well as certain other benefits
including medical, insurance, death and disability benefits, use of an
automobile and reimbursement of employment related expenses.
Mason Agreement
The Company has entered into an employment agreement with Mr. Mason. The
employment agreement provides for an indefinite employment term beginning on
October 1, 1995. The Company or Mr. Mason may terminate the employment
agreement at any time. Under the terms of the employment agreement, Mr. Mason
is entitled to receive an annual salary of at least $240,000, subject to
annual increases (but not decreases) as determined by the Board of Directors.
Pursuant to the employment agreement Mr. Mason was granted, on June 29, 1996,
107,500 shares of Class B Common Stock under the Company's Stock Incentive
Plan (after giving effect to a May 1996 stock split), representing 1% of the
total issued and outstanding shares of Class B Common Stock, subject to
vesting. Approximately 24% of these shares will vest upon the closing of the
Public Offering and the remaining shares, to the extent not vested, will vest
in 20% increments over 5 years beginning October 1, 1995 (subject to
acceleration upon certain conditions). In the event that Mr. Mason's vested
shares of Class B Common Stock are not freely tradeable under applicable
Federal and state securities laws, Mr. Mason is entitled
56
<PAGE>
to sell such vested shares of Class B Common Stock to the Company for the fair
value of such stock at that time. Additionally, in the event that vested
shares are not publicly traded at the termination date of the agreement, the
Company has a right of first refusal to purchase such shares for the fair
value of such stock at that time.
1996 STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable directors, executive officers, independent contractors and
other key employees of the Company, to participate in the ownership of the
Company. The Stock Incentive Plan covers 750,000 shares of Class A Common
Stock. The initial issuance under the Stock Incentive Plan consisted of
107,500 shares of Class B Common Stock issued to Mark K. Mason. See
"Management--Executive Compensation--Mason Employment Agreement." Immediately
prior to the effectiveness of the Registration Statement of which this
Prospectus constitutes a part, the Company intends to grant options to acquire
an aggregate of 510,000 shares of Class A Common Stock. These options will
vest 25% six months from the date of grant and 25% each year thereafter until
fully vested and expire on the earlier of ten years from the date of grant or
90 days after a holder's termination of service. The Stock Incentive Plan is
designed to attract and retain directors, executive officers, independent
contractors and other key employees of the Company. The Stock Incentive Plan
provides for the award to eligible employees of the Company of a broad variety
of stock-based compensation alternatives such as non-qualified stock options,
incentive stock options, restricted stock and performance awards.
The Stock Incentive Plan will be administered by the Stock Incentive
Committee, which is authorized to select from among the eligible participants
the individuals to whom options, restricted stock purchase rights and
performance awards are to be granted and to determine the number of shares to
be subject thereto and the terms and conditions thereof. The Stock Incentive
Committee is also authorized to adopt, amend and rescind the rules relating to
the administration of the Stock Incentive Plan. Except for grants that are
approved by a majority of the disinterested members of the Compensation
Committee, no member of the Stock Incentive Committee will be eligible to
participate in the Stock Incentive Plan.
Non-qualified stock options granted to the employee directors, officers and
employees will provide for the right to purchase shares of Class A Common
Stock at a specified price which may be less than fair market value on the
date of grant, and usually will become exercisable in installments after the
grant date. Non-qualified stock options may be granted to employee directors,
officers, employees and consultants for any reasonable term.
Incentive stock options will be designed to comply with the provisions of
the Code and will be subject to restrictions contained in the Code, including
a requirement that exercise prices are equal to at least 100% of fair market
value of the shares of Class A Common Stock on the grant date and a ten-year
restriction on the option term, but may be subsequently modified to disqualify
them from treatment as incentive stock options. Under the Stock Incentive Plan
and the Code, non-employee directors are not permitted to receive incentive
stock options.
57
<PAGE>
CERTAIN TRANSACTIONS
LEASE OF CORPORATE HEADQUARTERS
The Company leases approximately 40,000 square feet of office space for its
corporate headquarters from MJB Associates, a California limited partnership
of which Borgi-Hesis, Inc. is the general partner. Brian Chisick is the
President of Borgi-Hesis, Inc., and Brian and Sarah Chisick are the beneficial
owners of Borgi-Hesis, Inc. The lease agreement provides for an aggregate
annual rent payment in 1996 of approximately $464,000. The term of the lease
expires on January 31, 2003, at which time the Company has an option to renew
the lease for additional period of five years.
STOCKHOLDER NOTES
During 1995, the Company paid $223,000 in interest payments to Brian and
Sarah Chisick, under the terms of a note with a principal amount of $4.5
million. The interest rate on such note was 10% per annum. Such note was paid
in full in 1995.
In addition, the Company borrowed $1.5 million from Brian and Sarah Chisick
on January 30, 1996. The note evidencing this debt, which was repaid in full
in May 1996, had an interest rate of 10% per annum.
The Company has from time to time borrowed from affiliates to fund certain
distributions to shareholders, however, the Company does not intend to borrow
from its affiliates in the future.
TRANSACTIONS WITH NATIONSCAPITAL MORTGAGE CORPORATION AND COAST SECURITY
MORTGAGE, INC.
Primarily to increase the volume of its Securitizations, the Company
purchases loans originated by certain brokers that are controlled by the sons
of Brian and Sarah Chisick.
Pursuant to an agreement between the Company and Nationscapital Mortgage
Corporation ("Nationscapital"), the Company purchased on a servicing released
basis, $215,000 of loans from Nationscapital during 1995. Jamie Chisick and
Brad Chisick are the President and majority shareholder, and the Vice
President and minority shareholder, of Nationscapital, respectively, and the
sons of Brian and Sarah Chisick.
Pursuant to an agreement between the Company and Coast Security Mortgage
Inc. ("Coast Security"), the Company purchased on a servicing released basis,
$9.8 million of loans from Coast Security during 1995. Mark Chisick and Brad
Chisick are the President and majority shareholder, and the Vice President and
a minority shareholder, of Coast Security, respectively, and the sons of Brian
and Sarah Chisick.
The Company's purchases of the loans originated by Nationscapital and Coast
Security are documented by agreements similar to those entered into with
unaffiliated entities. In the future, the Company intends to purchase from
such related parties only loans that meet the Company's criteria for
Securitization. Certain deferred premiums on such loans remain payable by the
Company to Nationscapital and Coast Security and will become due upon the
Securitization by the Company of such loans.
Coast Security's outstanding balance pursuant to a line of credit with the
Company was $335,000 and $525,000 at March 31, 1996 and December 31, 1995
respectively. The line of credit bears an interest rate of 10.0% per annum.
The line of credit was terminated on June 30, 1996.
During the 1996 quarter and the 1995 year, the Company received fees of
$72,000 and $234,000 from Nationscapital and $72,000 and $481,000 from Coast
Security, respectively, from the sale of marketing lists. The fees, which were
consistent with those charged to unaffiliated third-parties, reflected
payments to the Company for customer lists developed by the Company in its
marketing efforts but with respect to which the potential customers did not
fit the Company's lending criteria or the Company had not been able to
originate
58
<PAGE>
loans. Nationscapital and Coast Security may utilize this information and
originate loans, and, if such loans satisfy the Company's underwriting
guidelines, the Company may purchase such loans.
SERVICING OF CERTAIN LOANS
During 1995, the Company serviced mortgage loans for certain related parties
for which no service fees were charged. At March 31, 1996, the outstanding
balances of such loans serviced on behalf of Brian Chisick, Brad Chisick, Mark
Chisick, Jamie Chisick and Randall K. McPhillips were $7.2 million, $716,000,
$311,000, $345,000 and $145,000, respectively. Brad, Mark and Jamie Chisick
are the sons of Brian and Sarah Chisick. In order to avoid any appearance of
impropriety, upon the completion of the Public Offering, the Company will
charge such related parties servicing fees consistent with the servicing fees
charged to third parties for such services.
OTHER TRANSACTIONS
During 1995, the Company purchased on a servicing released basis, $15.1
million of loans from a subsidiary of First Alliance Securities Corporation, a
company wholly owned by Brian and Sarah Chisick. These affiliate purchases
were made pursuant to written agreements similar to those entered into with
unaffiliated entities. The Company ceased purchasing loans from this entity in
May 1995 due to the permanent cessation of lending operation by First Alliance
Securities Corporation and that subsidiary.
The Company paid $76,000 during 1995 to Orange Coast Computer Services as
reimbursement for expenses advanced on behalf of the Company during 1995.
Brian and Sarah Chisick beneficially own Orange Coast Computer Services.
During 1995, the Company received fees of $146,000 from the sale of
marketing lists to a corporation that is no longer in existence and that was
beneficially owned by Brian and Sarah Chisick. The fees were consistent with
those charged to unaffiliated third parties.
During the quarter ended March 31, 1996 and the year 1995, the Company sold
loans in the amounts of $0.3 million and $3.2 million, respectively, to Brian
Chisick. Due to the procedures required to be taken in order to approve such
related party transactions and the relatively insignificant amount earned by
the Company on such loan sales, upon the completion of the Public Offering,
the Company will no longer sell loans to Brian Chisick or any of his
affiliates.
Brian and Sarah Chisick have recently formed two corporations in the United
Kingdom for the purposes of initiating retail and wholesale loan operations,
and a California corporation for the purpose of providing accounting,
financial and computer services to the Company. All outstanding shares of
capital stock of such corporations will be contributed to the Company
immediately prior to the consummation of the Public Offering.
FUTURE AFFILIATED OR RELATED PARTY TRANSACTIONS
At this time, the Company anticipates that following the completion of the
Public Offering, its transactions with affiliated or related parties will be
limited to the Company's relationships with Nationscapital and Coast Security.
The Company's Bylaws require that all transactions between the Company, on the
one hand, and the immediate family of Brian Chisick, or their affiliates, on
the other hand, must be approved by a majority of the independent directors.
INDEMNITY AGREEMENTS
Prior to the completion of the Public Offering, the Company will enter into
separate but identical indemnity agreements (the "Indemnity Agreements") with
each director and executive officer of the Company and expects to enter into
Indemnity Agreements with persons who become directors or executive officers
in the future. The Indemnity Agreements provide that the Company will
indemnify the director or officer (the "Indemnitee")
59
<PAGE>
against any expenses or liabilities in connection with any proceeding in which
such Indemnitee may be involved as a party or otherwise, by reason of the fact
that such Indemnitee is or was a director or officer of the Corporation or by
reason of any action taken by or omitted to be taken by such Indemnitee while
acting as an officer or director of the Corporation, provided that such
indemnity shall only apply if (i) the Indemnitee was acting in good faith and
in a manner the Indemnitee reasonably believed to be in the best interests of
the Corporation, and, with respect to any criminal action, had no reasonable
cause to believe the Indemnitee's conduct was unlawful, (ii) the claim was not
made to recover profits made by such Indemnitee in violation of Section 16(b)
of the Securities Exchange Act of 1934, as amended, or any successor statute,
(iii) the claim was not initiated by the Indemnitee, or (iv) the claim was not
covered by applicable insurance. Each Indemnitee has undertaken to repay the
Company for any costs or expenses paid by the Company if it shall ultimately
be determined by a court of competent jurisdiction in a final, nonappealable
adjudication that such Indemnitee is not entitled to indemnification under the
Indemnity Agreements. In addition to the Indemnity Agreements, the Company
anticipates obtaining a policy of directors and officers liability insurance
prior to the completion of the Public Offering.
PRINCIPAL STOCKHOLDERS
The following table sets forth security ownership information regarding the
Company's Common Stock as of the date of this Prospectus (except as otherwise
noted), and as adjusted to reflect the sale of shares offered by the Company
hereby, by (i) each person who is known by the Company to own beneficially
more than 5% of the Company's common stock, (ii) each director, (iii) each of
the Named Executive Officers and (iv) all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO PUBLIC AFTER PUBLIC
OFFERING OFFERING(4)
------------------ ------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
- --------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Brian and Sarah Chisick (2).............. 10,642,500 99.0% 10,642,500 74.7%
Mark K. Mason (3)........................ 107,500 1.0% 107,500 .7%
All directors and executive officers as a
group................................... 10,750,000 100.0% 10,750,000 75.4%
</TABLE>
- --------
(1) Unless otherwise indicated and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting
and investment power with respect to the shares shown as beneficially
owned by it. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options and warrants. Each beneficial
owner's percentage ownership is determined by assuming that options that
are held by such person (but not those held by any other person) and that
are exercisable within 60 days from the date of this Prospectus have been
exercised.
(2) Includes shares held by The Chisick Trust No. 1 U/D/T 3-30-96 and The
Chisick Trust No. 2 U/D/T 3-30-96, of which Brian Chisick is the sole
trustee, and the Brian and Sarah Chisick Revocable Trust U/A 3-7-79, of
which Brian and Sarah Chisick are the trustees.
(3) Represents restricted shares of Class B Common Stock subject to a vesting
schedule. See Management--Executive Compensation--Mason Employment
Agreement."
(4) Assumes no exercise of the Underwriters' over-allotment option.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 1,000,000 shares
of preferred stock, $.01 par value ("Preferred Stock"), (ii) 25,000,000 shares
of Class A common stock, $.01 par value (the "Class A Common Stock") and
15,000,000 shares of Class B common stock, $.01 par value (the "Class B Common
Stock" or, together with the Class A Common Stock, the "Common Stock").
COMMON STOCK
As of the date hereof, there are no shares of Class A Common Stock
outstanding and 10,750,000 shares of Class B Common Stock outstanding. All of
the outstanding Class B Common Stock is beneficially owned by the Chisick
Family and Mark K. Mason. Upon completion of the Public Offering, there will
be 3,500,000 shares of Class A Common Stock and 10,750,000 shares of Class B
Common Stock outstanding (assumes no exercise of the Underwriters' over-
allotment option). The issued and outstanding shares of Class A Common Stock
and Class B Common Stock have been, and the shares of Class A Common Stock
offered hereby will be, duly authorized, validly issued, fully paid and
nonassessable.
Holders of Class A Common Stock are entitled to one vote for each share held
of record, and holders of Class B Common Stock are entitled to four votes for
each share held of record. The Class A Common Stock and the Class B Common
Stock vote together as a single class on all matters submitted to a vote of
stockholders (including the election of directors which will be by proxy),
except that, (i) in the case of a proposed amendment to the Company's
Certificate of Incorporation that would alter the powers, preferences or
special rights of either the Class A Common Stock or the Class B Common Stock,
the class of Common Stock to be altered shall vote
on the amendment as a separate class and (ii) in the case of a proposed
issuance of Class B Common Stock, such issuance will require the affirmative
vote of the holders of a majority of the outstanding shares of Class B Common
Stock. Shares of Common Stock do not have cumulative voting rights with
respect to the election of directors. Immediately after the Public Offering,
the Chisick Family will hold shares of Class B Common Stock constituting
approximately 91.6% of the voting power of the outstanding Common Stock, which
will allow them to control all actions to be taken by the stockholders,
including the election of all directors to the Board of Directors. While the
Chisick Family will have the voting power to control the votes on any matter
requiring stockholder approval, the Company intends to submit all such matters
to a vote of all stockholders. However, because the Company's Certificate of
Incorporation provides that any action that can be taken at a meeting of the
stockholders may be taken by written consent in lieu of the meeting if the
Board of Directors of the Company has approved the action and the Company
receives consents signed by stockholders having the minimum number of votes
that would be necessary to approve the action at a meeting at which all shares
entitled to vote on the matter were present, the Chisick Family, assuming
approval by the Board of Directors, may take all actions required to be taken
by the stockholders without providing the other stockholders the opportunity
to make nominations or raise other matters at a meeting. See "Principal
Stockholders" and "Risk Factors-Anti-Takeover Effect of Capital Structure;
Voting Control of Company."
Each share of Class A Common Stock and Class B Common Stock will be equal in
respect of dividends and other distributions in cash, stock or property
(including distributions upon liquidation of the Company and consideration to
be received upon a merger or consolidation of the Company or a sale of all or
substantially all of the Company's assets), except that in the case of
dividends or other distributions pursuant to stock splits or dividends, only
shares of Class A Common Stock will be distributed with respect to the Class A
Common Stock and only shares of Class B Common Stock will be distributed with
respect to Class B Common Stock, except if the Board of Directors determines
that shares of Class A Common Stock shall be distributed with respect to the
Class B Common Stock. In no event will either Class A Common Stock or Class B
Common Stock be split, divided or combined unless the other class is
proportionately split, divided or combined.
61
<PAGE>
Holders of Common Stock do not have any preemptive rights or rights to
subscribe for additional securities of the Company. Shares of Common Stock are
not redeemable and there are no sinking fund provisions.
While the shares of Class A Common Stock are not convertible into any other
series or class of the Company's securities, each share of Class B Common
Stock is freely convertible into one share of Class A Common Stock at the
option of the Class B stockholder. All shares of Class B Common Stock shall
automatically convert to an equal number of shares of Class A Common Stock on
the earliest record date for an annual meeting of the Company's stockholders
on which the number of shares of Class B Common Stock outstanding is less than
10% of the total number of shares of Common Stock outstanding. Shares of Class
B Common Stock may not be transferred to third parties (except for transfers
to certain family members and in other limited circumstances). Any
impermissible transfer of shares of Class B Common Stock will result in the
automatic conversion of such shares.
Subject to the preferences applicable to Preferred Stock outstanding at the
time, holders of shares of Common Stock are entitled to dividends if, when and
as declared by the Board of Directors from funds legally available therefor,
and are entitled, in the event of liquidation, to share ratably in all assets
remaining after payment of liabilities and Preferred Stock preferences, if
any.
The Company's Board of Directors will have seven members following
completion of the Public Offering. Either the directors or the stockholders
may amend the Bylaws to change the size of the Board, subject to the
requirement in the Certificate of Incorporation that the entire Board must
consist of at least three and no more than 11 directors. After the initial
term, each director serves for a term ending following the third annual
meeting following the annual meeting at which such director is elected and
until his or her successor is elected. Any stockholder entitled to vote at a
meeting regarding the election of directors may nominate a person for election
as a director, provided that the stockholder gives the Company written notice
of the nomination at least 90 days before the meeting (or if later, the
seventh day after the first public announcement of the date of such meeting),
which notice must contain specified information about the stockholder and the
nominee.
The Class A Common Stock has been approved for inclusion on the Nasdaq
National Market under the symbol "FACO."
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority to issue up to 1,000,000 shares of Preferred Stock
in one or more series with such designations, rights, preferences and voting
rights as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a way of
discouraging, delaying or preventing an acquisition or change in control of
the Company. The Company does not currently intend to issue any shares of its
Preferred Stock.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person became an interested stockholder unless: (i)
before that person became an interested stockholder, the Board approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon completion of the
transaction that resulted in the interested stockholders becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of the Company and by
62
<PAGE>
employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (iii) on or following the date on which that
person became an interested stockholder, the business combination is approved
by the Company's Board and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock of the Company not owned by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who was not an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if that extraordinary transaction is
approved or not opposed by a majority of the directors (but not less than one)
who were directors before any person became an interested stockholder in the
previous three years or who were recommended for election or elected to
succeed such directors by a majority of such directors then in office.
Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing
a change of control of the Company. Other than pursuant to the Public
Offering, the Company has no plan or arrangement for the issuance of any
shares of capital stock other than in the ordinary course pursuant to the
Stock Incentive Plan.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation provides that the stockholders
may act only in a meeting that has been duly called and noticed, except that
stockholders may approve by written consent any proposal that has already been
approved by the Board of Directors.
The Company's Bylaws require stockholders to provide advance notice of any
stockholder nominations for director and of any business to be brought before
any meeting of stockholders. Stockholders are not entitled to cumulative
voting in connection with the election of directors. As a result, a person or
a group controlling the majority of shares of Common Stock can elect all of
the directors. Following the Public Offering, the Chisick Family will
beneficially own shares of Class B Common Stock constituting 91.6% of the
voting power of the issued and outstanding Common Stock. See "Principal
Stockholders" and "Risk Factors-Anti-Takeover Effect of Capital Structure."
The Certificate of Incorporation of the Company contains certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. These provisions eliminate the directors' liability for monetary
damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, including the breach of a director's duty of loyalty
or acts or omissions which involve intentional misconduct or a knowing
violation of a law. The Company's Certificate of Incorporation also contains
provisions to indemnify its directors and officers to the fullest extent
permitted by the Delaware General Corporation Law.
TRANSFER AGENT
The transfer agent and registrar for the Class A Common Stock is American
Stock Transfer and Trust Company.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
25,000,000 shares of Class A Common Stock and 15,000,000 shares of Class B
Common Stock. Upon completion of the Public Offering, there will be
outstanding 3,500,000 shares of Class A Common Stock and 10,750,000 shares of
Class B Common Stock (assuming no exercise of the Underwriters' over-allotment
option).
The 3,500,000 shares of Class A Common Stock to be sold in the Public
Offering, which will constitute all of the outstanding shares of Class A
Common Stock (4,025,000 shares if the Underwriters' over-allotment option is
exercised in full) will be available for resale in the public market without
restriction or further registration under the Securities Act, except for
shares purchased by affiliates of the Company (in general, any person who has
a control relationship with the Company), which shares will be subject to the
resale limitations of Rule 144 promulgated under the Securities Act ("Rule
144"). All outstanding shares of Class B Common Stock are deemed to be
"restricted securities," as that term is defined in Rule 144, and are eligible
for sale in the public market in compliance with Rule 144. The Chisick Family
and Mark Mason have agreed, subject to certain exceptions, that they will not
offer, sell or otherwise dispose of any of the shares of Class B Common Stock
owned by them for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representative of the Underwriters;
provided that Mark Mason may sell, after December 29, 1996, up to 13,700
shares of Class B Common Stock, in order to pay certain Federal and state
income taxes. The Company has agreed, subject to certain limited exceptions,
not to offer, sell or otherwise dispose of any shares of Class A Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representative of the Underwriters.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years is entitled to sell, within any three-month period, a number of
shares which does not exceed the greater of 1% of the then-outstanding shares
of the Company's Class A Common Stock (35,000 shares immediately after the
Public Offering assuming no exercise of the Underwriters' over-allotment
option) or the average weekly trading volume of the Company's Class A Common
Stock during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. Sales under Rule 144 may also be subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the three months preceding a sale, and who has
beneficially owned shares within the definition of "restricted securities"
under Rule 144 for at least three years, is entitled to sell such shares under
Rule 144(k) without regard to the volume limitation, manner of sale
provisions, public information requirements or notice requirements.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") through their Representative,
have severally agreed to purchase from the Company the following respective
number of shares of Class A Common Stock at the Public Offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.................................
Total Underwriters ( )............................................... 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of the Class A Common Stock offered hereby if any
of such shares are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Class A Common Stock to the public at the
Public Offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the Public
Offering, the offering price and other selling terms may be changed by the
Representative of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 525,000
additional shares of Class A Common Stock at the Public Offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Class A Common Stock to
be purchased by it shown in the above table bears to 3,500,000 and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Class A Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 3,500,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). The Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities is asserted by the Underwriters
in connection with the shares of Class A Common Stock offered hereby, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of competent jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
65
<PAGE>
The Chisick Family and Mark K. Mason have agreed, subject to certain
exceptions, that they will not offer, sell or otherwise dispose of any of the
shares of Class B Common Stock owned by them for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Representative of the Underwriters; provided, however, that Mark Mason may
sell, after December 29, 1996, up to 29,025 shares of Class B Common Stock, in
order to pay certain Federal and State income taxes. See "Shares Eligible for
Future Sale."
The Representative of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Los Angeles, California. Certain legal matters will be passed
upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Newport Beach,
California.
EXPERTS
The statement of financial condition of First Alliance Corporation as of
June 30, 1996 included in this Prospectus, has been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and is included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of First Alliance Mortgage Company as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 included in this Prospectus, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
66
<PAGE>
FINANCIAL GLOSSARY
ASSET-BACKED SECURITIES: A general reference to securities that are backed
by financial assets, such as home equity, credit card or trade receivables,
equipment or automobile loans or leases.
CERTIFICATE INSURER: Monoline insurance company providing credit enhancement
by issuing insurance in favor of holders of Regular Interests in the REMIC
Trusts sponsored by the Company.
NET DEFERRED ORIGINATION FEES: Loan origination fees net of direct loan
origination costs which are deferred until the sale of the related loans.
PORTFOLIO REFINANCING ORIGINATIONS: Loan originations associated with
centralized marketing and sales efforts focused on the preservation of the
Company's existing portfolio through refinancing loans to borrowers who have
made inquiries of the Company regarding prepayment of existing loans.
REGULAR INTEREST: The senior interest in a REMIC Trust that represents the
right to receive scheduled pass-through interest and principal.
REMIC TRUST: A real estate mortgage investment conduit trust.
RESIDUAL INTERESTS: The subordinated interest in a REMIC Trust that
represents the right to receive certain excess cash flow generated by the
Securitized loans.
RETAIL BRANCH ORIGINATIONS: Loans originated through the Company's retail
branch network.
SECURITIZATION OR SECURITIZED: The process through which loans are pooled
and sold to a REMIC Trust that issues Regular Interests and the Residual
Interests to the Company in exchange for loans sold to the Trust.
SERVICING PORTFOLIO: The aggregate of all loans serviced by the Company.
WAREHOUSE FINANCING FACILITY: The Company's $125 million secured 90-day
revolving line of credit used to finance loan originations and purchases.
WAREHOUSING PERIOD: The period of time between the funding or purchase of a
mortgage loan and its sale.
67
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (File No. 333-3633) under the Securities Act with respect to the Class A
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Class A Common Stock, reference is hereby made to such Registration Statement
and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies
of the Registration Statement, including all exhibits thereto, can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 500 West Madison Street, Room
1400, Chicago, Illinois 60606 and at 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, Washington, D.C.
20549, at prescribed rates. The Commission also maintains a web site that
contains reports, proxy and information statements and other information
regarding Registrants that file electronically with the Commission, including
the Company, and the address is http://www.SEC.GOV.
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements and an opinion thereon expressed by
the Company's independent auditors as well as quarterly reports for the first
three fiscal quarters of each fiscal year containing unaudited consolidated
condensed financial statements. The Company also intends to provide annual
financial statements to each person to whom a copy of this Prospectus has been
delivered, upon the request of such person.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FIRST ALLIANCE CORPORATION:
Independent Auditors' Report........................................... F-2
Statement of Financial Condition as of June 30, 1996................... F-3
Note to Financial Statement............................................ F-4
FIRST ALLIANCE MORTGAGE COMPANY:
Independent Auditors' Report........................................... F-5
Statements of Financial Condition as of December 31, 1994 and 1995 and
March 31, 1996 (unaudited)............................................ F-6
Statements of Income for each of the three years in the period ended
December 31, 1995 and for the quarters ended March 31, 1995 and 1996
(unaudited)........................................................... F-7
Statements of Stockholders' Equity for each of the three years in the
period ended
December 31, 1995 and for the quarter ended March 31, 1996
(unaudited)........................................................... F-8
Statements of Cash Flows for each of the three years in the period
ended December 31, 1995 and for the quarters ended March 31, 1995 and
1996 (unaudited)...................................................... F-9
Notes to Financial Statements.......................................... F-11
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
First Alliance Corporation:
We have audited the accompanying statement of financial condition of First
Alliance Corporation (the Company) as of June 30, 1996. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of financial condition
is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statement of
financial condition. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement of financial condition presentation. We
believe that our audit of the statement of financial condition provides a
reasonable basis for our opinion.
In our opinion, such statement of financial condition presents fairly, in
all material respects, the financial position of First Alliance Corporation as
of June 30, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
June 30, 1996
F-2
<PAGE>
FIRST ALLIANCE CORPORATION
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
<TABLE>
<S> <C>
ASSETS
Cash...................................................................... $100
====
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized; no shares outstanding......................
Class A common stock, $.01 par value; 25,000,000 shares authorized; no
shares issued and outstanding...........................................
Class B common stock, $.01 par value; 15,000,000 shares authorized;
one share issued and outstanding........................................
Additional paid in capital............................................... $100
----
Total stockholder's equity............................................ $100
====
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FIRST ALLIANCE CORPORATION
NOTE TO FINANCIAL STATEMENT
AS OF JUNE 30, 1996
NOTE 1. GENERAL
First Alliance Corporation (the Company) was formed to be a holding company
whose assets will consist entirely of all of the outstanding capital stock of
First Alliance Mortgage Company (FAMCO), and First Alliance Services, Inc.,
each of which are California corporations, and First Alliance Mortgage
Company, Limited, and First Alliance Company, Limited, each of which are
United Kingdom corporations.
The Company is contemplating an initial public offering (the Offering)
whereby the Company intends to acquire all of the outstanding shares of FAMCO
in exchange for 10,750,000 shares of Class B Common Stock. Shares of Class A
Common Stock are being offered for sale in the Offering. Holders of Class A
Common Stock will be entitled to one vote for each share held of record and
holders of Class B Common Stock will be entitled to four votes for each share
held of record. Each share of Class B Common Stock will be freely convertible
into one share of Class A Common Stock at the option of the Class B
stockholder. With limited exception, shares of Class B Common Stock may not be
transferred to third parties.
The acquisition will be accounted for similar to a pooling of interests. The
consolidated financial position and consolidated results of operations of the
Company will substantially consist of FAMCO.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
First Alliance Mortgage Company:
We have audited the accompanying statements of financial condition of First
Alliance Mortgage Company (the Company) as of December 31, 1994 and 1995, and
the related statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of First Alliance Mortgage Company as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As described in Note 2, on January 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights.
As described in Note 2, the accompanying 1994 and 1995 financial statements
have been restated.
Deloitte & Touche LLP
Costa Mesa, California
March 18, 1996 (June 24, 1996 as to Note 2)
F-5
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..... $ 5,298,000 $ 4,019,000 $ 2,206,000 $ 2,206,000
Receivable from trusts........ 3,906,000 4,722,000 7,467,000 7,467,000
Loans held for sale........... 18,676,000 24,744,000 26,325,000 26,325,000
Loans receivable held for
investment................... 2,521,000 2,261,000 2,075,000 2,075,000
Residual interests in
securities--at fair value ... 11,645,000 19,705,000 20,732,000 20,732,000
Mortgage servicing rights..... 763,000 4,021,000 4,641,000 4,641,000
Real estate owned, net........ 1,635,000 1,474,000 1,904,000 1,904,000
Property, net................. 2,080,000 2,141,000 2,154,000 2,154,000
Deferred taxes................ 73,000 3,237,000
Prepaid expenses and other
assets....................... 1,629,000 3,900,000 3,851,000 3,851,000
----------- ----------- ----------- -----------
Total assets................ $48,226,000 $66,987,000 $71,355,000 $74,592,000
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facility.. $13,390,000 $18,233,000 $20,015,000 $20,015,000
Accounts payable and accrued
liabilities.................. 9,403,000 5,310,000 5,355,000 5,355,000
Dividends payable............. 9,000,000 9,000,000
Notes payable................. 1,449,000 1,123,000 1,023,000 1,023,000
Notes payable to stockholders. 1,000,000 1,000,000
S distribution notes.......... 33,626,000
----------- ----------- ----------- -----------
Total liabilities........... 24,242,000 24,666,000 36,393,000 70,019,000
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock--no par value;
15,000,000 shares authorized;
10,642,500 shares issued and
outstanding.................. 42,000 42,000 42,000 1,336,000
Retained earnings............. 23,942,000 42,279,000 34,920,000 3,237,000
----------- ----------- ----------- -----------
Total stockholders' equity.. 23,984,000 42,321,000 34,962,000 4,573,000
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity..... $48,226,000 $66,987,000 $71,355,000 $74,592,000
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Loan origination and
sale................. $22,489,000 $27,902,000 $35,493,000 $1,086,000 $ 9,371,000
Loan servicing and
other fees........... 8,989,000 9,106,000 8,543,000 1,977,000 2,243,000
Interest.............. 4,452,000 8,650,000 14,668,000 2,871,000 3,158,000
Other................. 20,000 144,000 176,000 29,000 38,000
----------- ----------- ----------- ---------- -----------
Total revenue....... 35,950,000 45,802,000 58,880,000 5,963,000 14,810,000
EXPENSE:
Compensation and
benefits............. 10,847,000 9,559,000 10,395,000 2,780,000 3,196,000
Professional services. 1,288,000 1,521,000 697,000 264,000 269,000
Advertising........... 2,958,000 3,316,000 4,345,000 1,071,000 940,000
Subservicing and other
fees................. 659,000 1,019,000 1,212,000 266,000 192,000
Rent.................. 815,000 974,000 1,278,000 285,000 370,000
Supplies.............. 791,000 831,000 992,000 246,000 335,000
Depreciation and
amortization of
property............. 483,000 514,000 907,000 144,000 139,000
Interest.............. 2,106,000 3,744,000 4,167,000 613,000 763,000
Legal................. 3,044,000 7,162,000 1,491,000 206,000 146,000
Other................. 1,996,000 1,928,000 2,376,000 388,000 600,000
----------- ----------- ----------- ---------- -----------
Total expense....... 24,987,000 30,568,000 27,860,000 6,263,000 6,950,000
----------- ----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION
(BENEFIT).............. 10,963,000 15,234,000 31,020,000 (300,000) 7,860,000
INCOME TAX PROVISION
(BENEFIT) ............. 222,000 363,000 478,000 (5,000) 118,000
----------- ----------- ----------- ---------- -----------
NET INCOME (LOSS)....... $10,741,000 $14,871,000 $30,542,000 $ (295,000) $ 7,742,000
=========== =========== =========== ========== ===========
PRO FORMA (unaudited):
Historical income
(loss) before income
tax provision
(benefit)............ $10,963,000 $15,234,000 $31,020,000 $ (300,000) $ 7,860,000
Pro forma income tax
provision (benefit).. 4,403,000 6,200,000 12,772,000 (123,000) 3,233,000
----------- ----------- ----------- ---------- -----------
PRO FORMA NET INCOME
(LOSS)................. $ 6,560,000 $ 9,034,000 $18,248,000 $ (177,000) $ 4,627,000
=========== =========== =========== ========== ===========
PRO FORMA NET INCOME PER
SHARE.................. $ 1.39 $ 0.37
=========== ===========
WEIGHTED AVERAGE SHARES
USED IN PRO FORMA
COMPUTATION............ 13,088,417 12,529,250
=========== ===========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993........ 10,642,500 $42,000 $ 21,524,000 $ 21,566,000
Dividends....................... (5,853,000) (5,853,000)
Net income...................... 10,741,000 10,741,000
---------- ------- ------------ ------------
BALANCE, December 31, 1993...... 10,642,500 42,000 26,412,000 26,454,000
Dividends....................... (17,341,000) (17,341,000)
Net income...................... 14,871,000 14,871,000
---------- ------- ------------ ------------
BALANCE, December 31, 1994...... 10,642,500 42,000 23,942,000 23,984,000
Dividends....................... (12,205,000) (12,205,000)
Net income...................... 30,542,000 30,542,000
---------- ------- ------------ ------------
BALANCE, December 31, 1995...... 10,642,500 42,000 42,279,000 42,321,000
Dividends (Unaudited)........... (15,101,000) (15,101,000)
Net income (Unaudited).......... 7,742,000 7,742,000
---------- ------- ------------ ------------
BALANCE, March 31, 1996
(Unaudited).................... 10,642,500 $42,000 $ 34,920,000 $ 34,962,000
========== ======= ============ ============
</TABLE>
See notes to financial statements.
F-8
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 QUARTERS ENDED MARCH 31
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ 10,741,000 $ 14,871,000 $ 30,542,000 $ (295,000) $ 7,742,000
Adjustments to reconcile
net income (loss) to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization of
property............. 483,000 514,000 907,000 144,000 139,000
Amortization of
mortgage servicing
rights............... 988,000 683,000 638,000 107,000 340,000
Deferred income taxes. (184,000) (63,000) 73,000
Provision for
estimated losses on
real estate owned.... 240,000 8,000 74,000
Gain on sale of loans
held for sale ....... (16,423,000) (25,976,000) (24,539,000) (823,000) (7,094,000)
Noncash gain
recognized on
capitalization of
residual interests in
securities and
mortgage servicing
rights............... (4,171,000) (807,000) (9,833,000) (2,060,000)
Loss (gain) on sales
of real estate owned. 76,000 (109,000) 65,000 (94,000)
Loss (gain) on sales
of property.......... 75,000 23,000 (19,000)
Accretion of discounts
on loan receivable... (1,022,000) (256,000) (56,000)
Net accretion of
residual interests in
securities........... (128,000) (1,128,000) (2,048,000) (638,000) 74,000
Loans originated or
purchased for sale,
net of loan fees..... (257,928,000) (289,338,000) (213,903,000) (46,692,000) (68,412,000)
Proceeds from sale of
loans................ 68,440,000 20,503,000 64,400,000 7,560,000 21,318,000
Sale of regular
interests in
securities........... 141,056,000 347,500,000 167,899,000 52,419,000
Changes in assets and
liabilities:
Receivable from
trusts............. (788,000) 163,000 (816,000) (300,000) (2,745,000)
Prepaid expenses and
other assets....... (1,418,000) 802,000 (2,271,000) (633,000) 49,000
Accounts payable and
accrued
liabilities........ 2,643,000 4,775,000 (4,093,000) (3,159,000) 45,000
------------- ------------- ------------- ------------ ------------
Net cash (used in)
provided by
operating
activities....... (56,298,000) 72,421,000 5,980,000 (44,985,000) 1,739,000
------------- ------------- ------------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Loans receivable issued. (789,000) (1,949,000) (1,579,000) (785,000)
Collections on loans re-
ceivable............... 519,000 1,341,000 2,880,000 395,000 242,000
Capital expenditures.... (610,000) (851,000) (978,000) (156,000) (443,000)
Proceeds from sales of
property............... 723,000 29,000 31,000
Additions to real estate
owned.................. (200,000) (355,000) (16,000)
Proceeds from sales of
real estate owned...... 1,028,000 3,566,000 523,000 64,000 37,000
------------- ------------- ------------- ------------ ------------
Net cash provided
by investing ac-
tivities......... 671,000 2,107,000 520,000 (498,000) (133,000)
------------- ------------- ------------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net borrowings (repay-
ments) on warehouse fi-
nancing facility....... 66,835,000 (53,445,000) 4,843,000 40,414,000 1,782,000
Proceeds from issuance
of notes payable....... 19,000 18,000
Payments on notes pay-
able................... (2,079,000) (2,831,000) (436,000) (64,000) (100,000)
Cash dividends.......... (5,853,000) (17,341,000) (12,205,000) (2,874,000) (6,101,000)
Proceeds from issuance
of notes payable to
stockholder............ 11,000,000 3,000,000 4,500,000 4,500,000 1,000,000
Payments on notes pay-
able to stockholder.... (11,000,000) (3,000,000) (4,500,000)
------------- ------------- ------------- ------------ ------------
Net cash provided
by (used in) fi-
nancing activi-
ties............. 58,903,000 (73,617,000) (7,779,000) 41,994,000 (3,419,000)
------------- ------------- ------------- ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 3,276,000 911,000 (1,279,000) (3,489,000) (1,813,000)
CASH AND CASH EQUIVA-
LENTS, beginning of
year................... 1,111,000 4,387,000 5,298,000 5,298,000 4,019,000
------------- ------------- ------------- ------------ ------------
CASH AND CASH EQUIVA-
LENTS, end of year..... $ 4,387,000 $ 5,298,000 $ 4,019,000 $ 1,809,000 $ 2,206,000
============= ============= ============= ============ ============
</TABLE>
See notes to financial statements.
F-9
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31 MARCH 31
-------------------------------------- -----------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL INFORMA-
TION:
Interest paid........... $ 1,805,000 $ 3,605,000 $ 4,114,000 $ 442,000 $ 801,000
============ ============ ============ =========== ===========
Income taxes paid....... $ 698,000 $ 100,000 $ 486,000 $ 30,000
============ ============ ============ ===========
SUPPLEMENTAL INFORMATION
ON NONCASH INVESTING
AND FINANCING
ACTIVITIES:
Loans funded in connec-
tion with sales of real
estate owned........... $ 390,000 $ 290,000 $ 19,000
============ ============ ============
Assumption of debt
through acquisition of
real estate through
foreclosure............ $ 3,051,000 $ 2,342,000 $ 91,000 $ 26,000
============ ============ ============ ===========
Exchange of loans for
regular and residual
interests in
securities............. $141,795,000 $350,331,000 $167,974,000 $52,420,000
============ ============ ============ ===========
Dividends declared and
unpaid................. $ 9,000,000
===========
Transfer of property to
real estate owned...... $ 260,000
===========
Acquisition of real es-
tate through foreclo-
sure of loans.......... $ 113,000
===========
</TABLE>
See notes to financial statements.
F-10
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 AND FOR THE
QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
NOTE 1. GENERAL
First Alliance Mortgage Company (the Company) is engaged in the origination,
purchase, sale and servicing of home-equity loans collateralized by deeds of
trust. The majority of the Company's loans are made to owners of single family
residences who use the loan proceeds for such purposes as debt consolidation
and financing of home improvements, among others. The Company sells loans to
investors or securitizes them in the form of a Real Estate Mortgage Investment
Conduit (REMIC). A significant portion of the mortgages are sold on a
servicing retained basis. The Company is currently licensed or registered to
do business in ten states. The Company's business may be affected by many
factors including real estate and other asset values, the level of and
fluctuations in interest rates, changes in the securitization market and
competition.
Interim Unaudited Financial Information--In the opinion of management, the
accompanying unaudited financial statements contain all adjustments
(consisting only of various normal accruals) necessary to present fairly the
Company's financial position, results of operations and cash flows. The
financial position at March 31, 1996 is not necessarily indicative of the
financial position to be expected at December 31, 1996 and results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of the results of operations to be expected for the year ending
December 31, 1996.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115 Accounting for Certain Investments in Debt and Equity Securities, the
Company has restated its 1994 and 1995 financial statements to present its
Residual Interests in Securities (Residual Interests) as trading securities.
As a result, the Company has reestimated the fair value of such securities.
The restatement did not result in any changes to previously reported results
of operations or financial condition as of and for the years ended December
31, 1995 and 1994.
Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments purchased with an original maturity of no more than three months
to be cash equivalents.
Receivable From Trusts--In the normal course of servicing loans previously
sold or securitized, the Company may advance payments and other costs to
REMICs or private investor trusts on behalf of borrowers. In such cases, funds
advanced are reflected in the balance sheet as receivable from trusts.
Advances are recovered through subsequent collections from trusts or
borrowers.
Loans--Loans held for sale are loans the Company plans to sell or securitize
which are carried at the lower of aggregate cost or market value. Loan
origination and processing fees and related direct origination costs are
deferred until the related loan is sold. Loans receivable held for investment
are notes the Company has purchased or originated and has the intent and
ability to hold to maturity. Loan origination and commitment fees and direct
loan origination costs are deferred and offset against the related notes, and
the net fee or cost is amortized into interest income over the contractual
lives of the related notes. When a loan becomes over 90 days contractually
delinquent, it is placed on non-accrual status and unpaid interest income is
reversed. While a loan is on non-accrual status, interest is recognized only
as cash is received.
Allowances for Estimated Losses on Loans and Real Estate Owned--The
allowances for estimated losses on loans and real estate owned (REO) represent
the Company's estimate of identified and unidentified losses in the Company's
portfolios. These estimates, while based upon historical loss experience and
other relevant data, are ultimately subjective and inherently uncertain. The
Company has established valuation allowances for estimated losses on specific
loans and REO. When these estimated losses are determined to be permanent,
such
F-11
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
as when a loan is foreclosed and the related property is transferred to REO,
specific valuation allowances are charged off and are then reflected as
writedowns.
Effective January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures. SFAS No. 114
prescribes the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are modified in
troubled debt restructurings. SFAS No. 114 states that a loan is impaired when
it is probable that a creditor will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
SFAS No. 118 amends the disclosure requirements of SFAS No. 114 to require
information about the recorded investment in certain impaired loans and how a
creditor recognizes interest income related to those impaired loans. There was
no impact on the Company's financial condition or results of operations upon
adoption of such statements.
Residual Interests in Securities--The Company securitizes a majority of
loans held for sale into the form of a REMIC. A REMIC is a multi-class
security with certain tax advantages to investors and which derives its cash
flow from a pool of underlying mortgages. The senior classes of the REMICs are
sold, and the subordinated classes are retained by the Company. The
subordinated classes are in the form of residual certificates and are
classified as Residual Interests. The documents governing the Company's
securitizations require the Company to establish initial overcollateralization
or build overcollateralization levels through retention of distributions by
the REMIC trust otherwise payable to the Company as the Residual Interest
holder. This overcollateralization causes the aggregate principal amount of
the loans in the related pool and/or cash reserves to exceed the aggregate
principal balance of the outstanding investor certificates. Such excess
amounts serve as credit enhancement for the related REMIC trust. To the extent
that borrowers default on the payment of principal or interest on the loans,
losses will reduce the overcollateralization to the extent that funds are
available. If payment defaults exceed the amount of overcollateralization, as
applicable, the insurance policy maintained by the related REMIC trust will
pay any further losses experienced by holders of the senior interests in the
related REMIC trust. The Company does not have any recourse obligations for
credit losses in the REMIC trust. The Residual Interests are amortized to
operations over the contractual lives of the loans, considering future
estimated prepayments utilizing an amortization method which approximates the
level yield method.
In 1994, the Company adopted SFAS No. 115, and, in accordance with
provisions of SFAS No. 115, the Company classifies Residual Interests as
trading securities which are recorded at fair value with any unrealized gains
or losses recorded in the results of operations in the period of the change in
fair value. Valuations at origination and at each reporting period are based
on discounted cash flow analyses. The cash flows are estimated as the excess
of the weighted average coupon on each pool of loans sold over the sum of the
pass-through interest rate, a servicing fee, a trustee fee, an insurance fee
and an estimate of annual future credit losses related to the loans
securitized, over the life of the loans. These cash flows are projected over
the life of the loans using prepayment, default, loss, and interest rate
assumptions that market participants would use for similar financial
instruments subject to prepayment, credit and interest rate risk and are
discounted using an interest rate that a purchaser unrelated to the seller of
such a financial instrument would demand. At origination, the Company utilized
prepayment assumptions ranging from 25.0% to 30.0%, estimated loss factor
assumptions of 0.5% and weighted average discount rates of 18.0%, 23.6% and
26.6% for the years ended December 31, 1995, 1994 and 1993, respectively, to
value Residual Interests. The valuation includes consideration of
characteristics of the loans including loan type and size, interest rate,
origination date, term and geographic location. The Company also uses other
available information such as externally prepared reports on prepayment rates,
collateral value, economic forecasts and historical default and prepayment
rates of the portfolio under review. To the Company's knowledge, there is no
active market for the sale of these Residual Interests. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective.
F-12
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
In 1993, the Company valued Residual Interests at amortized cost which
approximated fair value in accordance with Emerging Issues Task Force No. 89-4
Collateralized Mortgage Obligation Residuals. The adoption of SFAS No. 115 did
not have a material impact on the financial position or results of operation
of the Company.
Mortgage Servicing Rights--Effective January 1, 1995, the Company adopted
SFAS No. 122, Accounting for Mortgage Servicing Rights, which requires that
upon sale or securitization of servicing retained mortgages, companies
capitalize the cost associated with the right to service mortgage loans based
on their relative fair values. The Company determines fair value based on the
present value of estimated net future cash flows related to servicing income.
The cost allocated to the servicing rights is amortized in proportion to and
over the period of estimated net future servicing fee income.
The Company capitalized, at fair value, $3,896,000 of mortgage servicing
rights for the year ended December 31, 1995. During the same period, related
amortization of such mortgage servicing rights was $208,000. At December 31,
1995, the capitalized servicing rights approximated fair value. The Company
periodically reviews capitalized servicing fees receivable to evaluate for
impairment. This review is performed on a disaggregated basis based on loan
type. The Company generally makes loans to credit impaired borrowers whose
borrowing needs may not be met by traditional financial institutions due to
credit exceptions. The Company has found that credit impaired borrowers are
payment sensitive rather than interest rate sensitive. Therefore, the Company
does not consider interest rates a predominant risk characteristic for
purposes of evaluating impairment. Impairment is recognized in a valuation
allowance for each pool in the period of impairment.
Property--Property is stated at cost and depreciated over the estimated
useful lives of the assets using accelerated methods. Leasehold improvements
are amortized on the straight-line method over the lesser of the useful lives
of the assets or the terms of the related leases. Useful lives generally range
from three to seven years.
Real Estate Owned--Real estate acquired in settlement of loans generally
results when property collateralizing a loan is foreclosed upon or otherwise
acquired by the Company in satisfaction of the loan. Real estate acquired
through foreclosure is carried at either the lower of fair value less costs to
dispose or the recorded investment in the loan. Fair value is based on the net
amount that the Company could reasonably expect to receive for the asset in a
current sale between a willing buyer and a willing seller, that is, other than
in a forced or liquidation sale. Adjustments to the carrying value of REO are
made through valuation allowances and charge-offs, recognized through a charge
to earnings.
Income Taxes--For federal and state income tax purposes, the Company has
elected to be taxed as an S corporation whereby its taxable income is included
in the individual returns of the stockholders. As an S corporation, the
Company is subject to certain state taxes, primarily in the State of
California.
The Company accounts for taxes under SFAS No. 109, Accounting for Income
Taxes, which requires an asset and liability approach to financial accounting
for income taxes. Deferred tax assets arise from temporary differences on
which the Company has paid income taxes or recognized income tax benefits that
will be realized as a reduction of future tax liabilities.
Revenue Recognition--The Company derives its revenue principally from fees
for the origination of loans, other fees, interest income, insurance
commissions, loan servicing fees and fees charged for services such as
appraisals and underwriting. The Company sells its loans through
securitization and other loan sales. Revenue
F-13
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
from loans pooled and securitized or sold in the secondary market is
recognized when such loan pools are sold. The Company retains the right to
service all loans it originates and securitizes. The Company receives a fee
for servicing loans based on a fixed percentage of the declining balance of
securitized loan pools. Through securitizations, the Company retains a
Residual Interest in the excess of the weighted average coupons on loans
securitized over the sum of pass-through interest rates on regular interests,
a servicing fee, a trustee fee, an insurance fee and credit losses.
Loan origination and sale revenue includes all mortgage related income other
than loan servicing and other fees, interest and other income.
Loan servicing and other fees are recorded as earned.
Interest income is recorded as earned. Interest income represents the
interest earned on loans held for sale during the period prior to their
securitization or sale, loans receivable held for investment, Residual
Interests and cash equivalents. In accordance with Emerging Issues Task Force
Issue number No. 89-4, the Company computes an effective yield based on the
carrying amount of each Residual Interest and its estimated future cash flows.
This yield is then used to accrue interest income on the Residual Interests.
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Stock split--As described in Note 15, on May 11, 1996, the Company's Board
of Directors approved a stock split of its common stock whereby approximately
710 shares of common stock were issued for each outstanding share of common
stock. All share and per share amounts included in the accompanying financial
statements and footnotes have been restated to reflect the stock split.
Reclassifications--Certain reclassifications have been made to conform the
1993 and 1994 financial statements to the 1995 presentation.
NOTE 3. UNAUDITED PRO FORMA INFORMATION
The pro forma financial information has been presented to show what the
significant effects on the historical financial position might have been had
the distribution of S Distribution Notes and the revocation of the Company's S
corporation status occurred as of March 31, 1996, and to show what the
significant effects on the historical results of operations might have been
had the Company not been treated as an S corporation for income tax purposes
as of the beginning of the earliest period presented.
Pro Forma Net Income and Pro Forma Statement of Financial Condition--Pro
forma net income represents the results of operations adjusted to reflect a
provision for income taxes which gives effect to the intended change in the
Company's income tax status from an S corporation to a C corporation. The
principal difference between the pro forma income tax rate and the federal
statutory rate of 35% relates to state income tax expense, net of the federal
income tax benefit. The pro forma statement of financial condition represents
the statement of financial condition as of March 31, 1996 adjusted to give
effect to (i) an S corporation distribution of notes with total principal
amounts of $33,626,000 equal to the Company's previously earned and
undistributed taxable S corporation earnings at March 31, 1996; (ii) the
reclassification of $1,294,000 of undistributed retained earnings to Common
Stock in accordance with Topic 4.B of the Compilation of Staff Accounting
Bulletins of the Securities and Exchange Commission; and, (iii) the
establishment of $3,237,000 of net deferred tax assets
F-14
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
that would have been recorded had the Company's S corporation status been
revoked as of March 31, 1996. The amount of the benefit to be recorded will be
dependent upon temporary differences existing at the date of revocation of the
Company's S corporation status. The principal components of the net deferred
tax assets relate to mark to market adjustments, legal reserves and
differences in accounting for residual interests in REMICs.
Pro Forma Net Income Per Share--Historical net income per common share is
not presented because it is not indicative of the ongoing entity.
Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of shares of common stock outstanding
during the year. In accordance with a regulation of the Securities and
Exchange Commission, pro forma net income per share data have been presented
to reflect the effect of the assumed issuance (at an assumed price of $18.00
per share) of that number of shares of common stock that would generate
sufficient cash to pay an S corporation distribution in an amount equal to
undistributed S corporation taxable earnings.
NOTE 4. LOAN ORIGINATION AND SALE REVENUE
Loan origination and sale revenue are comprised of the following:
<TABLE>
<CAPTION>
QUARTER
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net proceeds from the
sale of loans.......... $213,455,000 $371,641,000 $238,311,000 $ 7,560,000 $74,838,000
------------ ------------ ------------ ----------- -----------
Cost of loans sold...... 212,349,000 373,188,000 233,225,000 7,560,000 74,394,000
Allocated to mortgage
servicing rights....... (950,000) (3,896,000) (960,000)
------------ ------------ ------------ ----------- -----------
211,399,000 373,188,000 229,329,000 7,560,000 73,434,000
Origination fees........ (23,574,000) (33,601,000) (31,157,000) (1,010,000) (9,198,000)
Origination costs....... 5,037,000 5,271,000 5,767,000 187,000 1,448,000
------------ ------------ ------------ ----------- -----------
Net cost of loans sold.. 192,862,000 344,858,000 203,939,000 6,737,000 65,684,000
------------ ------------ ------------ ----------- -----------
Gain on sale of loans... 20,593,000 26,783,000 34,372,000 823,000 9,154,000
Other fees.............. 1,896,000 1,119,000 1,121,000 263,000 217,000
------------ ------------ ------------ ----------- -----------
Loan origination and
sale revenue........... $ 22,489,000 $ 27,902,000 $ 35,493,000 $ 1,086,000 $ 9,371,000
============ ============ ============ =========== ===========
</TABLE>
NOTE 5. LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment are secured principally by single
family residences. The loans bear interest at fixed rates ranging up to 15.95%
per annum and are due in monthly installments of principal and interest
through August 2024.
F-15
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
NOTE 6. PROPERTY
Property at December 31 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Office equipment................................... $ 3,496,000 $ 4,245,000
Vehicles........................................... 288,000 388,000
Leasehold improvements............................. 152,000 160,000
Computer software.................................. 1,119,000 1,119,000
Building........................................... 406,000 406,000
Land............................................... 98,000 98,000
----------- -----------
5,559,000 6,416,000
Less accumulated depreciation and amortization..... (3,479,000) (4,275,000)
----------- -----------
Property, net...................................... $ 2,080,000 $ 2,141,000
=========== ===========
</TABLE>
NOTE 7. SERVICING PORTFOLIO
Trust and other custodial funds, relating to loans serviced for others,
amounted to approximately $8,517,000, $5,783,000, $2,387,000 and $2,878,000 at
March 31, 1996 and December 31, 1995, 1994 and 1993, respectively. Such funds,
which are maintained in separate bank accounts, are excluded from the
Company's assets and liabilities.
Total loans serviced amounted to $611,718,000, $613,791,000, $555,685,000
and $385,570,000 as of March 31, 1996 and December 31, 1995, 1994 and 1993,
respectively. Included in such amounts are adjustable rate mortgage loans
totaling approximately $251,349,000, $281,551,000 and $153,224,000 as of
December 31, 1995, 1994 and 1993, respectively, for which the Company has
subcontracted servicing through an outside agency through February 1, 1996.
NOTE 8. WAREHOUSE FINANCING FACILITY
The Company has a revolving line of credit with a secured asset-based
lender. At December 31, 1995, the Company may borrow and repay during a 90 day
revolving period up to $125,000,000. This line of credit bears interest at a
variable rate based upon the London Interbank Offered Rate (LIBOR) payable
monthly. This line of credit is renewable by the lender on a quarterly basis
and currently expires on the sooner of the closing of a loan securitization or
June 28, 1996. Outstanding borrowings under this line of credit are
collateralized by loans held for sale. Upon the sale or securitization of
loans, borrowings are repaid. This line of credit contains certain
affirmative, negative and financial covenants, with which the Company was in
compliance at December 31, 1995.
The following table presents data on the line of credit for the periods
indicated
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 THREE MONTHS
--------------------------------------- ENDED
1993 1994 1995 MARCH 31, 1996
----------- ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average inter-
est rate for the peri-
od..................... 5.81% 5.96% 7.10% 6.31%
Interest rate at the end
of the period.......... 5.75% 7.38% 6.56% 6.31%
Weighted average amount
outstanding for the
period................. $24,138,000 $ 58,139,000 $ 52,610,000 $45,693,000
Maximum amount
outstanding at any
month-end.............. $77,351,000 $110,551,000 $108,217,000 $55,347,000
</TABLE>
F-16
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
NOTE 9. NOTES PAYABLE
Notes payable principally represent amounts owed related to senior liens on
properties foreclosed upon by the Company. The notes bear fixed and variable
interest at rates ranging from 7% to 15.45% per annum at December 31, 1995 and
are payable in aggregate annual amounts as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996............................................................ $ 95,000
1997............................................................ 54,000
1998............................................................ 54,000
1999............................................................ 49,000
2000............................................................ 49,000
Thereafter...................................................... 822,000
----------
$1,123,000
==========
</TABLE>
NOTE 10. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
The Company's operations are conducted from leased facilities located in
various areas of the United States. These leases have clauses which provide
for increases in rent based on increases in the cost of living index and
options for renewal. The future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996........................................................... $1,258,000
1997........................................................... 1,155,000
1998........................................................... 870,000
1999........................................................... 649,000
2000........................................................... 601,000
Thereafter..................................................... 1,240,000
----------
$5,773,000
==========
</TABLE>
In the ordinary course of business, the Company has liability under
representations and warranties made to purchasers and insurers of mortgage
loans. Under certain circumstances, the Company may become liable for the
unpaid principal and interest on defaulted loans or other loans if there has
been a breach of representation or warranties.
The Company has negotiated an employment agreement with an officer. This
agreement provides for the payment of a base salary, the issuance of common
stock subject to certain restrictions and the payment of severance benefits
upon termination.
In December 1989, a class action suit was filed on behalf of certain
borrowers related to the origination of their loans by the Company. The
Company, without admitting to any wrong-doing, agreed to settle the case in
December 1994. The terms of the settlement provide for cash distributions to
the plaintiffs in the amount $6,850,000, which is to be paid out over a three-
year period. Remaining future payments to plaintiffs of $1,833,000 and
$2,308,000 are included in accrued liabilities at March 31, 1996 and December
31, 1995, respectively.
F-17
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
The Company is involved in certain litigation arising in the normal course
of business. The Company believes that any liability with respect to such
legal actions, individually or in the aggregate, is not likely to be material
to the Company's financial position or results of operations.
At December 31, 1995, the State of California accounted for approximately
86% of the total serviced loan portfolio while no other state accounted for
more than 6%.
Availability of Funding Sources--The Company funds substantially all of the
loans which it originates or purchases through borrowings under its warehouse
financing facility and internally generated funds. These borrowings are in
turn repaid with the proceeds received by the Company from selling such loans
through loan sales or securitizations. Any failure to renew or obtain adequate
funding under this warehouse financing facility, or other borrowings, or any
substantial reduction in the size of or pricing in the markets for the
Company's loans, could have a material adverse effect on the Company's
operations. To the extent that the Company is not successful in maintaining or
replacing existing financing, it would have to curtail its loan production
activities or sell loans earlier than is optimal, thereby having a material
adverse effect on the Company's results of operations and financial condition.
Dependence on Securitizations--Since 1992, the Company has pooled and sold
through securitizations an increasing percentage of the loans which it
originates. The Company derives a significant portion of its income by
recognizing gains upon the sale of loans through securitizations which are due
in part to the fair value, recorded at the time of sale, of residual interests
received. Adverse changes in the securitization market could impair the
Company's ability to purchase and sell loans through securitizations on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's results of operations and financial condition.
The Company has relied on credit enhancement to achieve a "AAA/aaa" rating
for the regular interests in its securitizations. The credit enhancement has
generally been in the form of an insurance policy issued by an insurance
company insuring the timely repayment of regular interests in each of the
REMIC trusts. There can be no assurance that the Company will be able to
obtain credit enhancement in any form from the current insurer or any other
provider of credit enhancement on acceptable terms or that future
securitizations will be similarly rated. A downgrading of the insurer's credit
rating or its withdrawal of credit enhancement could have a material adverse
effect on the Company's results of operations and financial condition.
NOTE 11. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1995, 1994 and 1993, the Company
purchased approximately $15,126,000, $91,501,000 and $69,995,000,
respectively, in loans from a company in which a principal stockholder has a
controlling ownership.
During 1995, 1994 and 1993, the Company serviced mortgage loans for
employees and other related parties for which no service fees were charged.
The aggregate balances of such loans were approximately $11,470,000,
$12,909,000, $8,763,000 and $6,800,000 at March 31, 1996, and December 31,
1995, 1994 and 1993, respectively.
Interest expense related to notes payable to stockholders amounted to
approximately $7,000, $223,000, $10,000, and $561,000 for the three months
ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993
respectively.
F-18
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
During the years ended December 31, 1995, 1994 and 1993, the Company paid
consulting fees of approximately $76,000, $161,000 and $223,000, respectively,
to a company owned by the stockholders and received fees of approximately
$146,000, $514,000 and $705,000, respectively, from a company in which the
stockholders have a controlling ownership interest.
During the three months ended March 31, 1996 and the years ended December
31, 1995, 1994 and 1993, the Company sold, at par, loans held for sale of
$285,000, $3,188,000, $6,783,000 and $7,061,000, respectively, to a principal
stockholder. Additionally, in 1993, the Company sold certain real property to
this principal stockholder for $600,000.
The Company leases facilities from a principal stockholder on a term and
month-to-month basis. Rent expense amounted to $2,000 for the three months
ended March 31, 1996 and to $18,000 for each of the years ended December 31,
1995, 1994 and 1993. In October 1995, the Company entered into a lease with a
principal stockholder for its corporate headquarters facility. For the years
ending December 31, 1996 through 2003, such lease requires annual lease
payments of $464,000, $521,000, $536,000, $552,000, $569,000, $586,000,
$603,000, and $50,000, respectively.
In 1995, companies owned by family members of the Company's stockholders had
lines of credit with the Company which had outstanding balances of $335,000
and $525,000 at March 31, 1996 and December 31, 1995, respectively. Fees
received in the 1996 quarter and in 1995 from companies owned by the
stockholders' family members were $144,000 and $715,000, respectively. In
1995, the Company also paid premiums of $193,000 to companies owned by the
principal stockholders' family members as these companies included loans in
the Company's securitizations. Additionally, in 1995, the Company purchased
approximately $9,841,000 in loans from a company owned by the principal
stockholders' family members.
NOTE 12. INCOME TAXES
The income tax provision (benefit) for the periods indicated is as follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
--------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current provision (benefit).... $ 406,000 $426,000 $405,000 $(5,000) $118,000
Deferred taxes (principally
resulting from the accrual and
payment of legal settlement
costs and reserves)........... (184,000) (63,000) 73,000
--------- -------- -------- ------- --------
$ 222,000 $363,000 $478,000 $(5,000) $118,000
========= ======== ======== ======= ========
</TABLE>
NOTE 13. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
Financial Instruments--SFAS No. 105, Disclosure of Information about
Financial Instruments with Concentrations of Credit Risk and SFAS No. 119,
Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments requires the disclosure of the notional amount or contractual
amounts of financial instruments.
The Company regularly securitizes and sells fixed and variable rate mortgage
loans. As part of its interest rate risk management strategy, the Company may
from time to time hedge its interest rate risk related to its loans held for
sale and origination commitments by selling short United States Treasury
Securities. The Company
F-19
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
classifies these transactions as hedges of specific loans receivable and
commitments. The gains and losses derived from these financial futures are
deferred and included in the carrying amounts of the related hedged items and
are recognized in earnings upon sale of the related items. There were no
deferred gains or losses on hedging activities at March 31, 1996 and December
31, 1995, 1994 and 1993. Realized gains and (losses) on hedging activities
were $(255,000) and $800,000 for the years ended December 31, 1995 and 1994.
The following disclosures of the estimated fair value of the financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosure About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.... $ 4,019,000 $ 4,019,000 $ 2,206,000 $ 2,206,000
Loans held for sale.......... 24,744,000 25,610,000 26,325,000 30,159,000
Loans receivable held for
investment.................. 2,261,000 2,340,000 2,075,000 2,521,000
Residual Interests........... 19,705,000 19,705,000 20,732,000 20,732,000
Liabilities:
Warehouse financing facility. 18,233,000 18,233,000 20,015,000 20,015,000
Notes payable................ 1,123,000 1,174,000 2,023,000 2,023,000
</TABLE>
The estimated fair value of loans is based upon quoted market prices.
The fair value of Residual Interests is determined based on estimates of the
market value using discounted cash flows.
Rates currently available to the Company for debt with similar terms and
remaining maturities were used to estimate the fair value of the warehouse
financing facility and notes payable.
The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 1996 and December 31, 1995. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
Off-Balance Sheet Activities--The Company is exposed to on-balance sheet
credit risk related to its loans held for sale, Residual Interests and loans
receivable held for investment. The Company is exposed to off-balance sheet
credit risk related to loans which the Company has committed to originate or
buy.
The Company is party to financial instruments with off-balance sheet credit
risk in the normal course of business. These financial instruments include
commitments to extend credit to borrowers and commitments to
F-20
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
purchase loans from others. The Company has a first or second lien position on
substantially all of its loans, and the maximum combined loan-to-value (LTV)
permitted by the Company's underwriting guidelines is 85%. The LTV represents
the combined mortgage balances as a percentage of the appraised value of the
mortgaged property. A title insurance policy is required for all loans.
As of March 31, 1996 and December 31, 1995, the Company had outstanding
commitments to extend credit or purchase loans in the amounts of $7,469,000
and $4,181,000 respectively.
NOTE 14. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan, which was established in
1994, available to all employees who have been with the Company for one year
and have reached the age of 21. Employees may generally contribute up to 15%
of their salary each year; and the Company, at its discretion, may match up to
25% of the first 7% contributed by the employee. The Company's contribution
expense was $32,000, $97,000 and $45,000 for the three months ended March 31,
1996 and the years ended December 31, 1995 and 1994, respectively.
NOTE 15. SUBSEQUENT EVENTS
First Alliance Corporation, a Delaware Corporation owned by the stockholders
of the Company, intends to acquire the Company in exchange for 10,750,000
shares of its Class B Common Stock. First Alliance Corporation is also
contemplating an initial public offering of 3,500,000 shares of its Class A
Common Stock (the "Offering").
In 1996, the Company entered into an employment agreement (the "Agreement")
with its president and chief executive officer. The Agreement provides for a
three year term ending July 1, 1999, and shall be automatically renewed for
successive three year terms unless terminated by either party. Under the
Agreement, this officer has agreed to serve as a consultant to the Company for
a period of three years after termination at the discretion of the Board of
Directors (except for a termination due to cause, death or disability). This
officer shall receive an annual salary of $395,000, which salary may be
increased at the discretion of the Board of Directors. This officer will
receive an annual fee of $248,500 during the three year consulting period.
On May 2, 1996, the Company distributed S distribution notes totalling
$40,000,000 to the Company's stockholders. Additional S distribution notes
will be distributed prior to consummation of the Offering.
On May 11, 1996, the Company's Board of Directors approved a split of its
common stock whereby approximately 710 shares of common stock were issued for
each outstanding share of common stock. All share and per share amounts
included in the accompanying financial statements and footnotes have been
restated to reflect this stock split.
In June 1996, the Company granted 107,500 shares of common stock to an
officer of the Company. A value of approximately $1,600,000 has been ascribed
to such shares by the Company. Upon consummation of the Offering 24.6% of
these shares will vest with the balance vesting over a five year period. For
purposes of computing pro forma net income per share information, 18,628 of
these shares have been treated as outstanding.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE PUBLIC OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 15
Prior S Corporation Status................................................ 15
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 16
Dilution.................................................................. 16
Capitalization............................................................ 18
Selected Consolidated Financial and Other Data............................ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 35
Management................................................................ 53
Certain Transactions...................................................... 58
Principal Stockholders.................................................... 60
Description of Capital Stock.............................................. 61
Shares Eligible for Future Sale........................................... 64
Underwriting.............................................................. 65
Legal Matters............................................................. 66
Experts................................................................... 66
Glossary.................................................................. 67
Available Information..................................................... 68
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERING HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
FIRST ALLIANCE
CORPORATION
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the Public
Offering described in this registration statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 26,371
NASD filing fee................................................. 8,148
Printing expenses............................................... 200,000
Accounting fees and expenses.................................... 200,000
Legal fees and expenses......................................... 275,000
Listing fees.................................................... 50,000
Fees and expenses (including legal fees) for qualifications
under state securities laws.................................... 30,000
Transfer agent's fees and expenses.............................. 5,000
Portion of Directors' and Officers' Insurance Attributable to
the Public Offering............................................
Miscellaneous................................................... 125,000
--------
Total......................................................... $919,519
========
</TABLE>
All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "GCL") provides
that a Delaware corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if he or she acted under similar
standards, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action
or suit was brought shall determine that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to be indemnified for such expenses which the
court shall deem proper.
Section 145 of GCL further provides that to the extent a director or officer
of a corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, such officer or director shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the
II-1
<PAGE>
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against such officer
or director and incurred by him or her in any such capacity or arising out of
his or her status as such, whether or not the corporation would have the power
to indemnify him or her against such liabilities under Section 145.
As permitted by Section 102(b)(7) of the GCL, the Company's Certificate of
Incorporation provides that a director shall not be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director. However, such provision does not eliminate or limit the liability of
a director for acts or omissions not in good faith or for breaching his or her
duty of loyalty, engaging in intentional misconduct or knowingly violating a
law, paying a dividend or approving a stock repurchase which was illegal, or
obtaining an improper personal benefit. A provision of this type has no effect
on the availability of equitable remedies, such as injunction or rescission,
for breach of fiduciary duty.
The Company's Bylaws require the Company to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Company) by
reason of the fact that he is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Company, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
does not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, that he had reasonable cause to believe that his conduct was
unlawful.
In addition, the Company's Bylaws require the Company to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, except
that no indemnification may be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable for negligence
or misconduct in the performance of his duty to the Company unless and only to
the extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Any indemnification (unless ordered by a court) made by the Company may be
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct as set
forth above. Such determination must be made (i) by the Board by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders.
To the extent that a director, officer, employee or agent of the Company has
been successful on the merits or otherwise in defense of any covered action,
suit or proceeding, or in defense of any covered claim, issue or matter
therein, he will be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
II-2
<PAGE>
Expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding may be paid by the Company in advance of the final
disposition of such action, suit or proceeding as authorized by the Board in
the specific case upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Company as authorized
in this Article. Such expenses incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the Board deems
appropriate.
Prior to the completion of the Public Offering, the Company will enter into
separate but identical indemnity agreements (the "Indemnity Agreements") with
each director and executive officer of the Company and expects to enter into
Indemnity agreements with persons who become directors or executive officers
in the future. The Indemnity Agreements provide that the Company will
indemnify the director or officer (the "Indemnitee") against any expenses or
liabilities in connection with any proceeding in which such Indemnitee may be
involved as a party or otherwise, by reason of the fact that such Indemnitee
is or was a director or officer of the Corporation or by reason of any action
taken by or omitted to be taken by such Indemnitee while acting as an officer
or director of the Corporation, provided that such indemnity shall only apply
if (i) the Indemnitee was acting in good faith and in a manner the Indemnitee
reasonably believed to be in the best interests of the Corporation, and, with
respect to any criminal action, had no reasonable cause to believe the
Indemnitee's conduct was unlawful, (ii) the claim was not made to recover
profits made by such Indemnitee in violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, or any successor statute, (iii)
the claim was not initiated by the Indemnitee, or (iv) the claim was not
covered by applicable insurance. Each Indemnitee has undertaken to repay the
Company for any costs or expenses paid by the Company if it shall ultimately
be determined by a court of competent jurisdiction in a final, nonappealable
adjudication that such Indemnitee is not entitled to indemnification under the
Indemnity Agreements. In addition to the Indemnity Agreements, the Company
anticipates obtaining a policy of directors and officers liability insurance
prior to the completion of the Public Offering.
The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company, its
directors, officers and controlling persons against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to and in consideration for the performance of the duties of Mark
K. Mason under the employment agreement between the Company and Mr. Mason, on
June 29, 1996, the Company issued 107,500 shares of Class B Common Stock
(after giving effect to a May 1996 stock split) to Mr. Mason, the Executive
Vice President and Chief Financial Officer of the Company. The issuance to Mr.
Mason involved no public offering and will be a private placement exempt from
the registration requirements of the Securities Act of 1933, as amended,
pursuant to the exemption provided by Section 4(2) thereof.
During the last three years, the Company sold, on a servicing retained
basis, approximately $107 million of loans it had originated or purchased. The
loans were not publicly offered for sale and no underwriters were involved.
The Company effected the sales of the loans pursuant to the exemption from the
registration
II-3
<PAGE>
requirements of Section 5 of the Securities Act provided by Section 3(a)(11) of
the Securities Act and Rule 147 promulgated thereunder. The Company disclosed
in the materials used in the loan sales that it was relying on such exemption
and required each private investor to represent (i) that it was, at the time of
the sale, a resident of the State of California and (ii) that it would not
resell such loans to non-California residents for at least nine months.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1** Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1 1996 Stock Incentive Plan
4.2 Stock Certificate Specimen
5.1 Opinion of Gibson, Dunn & Crutcher LLP
10.1** Warehouse Financing Facility
10.2** Form of Pooling and Servicing Agreement
10.3** Corporate Headquarters Lease (Irvine, California)
10.4 S Distribution Notes
10.5 Mason Employment Agreement
10.6 Intentionally Omitted
10.7 Form of Directors' and Officers' Indemnity Agreement
10.8** Mortgage Loan Master Transfer Agreement dated as of June 30, 1995
between Nationscapital Mortgage Corporation and the Company
10.9** Mortgage Loan Master Transfer Agreement dated as of June 30, 1995
between Coast Security Mortgage Inc. and the Company
10.10** Chisick Employment Agreement
10.11 Reimbursement Agreement
10.12 Agreement and Plan of Merger
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte & Touche LLP re report dated March 18, 1996.
23.3** Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1)
24.1** Power of Attorney (included on signature page of Registration Statement)
27 ** Financial Data Schedule
99.1** Consent of Jeffrey W. Smith
99.2** Consent of Merrill Butler
99.3** Consent of George Gibbs, Jr.
99.4** Consent of Albert L. Lord
99.5** Consent of Mark K. Mason
</TABLE>
- --------
* To be filed by Amendment.
** Previously filed.
(b) FINANCIAL STATEMENTS
(c) FINANCIAL DATA SCHEDULE
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the Public Offering of such
securities at that time shall be deemed to be the initial bona fide
Public Offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Irvine, State of California, on July 23, 1996.
FIRST ALLIANCE MORTGAGE COMPANY
By /s/ Brian Chisick*
_____________________________________
Brian Chisick
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement on Form S-1 has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Brian Chisick* President, Chief Executive July 23, 1996
____________________________________ Officer and Director
Brian Chisick (Principal
Executive Officer)
/s/ Sarah Chisick* Director July 23, 1996
____________________________________
Sarah Chisick
/s/ Mark K. Mason Executive Vice President and July 23, 1996
____________________________________ Chief Financial Officer
Mark K. Mason (Principal
Financial and Accounting
Officer)
</TABLE>
*By
/s/ Mark K. Mason
----------------------------
Mark K. Mason Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
EXHIBIT DESCRIPTION SEQUENTIALLY
NO. ----------- NUMBERED PAGE
------- -------------
1.1 Form of Underwriting Agreement
3.1** Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1 1996 Stock Incentive Plan
4.2 Stock Certificate Specimen
5.1 Opinion of Gibson, Dunn & Crutcher LLP
10.1** Warehouse Financing Facility
10.2** Form of Pooling and Servicing Agreement
10.3** Corporate Headquarters Lease (Irvine, California)
10.4 S Distribution Notes
10.5 Mason Employment Agreement
10.6 Intentionally Omitted
10.7 Form of Directors' and Officers' Indemnity Agreement
10.8** Mortgage Loan Master Transfer Agreement dated as of
June 30, 1995 between Nationscapital Mortgage
Corporation and the Company
10.9** Mortgage Loan Master Transfer Agreement dated as of
June 30, 1995 between Coast Security Mortgage Inc.
and the Company
10.10** Chisick Employment Agreement
10.11 Reimbursement Agreement
10.12 Agreement and Plan of Merger
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte & Touche LLP re report dated
March 18, 1996
23.3** Consent of Gibson, Dunn & Crutcher LLP (contained
in Exhibit 5.1)
24.1** Power of Attorney (included on signature page of
Registration Statement)
27 ** Financial Data Schedule
99.1** Consent of Jeffrey W. Smith
99.2** Consent of Merrill Butler
99.3** Consent of George Gibbs, Jr.
99.4** Consent of Albert L. Lord
99.5** Consent of Mark K. Mason
</TABLE>
- --------
* To be filed by Amendment.
** Previously filed.
<PAGE>
EXHIBIT 1.1
FIRST ALLIANCE CORPORATION
3,500,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
July __, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
As Representative of the Several Underwriters
Dear Sirs:
First Alliance Corporation, a Delaware corporation (the "Company")
-------
hereby confirms its agreement with the several underwriters named in Schedule 1
----------
hereto (the "Underwriters"), for whom you have been duly authorized to act as
------------
representative (in such capacity, the "Representative"), as set forth below. If
--------------
you are the only Underwriters, all references herein to the Representative shall
be deemed to be to the Underwriters. All references herein to the Company and
representations and warranties relating thereto give effect to the merger of a
subsidiary of the Company with and into First Alliance Mortgage Company, a
California corporation ("FAMCO"), as a result of which FAMCO will become a
wholly-owned subsidiary of the Company, which merger shall be consummated on the
Firm Closing Date (as defined below). Accordingly, references to the Company
herein at all times prior to the Firm Closing Date shall mean FAMCO and
reference to the Company on and subsequent to the Firm Closing Date shall be
deemed to include the Company and FAMCO and the Company's other subsidiaries.
1. Securities. Subject to the terms and conditions herein contained, the
----------
Company proposes to issue and sell to the several Underwriters an aggregate of
3,500,000 shares (the "Firm Securities") of the Company's Class A Common Stock,
---------------
no par value per share ( the "Class A Common Stock"). The Company also proposes
--------------------
to issue and sell to the several Underwriters not more than 525,000 additional
shares of Class A Common Stock if requested by the Representative as provided in
Section 3 of this Agreement. Any and all shares of Class A Common Stock to be
purchased by the Underwriters pursuant to such option are referred to herein as
the "Option Securities," the Firm Securities and any Option Securities are
-----------------
collectively
- --------------------
/1/ Plus an option to purchase from First Alliance Mortgage Company up to
525,000 additional shares to cover over-allotments.
1
<PAGE>
referred to herein as the "Securities." The Class A Common Stock and Class B
----------
Common Stock of the Company are collectively referred to as the "Common Stock".
------------
2. Representations and Warranties of the Company and the Principal
---------------------------------------------------------------
Stockholders.
- ------------
(a) The Company represents and warrants to, and agrees with, each of
the several Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-03633)
with respect to the Securities, including a prospectus subject to
completion, has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
----------
(the "Act"), and one or more amendments to such registration statement may
---
have been so filed. After the execution of this Agreement, the Company
will file with the Commission either (i) if such registration statement, as
it may have been amended, has been declared by the Commission to be
effective under the Act, either (A) if the Company relies on Rule 434 under
the Act, a Term Sheet (as hereinafter defined) relating to the Securities,
that shall identify the Preliminary Prospectus (as hereinafter defined)
that it supplements containing such information as is required or permitted
by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not
rely on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act, and in the case of either clause
(i)(A) or (i)(B) of this sentence, as have been provided to and approved by
the Representative prior to the execution of this Agreement, or (ii) if
such registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, an amendment to
such registration statement, including a form of prospectus, a copy of
which amendment has been furnished to and approved by the Representative
prior to the execution of this Agreement. The Company may also file a
related registration statement with the Commission pursuant to Rule 462(b)
under the Act for the purpose of registering certain additional Securities,
which registration statement shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
---------------------
Statement" means the registration statement initially filed relating to the
---------
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Rule 462(b)
-----------
Registration Statement" means any registration statement filed with the
----------------------
Commission pursuant to Rule 462(b) under the Act (including the
Registration Statement and any Preliminary Prospectus or Prospectus
incorporated therein at the time such Registration Statement becomes
effective); the term "Registration Statement" includes both the Original
----------------------
Registration Statement and any Rule 462(b) Registration Statement; the term
"Preliminary Prospectus" means each prospectus subject to completion filed
----------------------
with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means: (A) if the
----------
2
<PAGE>
Company relies on Rule 434 under the Act, the Term Sheet relating to the
Securities that is first filed pursuant to Rule 424(b)(7) under the Act,
together with the Preliminary Prospectus identified therein that such Term
Sheet supplements; (B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or (C) if the Company does not rely on Rule 434 under the
Act and if no prospectus is required to be filed pursuant to Rule 424(b)
under the Act, the prospectus included in the Registration Statement; and
the term "Term Sheet" means any term sheet that satisfies the requirements
----------
of Rule 434 under the Act. Any reference herein to the "date" of a
Prospectus that includes a Term Sheet shall mean the date of such Term
Sheet.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any Preliminary
Prospectus was filed with the Commission it (A) contained all statements
required to be stated therein in accordance with, and complied in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not include any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, it (A)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with
the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading. When the Prospectus or any
Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or any part thereof or such amendment or supplement is not
required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and on the Firm Closing Date and any Option Closing
Date (both as hereinafter defined), the Prospectus, as amended or
supplemented at any such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied or will
comply in all material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder and (B) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (ii) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or
any amendment thereto or the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representative
specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement has not been declared effective (i) the
Company has filed a Rule 462(b) Registration Statement in compliance with
and that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (ii) the
3
<PAGE>
Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the
Act or the Commission has received payment of such filing fee.
(iv) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under
the laws of their respective jurisdictions of incorporation and are duly
qualified to transact business as foreign corporations and are in good
standing under the laws of all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their respective
businesses requires such qualification, except where the failure to be so
qualified does not result in a material adverse change in the condition
(financial or otherwise), management, business, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a whole
(a "Material Adverse Effect").
(v) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and
conduct their respective businesses as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus); and the Company has full power
(corporate and other) to enter into this Agreement and to carry out all the
terms and provisions hereof to be carried out by it.
(vi) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned beneficially by the Company free and clear
of any security interests, liens, encumbrances, equities or claims.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus). All of the issued
shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. The Firm Securities
and the Option Securities have been duly authorized and at the Firm Closing
Date or the related Option Closing Date (as the case may be), after payment
therefor in accordance herewith, will be validly issued, fully paid and
nonassessable. At the Firm Closing Date or the Option Closing Date, no
holders of outstanding shares of capital stock of the Company will be
entitled as such to any preemptive or other rights to subscribe for any of
the Securities, and no holder of securities of the Company has any right
which has not been fully exercised or waived to require the Company to
register the offer or sale of any securities owned by such holder under the
Act in the public offering contemplated by this Agreement.
(viii) The capital stock of the Company conforms to the
description thereof contained in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
4
<PAGE>
(ix) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such subsidiary any such
capital stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any such subsidiary to
issue any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(x) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its consolidated subsidiaries and the results
of operations and cash flows as of the dates and periods therein specified.
Such financial statements and schedules have been prepared in accordance
with generally accepted accounting principles ("GAAP") consistently applied
throughout the periods involved (except as otherwise noted therein). The
selected financial data set forth under the captions "Capitalization" and
"Selected Consolidated Financial Data" in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present, in accordance with GAAP on the basis stated in the
Prospectus (or such Preliminary Prospectus), the information included
therein.
(xi) Deloitte & Touche LLP, who have audited certain financial
statements of the Company and its consolidated subsidiaries and delivered
their report with respect to the audited consolidated financial statements
included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
are independent public accountants as required by the Act and the
applicable rules and regulations thereunder.
(xii) The execution and delivery of this Agreement have been
duly authorized by the Company and this Agreement has been duly executed
and delivered by the Company, and is the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by the effect of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to
rights and remedies of creditors or by general equitable principles.
(xiii) No legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party or to which the property
of the Company or any of its subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectus and are not
described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), to the best of the Company's knowledge, and
no such proceedings have been threatened against the Company or any of its
subsidiaries or with respect to any of their respective properties; and no
contract or other document is required to be described in the Registration
Statement or the
5
<PAGE>
Prospectus or to be filed as an exhibit to the Registration Statement that
is not described therein (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) or filed as required.
(xiv) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained,
such as may be required under state securities or blue sky laws, such as
may be required by the National Association of Securities Dealers, Inc.
(the "NASD") and, if the registration statement filed with respect to the
Securities (as amended) is not effective under the Act as of the time of
execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (B) conflict with or result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, lease
or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties are bound, or the charter documents
or by-laws of the Company or any of its subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or any
of its subsidiaries.
(xv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
neither the Company nor any of its subsidiaries has sustained any loss or
interference with their respective businesses or properties having or
resulting in a Material Adverse Effect from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding and there has not
been any event, circumstance, or development that results in, or that the
Company believes would result in, a Material Adverse Effect, except in each
case as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xvi) The Company has not, directly or indirectly (except for
the sale of Securities under this Agreement), (i) taken any action designed
to cause or to result in, or that has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased, or paid anyone any compensation for soliciting
purchases of, the Securities or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(xvii) None of the Company, its subsidiaries or any employee of
the Company or its subsidiaries has made any payment of funds of the
Company or its subsidiaries prohibited by law and no funds of the Company
or its subsidiaries have been set aside to be used for any payment
prohibited by law.
6
<PAGE>
(xviii) No Default or Event of Default (as defined in that certain
Interim Warehouse and Security Agreement dated as of October 29, 1993, as
amended, between Prudential Securities Realty Funding Corporation and the
Company), no Events of Servicing Termination or increase in the Reserve
Account Required Amount (as defined in that certain Pooling and Servicing
Agreement relating to First Alliance Home Equity Trust 1992-1 Home Equity
Loan Certificates dated as of January 31, 1992, between the Company and
Chemical Bank in its capacity as Master Servicer and in its fiduciary
capacity as Trustee), no Events of Servicing Termination or increase in the
Reserve Account Required Amount (as defined in that certain Pooling and
Servicing Agreement relating to First Alliance Home Equity Trust 1992-2
Home Equity Loan Certificates dated as of October 1, 1992, between the
Company and Chemical Bank in its capacity as Master Servicer and in its
capacity as Trustee), no Events of Servicing Termination or increase in the
Specified Subordinated Amount (as defined in that certain Pooling and
Servicing Agreement relating to First Alliance Mortgage Loan Trust 1993-2
dated as of August 1, 1993, among the Company, the Company as Servicer and
Chemical Bank as Trustee and as Master Servicer), no Events of Servicing
Termination or increase in the Specified Subordinated Amount (as defined in
that certain Pooling and Servicing Agreement dated as of November 1, 1993,
relating to First Alliance Mortgage Loan Trust 1993-2 among the Company,
the Company as Servicer and Chemical Bank as Trustee and Master Servicer),
no Events of Servicing Termination or increase in the Specified
Subordinated Amount (as defined in that certain Pooling and Servicing
Agreement relating to First Alliance Mortgage Loan Trust 1994-1 dated as of
February 1, 1994, among the Company, the Company as Servicer and Chemical
Bank as Trustee and as Master Servicer), no Events of Servicing Termination
or increase in the Specified Subordinated Amount (as defined in that
certain Pooling and Servicing Agreement relating to First Alliance Mortgage
Loan Trust 1994-2 dated as of May 1, 1994 among the Company, the Company as
Servicer and Chemical Bank as Trustee and as Master Servicer), no Events of
Servicing Termination or increase in the Specified Subordinated Amount (as
defined in that certain Pooling and Servicing Agreement relating to First
Alliance Mortgage Loan Trust 1994-3, dated as of August 1, 1994, among the
Company, the Company as Servicer and Bankers Trust Company as Trustee and
as Master Servicer), no Events of Servicing Termination or increase in the
Specified Subordinated Amount (as defined in that certain pooling and
Servicing Agreement relating to First Alliance Mortgage Loan Trust 1994-4
dated as of December 1, 1994, among the Company, the Company as Servicer
and Bankers Trust Company of California, N.A. as trustee), no Events of
Servicing Termination or increase in the Specified Subordinated Amount (as
defined in that certain Pooling and Servicing Agreement relating to First
Alliance Mortgage Loan Trust 1995-1 dated as of May 1, 1995, among the
Company and the Company as Servicer and Bankers Trust Company of
California, N.A. as Trustee), no Events of Servicing Termination or
increase in the Specified Subordinated Amount (as defined in that certain
Pooling and Servicing Agreement relating to First Alliance Mortgage Loan
Trust 1995-2 dated as of December 1, 1995, among the Company, the Company
as Servicer and Bankers Trust Company of California, N.A. as Trustee), and
no event of default (as defined in that certain Pooling and Servicing
Agreement relating to First Alliance Mortgage Loan Trust 1996-1, dated
March 1, 1996 among the Company and the Company as Servicer,
7
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Prudential Securities Secured Financing Corporation, as Depositor, and
Bankers Trust Company of California, N.A., as Trustee) has occurred and, to
the best of the Company's knowledge, there is no event which, with the
giving of notice or the passage of time or both, would give rise to such a
Default, Event of Default or Events of Servicing Termination or increase in
the Specified Subordinated Amount.
(xix) The description of past securitization transactions
effected by the Company, as contained in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), is true and complete in all material respects and
to the Company's best knowledge, no event or series of events has occurred
that would result in any of the securities issued in connection with any of
such transactions being downgraded or placed on a watch list with negative
implications by any rating agency or similar organization, or that would
impair the Company's or its subsidiaries' ability to consummate future
securitization transactions upon economic terms consistent with past
securitization transactions or otherwise cause the Company and its
subsidiaries to suffer any material adverse effect with respect to any past
or future securitization transaction (other than any such event or series
of events described in the Prospectus, or, if the Prospectus is not yet in
existence, the most recent Preliminary Prospectus).
(xx) (a) The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their
respective businesses except where the failure to possess any such item
would not have a Material Adverse Effect, and (b) neither the Company nor
any such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
that, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect, except
as described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xxi) The Company is not an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and this
transaction will not cause the Company to become an investment company
subject to registration under the 1940 Act.
(xxii) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not have
a Material Adverse Effect and has paid all taxes required to be paid by it
and any other assessment, fine or penalty levied against it, to the extent
that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith
or as described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). FAMCO has
validly elected to be treated as an S corporation for federal and
California income tax purposes since May 1, 1988 and has continued to
qualify as an S corporation since that date. FAMCO will remain an S
corporation for federal and California tax purposes until termination of
such S
8
<PAGE>
corporation status immediately prior to the consummation of the sale of the
Securities pursuant to this Agreement.
(xxiii) Except for the shares of capital stock of each of the
subsidiaries owned by the Company, neither the Company nor any such
subsidiary owns any shares of stock or any other equity securities of any
corporation or has any equity interest in any firm, partnership,
association or other entity.
(xxiv) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (A) transactions are executed in accordance with
management's general or specific authorizations; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (C) access to assets is permitted only in accordance
with management's general or specific authorization; and (D) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxv) Except as described in the Registration Statement and the
Prospectus, no default exists, and no event has occurred that, with notice
or lapse of time or both, would constitute a default, in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, lease or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective properties is
bound or may be affected, in any respect that would have a Material Adverse
Effect.
(xxvi) The Company has not distributed and, prior to the later
of (A) the Firm Closing Date or any Option Closing Date and (B) the
completion of the distribution of the Securities, will not distribute any
offering material in connection with the offering and sale of the
Securities other than the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or Term Sheet or any amendment
or supplement thereto, or other materials, if any, permitted by the Act.
(xxvii) Neither the Company nor its subsidiaries own any items
of real property other than (A) real property obtained as a result of the
exercise of remedies under deeds of trust or mortgages securing loans made
in the ordinary course of business by the Company and (B) certain real
property located in Palm Springs, California, and each of them has
marketable title to all personal property owned by each of them, in each
case free and clear of any security interests, liens, encumbrances,
equities, claims and other defects, except such as do not have a Material
Adverse Effect on the value of such property and do not interfere with the
use made or proposed to be made of such property by the Company or such
subsidiary, and any real property and buildings held under lease by the
Company or any such subsidiary are held under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or such
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<PAGE>
subsidiary, in each case except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxviii) No labor dispute with the employees of the Company or
any of its subsidiaries exists or, to the Company's knowledge, is
threatened or imminent that could result in a Material Adverse Effect,
except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xxix) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such subsidiary has received
any notice of infringement of or conflict with asserted rights of any third
party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decisions, ruling or finding,
would have a Material Adverse Effect, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(xxx) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; and neither the Company nor any such subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not have a Material Adverse Effect, except as
described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xxxi) The merger of a subsidiary of the Company with and into
FAMCO, in order to effect the reorganization of the Company in Delaware
(the "Reorganization Merger"), has been approved by all necessary corporate
---------------------
action on behalf of the Company and FAMCO and the merger agreement and
related certificates, in appropriate form to effect the Reorganization
Merger, have been filed with the Secretary of State of California in order
to permit the Reorganization Merger to become effective at 8:00 A.M., New
York City time, on the Firm Closing Date.
(xxxii) The Company's conversion of its Servicing Portfolio to the
newly installed loan servicing software has been substantially completed and the
Company has no reason to believe that the reports generated by such software
contain any material inaccuracies.
(xxxiii) The Company has filed all reports required under the
Exchange Act with respect to the registration statements filed in connection
with the asset securitizations sponsored by the Company.
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(b) [Brian and Sarah Chisick, as Co-Trustees of the Brian and Sarah
Chisick Revocable Trust U/A 3-7-79, Brian Chisick as Trustee of The Chisick
Trust No. 1 U/D/T 3-30-96, and Brian Chisick as Trustee of The Chisick Trust No.
2 U/D/T 3-30-96], in their capacities as principal stockholders of the Company
(the "Principal Stockholders"), represent and warrant to, and agree with each of
the several Underwriters that the Registration Statement as amended as of the
Firm Closing Date, does not include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the Firm
Closing Date and as of Option Closing Date does not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(c) Any certificate signed by (i) any officer of the Company or (ii)
by the Principal Stockholders and delivered to the Representative or to counsel
for the Underwriters shall be deemed a representation and warranty by the
Company or the Principal Stockholders, respectively, to each Underwriter, as to
the matters covered thereby.
3. Purchase, Sale and Delivery of the Securities.
---------------------------------------------
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each of the Underwriters, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company, at
a purchase price of $____ per share, the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule 1 hereto. One or more
----------
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representative request
upon notice to the Company at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company to the Representative for the
respective accounts of the Underwriters, against payment by or on behalf of the
Underwriters of the aggregate purchase price therefor by wire transfer in same
day funds (the "Wired Funds") to the account of the Company. Such delivery of
-----------
and payment for the Firm Securities shall be made at the offices of Gibson, Dunn
& Crutcher LLP, 4 Park Plaza, Suite 1700, Irvine, California, 92714 at 9:30
A.M., New York City time, on ________, 1996, or at such other place, time or
date as the Representative and the Company may agree upon or as the
Representative may determine pursuant to Section 9 hereof, such time and date of
delivery against payment being herein referred to as the "Firm Closing Date."
-----------------
The Company will make such certificate or certificates for the Firm Securities
available for checking and packaging by the Representative at the offices in
[New York, New York] of the Company's transfer agent or registrar at least 24
hours prior to the Firm Closing Date.
(b) For the sole purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of this
Section 3. The option granted hereby may be exercised as to all or any part of
the Option
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<PAGE>
Securities from time to time within thirty days after the date of the Prospectus
(or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next
business day thereafter when the New York Stock Exchange is open for trading).
The Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representative may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed within 24 hours in writing) to the Company setting forth
the aggregate number of Option Securities as to which the several Underwriters
are then exercising the option and the date and time for delivery of and payment
for such Option Securities. Any such date of delivery shall be determined by
the Representative but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representative and the
Company may agree upon or as the Representative may determine pursuant to
Section 9 hereof, is herein called the "Option Closing Date" with respect to
-------------------
such Option Securities. Upon exercise of the option as provided herein, the
Company shall become obligated to sell to each of the several Underwriters, and,
subject to the terms and conditions herein set forth, each of the Underwriters
(severally and not jointly) shall become obligated to purchase from the Company,
the same percentage of the total number of the Option Securities as to which the
several Underwriters are then exercising the option as such Underwriter is
obligated to purchase of the aggregate number of Firm Securities, as adjusted by
the Representative in such manner as it deems advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 3, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph 3(b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) It is understood that you, individually and not as the
Representative, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
(d) The Company hereby acknowledges that the wire transfer by or on
behalf of the Underwriters of the purchase price for any Securities does not
constitute closing of a purchase and sale of the Securities. Only execution and
delivery of a receipt (by facsimile or otherwise) for the Securities by the
Underwriters indicates completion of the closing of a purchase of the Securities
from the Company. Furthermore, in the event that the Underwriters wire funds to
the Company prior to the completion of the closing of a purchase of Securities,
the Company hereby acknowledges that until the Underwriters execute and deliver
a receipt for the Securities, by facsimile or otherwise, the Company will not be
entitled to the wired funds and shall return the wired funds to the Underwriters
as soon as practicable (by wire transfer of same-day funds) upon demand. In the
event that the closing of a purchase of Securities is not completed and the wire
funds are not returned by the Company to the Underwriters on the same day the
wired funds were received by the Company, the Company agrees to pay to the
Underwriters in respect of each day the wire funds are not returned by it, in
same-day funds,
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<PAGE>
interest at the Prime Rate as stated in the Wall Street Journal on the date
hereof on the amount of such wire funds.
4. Offering by the Underwriters. Upon your authorization of the release
----------------------------
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and agrees with each
------------------------
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible. If required, the Company will file
the Prospectus or any Term Sheet that constitutes a part thereof and any
amendment or supplement thereto with the Commission in the manner and within the
time period required by Rules 434 and 424(b) under the Act. During any time
when a prospectus relating to the Securities is required to be delivered under
the Act, the Company (i) will comply with all requirements imposed upon it by
the Act and the rules and regulations of the Commission thereunder to the extent
necessary to permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission the Prospectus, Term
Sheet or the amendment referred to in the second sentence of Section 2(a)
hereof, any amendment or supplement to such Prospectus, Term Sheet or any
amendment to the Registration Statement or any Rule 462(b) Registration
Statement of which the Representative shall not previously have been advised and
furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representative shall not have given its
consent. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon request by the
Representative or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be necessary or advisable in connection with the distribution of the Securities
by the several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the Representative,
promptly after receiving notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
provide to the Representative copies of each such filing.
(b) The Company will advise the Representative, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement or any amendment thereto or
any order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, (iii)
the institution, threatening or contemplation of any proceeding for any such
purpose, or (iv) any request made by the Commission for amending the Original
Registration Statement or any Rule 462(b) Registration Statement, for amending
or supplementing the Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any
13
<PAGE>
such stop order and, if any such stop order is issued, to obtain the withdrawal
thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representative may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection therewith
-------- -------
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representative thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representative and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of such
registration statement and any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representative may reasonably request; without
limiting the application of clause (iii) of this sentence, the Company, not
later than (A) 8:00 P.M., New York City time, on the date of determination of
the public offering price, if such determination occurred at or prior to 10:00
A.M., New York City time, on such date or (B) 2:00 P.M., New York City time, on
the business day following the date of determination of the public offering
price, if such determination occurred after 10:00 A.M., New York City time, on
such date, will deliver to the Underwriters, without charge, as many copies of
the Prospectus and any amendment or supplement thereto as the Representative may
reasonably request for purposes of confirming orders that are expected to settle
on the Firm Closing Date. The Company will provide or cause to be provided to
each of the Representative, and to each Underwriter that so requests in writing,
a copy of each report on Form SR filed by the Company as required by Rule 463
under the Act.
(f) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier
14
<PAGE>
of (i) 10:00 P.M., Eastern time on the date of this Agreement and (ii) the time
confirmations are sent or given, as specified by Rule 462(b)(2).
(g) The Company, as soon as practicable, will make generally available
to its securityholders and to the Representative a consolidated earnings
statement of the Company and its subsidiaries that satisfies the provisions of
Section 11(a) of the Act and Rule 158 thereunder.
(h) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will not, directly or indirectly, without the prior
written consent of the Representative, on behalf of the Underwriters, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 180 days
after the date hereof, except pursuant to this Agreement and except for the
grant of options to purchase an aggregate of 510,000 shares of Class A Common
Stock as disclosed in the Prospectus, issuances pursuant to the exercise of
warrants or employee stock options or pursuant to the terms of convertible
securities of the Company outstanding on the date hereof.
(j) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii)(A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.
(k) The Company will obtain the lockup agreements described in Section
7(j) hereof prior to the Firm Closing Date.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, your counsel and counsel to the
Company responding to or commenting on such rumor, publication or event.
(m) The Company will cause the Securities to be duly included for
quotation on the Nasdaq National Market prior to the Firm Closing Date. The
Company will use its best efforts to ensure that the Securities remain included
for quotation on the Nasdaq National Market following the Firm Closing Date.
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<PAGE>
(n) The Company will cause the Reorganization Merger to be effected as
of the Firm Closing Date, subject to completion of filing with the State of
California.
6. Expenses. The Company will pay all costs and expenses incident to the
--------
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Registration Statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the Securities and (vii)
any quotation of the Securities on the Nasdaq National Market. If the sale of
the Securities provided for herein is not consummated because any condition to
the obligations of the Underwriters set forth in Section 7 hereof is not
satisfied, because this Agreement is terminated pursuant to Section 11 hereof or
because of any failure, refusal or inability on the part of the Company to
perform all obligations and satisfy all conditions on its part to be performed
or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Representative upon demand for all
reasonable out-of-pocket expenses (including counsel fees and disbursements)
that shall have been incurred by it in connection with the proposed purchase and
sale of the Securities. The Company shall not in any event be liable to any of
the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
several Underwriters to purchase and pay for the Firm Securities shall be
subject to the accuracy of the representations and warranties of the Company
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of its covenants and agreements hereunder and to the
following additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Registration Statement or such amendment, and if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement, shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York City time, on the date on which the amendment to the
Registration Statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission, and (ii) the time confirmations are sent
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<PAGE>
or given as specified by Rule 462(b) or, with respect to the Original
Registration Statement, such later time and date as shall have been consented to
by the Representative; if required, the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto shall have
been filed with the Commission in the manner and within the time period required
by Rules 434 and 424(b) under the Act; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall have
been issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Representative, shall be
contemplated by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) The Representative shall have received an opinion, dated the Firm
Closing Date, of Gibson, Dunn & Crutcher LLP, counsel for the Company, to the
effect that:
(i) the Company and each of its U.S. subsidiaries listed in
Schedule 2 hereto (the "Subsidiaries") have been duly organized and are
---------- ------------
validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under
the laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
does not or would not have a Material Adverse Effect;
(ii) the Company and each of the Subsidiaries have corporate
power to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and the
Prospectus, and the Company has corporate power to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it;
(iii) the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned by the Company free and clear of any
perfected security interests that have been in existence for at least 21
days preceding the date of such opinion or, to the best knowledge of such
counsel, any other security interests, liens, encumbrances or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, and, to the best knowledge of such
counsel, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities; the Firm
Securities have been duly authorized by all necessary corporate action of
the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully paid
and nonassessable; to the best knowledge of such counsel, no holders of
outstanding shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the Securities; and,
to the best knowledge of such counsel, no
17
<PAGE>
holders of securities of the Company are entitled to have such securities
registered under the Registration Statement;
(v) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide a
fair summary of such provisions; and the statements set forth under the
heading "Business--Governmental Regulation" and "Shares Eligible for Future
Sale" in the Prospectus, insofar as such statements constitute a summary of
the legal matters, documents or proceedings referred to therein, provide a
fair summary of such legal matters, documents and proceedings in all
material respects;
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company;
(vii) to the best knowledge of such counsel, (A) no legal or
governmental proceedings are pending to which the Company or any of the
Subsidiaries is a party or to which the property of the Company or any of
the Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein, and
no such proceedings have been threatened against the Company or any of the
Subsidiaries or with respect to any of their respective properties and (B)
no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that is not described therein or filed as
required;
(viii) to the knowledge of such counsel, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), (1) the Company and its
Subsidiaries have not incurred any material liability or obligation, direct
or contingent, nor entered into any material transaction not in the
ordinary course of business; and (2) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock, except in each
case as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus);
(ix) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained
and such as may be required under state securities or blue sky laws and by
the NASD, or (B) conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument known to
such counsel to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of
18
<PAGE>
their respective properties are bound, or the charter documents or by-laws
of the Company or any of the Subsidiaries, or, so far as it is known to
such counsel, any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
having jurisdiction over the Company or any of the Subsidiaries, in each
case, where such conflict, breach, violation or default would have a
Material Adverse Effect;
(x) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner
and within the time period required by Rules 434 and 424(b); and, to such
counsel's best knowledge, no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or are
contemplated by the Commission;
(xi) the Registration Statement originally filed with respect to
the Securities and each amendment thereto, any Rule 462(b) Registration
Statement and the Prospectus (in each case, other than the financial
statements and other financial and statistical information contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements of the Act
and the rules and regulations of the Commission thereunder;
(xii) if the Company elects to rely on Rule 434, the Prospectus
is not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A);
(xiii) the Company is not, and the transactions contemplated by
this Agreement will not cause the Company to become, an investment company
subject to registration under the 1940 Act;
(xiv) the specimen stock certificate of the Company filed as an
exhibit to the Registration Statement is in due and proper form to evidence
shares of Common Stock, has been duly authorized and approved by the Board
of Directors of the Company and complies with all legal requirements
applicable under the Delaware General Corporation Law; and
(xv) the execution and delivery of the merger agreement effecting
the Reorganization Merger have been duly authorized by all necessary
corporate action on the part of the Company and FAMCO; the Reorganization
Merger has been consummated and is effective in accordance with California
law subject only to confirmation of the acceptance of the filing of the
merger agreement and related certificates by the State of California.
19
<PAGE>
Such counsel shall also state that they have no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (except such counsel
need express no view as to the financial statements and notes thereto, schedules
and reports thereon, and other financial and statistical data included or
incorporated by reference in the Registration Statement or Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem(s) proper, on certificates of responsible
officers of the Company and public officials and opinions of such other counsel
as are reasonably acceptable to the Representative.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) [The Company] shall have received an opinion dated the Firm
Closing Date from Doss, Cavett and Page in form and substance satisfactory to
the Representative.
(d) The Representative shall have received from Arter & Hadden LLC an
opinion dated the Firm Closing Date to the effect that the description of past
securitization transactions effected by the Company (other than the financial
data as to which such counsel need express no opinion), as contained in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), is true and complete in all
material respects.
(e) [The Company] shall have received from Deloitte & Touche LLP
a letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representative, to the effect
that:
(i) they are independent accountants with respect to the Company
and its consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements examined by them and included in the Registration Statement and
the Prospectus comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iii) on the basis of carrying out certain specified procedures
(which do not constitute an examination made in accordance with generally
accepted auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the shareholders, the board of
directors and any committees thereof of the Company and
20
<PAGE>
each of its consolidated subsidiaries, and inquiries of certain officials
of the Company and its consolidated subsidiaries who have responsibility
for financial and accounting matters, nothing came to their attention that
caused them to believe that at a specific date not more than five business
days prior to the date of such letter, there were any changes in the
capital stock or total debt of the Company and its consolidated
subsidiaries or any decreases in net current assets or stockholders' equity
of the Company and its consolidated subsidiaries, in each case compared
with amounts shown on the December 31, 1995 consolidated balance sheet
included in the Registration Statement and the Prospectus, or for the
period from January 1, 1996 to such specified date there any decreases, as
compared with $58,880,000, $30,542,000, $1.39 in total revenues, net income
or pro forma net income per share, respectively, of the Company and its
consolidated subsidiaries, except in all instances for changes, decreases
or increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included in the
Registration Statement and the Prospectus, and have compared such amounts,
percentages and financial information with such records of the Company and
its consolidated subsidiaries and with information derived from such
records and have found them to be in agreement, excluding any questions of
legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases which, in the reasonable discretion of the
Representative, are likely to result in a Material Adverse Effect, it shall be a
further condition to the obligations of the Underwriters that such letters shall
be accompanied by a written explanation of the Company as to the significance
thereof, unless the Representative deems such explanation unnecessary.
References to the Registration Statement and the Prospectus in this
paragraph (e) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(f) [The Company] shall have received from Deloitte & Touche LLP a
certificate, dated the Firm Closing Date, in form and substance satisfactory to
the Representative, to the effect that, in their opinion, the Company has been
an S corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended, and comparable laws of the State of California since May 1, 1988 until
termination of such S corporation status immediately prior to the consummation
of the sale of Securities pursuant to this Agreement.
(g) The Representative shall have received a certificate, dated the
Firm Closing Date, of Brian Chisick and Mark K. Mason in their capacities as the
principal executive officer and the principal financial or accounting officer,
respectively, of the Company to the effect that:
21
<PAGE>
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the
best of the Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has sustained any loss or interference
with their respective businesses or properties having or resulting in a
Material Adverse Effect from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding, and there has not been any event,
circumstance, or development that results in, or that the Company believes
would result in, a Material Adverse Effect, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment
or supplement thereto).
(h) The Representative shall have received a certificate, dated the
Firm Closing Date (or the Option Closing Date, as the case may be), of the
Principal Stockholders, to the effect that (i) the Registration Statement, as
amended as of the Firm Closing Date (or the Option Closing Date, as the case may
be), does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading, and
the Prospectus, as amended or supplemented as of the Firm Closing Date (or the
Option Closing Date, as the case may be), does not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(i) The Representative shall have received from each person who is a
director or officer of the Company or who owns more than [ ] shares of
Common Stock (as calculated on the Firm Closing Date) an agreement to the effect
that such person will not, except to the extent otherwise specifically permitted
by the terms of each such person's agreement, directly or indirectly, without
the prior written consent of the Representative, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of an option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of 180 days after the date of this
Agreement; provided, however, that Mark K. Mason shall not be prohibited after
-------- -------
22
<PAGE>
December 29, 1996 from selling up to [29,025] shares of Class B Common Stock,
solely in order to pay applicable federal and state income taxes relating to his
shares of Class B Common Stock.
(j) On or before the Firm Closing Date, the Representative and counsel
for the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.
(k) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
(l) The Representative shall have received an opinion, dated the Firm
Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and Prospectus, and such other related matters as the Representative
may reasonably require, and the Company shall have furnished to such counsel
such documents as they may reasonably request for the purpose of enabling them
to pass upon such matters.
(m) The charter of First Alliance Securities Corporation, a
____________ corporation, shall have been amended so that the name of such
corporation contains no reference to "First Alliance."
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representative and
counsel for the Underwriters. The Company shall furnish to the Representative
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representative and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution.
--------------------------------
(a) Except with respect to any losses, claims, damages or liabilities
arising out of or based upon untrue statements, alleged untrue statements,
omissions or alleged omissions made exclusively by the Company or upon Section
8(a)(i) of this Agreement, which shall apply only to the Company, the Company
and the Principal Stockholders jointly and severally agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), against any losses,
------------
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become
23
<PAGE>
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 2(a) of this Agreement,
(ii) any untrue statement or alleged untrue statement made by the
Principal Stockholders in Section 2(b) of this Agreement,
(iii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company or Principal
Stockholders filed in any jurisdiction in order to qualify the Securities
under the securities or blue sky laws thereof or filed with the Commission
or any securities association or securities exchange (each, an
"Application"),
-----------
(iv) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to
make the statements therein not misleading; or
(v) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in connection
with the marketing of the Securities, including without limitation, slides,
videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company and Principal
-------- -------
Stockholders will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representative
specifically for use therein; and provided, further, that neither the Company
-------- -------
nor any of the Principal Stockholders will be liable to any Underwriter or any
person controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any such loss,
claim, damage or liability purchased Securities from such Underwriter but was
not sent or given a copy of the Prospectus (as amended or supplemented) at or
prior to the written confirmation of the sale of such Securities to such person
in any case where such delivery of the Prospectus (as amended or supplemented)
is required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of
24
<PAGE>
noncompliance by the Company with Section 5(d) and (e) of this Agreement. This
indemnity agreement will be in addition to any liability that the Company and
Principal Stockholders may otherwise have. Neither the Company nor Principal
Stockholders will, without the prior written consent of the Representative,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not any Underwriter or any person who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of all of the Underwriters and such controlling persons from all liability
arising out of such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, Principal Stockholders and each person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act against any losses, claims, damages or
liabilities to which the Company or any such director, officer of the Company,
Principal Stockholders or controlling person of the Company or Principal
Stockholders may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application or (ii) the omission or the alleged omission to
state therein a material fact required to be stated in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representative specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company or any such director,
officer or controlling person or Principal Stockholders in connection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
-------- -------
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded or shall have been advised by its counsel that there
may be one or more
25
<PAGE>
legal defenses available to it and/or other indemnified parties that conflict
with those available to the indemnifying party, the indemnifying party shall not
have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representative in
the case of paragraph (a) of this Section 8, representing the indemnified
parties under such paragraph (a) who are parties to such action or actions) or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and Principal
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault of
the parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, Principal Stockholders or the Underwriters, the parties' relative
intents, knowledge, access to information and opportunity to correct or prevent
such statement or omission, and any other equitable considerations appropriate
in the circumstances. The Company, Principal Stockholders and the Underwriters
agree that it would
26
<PAGE>
not be equitable if the amount of such contribution were determined by pro rata
or per capita allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to above in this paragraph (d).
Notwithstanding any other provision of this paragraph (d), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Representative's Agreement Among Underwriters. For the purposes of this
paragraph 8(d), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each person, if any, who controls the Company or Principal Stockholders within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company or Principal Stockholders,
as the case may be.
27
<PAGE>
(e) In making a claim for indemnification under this Section 8, the
indemnified parties may proceed against either (i) both the Company and the
Principal Stockholders jointly or (ii) the Company only, but may not proceed
solely against the Principal Stockholders. In the event that the indemnified
parties are entitled to seek indemnity or contribution hereunder against any
loss, liability, claim, damage and expense incurred with respect to a settlement
or judgment from a trial court (the "First Judgment") then, as a precondition to
any indemnified party obtaining indemnification or contribution from the
Principal Stockholders, the indemnified parties shall first obtain a judgment
from a trial court that such indemnified parties are entitled to indemnity or
contribution under this Agreement with respect to such loss, liability, claim,
damage or expense (the "Final Judgment") from the Company and the Principal
Stockholders and shall seek to satisfy such Final Judgment in full from the
Company by making a written demand upon the Company for such satisfaction. The
indemnified parties may seek a Final Judgment either through a cross- or
counter-claim in the action which results in the First Judgment, or they may
bring a subsequent, separate action against the Company and the Principal
Stockholders for indemnification. Only in the event such Final Judgment shall
remain unsatisfied in whole or in part 45 days following the date of receipt by
the Company of such demand shall any indemnified party have the right to take
action to satisfy such Final Judgment by making demand directly on the Principal
Stockholders (but only if and to the extent the Company has not already
satisfied such Final Judgment, whether by settlement, release or otherwise).
The indemnified party or parties may exercise this right to first seek to obtain
payment from the Company and thereafter obtain payment from the Principal
Stockholders without regard to the pursuit by any party of its rights to the
appeal of such Final Judgment. The indemnified party or parties shall, however,
be relieved of their obligation to first obtain a Final Judgment, seek to obtain
payment from the Company with respect to such Final Judgment or, having sought
such payment, to wait such 45 days after failure by the Company to immediately
satisfy any such Final Judgment if (i) the Company files a petition for relief
under the United States Bankruptcy Code (the "Bankruptcy Code"), (ii) an order
for relief is entered against the Company in an involuntary case under the
Bankruptcy Code, (iii) the Company makes an assignment for the benefit of its
creditors, or (iv) any court orders or approves the appointment of a receiver or
custodian for the Company or a substantial portion of its assets.
(f) Notwithstanding any other provision of this Agreement, the
aggregate liability of the Principal Stockholders under this Agreement,
including this Section 8 hereof, shall not exceed the sum of Fifteen Million
Dollars ($15,000,000).
9. Default of Underwriters. If one or more Underwriters default in their
-----------------------
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may make
arrangements satisfactory to the Representative for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
28
<PAGE>
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representative are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters
as described in this Section 9, the Representative shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers,
Principal Stockholders and the several Underwriters set forth in this Agreement
or made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by or
on behalf of the Company, any of its officers or directors, Principal
Stockholders, any Underwriter or any controlling person referred to in Section 8
hereof and (ii) delivery of and payment for the Securities. The respective
agreements, covenants, indemnities and other statements set forth in Sections 6
and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
11. Termination.
-----------
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the Representative
by notice to the Company given prior to the Firm Closing Date or the related
Option Closing Date, respectively, in the event that the Company or the
Principal Stockholders shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder at or prior thereto or, if at or prior to the Firm Closing Date or,
with respect to the Company, such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have, in the
sole judgment of the Representative, sustained any loss or interference
with their respective businesses or properties having or resulting in a
Material Adverse Effect from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding or there shall have been any event,
circumstance of development that results in, or that the Company believes
would result in, a Material Adverse Effect, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment
or supplement thereto);
29
<PAGE>
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange or Nasdaq National Market shall have been
suspended or minimum or maximum prices shall have been established on
either such exchange or market system;
(iii) a banking moratorium shall have been declared by New York
or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U.S. financial markets that, in the sole judgment
of the Representative, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. Information Supplied by Underwriters. The statements set forth in (i)
------------------------------------
the last paragraph on the front cover page, (ii) under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus and (iii) on page
2 in any Preliminary Prospectus or the Prospectus pertaining to stabilization
(to the extent such statements relate to the Underwriters) constitute the only
information furnished by any Underwriter through the Representative to the
Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters
confirm that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if
-------
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Friedman, Billings, Ramsey &
Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia
22209, Attention: _________________; and if sent to the Company, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at 17305 Von Karman Avenue, Irvine, California 92714,
Attention: Chief Executive Officer; and if sent to Principal Stockholders, shall
be delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to Principal Stockholders at 17305 Von Karman Avenue, Irvine, California
92714, Attention: Chief Executive Officer.
14. Successors. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, the Company, Principal Stockholders and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the
30
<PAGE>
indemnities of the Company and Principal Stockholders contained in Section 8 of
this Agreement shall also be for the benefit of any person or persons who
control any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 8 of this Agreement shall also be for the benefit of the directors of
the Company, the officers of the Company who have signed the Registration
Statement, Principal Stockholders and any person or persons who control the
Company or Principal Stockholders within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter
shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement,
--------------
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
----------------------------------------------
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of California, and
by execution and delivery of this Agreement, the Company and Principal
Stockholders each accepts for itself and in connection with their respective
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts and waives any defense of forum non conveniens and irrevocably
agree to be bound by any judgment rendered thereby in connection with this
Agreement. Principal Stockholders designate and appoint Brian Chisick, and the
Company designates and appoints Mark K. Mason and such other persons as may
hereafter be selected by the Company or Principal Stockholders irrevocably
agreeing in writing to so serve, as their respective agents to receive on its
behalf service of all process in any such proceedings in any such court, such
service being hereby acknowledged by the Company and Principal Stockholders to
be effective and binding service in every respect. A copy of any such process
so served shall be mailed by registered mail to the Company and/or Principal
Stockholders at their respective addresses provided in Section 13 hereof;
provided, however, that, unless otherwise provided by applicable law, any
- -------- -------
failure to mail such copy shall not affect the validity of service of such
process. If any agent appointed by the Company or Principal Stockholders
refuses to accept service, the Company and Principal Stockholders each hereby
agrees that service of process sufficient for personal jurisdiction in any
action against the Company or Principal Stockholders in the State of California
may be made by registered or certified mail, return receipt requested, to the
Company and/or Principal Stockholders, as applicable, at their respective
addresses provided in Section 13 hereof, and Principal Stockholders and the
Company each hereby acknowledge that such service shall be effective and binding
in every respect. Nothing herein shall affect the right to serve process in any
other manner permitted by law or shall limit the right of any Underwriter to
bring proceedings against the Company and Principal Stockholders in the courts
of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
31
<PAGE>
If the foregoing correctly sets forth our understanding please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and each
of the several Underwriters.
Very truly yours,
FIRST ALLIANCE CORPORATION
By
-------------------------------
Brian Chisick
Chief Executive Officer
FIRST ALLIANCE MORTGAGE COMPANY
By
-------------------------------
Brian Chisick
Chief Executive Officer
Principal Stockholders
BRIAN AND SARAH CHISICK REVOCABLE TRUST
U/A 3-7-79
By:
---------------------------------------
Brian Chisick
Co-Trustee
By:
---------------------------------------
Sarah Chisick
Co-Trustee
THE CHISICK TRUST NO. 1 U/D/T 3-30-96
By:
---------------------------------------
Brian Chisick
Trustee
THE CHISICK TRUST NO. 2 U/D/T 3-30-96
By:
---------------------------------------
Brian Chisick
Trustee
32
<PAGE>
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
By:
---------------------------
Name:
Title:
For itself and as the Representative.
33
<PAGE>
Schedule 1
UNDERWRITERS
Number of Firm Securities to be
Underwriting Purchased
- ------------ ---------
Friedman, Billings, Ramsey & Co., Inc... --------
Total................................... 3,500,000
=============
34
<PAGE>
Schedule 2
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- -----------------------------
[ ] UK
35
<PAGE>
EXHIBIT 3.2
FIRST ALLIANCE CORPORATION
A DELAWARE CORPORATION
BYLAWS
ARTICLE I: OFFICES.
SECTION 1.1 Registered Office. The registered office of FIRST
-----------------
ALLIANCE CORPORATION (the "Corporation") shall be at Corporation Service
Company, 1013 Centre Road, City of Wilmington, County of New Castle, State of
Delaware, and the name of the registered agent in charge thereof shall be the
Corporation Service Company.
SECTION 1.2 Principal Office. The principal office for the
----------------
transaction of the business of the Corporation shall be at such place as the
Board of Directors of the Corporation (the "Board") may determine. The Board is
hereby granted full power and authority to change said principal office from one
location to another.
SECTION 1.3 Other Offices. The Corporation may also have an office
-------------
or offices at such other place or places, either within or without the State of
Delaware, as the Board may from time to time determine or as the business of the
Corporation may require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
SECTION 2.1 Place of Meetings. All annual meetings of stockholders
-----------------
and all other meetings of stockholders shall be held either at the principal
office of the Corporation or at any other place within or without the State of
Delaware that may be designated by the Board pursuant to authority hereinafter
granted to the Board.
SECTION 2.2 Annual Meetings. Annual meetings of stockholders of the
---------------
Corporation for the purpose of electing directors and for the transaction of
such other business as may come properly before such meetings may be held at
such time and place and on such date as the Board shall determine by resolution.
SECTION 2.3 Special Meetings. A special meeting of the stockholders
----------------
for the transaction of any proper business may be called at any time exclusively
by the Board or the Chairman.
SECTION 2.4 Notice of Meetings. Except as otherwise required by law,
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 days nor more than 60 days before the date of the meeting
to each stockholder of record entitled to vote at such meeting by delivering a
typewritten or printed notice thereof to such stockholder personally, or by
depositing such notice in the United States mail, in a postage prepaid envelope,
directed to such stockholder at such stockholder's post office address furnished
by such stockholder to the Secretary of the Corporation for such purpose, or, if
such stockholder shall not have furnished an address to the Secretary for such
purpose, then at such stockholder's post office address last known to the
Secretary, or by transmitting a notice thereof to such stockholder at such
address by telegraph, cable, wireless or facsimile. Except as otherwise
expressly required by law, no publication of any notice of a meeting of
stockholders shall be
1
<PAGE>
required. Every notice of a meeting of stockholders shall state the place, date
and hour of the meeting and, in the case of a special meeting, shall also state
the purpose for which the meeting is called. Notice of any meeting of
stockholders shall not be required to be given to any stockholder to whom notice
may be omitted pursuant to applicable Delaware law or who shall have waived such
notice, and such notice shall be deemed waived by any stockholder who shall
attend such meeting in person or by proxy, except a stockholder who shall attend
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Except as otherwise expressly required by law, notice of any
adjourned meeting of stockholders need not be given if the time and place
thereof are announced at the meeting at which the adjournment is taken.
SECTION 2.5 Quorum. Except as otherwise required by law, the holders
------
of record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of
stockholders of the Corporation or any adjournment thereof. Subject to the
requirement of a larger percentage vote, if any, contained in the Certificate of
Incorporation, these Bylaws or by statute, the stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding any withdrawal of stockholders that may leave
less than a quorum remaining, if any action taken (other than adjournment) is
approved by the vote of at least a majority in voting interest of the shares
required to constitute a quorum. In the absence of a quorum at any meeting or
any adjournment thereof, a majority in voting interest of the stockholders
present in person or by proxy and entitled to vote thereat or, in the absence
therefrom of all the stockholders, any officer entitled to preside at, or to act
as secretary of, such meeting may adjourn such meeting from time to time. At
any such adjourned meeting at which a quorum is present, any business may be
transacted that might have been transacted at the meeting as originally called.
SECTION 2.6 Voting.
------
(A) Each stockholder shall, at each meeting of stockholders, be
entitled to vote in person or by proxy each share of the stock of the
Corporation that has voting rights on the matter in question and that shall have
been held by such stockholder and registered in such stockholder's name on the
books of the Corporation:
(i) on the date fixed pursuant to Section 6.5 of these Bylaws as the
record date for the determination of stockholders entitled to notice
of and to vote at such meeting; or
(ii) if no such record date shall have been so fixed, then (a) at the
close of business on the business day next preceding the day upon
which notice of the meeting shall be given or (b) if notice of the
meeting shall be waived, at the close of business on the business day
next preceding the day upon which the meeting shall be held.
(B) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity
shall be entitled to vote such stock. Persons whose stock is pledged shall be
entitled to vote, unless in the transfer by the pledgor on the books of the
Corporation the pledgor shall have expressly empowered the pledgee to vote
thereon, in
2
<PAGE>
which case only the pledgee, or the pledgee's proxy, may represent such stock
and vote thereon. Stock having voting power standing of record in the names of
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship, shall
be voted in accordance with the provisions of the Delaware General Corporation
Law as the same exists or may hereafter be amended (the "DGCL").
(C) Subject to the provisions of the Corporation's Certificate of
Incorporation, any such voting rights may be exercised by the stockholder
entitled thereto in person or by such stockholder's proxy appointed by an
instrument in writing, subscribed by such stockholder or by such stockholder's
attorney thereunto authorized and delivered to the secretary of the meeting.
The attendance at any meeting of a stockholder who may theretofore have given a
proxy shall not have the effect of revoking the same unless such stockholder
shall in writing so notify the secretary of the meeting prior to the voting of
the proxy. At any meeting of stockholders at which a quorum is present, all
matters, except as otherwise provided in the Certificate of Incorporation, in
these Bylaws or by law, shall be decided by the vote of a majority in voting
interest of the stockholders present in person or by proxy and entitled to vote
thereat and thereon. The vote at any meeting of stockholders on any question
need not be by ballot, unless so directed by the chairman of the meeting. On a
vote by ballot, each ballot shall be signed by the stockholder voting, or by
such stockholder's proxy, if there be such proxy, and it shall state the number
of shares voted.
SECTION 2.7 Judges. Prior to each meeting of stockholders, the
------
Chairman of such meeting shall appoint a judge or judges to act with respect to
any vote. Each judge so appointed shall first subscribe an oath faithfully to
execute the duties of a judge at such meeting with strict impartiality and
according to the best of such judge's ability. Such judges shall decide upon the
qualification of the voters and shall certify and report the number of shares
represented at the meeting and entitled to vote on any question, determine the
number of votes entitled to be cast by each share, shall conduct and, when the
voting is completed, accept the votes and ascertain and report the number of
shares voted respectively for and against the question, and determine, and
retain for a reasonable period a record of the disposition of, any challenge
made to any determination made by such judges. Reports of judges shall be in
writing and subscribed and delivered by them to the Secretary of the
Corporation. The judges need not be stockholders of the Corporation, and any
officer of the Corporation may be a judge on any question other than a vote for
or against a proposal in which such officer shall have a material interest. The
judges may appoint or retain other persons or entities to assist the judges in
the performance of the duties of the judges.
SECTION 2.8 Advance Notice of Stockholder Proposals and Stockholder
-------------------------------------------------------
Nominations.
- -----------
(A) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board or (ii) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Section 2.8(A). For
business to be properly brought before any meeting of the stockholders by a
stockholder, the stockholder must have given notice thereof in writing to the
Secretary of the Corporation not less than 90 days in advance of such meeting
or, if later, the seventh day following the first public announcement of the
date of such meeting. A stockholder's notice to the Secretary shall set forth
as to each matter the stockholder proposes to bring before the meeting (1) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (2) the name and
address, as
3
<PAGE>
they appear on the Corporation's books, of the stockholder proposing such
business, (3) the class and number of shares of the Corporation that are
beneficially owned by the stockholder, and (4) any material interest of the
stockholder in such business. In addition, the stockholder making such proposal
shall promptly provide any other information reasonably requested by the
Corporation. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any meeting of the stockholders except in
accordance with the procedures set forth in this Section 2.8. The Chairman of
any such meeting shall direct that any business not properly brought before the
meeting shall not be considered.
(B) Nominations for the election of directors may be made by the Board
or by any stockholder entitled to vote in the election of directors; provided,
however, that a stockholder may nominate a person for election as a director at
a meeting only if written notice of such stockholder's intent to make such
nomination has been given to the Secretary of the Corporation not later than 90
days in advance of such meeting or, if later, the seventh day following the
first public announcement of the date of such meeting. Each such notice shall
set forth: (i) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (ii) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting and nominate the person or persons specified in the notice; (iii) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (iv) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the United States Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
Board; and (v) the consent of each nominee to serve as a director of the
Corporation if so elected. In addition, the stockholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 2.8(B). The Chairman of any meeting of stockholders shall direct that
any nomination not made in accordance with these procedures be disregarded.
SECTION 2.9 Action Without Meeting. Any action required to be taken
----------------------
at any annual or special meeting of stockholders of the Corporation, or any
action which may be taken at any annual or special meeting of such stockholders,
may, if such action has been earlier approved by the Board, be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE III: BOARD OF DIRECTORS
SECTION 3.1 General Powers. Subject to any requirements in the
--------------
Certificate of Incorporation, these Bylaws, or of the DGCL as to action which
must be authorized or approved by the stockholders, any and all corporate powers
shall be exercised by or under the authority of, and the business and affairs of
the Corporation shall be under the direction of, the Board
4
<PAGE>
to the fullest extent permitted by law. Without limiting the generality of the
foregoing, it is hereby expressly declared that the Board shall have the
following powers, to wit:
(A) to select and remove all the officers, agents and employees of the
Corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the Certificate of Incorporation or these Bylaws, fix
their compensation, and require from them security for faithful service;
(B) to conduct, manage and control the affairs and business of the
Corporation, and to make such rules and regulations therefor not inconsistent
with law, the Certificate of Incorporation or these Bylaws, as it may deem best;
(C) to change the location of the registered office of the Corporation
in Section 1.1 hereof; to change the principal office and the principal office
for the transaction of the business of the Corporation from one location to
another as provided in Section 1.2 hereof; to fix and locate from time to time
one or more offices of the Corporation within or without the State of Delaware
as provided in Section 1.3 hereof; to designate any place within or without the
State of Delaware for the holding of any meeting or meetings of stockholders;
and to adopt, make and use a corporate seal, and to prescribe the forms of
certificates of stock, and to alter the form of such seal and of such
certificates from time to time, and in its judgment as it may deem best,
provided such seal and such certificate shall at all times comply with the
provisions of law;
(D) to authorize the issuance of shares of stock of the Corporation
from time to time, upon such terms and for such considerations as may be lawful;
(E) to borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust and
securities therefor; and
(F) by resolution adopted by a majority of the whole Board to
designate an executive and other committees of the Board, each consisting of one
or more directors, to serve at the pleasure of the Board, and to prescribe the
manner in which proceedings of such committee or committees shall be conducted.
SECTION 3.2 Number and Term of Office.
-------------------------
(A) Until this Section 3.2 is amended by a resolution duly adopted by
the Board or by the stockholders of the Corporation, the number of directors
constituting the entire Board shall be not less than three (3) members nor more
than eleven (11) members and shall initially consist of seven (7) members.
Directors need not be stockholders. Each of the directors of the Corporation
shall hold office until his successor shall have been duly elected and shall
qualify or until he shall resign or shall have been removed in the manner
hereinafter provided.
(B) The Board shall be divided into three classes: Class I, Class II
and Class III. Such classes shall be as nearly equal in number of directors as
possible with the term of office of one class expiring each year. At the annual
meeting of stockholders in 1996, directors of Class I shall be elected to hold
office for a term ending at the next succeeding annual meeting of stockholders,
directors of Class II shall be elected to hold office for a term ending at the
second succeeding annual
5
<PAGE>
meeting of stockholders and directors of Class III shall be elected to hold
office for a term ending at the third succeeding annual meeting of stockholders.
Subject to the following, at each annual meeting of stockholders, the successors
to the class of directors whose term shall then expire shall be elected to hold
office for a term expiring at the third succeeding annual meeting of
stockholders.
(C) During any period when the holders of preferred stock or any one
or more series thereof, voting as a class, shall be entitled to elect a
specified number of directors by reason of dividend arrearages or other
contingencies giving them the right to do so, then and during such time as such
right continues (1) the then otherwise authorized number of directors shall be
increased by such specified number of directors, and the holders of the
preferred stock or such series thereof, voting as a class, shall be entitled to
elect the additional directors as provided for pursuant to the provisions of
such preferred stock or series; (2) the additional directors shall be members of
those respective classes of directors in which vacancies are created as a result
of such increase in the authorized number of directors; and (3) each such
additional director shall serve until the annual meeting at which the term of
office of his class shall expire and until his successor shall be elected and
shall qualify, or until his right to hold such office terminates pursuant to the
provisions of such preferred stock or series, whichever occurs earlier.
Whenever the holders of such preferred stock or series thereof are divested of
such rights to elect a specified number of directors, voting as a class,
pursuant to the provisions of such preferred stock or series, the terms of
office of all directors elected by the holders of such preferred stock or
series, voting as a class pursuant to such provisions, or elected to fill any
vacancies resulting from the death, resignation or removal of directors so
elected by the holders of such preferred stock or series, shall forthwith
terminate and the authorized number of directors shall be reduced accordingly.
SECTION 3.3 Election of Directors. The directors shall be elected by
---------------------
the stockholders of the Corporation, and at each election, the persons receiving
the greater number of votes, up to the number of directors then to be elected,
shall be the persons then elected. The election of directors is subject to any
provision contained in the Certificate of Incorporation relating thereto,
including any provision regarding the rights of holders of preferred stock to
elect directors.
SECTION 3.4 Resignations. Any director of the Corporation may resign
------------
at any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time is not specified, it shall take effect immediately upon
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 3.5 Vacancies. Except as otherwise provided in the
---------
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors,
removal, or any other cause, may be filled by vote of the majority of the
remaining directors, although less than a quorum. Increases in the number of
directors shall be filled in accordance with the rule that each class of
directors shall be as nearly equal in number of directors as possible.
Notwithstanding such rule, in the event of any change in the authorized number
of directors each director then continuing to serve as such will nevertheless
continue as a director of the class of which he is a member, until the
expiration of his current term or his earlier death, resignation or removal. If
any newly created directorship or vacancy on the Board, consistent with the rule
that the three classes shall be as nearly equal in number of directors as
possible, may be allocated to one or two or more classes, the Board shall
allocate it to that of the available class whose term of office is due to expire
at the earliest date following such allocation. When the Board fills a vacancy,
the director chosen to fill that vacancy shall be of the same class as the
director he succeeds and shall hold
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office until such director's successor shall have been elected and shall qualify
or until such director shall resign or shall have been removed. No reduction of
the authorized number of directors shall have the effect of removing any
director prior to the expiration of such director's term of office.
SECTION 3.6 Place of Meeting. The Board or any committee thereof may
----------------
hold any of its meetings at such place or places within or without the State of
Delaware as the Board or such committee may from time to time by resolution
designate or as shall be designated by the person or persons calling the meeting
or in the notice or a waiver of notice of any such meeting. Directors may
participate in any regular or special meeting of the Board or any committee
thereof by means of conference telephone or similar communications equipment
pursuant to which all persons participating in the meeting of the Board or such
committee can hear each other, and such participation shall constitute presence
in person at such meeting.
SECTION 3.7 Regular Meetings. Regular meetings of the Board may be
----------------
held at such times as the Board shall from time to time by resolution determine.
If any day fixed for a regular meeting shall be a legal holiday at the place
where the meeting is to be held, then the meeting shall be held at the same hour
and place on the next succeeding business day not a legal holiday. Except as
provided by law, notice of regular meetings need not be given.
SECTION 3.8 Special Meetings. Special meetings of the Board for any
----------------
purpose or purposes shall be called at any time by the Chairman of the Board or,
if the Chairman of the Board is absent or unable or refuses to act, by the
President, and may also be called by any two members of the Board. Except as
otherwise provided by law or by these Bylaws, written notice of the time and
place of special meetings shall be delivered personally or by facsimile to each
director, or sent to each director by mail or by other form of written
communication, charges prepaid, addressed to such director at such director's
address as it is shown upon the records of the Corporation, or, if it is not so
shown on such records and is not readily ascertainable, at the place in which
the meetings of the directors are regularly held. In case such notice is mailed
or telegraphed, it shall be deposited in the United States mail or delivered to
the telegraph company in the County in which the principal office for the
transaction of the business of the Corporation is located at least 48 hours
prior to the time of the holding of the meeting. In case such notice is
delivered personally or by facsimile as above provided, it shall be delivered at
least 24 hours prior to the time of the holding of the meeting. Such mailing,
telegraphing, delivery or facsimile transmission as above provided shall be due,
legal and personal notice to such director. Except where otherwise required by
law or by these Bylaws, notice of the purpose of a special meeting need not be
given. Notice of any meeting of the Board shall not be required to be given to
any director who is present at such meeting, except a director who shall attend
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
SECTION 3.9 Quorum and Manner of Acting. Except as otherwise
---------------------------
provided in these Bylaws, the Certificate of Incorporation or by applicable law,
the presence of a majority of the authorized number of directors shall be
required to constitute a quorum for the transaction of business at any meeting
of the Board, and all matters shall be decided at any such meeting, a quorum
being present, by the affirmative votes of a majority of the directors present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, provided any action taken
is approved by at least a majority of the required quorum for such meeting. In
the absence of a quorum, a majority of directors present at any meeting may
adjourn the same from time to time until
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a quorum shall be present. Notice of any adjourned meeting need not be given.
The directors shall act only as a Board, and the individual directors shall have
no power as such.
SECTION 3.10 Action by Unanimous Written Consent. Any action required
-----------------------------------
or permitted to be taken at any meeting of the Board or of any committee thereof
may be taken without a meeting if consent in writing is given thereto by all
members of the Board or of such committee, as the case may be, and such consent
is filed with the minutes of proceedings of the Board or of such committee.
SECTION 3.11 Compensation. Directors, whether or not employees of
------------
the Corporation or any of its subsidiaries, may receive an annual fee for their
services as directors in an amount fixed by resolution of the Board plus other
compensation, including options to acquire capital stock of the Corporation, in
an amount and of a type fixed by resolution of the Board, and, in addition, a
fixed fee, with or without expenses of attendance, may be allowed by resolution
of the Board for attendance at each meeting, including each meeting of a
committee of the Board. Nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation therefor.
SECTION 3.12 Committees. The Board may, by resolution passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. Any such committee,
to the extent provided in the resolution of the Board and subject to any
restrictions or limitations on the delegation of power and authority imposed by
applicable law, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it. Any such committee shall keep written minutes of its meetings and
report the same to the Board at the next regular meeting of the Board. Unless
the Board or these Bylaws shall otherwise prescribe the manner of proceedings of
any such committee, meetings of such committee may be regularly scheduled in
advance and may be called at any time by the chairman of the committee or by any
two members thereof; otherwise, the provisions of these Bylaws with respect to
notice and conduct of meetings of the Board shall govern.
SECTION 3.13 Affiliated Transactions. Notwithstanding any other
-----------------------
provisions of these Bylaws, each transaction, or, if an individual transaction
constitutes a part of a series of transactions, each series of transactions,
proposed to be entered into between the Corporation, on the one hand, and Brian
Chisick and his immediate family (the "Chisick Family"), or any affiliate of the
Chisick Family, on the other hand, must be approved by a majority of the
Independent Directors. Notwithstanding any other provision of these Bylaws, this
Section 3.13 may only be amended by the vote of the majority of the Independent
Directors. For the purposes of this Section 3.13, (a) "affiliate" shall mean (i)
any person that, directly or indirectly, controls or is controlled by or is
under common control with such person, (ii) any other person that owns,
beneficially, directly or indirectly, twenty percent (20%) or more of the
outstanding capital shares, shares or equity interests of such person, or (iii)
any officer, director, employee, partner or trustee of such person or any person
controlling, controlled by or under common control with such person (excluding
trustees and persons serving in similar capacities who are not otherwise an
Affiliate of such person); (b) "person" shall mean and include individuals,
corporations, general and limited partnerships, stock companies or associations,
joint ventures, associations, companies, trusts, banks, trust companies, land
trusts, business trusts or other entities and governments and agencies and
political subdivisions thereof; (c) "control" (including the correlative
meanings of the terms "controlled by" and "under common control with"), as used
with respect to any person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such person, through the ownership of voting securities, partnership interests
or other equity interests; and (d) Independent Director shall mean a Director
who is not an officer or employee of the Corporation or any of its subsidiaries.
ARTICLE IV: OFFICERS
SECTION 4.1 Officers. The officers of the Corporation shall be a
--------
Chairman, a President, one or more Vice Presidents (the number thereof and their
respective titles to be determined by the Board), a Secretary, and such other
officers as may be appointed at the discretion of the Board in accordance with
the provisions of Section 4.3 hereof.
SECTION 4.2 Election. The officers of the Corporation, except such
--------
officers as may be appointed or elected in accordance with the provisions of
Sections 4.3 or 4.5 hereof, shall be chosen annually by the Board at the first
meeting thereof after the annual meeting of stockholders, and each officer shall
hold office until such officer shall resign or shall be removed or otherwise
disqualified to serve, or until such officer's successor shall be elected and
qualified.
SECTION 4.3 Other Officers. In addition to the officers chosen
--------------
annually by the Board at its first meeting, the Board also may appoint or elect
such other officers as the business of the Corporation may require, each of whom
shall have such authority and perform such duties as are provided in these
Bylaws or as the Board may from time to time specify, and shall hold office
until such
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officer shall resign or shall be removed or otherwise disqualified to serve, or
until such officer's successor shall be elected and qualified.
SECTION 4.4 Removal and Resignation. Any officer may be removed,
-----------------------
either with or without cause, by resolution of the Board, at any regular or
special meeting of the Board, or except in case of an officer chosen by the
Board, by any officer upon whom such power of removal may be conferred by the
Board. Any officer or assistant may resign at any time by giving written notice
of his resignation to the Board or the Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein, or, if the time is
not specified, upon receipt thereof by the Board or the Secretary, as the case
may be; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 4.5 Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
SECTION 4.6 Chairman of the Board. The Chairman of the Board shall
----------------------
preside at all meetings of stockholders and at all meetings of the Board. The
Chairman shall exercise and perform such powers and duties with respect to the
business and affairs of the Corporation as may be assigned to the Chairman by
the Board or such other powers and duties as may be prescribed by the Board or
these Bylaws.
SECTION 4.7 President. The President shall exercise and perform such
---------
powers and duties with respect to the administration of the business and affairs
of the Corporation as may from time to time be assigned to the President by the
Chairman of the Board or by the Board, or as may be prescribed by these Bylaws.
In the absence or disability of the Chairman of the Board, or in the event and
during the period of a vacancy in that office, the President shall perform all
the duties of the Chairman of the Board, and when so acting shall have all of
the powers of, and be subject to all the restrictions upon, the Chairman of the
Board and chief executive officer of the Corporation.
SECTION 4.8 Vice President. Each Vice President shall have such
--------------
powers and perform such duties with respect to the administration of the
business and affairs of the Corporation as may from time to time be assigned to
such Vice President by the Chairman of the Board or the Board, or the President
or as may be prescribed by these Bylaws. In the absence or disability of the
Chairman of the Board and the President, the Vice Presidents in order of their
rank as fixed by the Board, or if not ranked, the Vice President designated by
the Board, shall perform all of the duties of the Chairman of the Board, and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the Chairman of the Board.
SECTION 4.9 Secretary.
---------
(A) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation or such other place as the Board may order, a book of
minutes of all meetings of directors and stockholders, with the time and place
of holding, whether regular or special, and if special, how authorized and the
notice thereof given, the names of those present at meetings of directors, the
number of shares present or represented at meetings of stockholders, and the
proceedings thereof.
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(B) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation's transfer agent, a share register, or a duplicate
share register, showing the name of each stockholder, the number of shares of
each class held by such stockholder, the number and date of certificates issued
for such shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
ARTICLE V: CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 5.1 Execution of Contracts. The Board, except as otherwise
----------------------
provided in these Bylaws, may authorize any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in the name of and
on behalf of the Corporation, and such authority may be general or confined to
specific instances; and unless so authorized by the Board or by these Bylaws, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or in any amount.
SECTION 5.2 Checks, Drafts, Etc. All checks, drafts or other orders
-------------------
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board. Each such officer, assistant, agent or attorney
shall give such bond, if any, as the Board may require.
SECTION 5.3 Deposits. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select, or
as may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, the Chairman of the
Board, the President, any Vice President (or any other officer or officers,
assistant or assistants, agent or agents, or attorney or attorneys of the
Corporation who shall from time to time be determined by the Board) may endorse,
assign and deliver checks, drafts and other orders for the payment of money
which are payable to the order of the Corporation.
SECTION 5.4 General and Special Bank Accounts. The Board may from
---------------------------------
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI: SHARES AND THEIR TRANSFER
SECTION 6.1 Certificates for Stock. Every owner of stock of the
----------------------
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class or
series of shares of the stock of the Corporation owned by such owner. The
certificates representing shares of such stock shall be numbered in the order in
which they shall be issued and shall be signed in the name of the Corporation by
the Chairman of the Board, the President or any Vice President, and by the
Secretary. Any or all of the signatures on the certificates may be a
10
<PAGE>
facsimile. In case any officer, transfer agent or registrar who has signed, or
whose facsimile signature has been placed upon, any such certificate, shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, such certificate may nevertheless be issued by the Corporation with
the same effect as though the person who signed such certificate, or whose
facsimile signature shall have been placed thereupon, were such an officer,
transfer agent or registrar at the date of issue. A record shall be kept of the
respective names of the persons, firms or corporations owning the stock
represented by such certificates, the number and class or series of shares
represented by such certificates, respectively, and the respective dates
thereof, and in case of cancellation, the respective dates of cancellation.
Every certificate surrendered to the Corporation for exchange or transfer shall
be cancelled, and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been so
cancelled, except in cases provided for in Section 6.4 hereof.
SECTION 6.2 Transfers of Stock. Transfers of shares of stock of the
------------------
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by such holder's attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk or
a transfer agent appointed as provided in Section 6.3 hereof, and upon surrender
of the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards the Corporation. Whenever any transfer of shares shall be made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates shall be presented to
the Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
SECTION 6.3 Regulations. The Board may make such rules and
-----------
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
SECTION 6.4 Lost, Stolen, Destroyed, and Mutilated Certificates. In
---------------------------------------------------
any case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof satisfactory to the Board of such
loss, theft, destruction, or mutilation and upon the giving of a bond of
indemnity to the Corporation in such form and in such sum as the Board may
direct; provided, however, that a new certificate may be issued without
requiring any bond when, in the judgment of the Board, it is proper so to do.
SECTION 6.5 Fixing Date for Determination of Stockholders of Record.
-------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any other
change, conversion or exchange of stock or for the purpose of any other lawful
action other than to consent to corporate action in writing without a meeting,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any such other action. If in any case involving the determination of
stockholders for any purpose other than notice of or voting at a meeting of
stockholders the Board shall not fix such a record date, then the record date
for determining stockholders for such purpose shall be the close of business on
the day on which the Board shall adopt the resolution relating thereto. A
determination of stockholders entitled to
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<PAGE>
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of such meeting; provided, however, that the Board may fix a new record date for
the adjourned meeting.
ARTICLE VII: INDEMNIFICATION
SECTION 7.1 Indemnification of Directors and Officers. The
-----------------------------------------
Corporation shall indemnify, in the manner and to the fullest extent permitted
by the DGCL (but in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
permitted prior thereto), any person (or the estate of any person) who is or was
a party to, or is threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise. The Corporation may, to the fullest extent
permitted by the DGCL, purchase and maintain insurance on behalf of any
such person against any liability which may be asserted against such person. The
Corporation may create a trust fund, grant a security interest or use other
means (including without limitation a letter of credit) to ensure the payment of
such sums as may become necessary to effect the indemnification as provided
herein. To the fullest extent permitted by the DGCL, the indemnification
provided herein shall include expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement and any such expenses shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the indemnitee to
repay such amounts if it is ultimately determined that he or she is not entitled
to be indemnified. The indemnification provided herein shall not be deemed to
limit the right of the Corporation to indemnify any other person for any such
expenses to the fullest extent permitted by the DGCL, nor shall it be deemed
exclusive of any other rights to which any person seeking indemnification from
the Corporation may be entitled under any agreement, the Corporation's
Certificate of Incorporation, vote of stockholders or disinterested directors,
or otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding such office.
SECTION 7.2 Indemnification of Employees and Agents. The Corporation
---------------------------------------
may, but only to the extent that the Board may (but shall not be obligated to)
authorize from time to time, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article VII as they apply to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 7.3 Enforcement of Indemnification. The rights to
------------------------------
indemnification and the advancement of expenses conferred above shall be
contract rights. If a claim under this ARTICLE VII is not paid in full by the
Corporation within 60 days after written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of such claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a
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defense that, and (ii) any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met any applicable standard for indemnification set forth in the DGCL.
Neither the failure of the Corporation (including its Board, independent legal
counsel or stockholders) to have made a determination prior to the commencement
of such suit that indemnification of the indemnitee is proper in the
circumstances because the indemnitee has met the applicable standard of conduct
set forth in the DGCL, nor an actual determination by the Corporation (including
its Board, independent legal counsel or stockholders) that the indemnitee has
not met such applicable standard of conduct, shall either create a presumption
that the indemnitee has not met the applicable standard of conduct or, in the
case of such a suit brought by the indemnitee, be a defense to such suit. In any
suit brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article VII or otherwise shall be on the
Corporation.
ARTICLE VIII: MISCELLANEOUS
SECTION 8.1 Seal. The Board shall adopt a corporate seal, which
----
shall be in the form of a circle and shall bear the name of the Corporation and
words showing that the Corporation was incorporated in the State of Delaware.
SECTION 8.2 Waiver of Notices. Whenever notice is required to be
-----------------
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
SECTION 8.3 Amendments. Except as otherwise provided herein or in
----------
the Certificate of Incorporation, these Bylaws or any of them may be altered,
amended, repealed or rescinded and new Bylaws may be adopted by the Board or by
the stockholders at any annual or special meeting of stockholders, provided that
notice of such proposed alteration, amendment, repeal, recession or adoption is
given in the notice of such meeting.
SECTION 8.4 Representation of Other Corporations. The Chairman of
------------------------------------
the Board or the President or the Secretary or any Vice President of the
Corporation is authorized to vote, represent and exercise on behalf of the
Corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of the Corporation, other than a
corporation of which the Corporation owns twenty percent (20%) or more of its
capital stock, in which case such officers shall not be so authorized under
these Bylaws without the authorization of the Board. The authority
herein granted to said officers to vote or represent on behalf of the
Corporation any and all shares held by the Corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
person authorized so to do by proxy or power of attorney duly executed by such
officers.
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Exhibit 4.1
FIRST ALLIANCE CORPORATION
1996 STOCK INCENTIVE PLAN
Section 1. PURPOSE OF PLAN
The purpose of this 1996 Stock Incentive Plan ("Plan") of First
Alliance Corporation, a Delaware corporation (the "Company"), is to enable the
Company to attract, retain and motivate its employees, non-employee directors
and independent contractors by providing for or increasing the proprietary
interests of such employees, non-employee directors and independent contractors
in the Company.
Section 2. PERSONS ELIGIBLE UNDER PLAN
Any person, including any director of the Company, who is an employee
of the Company or any of its subsidiaries (an "Employee"), and any non-employee
director (a "Non-Employee Director") or independent contractor of the Company
(an "Independent Contractor," or, together with the Employees and the Non-
Employee Directors, the "Eligible Persons") shall be eligible to be considered
for the grant of Awards (as hereinafter defined) hereunder. For purposes of this
Plan, the Chairman of the Board's status as an Eligible Person shall be
determined by the Board of Directors of the Company (the "Board").
Section 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf of the
Company, is authorized under this Plan to enter into any type of arrangement
with an Eligible Person that is not inconsistent with the provisions of this
Plan and that, by its terms, involves or might involve the issuance of (i)
shares of Class A Common Stock, $.01 par value per share, of the Company or of
any other class of security of the Company which is convertible into shares of
the Company's Class A Common Stock ("Shares") or (ii) a right or interest with
an exercise or conversion privilege at a price related to the Shares or with a
value derived from the value of the Shares, which right or interest may, but
need not, constitute a "Derivative Security," as such term is defined in Rule
16a-1 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as such Rule may be amended from time to time. The entering
into of any such arrangement is referred to herein as the "grant" of an "Award."
(b) Awards are not restricted to any specified form or structure and
may include, without limitation, sales or bonuses of stock, restricted stock,
stock options, reload stock options, stock purchase warrants, other rights to
acquire stock, securities convertible into or redeemable for stock, stock
appreciation rights, limited stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares, and an Award may consist
of one such security or benefit, or two or more of them in tandem or in the
alternative. The terms upon which an Award is granted shall be evidenced by a
written agreement executed by the Company and the Eligible Person to whom such
Award is granted.
(c) Subject to paragraph (d)(ii) below, Awards may be issued, and
Shares may be issued pursuant to an Award, for any lawful consideration as
determined by the Committee, including, without limitation, services rendered by
the Eligible Person.
<PAGE>
(d) Subject to the provisions of this Plan, the Committee, in its
sole and absolute discretion, shall determine all of the terms and conditions of
each Award granted under this Plan, which terms and conditions may include,
among other things:
(i) provisions permitting the Committee to allow or require the
recipient of such Award, including any Eligible Person who is a director or
officer of the Company, or permitting any such recipient the right, to pay
the purchase price of the Shares or other property issuable pursuant to
such Award, or such recipient's tax withholding obligation with respect to
such issuance, or both, in whole or in part, by any one or more of the
following means:
(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by the
Committee;
(C) the delivery of previously owned shares of capital stock of
the Company (including "pyramiding") or other property;
(D) a reduction in the amount of Shares or other property
otherwise issuable pursuant to such Award; or
(E) the delivery of a promissory note of the Eligible Person or
of a third party, the terms and conditions of which shall be
determined by the Committee;
(ii) provisions specifying the exercise or settlement price for any
option, stock appreciation right or similar Award, or specifying the method
by which such price is determined, provided that the exercise or settlement
price of any option, stock appreciation right or similar Award that is
intended to qualify as "performance based compensation" for purposes of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code") shall be not less than the fair market value of a Share on the date
such Award is granted;
(iii) provisions relating to the exercisability and/or vesting of
Awards, lapse and non-lapse restrictions upon the Shares obtained or
obtainable under Awards or under the Plan and the termination, expiration
and/or forfeiture of Awards;
(iv) provisions conditioning or accelerating the grant of an Award or
the receipt of benefits pursuant to such Award, either automatically or in
the discretion of the Committee, upon the occurrence of specified events,
including, without limitation, the achievement of performance goals, the
exercise or settlement of a previous Award, the satisfaction of an event or
condition within the control of the recipient of the Award or within the
control of others, a change of control of the Company, an acquisition of a
specified percentage of the voting power of the Company, the dissolution or
liquidation of the Company, a sale of substantially all of the property and
assets of the Company or an event of the type described in Section 7
hereof; and/or
(v) provisions required in order for such Award to qualify as an
incentive stock option under Section 422 of the Code (an "Incentive Stock
Option").
(e) Unless otherwise provided by the Committee in the written
agreement evidencing an Award, the terms of any stock option granted under the
Plan shall provide:
2
<PAGE>
(i) that the exercise price thereof shall not be less than 100% of the
market value of a share of Class A Common Stock on the date the option is
granted;
(ii) that the term of such option shall be ten years from the date of
grant;
(iii) that, upon an Employee ceasing to be employed by the Company for
any reason other than death or disability, or a Non-Employee Director
ceasing to be a Non-Employee Director of the Company, an option shall not
become exercisable to an extent greater than it could have been exercised
on the date the Employee's employment by the Company, or the Non-Employee
Director's incumbency, as the case may be, ceased; and
(iv) that the option shall expire ninety (90) days after the Employee
ceases to be employed with the Company or a Non-Employee Director ceases to
be a Non-Employee Director of the Company.
Section 4. STOCK SUBJECT TO PLAN
(a) Subject to adjustment as provided in Section 7 hereof, at any
time, the aggregate number of Shares issued and issuable pursuant to all Awards
(including all Incentive Stock Options) granted under this Plan shall not exceed
750,000.
(b) The aggregate number of Shares subject to Awards granted during
any calendar year to any one Eligible Person (including the number of shares
involved in Awards having a value derived from the value of Shares) shall not
exceed _______; provided, however, that the limitation set forth in this Section
4(b) shall not apply if such provision is not required in order for Awards to
qualify as "performance based compensation" under Section 162(m) of the Code.
Further, such aggregate number of shares shall be subject to adjustment under
Section 7 only to the extent that such will not affect the status of any Award
intended to qualify as "performance based compensation" under Section 162(m) of
the Code.
(c) Subject to adjustment as provided in Section 7 hereof, the
aggregate number of Shares issued and issuable pursuant to all Incentive Stock
Options granted under this Plan shall not exceed 750,000; provided, however,
that such aggregate number of shares shall be subject to adjustment under
Section 7 only to the extent that such adjustment will not affect the status of
any Incentive Stock Option under Section 422 of the Code. Such maximum number
does not include the number of Shares subject to the unexercised portion of any
Incentive Stock Option granted under this Plan that expires or is terminated.
(d) The aggregate number of Shares issued under this Plan at any
time shall equal only the number of shares actually issued upon exercise or
settlement of an Award and shall not include Shares, or rights with respect to
shares, that have been canceled or returned to the Company upon forfeiture of an
Award or in payment or satisfaction of the purchase price, exercise price or tax
withholding obligation of an Award.
Section 5. NATURE AND DURATION OF PLAN
(a) This Plan is intended to constitute an unfunded arrangement for
a select group of management or other key employees.
(b) No Awards shall be made under this Plan after ______ ___, 2006.
Although Shares may be issued after _______ ___, 2006 pursuant to Awards made
prior to such date, no Shares shall be issued under this Plan after _______ ___,
2016.
3
<PAGE>
Section 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by one or more committees of the
Board (any such committee, the "Committee"). If no persons are designated by the
Board to serve on the Committee, the Plan shall be administered by the Board and
all references herein to the Committee shall refer to the Board. The Board shall
have the discretion to appoint, add, remove or replace members of the Committee,
and shall have the sole authority to fill vacancies on the Committee. Unless
otherwise provided by the Board: (i) with respect to any Award for which such is
necessary and desired for such Award to be exempted by Rule 16b-3 of the
Exchange Act, the Committee shall consist of two or more directors, each of whom
is a "disinterested person" (as such term is defined in Rule 16b-3 promulgated
under the Exchange Act, as such Rule may be amended from time to time), (ii)
with respect to any Award that is intended to qualify as "performance based
compensation" under Section 162(m) of the Code, the Committee shall consist of
two or more directors, each of whom is an "outside director" (as such term is
defined under Section 162(m) of the Code), and (iii) with respect to any other
Award, the Committee shall consist of one or more directors (any of whom also
may be an Eligible Person who has been granted or is eligible to be granted
Awards under the Plan).
(b) Subject to the provisions of this Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of this Plan with respect to the Awards over which such
Committee has authority, including, without limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to
this Plan;
(ii) determine which persons are Eligible Persons and to which
of such Eligible Persons, if any, and when Awards shall be granted
hereunder;
(iii) grant Awards to Eligible Persons and determine the terms
and conditions thereof, including the number of Shares subject thereto and
the circumstances under which Awards become exercisable or vested or are
forfeited or expire, which terms may but need not be conditioned upon the
passage of time, continued employment, the satisfaction of performance
criteria, the occurrence of certain events (including events which the
Board or the Committee determine constitute a change of control), or other
factors;
(iv) at any time cancel an Award with the consent of the holder
and grant a new Award to such holder in lieu thereof, which new Award may
be for a greater or lesser number of Shares and may have a higher or lower
exercise or settlement price;
(v) determine whether, and the extent to which adjustments are
required pursuant to Section 7 hereof; and
(vi) interpret and construe this Plan, any rules and
regulations under the Plan and the terms and conditions of any Award
granted hereunder.
All decisions, determinations, and interpretations of the Committee shall be
final and conclusive upon any Eligible Person to whom an Award has been granted
and to any other person holding an Award.
(c) The Committee may, in the terms of an Award or otherwise,
temporarily suspend the issuance of Shares under an Award if the Committee
determines that securities law considerations so warrant.
4
<PAGE>
(d) The Committee from time to time may permit a recipient holding
any stock option granted by the Company to surrender for cancellation any
unexercised portion of such option and receive in exchange an option or other
Award for such number of Shares as may be designated by the Committee. The
Committee may, with the consent of the person entitled to exercise any
outstanding option, amend such option, including reducing the exercise price of
any option and/or extending the term thereof.
Section 7. ADJUSTMENTS
If the outstanding securities of the class then subject to this Plan
are increased, decreased or exchanged for or converted into cash, property or a
different number or kind of shares or securities, or if cash, property or shares
or securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split, spin-off or the like, or if substantially all of the property and
assets of the Company are sold, then, unless the terms of such transaction shall
provide otherwise, the Committee shall make appropriate and proportionate
adjustments in (i) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to Awards theretofore granted under
this Plan and the exercise or settlement price of such Awards, and (ii) the
maximum number and type of shares or other securities that may be issued
pursuant to such Awards thereafter granted under this Plan. The foregoing
adjustments shall be applied to any Awards or Incentive Stock Options only to
the extent permitted by Sections 162(m) and 422 of the Code, respectively.
Section 8. AMENDMENT AND TERMINATION OF PLAN
The Board may amend or terminate this Plan at any time and in any
manner; provided, however, that no such amendment or termination shall deprive
the recipient of any Award theretofore granted under this Plan, without the
consent of such recipient, of any of his or her rights thereunder or with
respect thereto; provided, further, that if an amendment to the Plan would
affect the Plan's compliance with Rule 16b-3 under the Exchange Act or Section
422 or 162(m) or other applicable provisions of the Code, the amendment shall be
approved by the Company's stockholders to the extent required to comply with
Rule 16b-3 under the Exchange Act, Sections 422 and 162(m) of the Code, or other
applicable provisions of or rules under the Code.
Section 9. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of the date upon which it was approved
by the Board, subject however to approval of the plan by the affirmative votes
of the holders of a majority of the securities of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with the
laws of the State of Delaware.
5
<PAGE>
Section 10. COMPLIANCE WITH OTHER LAWS AND REGULATIONS
The Plan, the grant and exercise of Awards thereunder, and the
obligation of the Company to sell and deliver shares under such Awards, shall be
subject to all applicable federal and state laws, rules and regulations and to
such approvals by any governmental or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificates for shares of
Class A Common Stock prior to the completion of any registration or
qualification of such shares under any federal or state law or issuance of any
ruling or regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable. Any adjustments provided for
in Section 7 shall be subject to any shareholder action required by Delaware
corporate law.
Section 11. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted pursuant to
this Plan shall confer on any individual any right to continue in the employ of
the Company or interfere in any way with the right of the Company to terminate
an individual's employment at any time. The agreement evidencing an Award may
contain such provisions as the Committee may approve with reference to the
effect of approved leaves of absence.
Section 12. LIABILITY OF COMPANY
The Company and any affiliate which is in existence or hereafter comes
into existence shall not be liable to an Eligible Person or other persons as to:
(a) The Non-Issuance of Shares. The non-issuance or sale of shares
as to which the Company has been unable to obtain from any regulatory body
having jurisdiction the authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any shares hereunder; and
(b) Tax Consequences. Any tax consequence expected, but not
realized, by any Eligible Person or other person due to the issuance, exercise,
settlement, cancellation or other transaction involving any Award granted
hereunder.
Section 13. GOVERNING LAW
This Plan and any Awards and agreements hereunder shall be interpreted
and construed in accordance with the laws of the State of Delaware and
applicable federal law.
6
<PAGE>
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing by directors of the Company, __________________________ has caused
these presents to be duly executed in its name and behalf by its proper officers
thereunto duly authorized as of this ______ day of _______________, 1996.
FIRST ALLIANCE CORPORATION
By:___________________________
Brian Chisick, Chief Executive
Officer and President
ATTEST:
- --------------------------
Mark K. Mason
Executive Vice President and
Chief Financial Officer
7
<PAGE>
EXHIBIT 4.2
NUMBER SHARES
FIRST ALLIANCE CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
AUTHORIZED SHARES $.01 PAR VALUE
THIS CERTIFICATE IS
TRANSFERABLE IN
NEW YORK, NEW YORK CUSIP
SEE REVERSE
FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
Is The Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF $.01 PAR VALUE CLASS A COMMON STOCK OF
FIRST ALLIANCE CORPORATION
(herein called the "Corporation") transferable only on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This certificate is not valid
unless duly countersigned and registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by
the facsimile signatures of its duly authorized officers and to be sealed with
the facsimile seal of the Corporation.
Dated:
(SEAL)
/s/ BRIAN CHISICK /s/ MARK K. MASON
PRESIDENT AND CHIEF EXECUTIVE EXECUTIVE VICE PRESIDENT AND
OFFICER CHIEF FINANCIAL OFFICER
COUNTERSIGNED AND REGISTERED:
American Stock Transfer & Trust Company
Transfer Agent & Registrar
By:
--------------------------------
Authorized Signature
<PAGE>
FIRST ALLIANCE CORPORATION
This certificate and the shares represented hereby shall be subject to all
of the provisions of the Certificate of Incorporation and bylaws of the
Corporation and of the amendments thereto, by all of which the holder by
acceptance hereof is bound. The Corporation will furnish without charge to the
holders hereof upon written request a statement of the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights as established, from time to
time, by the Certificate of Incorporation of the Corporation, and the number of
shares constituting each such class and series. Any such request should be made
at the principal office of the Corporation.
The following abbreviations when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -as tenants in common UNIF GIFT MIN ACT- Custodian
TEN ENT -as tenants by the entireties --------------------
JT TEN -as joint tenants with right of (cust) (minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
-------------------------
(State)
UNIF TRF MIN ACT- Custodian (until age )
------ ---
(Cust)
under Uniform Transfers to Minors
(Minor)
Act
-------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
- --------------------------------------------------------------------------------
For Value Received, hereby sell, assign and transfer unto
-----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPE NAME AND ADDRESS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------shares
of the Class A Common Stock represented by this Certificate, and hereby
irrevocably constitutes and appoints
-------------------------------------------
attorney-in-fact to transfer the said stock on the books of the Corporation,
with full power of substitution in the premises.
Dated
--------------
--------------------------------------------
(SIGNATURE)
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THIS CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGE-
MENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
By:
--------------------
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) with
membership in an approved signature guarantee Medallion Program, pursuant to
S.E.C. Rule 17Ad-15.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP]
July 5, 1996
First Alliance Corporation
17305 Von Karman Avenue
Irvine, California 92714-6203
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for First Alliance Corporation, a Delaware
corporation (the "Company"), in connection with a proposed restructuring, as a
result of which First Alliance Mortgage Company, a California corporation, will
become a wholly-owned subsidiary of the Company, and in connection with the
registration of 4,025,000 shares of the Company's Class A Common Stock, $.01 par
value (the "Shares"), on Form S-1 Registration Statement No. 333-3633 (as
amended, the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), on May 13, 1996 and Amendment No. 1 thereto filed with the Commission on
July __, 1996. Of the 4,025,000 Shares, 525,000 are subject to an option granted
to the Underwriters (as defined below) to cover over-allotments. We understand
that the Company proposes to sell the Shares to a group of underwriters (the
"Underwriters") represented by Friedman, Billings, Ramsey & Co., Inc. for
offering to the public.
We are familiar with the corporate actions to be taken by the Company in
connection with the authorization, issuance and sale of the Shares and have made
such other legal and factual inquiries as we deem necessary for the purpose of
rendering this opinion.
Based on the foregoing and in reliance thereon, and subject to the
effectiveness of the Registration Statement under the Act, we are of the
opinion that, upon conclusion of the
<PAGE>
First Alliance Corporation
July 5, 1996
Page 2
proceedings contemplated by us to be taken prior to the issuance of the Shares,
the Shares, when issued and sold in the manner described in the Registration
Statement and in accordance with the terms of the underwriting agreement to be
entered into between the Company and the Underwriters, will be legally issued,
fully paid and nonassessable.
We are admitted to practice in California. We are not admitted to practice
in Delaware. However, we are generally familiar with the Delaware General
Corporation Law and have made such review thereof as we consider necessary for
the purpose of rendering this opinion. Subject to the foregoing, this opinion
is limited to Delaware, California and federal law.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" contained in the prospectus that forms a part of the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Act or the General Rules and Regulations of the Commission.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
<PAGE>
EXHIBIT 10.4
PROMISSORY NOTE
Irvine, California
June 25, 1996
FOR VALUE RECEIVED, the undersigned, First Alliance Mortgage Company
("Maker"), hereby promises to pay to the order of Brian Chisick, Trustee of the
Chisick Trust No. 1 U/D/T dated March 30, 1996 ("Holder"), the principal amount
as hereinafter defined (the "Principal Amount") (or so much thereof as shall not
have been prepaid) on April 30, 2011 (the "Maturity Date"). No interest shall
accrue on the unpaid Principal Amount. All payments hereunder shall be made in
lawful money of the United States of America at 17305 Von Karman Avenue, Irvine,
California 92714. Maker shall have the right to prepay this Promissory Note in
whole or in part at any time and from time to time.
1. PRINCIPAL AMOUNT. The Principal Amount shall be equal to $4,000.00 plus
----------------
20% of any aggregate reduction in the Maker's federal and state income and
franchise tax liability for any taxable year starting in 1996 in which Maker is
a C corporation that is triggered by an Audit Adjustment. "Audit Adjustment"
shall be equal to any net increase, as a result of any Final Adjustment to
Maker's federal or state income or franchise tax return for any S period, as
defined in Section 1368(e)(2) of the Internal Revenue Code, in Maker's
Accumulated Adjustment Account, as defined under Section 1368(e)(1) of the
Internal Revenue Code or any state counterpart, on the date of termination of
Maker's S corporation status, as reflected on Schedule M-2 of the Maker's
federal income tax return or equivalent state schedule (or any successor
schedule) for the taxable period ending on such termination date, before giving
effect to the distribution of this Promissory Note and similar promissory notes
distributed to the stockholders of Maker on the date hereof. "Final Adjustment"
shall mean a final adjustment to Maker's federal or state income or franchise
tax return for any S period.
2. EVENTS OF DEFAULT. The occurrence of any one or more of the following
events, acts or occurrences shall constitute an event of default (an "Event of
Default") hereunder:
(a) Maker shall fail to pay any amount owing hereunder when due, whether
on an interest payment date, at the Maturity Date, by acceleration or otherwise;
(b) Maker shall file a voluntary petition for relief under any federal
or state bankruptcy or insolvency law, or commence any other voluntary
proceeding or other action in bankruptcy, or any involuntary petition shall be
filed against Maker under any federal or state bankruptcy or insolvency law, and
such involuntary petition, proceeding or action remains undismissed and unstayed
for a period of thirty (30) consecutive days; or
(c) Maker shall admit in writing its inability to pay debts as they
mature or make an assignment for the benefit of its creditors.
3. ACCELERATION. If any Event of Default shall occur, Holder may, at its
------------
option, by written notice to Maker, declare the entire unpaid Principal Amount
and accrued
<PAGE>
interest hereunder to be due and payable, whereupon the same shall
immediately become due and payable. Maker hereby expressly waives presentment
for payment, demand, notice of nonpayment or dishonor, protest and notice of
protest, and all other notices in connection with the delivery, acceptance,
performance, default or enforcement of this Promissory Note.
4. ATTORNEYS' FEES. In the event it should become necessary for Holder to
---------------
employ counsel to enforce this Promissory Note, Maker agrees to pay the
reasonable fees and expenses of Holder's counsel, irrespective of whether suit
is brought.
5. EXERCISE OF RIGHTS. No single or partial exercise of any power granted
------------------
to Holder under this Promissory Note shall preclude other or further exercise
thereof or the exercise of any other power. No delay or omission on the part of
Holder in exercising any right under this Promissory Note shall operate as a
waiver of such right or of any other right.
6. SUCCESSORS AND ASSIGNS. This Promissory Note shall inure to the benefit
----------------------
of and be binding upon the parties hereto and their permitted successors and
assigns, provided that Maker shall not have the right to assign its rights or
delegate its obligations hereunder and any attempted assignment or delegation in
contravention of the terms hereof shall be void.
7. SEVERABILITY. If any provision of this Promissory Note shall be adjudged
------------
by a court to be unlawful, void, or for any reason unenforceable, such provision
shall be deemed separable from the remainder of this Promissory Note and the
same shall in no way affect the validity or enforceability of any other
provision of this Promissory Note, the application of such provision to other
parties or circumstances, or the validity or enforceability of this Promissory
Note as a whole.
8. TIME. The time for the performance of any obligation hereunder shall be
----
strictly construed, time being of the essence. Whenever any payment to be made
hereunder shall be stated to be due on a day that is not a Business Day, the
payment shall be made on the next succeeding Business Day. As used herein, the
term "Business Day" means any day excluding Saturday, Sunday and any day that is
a legal holiday under the laws of the State of California and any other day that
banks are authorized by law or other governmental action to close.
9. GOVERNING LAW. This Promissory Note shall be governed by the internal
-------------
laws, and not the laws of conflicts or choice of law, of the State of
California.
2
<PAGE>
10. UNCONDITIONAL AND FULL-RECOURSE. The obligations hereunder shall be the
-------------------------------
unconditional obligations of Maker, and Holder shall have full recourse against
Maker for the satisfaction of this Promissory Note.
FIRST ALLIANCE MORTGAGE COMPANY
By: /s/ Mark Mason
---------------------------------
Printed Name: Mark Mason
---------------------
Title: Executive Vice President and
----------------------------
Chief Financial Officer
----------------------------
3
<PAGE>
EXHIBIT 10.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DATED AS OF OCTOBER 1, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
- by and between -
FIRST ALLIANCE MORTGAGE COMPANY
- and -
MARK K. MASON
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.5
DATED AS OF OCTOBER 1, 1995
EMPLOYMENT AGREEMENT
- by and between -
FIRST ALLIANCE MORTGAGE COMPANY
- and -
MARK K. MASON
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
the 1st day of October, 1995, by and between First Alliance Mortgage Company, a
California corporation ("Employer"), and Mark K. Mason ("Employee").
W I T N E S S E T H:
WHEREAS, Employer is a corporation engaged in the business of origination,
purchase, sales and servicing of mortgage loans secured primarily by first
mortgages on single family homes;
WHEREAS, in furtherance of its business objective, Employer has need of
qualified, experienced personnel;
WHEREAS, Employee has disclosed his work experience, education and training
to Employer and both Employer and Employee agree that Employee possesses
sufficient qualifications and expertise in order to fulfill the terms of the
employment stated in this Agreement; and
WHEREAS, Employer is willing to employ Employee, and Employee is desirous
of accepting employment from Employer, under the terms and pursuant to the
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the foregoing recitals, and in
consideration of the mutual covenants, agreements, understandings, undertakings,
representations, warranties and promises hereinafter set forth, and intending to
be legally bound thereby, Employer and Employee do hereby covenant and agree as
follows:
1. DEFINITIONS. As used in this Agreement, the words and terms
hereinafter defined have the respective meanings ascribed to them below:
"Base Salary" shall have the meaning set forth in Section 6(a) hereof.
"Cause" means any of the following:
(a) the conviction of Employee by a court of competent jurisdiction
of a felony or any other offense involving moral turpitude or dishonesty;
(b) the indictment of Employee by a state or federal grand jury of
competent jurisdiction for embezzlement or misappropriation of funds or for any
act of dishonesty or lack of fidelity;
(c) a decree of a court of competent jurisdiction that Employee is
not mentally competent or is unable to handle his own affairs;
<PAGE>
(d) the written confession by Employee of any embezzlement or
misappropriation of funds;
(e) the payment (or, by the operation solely of the effect of a
deductible, the failure of payment) by a surety or insurer of a claim under any
fidelity bond issued for the benefit of Employer or Employer's Affiliates
reimbursing Employer or Employer's Affiliates for a loss due to the wrongful act
or wrongful omission to act of Employee; and
(f) Employee's material breach of any of his obligations under this
Agreement, as determined by a court of competent jurisdiction.
"Change in Control" means the first to occur of the following:
(a) the date upon which the directors of Employer who were nominated
by the Board of Directors for election as directors cease to constitute a
majority of the directors of Employer;
(b) the consummation of a reorganization, merger or consolidation of
Employer (other than a reorganization, merger or consolidation the sole purpose
of which is to change Employer's domicile solely within the United States) as a
result of which the outstanding Common Shares are exchanged for or converted
into cash, property and/or securities not issued by Employer;
(c) the date as of which the Chisick Family (as defined below)
beneficially own, whether individually or together, directly or indirectly, less
than twenty percent (20%) of the outstanding Common Shares; or
(d) the date of the first public announcement that any Person (as
herein defined), together with all Affiliates and Associates (as such
capitalized terms are defined in Rule 12b-2 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of such Person, shall
have become the Beneficial Owner (as defined in Rule 13d-3 promulgated under the
Exchange Act) of Common Shares representing more than fifty percent (50%) of the
voting power of all outstanding Common Shares (a "50% Shareholder"); provided,
however, that the following shall not be a 50% Shareholder: (i) Employer, (ii)
any employee benefit plan of Employer, (iii) any entity holding voting
securities of Employer for or pursuant to the terms of any such employee benefit
plan, (iv) any member of the Chisick Family, or (v) any Person if the
transaction that resulted in such Person becoming a 50% Shareholder was approved
in advance by the Board of Directors of Employer.
"Chisick Family" includes Brian Chisick, his spouse and any trust over
which Brian Chisick and/or his spouse exercises voting control with respect to
any Common Shares held therein.
"Commencement Date" means October 1, 1995.
"Common Shares" means shares of Employer's Common Stock or Preferred Stock
having voting rights substantially the same as or superior to Common Stock.
"Complete Disability" means the inability of Employee, due to illness or
accident or other mental or physical incapacity, to perform his duties and
obligations under this Agreement for a period of one hundred and twenty (120)
calendar days in the aggregate over a period of three hundred and sixty-five
(365) consecutive calendar days or less, such "Complete Disability" to
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become effective upon the expiration of such one hundred and twentieth (120th)
day. Employer shall determine, according to the facts then available, whether a
Complete Disability has occurred. Such determination shall not be arbitrary or
unreasonable, and Employer shall take into consideration the opinion of
Employee's personal physician, if reasonably available, but such determination
by Employer shall be final and binding on the parties hereto.
"Employee" means Employee as earlier defined in this Agreement.
"Employee Shares" shall have the meaning set forth in Section 7(a) hereof.
"Employer" means Employer as earlier defined in this Agreement.
"Employer's Affiliates" means any parent or subsidiary corporation or other
person or legal entity that, directly or indirectly, controls, is controlled by,
or is under common control with, Employer.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to the Common Shares on a given
date, the value determined on the basis of the good faith determination of the
Board of Directors of Employer, without regard to whether the Common Shares are
restricted or represent a minority interest, pursuant to the applicable method
described below:
(a) if the Common Shares are listed on a national securities exchange or
quoted on the Nasdaq National Market ("NASDAQ"), the Fair Market Value of
each Common Share shall equal the average of the closing prices of the
Common Shares on the preceding five business days on which trades in such
Common Shares occurred, as reported by the principal national exchange on
which such Common Shares are traded (in the case of an exchange) or on
NASDAQ, as the case may be;
(b) if the Common Shares are not listed on a national securities exchange
or quoted on NASDAQ, but are actively traded in the over-the-counter
market, the Fair Market Value of each Common Share shall equal the average
of the averages of the closing bid and asked prices for such Common Shares
on the preceding five business days on which trades in such Common Shares
occurred; and
(c) if, on the relevant date, the Common Shares are not publicly traded or
reported as described in (a) or (b) above, the Fair Market Value of each
Common Shares shall be determined in good faith by the Board of Directors
of Employer.
"IPO" shall have the meaning set forth in Section 7(b)(i) hereof.
"Issuance" means any issuance by the Company of its Common Shares, whether
for cash or other consideration, and whether by direct issuance, upon exercise
of options or warrants, by conversion of convertible securities, or upon
consummation of a merger, consolidation or business combination (excluding any
merger, consolidation or business combination in which the Common Shares are
converted into or exchanged for cash, property or securities of another entity),
but excluding issuances pursuant to any employee stock incentive or option plan
or program of the Company.
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"Person" means any individual, firm, partnership, corporation, association,
group (as such term is used in Rule 13d-5 promulgated under the Exchange Act as
in effect on the date hereof) or other entity, and shall include any successor
(by merger or otherwise) of such entity.
"Put Option" shall have the meaning set forth in Section 7(f) hereof.
"Restricted Shares" shall have the meaning set forth in Section 7(a)
hereof.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Term" shall have the meaning set forth in Section 5 hereof.
"Termination" shall have the meaning set forth in Section 9 hereof.
2. REPRESENTATIONS AND WARRANTIES.
(a) Employee hereby represents and warrants to Employer that Employee
is not, on and as of the date of this Agreement, a party to, bound by or subject
to (i) any employment agreement or understanding with any other party or (ii)
any non-competition or other agreement or understanding that would be breached
or contravened by, or would conflict with, Employee's execution and delivery of
this Agreement or Employee's performance of his obligations hereunder. The
parties acknowledge that Employee serves as a director on the board of directors
of Fidelity Federal Bank, a FSB.
(b) This Agreement supersedes and replaces any and all prior
employment agreements, whether written or oral, by and between Employee and
Employer or Employer's Affiliates. From and after the Commencement Date,
Employee shall be the employee of Employer under the terms and pursuant to the
conditions set forth in this Agreement.
3. BASIC EMPLOYMENT AGREEMENT. Subject to the terms and pursuant to the
conditions set forth in this Agreement, Employer hereby employs Employee from
the Commencement Date through the end of the Term of this Agreement to serve
initially in the position of Executive Vice President and Chief Financial
Officer of Employer and with such duties not inconsistent with those generally
understood within the consumer finance industry to be those of a Chief Financial
Officer, and to serve in such other offices and positions as may be assigned to
Employee by the Board of Directors or the President of Employer, and Employee
shall commence work in such capacity on the Commencement Date. This Agreement
shall not be construed to prevent or restrict Employee from making passive
personal investments during his personal time so long as such investments do not
give rise to a conflict of interest with Employee's duties to Employer. The
employment relationship between Employer and Employee shall be governed by the
general employment policies and practices of Employer, including but not limited
to those relating to protection of confidential information, except that when
the terms of this Agreement differ from or are in conflict with Employer's
general employment policies or practices, this Agreement shall control.
4. ACCEPTANCE OF EMPLOYMENT. Employee hereby accepts the employment set
forth hereunder, under the terms and pursuant to the conditions set forth in
this Agreement. Employee hereby covenants and agrees that, from the
Commencement Date through the end of the Term of this Agreement, Employee shall
devote his entire productive time, ability and attention to the business of
Employer during the Term (as defined below) of this Agreement, and
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Employee shall endeavor faithfully and diligently to promote the business
affairs and best interests of Employer. Employer shall be entitled to all of the
income, benefits, products and profits arising from or incident to all work,
work association, services, or advice of Employee, unless otherwise authorized
by Employer.
5. TERM. The term of this Agreement shall commence as of the Commencement
Date and shall continue until terminated as provided in this Agreement (the
"Term").
6. COMPENSATION TO EMPLOYEE. For and in complete consideration of
Employee's full and faithful performance of his duties under this Agreement,
Employer hereby covenants and agrees to pay to Employee during the Term, and
Employee hereby covenants and agrees to accept from Employer during the Term,
the following items of compensation, all of which shall commence to accrue and
be paid from and after the Commencement Date:
(a) Base Salary. Employee shall receive a base salary of Two Hundred
and Forty Thousand Dollars ($240,000.00) per annum, subject to adjustment as set
forth below, payable in accordance with the normal payroll practices of Employer
(as adjusted from time to time, the "Base Salary"). On each anniversary of the
Commencement Date on which Employee is employed hereunder, the Board of
Directors of Employer shall perform a review of Employee's Base Salary and shall
make such increases (but not decreases) in such Base Salary as determined by the
Board of Directors in its sole discretion to be appropriate.
(b) Employee Benefit Plans. After the Commencement Date, Employer
will include Employee in all pension plans, retirement plans, company life
insurance plans, medical and/or hospitalization plans, and/or any and all other
benefit plans that may be placed in effect by Employer, in its sole discretion,
for its senior executives in accordance with their terms. Employer may, in its
sole discretion and from time to time, amend, eliminate or establish additional
benefit programs as it deems appropriate.
(c) Expense Reimbursement. Employer will either pay directly or
reimburse Employee for Employee's reasonable, necessary and customary expenses
incurred for the benefit of Employer in accordance with Employer's general
policy regarding reimbursement, as the same may be amended, modified or changed
from time to time. Such reimbursable expenses shall include, but are not
limited to, reasonable entertainment and promotional expenses, gift and travel
expenses, professional societies and fraternal organizations, and the like;
provided, however, such reimbursable expenses are approved by Employer. Prior
to reimbursement, Employee shall provide Employer with sufficient detailed
invoices of such expenses in accordance with the then applicable guidelines of
the Internal Revenue Service so as to entitle Employer to a deduction for such
expenses.
(d) Vacations and Holidays. Employee will be entitled to annual paid
vacation leave in accordance with Employer's standard policy therefor, to be
taken at such times as selected by Employee and approved by Employer. Unused
vacation days will not accrue or cumulate from year to year and will be
forfeited if not used in the year to which they apply.
All compensation payable to Employee hereunder is stated in gross
amount and shall be subject to all applicable withholding taxes, other normal
payroll deductions and any other amounts required by law to be withheld. The
rights afforded to Employee by this Section 6 shall be in addition to, and not
exclusive of, any and all other bonus, profit-sharing, incentive or other
compensation plans or programs for which executives of Employer are eligible.
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<PAGE>
7. EQUITY PARTICIPATION. Subject to the terms and pursuant to the
conditions set forth in this Agreement, and subject to applicable laws and
regulations, in consideration of past and future services of Employee to
Employer, Employer shall issue additional compensation to Employee as follows:
(a) After May 3, 1996 and on or before July 15, 1996, Employer shall
issue and grant to Employee pursuant to Employer's 1996 Stock Incentive Plan one
hundred seven thousand five hundred (107,500) shares (after giving effect to
Employer's forthcoming stock split to be effected prior to such issuance) of
Employer's Common Stock (the "Employee Shares"), representing one percent (1%)
of the total number of Common Shares that are to be issued and outstanding after
giving effect to such issuance. The exact date of such issuance within the
specified period shall be at the discretion of Employer, and, upon such
issuance, copies of all certificates evidencing the Employee Shares and written
notice of the date of their issuance shall be delivered to Employee. Upon
issuance, the Employee Shares shall be unvested "Restricted Shares" that, until
vested in the manner described below, may not be voted, sold, assigned,
conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner
by Employee and shall, except to the extent provided in Section 9 hereof, be
forfeited by Employee upon a Termination; provided, however, that any cash,
property and/or securities (other than dividends paid in Employer's Common Stock
that are the equivalent of a stock split) that are distributed prior to a
Termination in respect of Restricted Shares shall be delivered promptly to
Employee free of any risk of forfeiture or restrictions hereunder. Upon vesting
of any Employee Shares, such shares shall cease to be Restricted Shares and
Employee shall have all rights of ownership with respect to such shares.
(b) The Restricted Shares shall vest as follows:
(i) Upon the closing of an initial public offering of Common
Shares by Employer (an "IPO") during the Term of this Agreement, a number
of Restricted Shares shall be vested in Employee equal to the product of
(A) the total original number of Employee Shares multiplied by (B) a
fraction, the numerator of which is the number of Common Shares issued by
Employer in the IPO, and the denominator of which is the number of Common
Shares outstanding immediately after the IPO.
(ii) Upon the closing of an Issuance during the Term of this
Agreement, a number of Restricted Shares shall vest in Employee such that,
after giving effect to such vesting, the total number of vested Employee
Shares equals the product of (A) the total original number of Employee
Shares multiplied by (B) a fraction, the numerator of which is the number
of Common Shares issued by Employer in the IPO and all Issuances since the
Commencement Date, and the denominator of which is the sum of the number of
Common Shares outstanding immediately after such Issuance plus the number
of Common Shares repurchased by Employer since the Commencement Date.
(iii) On October 1 of each of years 1996 through 2000 during the
Term of this Agreement, a number of Restricted Shares shall vest in
Employee such that, after giving effect to such vesting, the percentage of
the original number of Employee Shares that shall have vested through such
date equals the percentage set forth opposite such date below (but if the
number of vested shares exceeds the designated percentage on any of such
dates, the number of vested shares shall not be reduced):
October 1, 1996 - 20%
October 1, 1997 - 40%
October 1, 1998 - 60%
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October 1, 1999 - 80%
October 1, 2000 - 100%
(iv) Notwithstanding anything to the contrary in this Agreement,
all Restricted Shares shall vest in Employee as contemplated by Section 9
hereof and, in addition, immediately prior to the consummation of any of
the following events:
(A) the dissolution or liquidation of Employer;
(B) a sale of all or substantially all of the property or
assets of Employer; or
(C) a Change in Control.
(v) The Board of Directors of Employer, in its sole discretion,
may accelerate the vesting of the Restricted Shares at any time and for any
reason.
(c) In the event that the outstanding Common Shares are increased,
decreased or exchanged for or converted into cash, property and/or a different
number or kind of securities as a result of a reorganization, merger,
consolidation, recapitalization, restructuring, or reclassification, stock split
(or stock dividend paid in Employer's Common Stock that is the equivalent of a
stock split), reverse stock split or the like, or in the event that
substantially all of the property and assets of Employer are sold, then, unless
such event shall cause the Restricted Shares to become fully vested pursuant to
Section 7(b)(iv), the term "Restricted Shares" shall, from and after the date of
such event, include such cash, property and/or securities into or by which the
Restricted Shares are so increased, decreased, exchanged or converted.
(d) Until a Restricted Share vests, (i) the record address of the
holder of record of such Restricted Share shall be the Secretary of the Company
at the address of the Company's principal executive office, (ii) the stock
certificate representing such Restricted Share (together with any cash, property
and/or securities comprising all or any part of such Restricted Share as
provided in Section 7(c)) shall be held in escrow in the custody of the
Secretary of the Company, duly endorsed in blank or accompanied by a duly
executed stock powers, and (iii) such stock certificate shall contain the
following legend:
"The transfer and registration of transfer of the securities
represented by this certificate are subject to certain restrictions as
provided in an Employment Agreement dated as of October 1, 1995, by
and between the Corporation and Mark K. Mason."
(e) From and after the date upon which a Restricted Share vests,
Employee shall be entitled to receive the stock certificate representing such
Restricted Share (together with any cash, property and/or securities comprising
all or any part of such Restricted Share as provided in Section 7(c)), which
stock certificate shall not contain the legend set forth in Section 7(d).
(f) Employer shall use its reasonable efforts to cause the Employee
Shares, when vested, to be qualified and registered under applicable federal and
state securities laws to the extent necessary to make them freely tradable under
such laws (subject to the requirements of Section 16 of the Exchange Act) in the
hands of Employee. Such vested Employee Shares shall be deemed freely tradable
under federal securities laws if they are issued under an Employer stock
incentive plan complying with Rule 16b-3 under the Exchange Act and can be sold
by Employee
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(i) under Rule 144 promulgated by the SEC under the Securities Act without any
requirement to satisfy a future holding period in excess of 120 days and can be
sold within 120 days in toto without violating the volume limitations of such
rule or (ii) pursuant to a registration statement under the Securities Act on
Form S-8 or otherwise. In the event that the vested Employee Shares are not
freely tradable under applicable federal and state securities laws, Employee
shall have the right, at his option (the "Put Option"), to sell any or all
vested Employee Shares to Employer, but only to the extent that such Put Option
does not give rise to Employee liability under Section 16(b) of the Exchange
Act, and Employer shall purchase such Employee Shares for which Employee
exercises such Put Option at a cash price per Employee Share equal to their Fair
Market Value as of the date such Put Option is exercised.
(g) If at Termination the Common Shares are not publicly traded, then,
during the 90 days following Termination of this Agreement, Employer shall have
the right to purchase from Employee all vested Employee Shares then owned by
Employee for a price in cash equal to their Fair Market Value on the date of
such purchase by Employer.
(h) Employee and Employer hereby acknowledge that Employee may make an
election under Section 83(b) (the "Election") of the Internal Revenue Code of
1986, as amended (the "Code"), to include the value of all Restricted Shares in
taxable income as and when such Restricted Shares are actually issued. Employee
and Employer understand that, should Employee make the Election, then, pursuant
to Treasury Regulation 1.1361-1(a)(3), Employee will be treated as a shareholder
for purposes of subchapter S of the Code. Employee hereby agrees to consent to
any and all elections necessary to facilitate the transition of Employer from an
S corporation under the Code to a C corporation under the Code, including, but
not limited to, the election to revoke the Employer's S election pursuant to
Section 1362(d)(1) of the Code and the election to allocate income and loss
based on the closing of Employer's books as of the S election termination day
pursuant to Section 1362(e)(3) of the Code. Employee also expressly agrees
that, during the period of time that Employee is a shareholder of Employer while
Employer is an S corporation under the Code, Employee will not take any action
that could jeopardize (or terminate) Employer's S election under the Code.
8. SPECIAL TERMINATION PROVISIONS. This Agreement shall terminate upon
the occurrence of any of the following events:
(a) the death of Employee;
(b) the giving of written notice from Employer to Employee of the
termination of this Agreement upon the Complete Disability of Employee;
(c) the giving of written notice by Employer to Employee of the
termination of this Agreement for Cause;
(d) the giving of written notice by Employer to Employee of the
termination of this Agreement without Cause;
(e) the giving of written notice by Employee to Employer of the
termination of this Agreement upon a material breach of this Agreement by
Employer, provided, however, that Employer shall have a period of thirty (30)
days after the giving of such notice to cure the breach or default; or
(f) the giving of written notice by Employee to Employer of the
termination of this Agreement for any reason other than that set forth in
Section 8(e).
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9. EFFECT OF EXPIRATION OR TERMINATION OF AGREEMENT. Upon the expiration
or termination of this Agreement (a "Termination"), all obligations of Employer
and Employee under this Agreement shall terminate; subject, however, to the
following:
(a) The provisions of this Section 9 and Sections 7(f) through (h),
10, 13, 14, 16 and 18 through 24 of this Agreement shall survive the
Termination.
(b) Employee (or his estate, as applicable) shall receive in cash
Employee's Base Salary accrued through the date of Termination.
(c) In the event of the Termination of this Agreement pursuant to
Sections 8(d) or (e) of this Agreement, all Restricted Shares shall vest in
Employee.
(d) Notwithstanding the foregoing, the Termination of this Agreement
shall not relieve any party of any liability for any rights or obligations
accrued hereunder prior to such expiration or termination or for any breach of,
or default under, this Agreement occurring prior to such Termination, and any
Termination of this Agreement shall not be deemed a waiver of any available
remedy for any such breach or default occurring prior to such Termination.
10. CONFIDENTIALITY. Employee hereby warrants, covenants and agrees that,
without the prior express written approval of Employer, during such time as
Employee remains employed by Employer and for a period of two (2) years after
the termination of this Agreement, Employee shall hold in the strictest
confidence, and shall not disclose to any person, firm, corporation or other
entity, any of Employer's proprietary or confidential data, including but not
limited to (i) information or other documents concerning Employer's or
Employer's Affiliates' businesses, customers or suppliers, (ii) Employer's or
Employer's Affiliates' marketing methods, files, and credit and collection
techniques and files, (iii) Employer's or Employer's Affiliates' trade secrets
and other "know-how" or information not of a public nature, regardless of how
such information came into the possession of Employee. The warranty, covenant
and agreement set forth in this Section 10 shall not expire, shall survive this
Agreement and shall be binding upon Employee without regard to the passage of
time or other events except as expressly set forth herein. The parties agree
that damages would be an inadequate remedy for a breach by Employee of this
Section 10, and that Employer shall be entitled to equitable relief (including,
without limitation, injunctive relief) for a breach or threatened breach by
Employee of this Section 10.
11. RESTRICTIVE COVENANT. Employee hereby covenants and agrees that,
during such time as Employee remains employed by Employer, Employee shall not,
without the prior consent of the Board of Directors of Employer, directly or
indirectly, either as a principal, agent, employee, employer, consultant,
partner, shareholder of a closely held corporation or shareholder in excess of
five per cent (5%) of a publicly traded corporation, corporate officer or
director, or in any other individual or representative capacity, engage or
otherwise participate in any manner or fashion in any business that is in
competition in any manner whatsoever with the principal business activity of
Employer or Employer's Affiliates. Employee hereby further covenants and agrees
that the restrictive covenant contained in this Section 11 is reasonable as to
duration, terms and geographical area and that the same protects the legitimate
interests of Employer, imposes no undue hardship on Employee, and is not
injurious to the public. The parties agree that damages would be an inadequate
remedy for a breach by Employee of this Section 11, and that Employer shall be
entitled to equitable relief (including, without limitation, injunctive relief)
for a breach or threatened breach by Employee of this Section 11.
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12. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same Agreement.
13. SUCCESSION. This Agreement shall be binding upon and inure to the
benefit of Employer and Employee and their respective permitted successors and
assigns.
14. ASSIGNMENT. The rights, benefits and obligations of Employee under
this Agreement shall not be assignable. Any purported assignment in violation
of this Section 14 shall be null and void and of no force or effect.
15. AMENDMENT OR MODIFICATION. This Agreement may not be amended,
modified, changed or altered except by a writing signed by both Employer and
Employee.
16. GOVERNING LAW. This Agreement shall be exclusively governed by and
construed in accordance with the laws of the State of California without resort
to any conflict or choice of laws principles.
17. NOTICES. Any and all notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be either (i) hand-delivered, (ii) sent by reputable
express courier service (charges prepaid), or (iii) mailed, certified mail,
return receipt requested. Such notices, demands and other communications shall
be sent to the addresses indicated below:
<TABLE>
<S> <C>
IF TO EMPLOYER: First Alliance Mortgage Company
17305 Von Karman Avenue
Irvine, California 92714
Attention: Brian Chisick
President
IF TO EMPLOYEE: Mark K. Mason
17 Ninos
Irvine, California 92720
</TABLE>
All notices, demands or other communications hand-delivered shall be deemed
delivered as of the date actually delivered. All notices, demands or other
communications sent by reputable express courier services shall be deemed
delivered one (1) day after the date of delivery to the express courier. All
notices, demands or other communications mailed shall be deemed delivered as of
three (3) business days after the date postmarked. Any changes in any of the
addresses listed herein shall be made by notice as provided in this Section 17.
18. INTERPRETATION. The preamble recitals to this Agreement are
incorporated into and made a part of this Agreement. Titles and headings of
Sections are for convenience only, are not to be considered a part of this
Agreement and shall not affect in any way the meaning or interpretation of this
Agreement. Neither party, nor its respective counsel, shall be deemed the
drafter of this Agreement for purposes of construing the provisions of this
Agreement, and all language in all parts of this Agreement shall be construed in
accordance with its fair meaning, and not strictly for or against any party.
The use of the word "including" in this Agreement shall be by way of example
rather than by limitation.
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19. SEVERABILITY. In the event any one or more provisions of this
Agreement is declared judicially void or otherwise unenforceable, the remainder
of this Agreement shall survive and such provision(s) shall be deemed modified
or amended so as to fulfill the intent of the parties hereto.
20. DISPUTE RESOLUTION. In the event of a dispute between the parties
hereunder, the parties shall meet and confer in good faith to resolve their
differences. If the parties cannot so resolve their differences, then, except
for equitable actions (including, without limitation, injunctive relief) seeking
to enforce the provisions of Sections 10 and 11 of this Agreement, which may be
brought in any court of competent jurisdiction in the State of California, any
and all claims, disputes, or controversies arising between the parties hereto
regarding any of the terms of this Agreement or the breach thereof, or in
connection with this Agreement, shall be submitted to and be determined by final
and binding arbitration held in Orange County, California, in accordance with
the Commercial Arbitration Rules of the American Arbitration Association. This
agreement to arbitrate shall be specifically enforceable in any state or federal
court of competent jurisdiction in the State of California.
21. WAIVER. None of the terms of this Agreement, including this Section
21, or any term, right or remedy hereunder shall be deemed waived unless such
waiver is in writing and signed by the party to be charged therewith and in no
event shall any waiver be deemed to occur by reason of any failure to assert or
delay in asserting any such term, right or remedy or similar term, right or
remedy hereunder.
22. PAROL. This Agreement constitutes the entire agreement between
Employer and Employee with respect to the subject matter hereof and this
Agreement supersedes any prior understandings, agreements or undertakings by and
between Employer and Employee with respect to the subject matter hereof.
23. GENERAL PROVISIONS.
(a) Time is of the essence.
(b) This Agreement has been carefully and fully examined by Employee,
and Employee represents that the legal and factual contents hereof are fully
appreciated and comprehended by Employee. Further, Employee has had ample
opportunity to review this Agreement with legal and/or such other counsel as
deemed appropriate, if any. Employee has decided to execute this Agreement
having considered the various advantages and possible detriments associated
therewith.
(c) In the event an action is filed or an arbitration is commenced in
relation to this Agreement, the unsuccessful party in the action or arbitration
shall pay to the successful party, in addition to all sums that the party may be
ordered to pay, the reasonable attorneys' fees and expenses of the successful
party.
24. FURTHER ASSURANCES. The parties hereto shall each perform such acts,
execute and deliver such instruments and documents, and do all such other things
as may be reasonably necessary to accomplish the purposes of this Agreement.
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IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties
hereto have executed and delivered this Agreement as of the year and date first
above written.
EMPLOYER
FIRST ALLIANCE MORTGAGE COMPANY
By:
----------------------------------
Brian Chisick
President
EMPLOYEE
-----------------------------------
Mark K. Mason
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Exhibit 10.7
FORM OF
FIRST ALLIANCE CORPORATION
INDEMNIFICATION AGREEMENT
This Indemnification Agreement, dated as of ______________, 1996, is
made by and between First Alliance Corporation, a Delaware corporation (the
"Corporation"), and [Indemnitee], [Title] of the Corporation ("Indemnitee").
RECITALS
A. Indemnitee is currently serving as, or is assuming the position
of, a director and/or officer of the Corporation and/or, at the Corporation's
request, a director, officer, employee and/or agent of another corporation,
partnership, joint venture, trust or other enterprise, and the Corporation
wishes Indemnitee to continue in such capacity(ies);
B. The Corporation and Indemnitee recognize that the present state of
the law is too uncertain to provide the Corporation's directors and officers
with adequate and reliable advance knowledge or guidance with respect to the
legal risks and potential liabilities to which they may become personally
exposed as a result of performing their duties for the Corporation;
C. The Certificate of Incorporation (the "Articles") and the Bylaws
(the "Bylaws") of the Corporation each provide that the Corporation may
indemnify, to the fullest extent permitted by law, certain persons, including
directors, officers, employees or agents of the Corporation, against specified
expenses and losses arising out of certain threatened, pending or completed
actions, suits or proceedings;
D. Section 317(f) of the Delaware General Corporation Law (the
"DGCL") expressly recognizes that the indemnification provided by Section 145 of
the DGCL shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in an official capacity and as to action in another capacity
while holding such office;
E. Indemnitee has indicated that he may not be willing to serve, or
continue to serve, as a director and/or officer of the Corporation and/or, at
the Corporation's request, as a director, officer, employee and/or agent of
another corporation, partnership, joint venture, trust or other enterprise in
the absence of an indemnification agreement of the Corporation;
F. The Board of Directors of the Corporation has concluded that, to
retain and attract talented and experienced individuals to serve as directors
and officers of the Corporation and to encourage such individuals to take the
business risks necessary for the success of the Corporation, it is necessary for
the Corporation to contractually indemnify them, and to assume for itself
liability for expenses and damages in connection with claims against them in
connection with their service to the Corporation, and has further concluded that
the failure to provide such contractual indemnification could result in great
harm to the Corporation and its stockholders.
<PAGE>
AGREEMENT
NOW, THEREFORE, the Corporation and Indemnitee agree as follows:
1. Definitions.
(a) "Expenses" means, for the purposes of this Agreement, all direct
and indirect costs of any type or nature whatsoever (including, without
limitation, any fees and disbursements of Indemnitee's counsel, accountants and
other experts and other out-of-pocket costs) actually and reasonably incurred by
Indemnitee in connection with the investigation, preparation, defense or appeal
of a Proceeding; provided, however, that Expenses shall not include judgments,
fines, penalties or amounts paid in settlement of a Proceeding unless such
matters may be indemnified under applicable provisions of the DGCL.
(b) "Proceeding" means, for the purposes of this Agreement, any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative (including actions, suits or
proceedings brought by or in the right of the Corporation) in which Indemnitee
may be or may have been involved as a party or otherwise, by reason of the fact
that Indemnitee is or was a director or officer of the Corporation, by reason of
any action taken by him or of any inaction on his part while acting as such
director or officer or by reason of the fact that he is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director and/or officer of the foreign or domestic
corporation which was a predecessor corporation to the Corporation or of another
enterprise at the request of such predecessor corporation, whether or not he is
serving in such capacity at the time any liability or expense is incurred for
which indemnification or reimbursement can be provided under this Agreement.
2. Indemnification.
(a) Third Party Proceedings. To the fullest extent permitted by law,
the Corporation shall indemnify Indemnitee against Expenses and liabilities of
any type whatsoever (including, but not limited to, judgments, fines, penalties,
and amounts paid in settlement (if the settlement is approved in advance by the
Corporation)) actually and reasonably incurred by Indemnitee in connection with
a Proceeding (other than a Proceeding by or in the right of the Corporation) if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
Indemnitee's conduct was unlawful. The termination of any Proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner that Indemnitee reasonably believed to be
in, or not opposed to, the best interests of the Corporation, or, with respect
to any criminal Proceeding, had reasonable cause to believe that Indemnitee's
conduct was unlawful. Notwithstanding the foregoing, no indemnification shall
be made in any criminal proceeding where Indemnitee has been adjudged guilty
unless a disinterested majority of the directors determines that Indemnitee did
not receive, participate in or share in any pecuniary benefit to the detriment
of the Corporation and, in view of all the circumstances of the case, Indemnitee
is fairly and reasonably entitled to indemnity for Expenses or liabilities.
(b) Proceedings by or in the Right of the Corporation. To the fullest
extent permitted by law, the Corporation shall indemnify Indemnitee against
Expenses actually
2
<PAGE>
and reasonably incurred by Indemnitee in connection with the defense or
settlement of a Proceeding by or in the right of the Corporation to procure a
judgment in its favor if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in, or not opposed to, the best interests
of the Corporation. Notwithstanding the foregoing, no indemnification shall be
made in respect of any claim, issue or matter as to which Indemnitee shall have
been adjudged to be liable to the Corporation in the performance of Indemnitee's
duty to the Corporation unless and only to the extent that the court in which
such Proceeding is or was pending shall determine upon application that, in view
of all the circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for Expenses and then only to the extent that the court
shall determine.
(c) Scope. Notwithstanding any other provision of this Agreement
other than Sections 3 and 13, the Corporation shall indemnify Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by other provisions of this Agreement, the Articles,
the Bylaws or statute.
3. Limitations on Indemnification. Any other provision herein to the
contrary notwithstanding, the Corporation shall not be obligated pursuant to the
terms of this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions
or transactions from which a director may not be relieved of liability under
Section 102(b)(7) of the DGCL; or
(b) Claims Initiated by Indemnitee. To indemnify or advance Expenses
to Indemnitee with respect to Proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the DGCL, but such indemnification or advancement of Expenses may
be provided by the Corporation in specific cases if a majority of the
disinterested directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for Expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines or penalties, and amounts paid in settlement) which have been paid
directly to or on behalf of Indemnitee by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Corporation or
any other policy of insurance maintained by the Corporation or Indemnitee; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for Expenses
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
4. Determination of Right to Indemnification. Upon receipt of a
written claim addressed to the Board of Directors for indemnification pursuant
to Section 2 of this Agreement, the Corporation shall determine by any of the
methods set forth in Section 145(d)
3
<PAGE>
of the DGCL whether Indemnitee has met the applicable standards of conduct that
make it permissible under applicable law to indemnify Indemnitee. If a claim
under Section 2 of this Agreement is not paid in full by the Corporation within
ninety days after such written claim has been received by the Corporation,
Indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, unless such action is dismissed by
the court as frivolous or brought in bad faith, Indemnitee shall be entitled to
be paid also the expense of prosecuting such claim. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to make a determination prior to the commencement of such action
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct under applicable law, nor
an actual determination by the Corporation (including its Board of Directors,
independent legal counsel or its stockholders) that Indemnitee has not met such
applicable standard of conduct, shall create a presumption that Indemnitee has
not met the applicable standard of conduct. The court in which such action is
brought shall determine whether Indemnitee or the Corporation shall have the
burden of proof concerning whether Indemnitee has or has not met the applicable
standard of conduct.
5. Advancement and Repayment of Expenses. The Expenses incurred by
Indemnitee in defending and investigating any Proceeding shall be paid by the
Corporation prior to the final disposition of such Proceeding within thirty days
after receiving from Indemnitee copies of invoices presented to Indemnitee for
such Expenses and an undertaking by or on behalf of Indemnitee to the
Corporation to repay such amount to the extent it is ultimately determined that
Indemnitee is not entitled to indemnification. In determining whether or not to
make an advance hereunder, the ability of Indemnitee to repay shall not be a
factor. Notwithstanding the foregoing, in a proceeding brought by the
Corporation directly, in its own right (as distinguished from an action brought
derivatively or by any receiver or trustee), the Corporation shall not be
required to make the advances called for hereby if a majority of the
disinterested directors determine that it does not appear that Indemnitee has
met the standards of conduct that made it permissible under applicable law to
indemnify Indemnitee and that the advancement of Expenses would not be in the
best interests of the Corporation and its stockholders.
6. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification or advancement by the Corporation
of some or a portion of any Expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, penalties, and amounts paid in
settlement) incurred by him in the investigation, defense, settlement or appeal
of a Proceeding, but is not entitled to indemnification or advancement of the
total amount thereof, the Corporation shall nevertheless indemnify or pay
advancements to Indemnitee for the portion of such Expenses or liabilities to
which Indemnitee is entitled.
7. Notice to Corporation by Indemnitee. Indemnitee shall notify the
Corporation in writing of any matter with respect to which Indemnitee intends to
seek indemnification hereunder as soon as reasonably practicable following the
receipt by Indemnitee of written notice thereof; provided that any delay in so
notifying Corporation shall not constitute a waiver by Indemnitee of his rights
hereunder. The written notification to the Corporation shall be addressed to
the Board of Directors and shall include a description of the nature of the
Proceeding and the facts underlying the Proceeding and be accompanied by copies
of any documents filed with the court, if any, in which the Proceeding is
pending. In addition, Indemnitee shall give the Corporation such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
4
<PAGE>
8. Defense of Claim. In the event that the Corporation shall be
obligated under Section 5 hereof to pay the Expenses of any Proceeding against
Indemnitee, the Corporation, if appropriate, shall be entitled to assume the
defense of such Proceeding, with counsel approved by Indemnitee, which approval
shall not be unreasonably withheld, upon the delivery to Indemnitee of written
notice of its election to do so. After delivery of such notice, approval of
such counsel by Indemnitee and the retention of such counsel by the Corporation,
the Corporation will not be liable to Indemnitee under this Agreement for any
fees of counsel subsequently incurred by Indemnitee with respect to the same
Proceeding; provided that (i) Indemnitee shall have the right to employ his own
counsel in any such Proceeding at Indemnitee's expense, and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the
Corporation, or (B) Indemnitee shall have reasonably concluded that there may be
a conflict of interest between the Corporation and Indemnitee in the conduct of
such defense or (C) the Corporation shall not, in fact, have employed counsel to
assume the defense of such Proceeding, then the fees and expenses of
Indemnitee's counsel shall be paid by the Corporation.
9. Attorneys' Fees. If any legal action is necessary to enforce the
terms of this Agreement, the prevailing party shall be entitled to recover, in
addition to other amounts to which the prevailing party may be entitled, actual
attorneys' fees and court costs as may be awarded by the court.
10. Continuation of Obligations. All agreements and obligations of
the Corporation contained herein shall continue during the period Indemnitee is
a director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, fiduciary, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and shall
continue thereafter so long as Indemnitee shall be subject to any possible
Proceeding by reason of the fact that Indemnitee served in any capacity referred
to herein.
11. Successors and Assigns. This Agreement establishes contract
rights that shall be binding upon, and shall inure to the benefit of, the
successors, assigns, heirs and legal representatives of the parties hereto.
12. Non-exclusivity.
(a) The provisions for indemnification and advancement of expenses set
forth in this Agreement shall not be deemed to be exclusive of any other rights
that Indemnitee may have under any provision of law, the Corporation's
Certificate of Incorporation or Bylaws, the vote of the Corporation's
stockholders or disinterested directors, other agreements or otherwise, both as
to action in his official capacity and action in another capacity while
occupying his position as a director or officer of the Corporation.
(b) In the event of any changes, after the date of this Agreement, in
any applicable law, statute, or rule that expand the right of a Delaware
corporation to indemnify its directors and officers, Indemnitee's rights and the
Corporation's obligations under this Agreement shall be expanded to the fullest
extent permitted by such changes. In the event of any changes in any applicable
law, statute or rule, that narrow the right of a Delaware corporation to
indemnify a director and officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
5
<PAGE>
13. Effectiveness of Agreement. This Agreement shall be effective as
of the date set forth on the first page and may apply to acts or omissions of
Indemnitee that occurred prior to such date if Indemnitee was a director or
officer of the Corporation or its predecessor, or was serving at the request of
the Corporation or its predecessor as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, at
the time such act or omission occurred.
14. Severability. Nothing in this Agreement is intended to require
or shall be construed as requiring the Corporation to do or fail to do any act
in violation of applicable law. The Corporation's inability, pursuant to court
order, to perform its obligations under this Agreement shall not constitute a
breach of this Agreement. The provisions of this Agreement shall be severable
as provided in this Section 14. If this Agreement or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify Indemnitee to the fullest extent
permitted by any applicable portion of this Agreement that shall not have been
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
15. Governing Law. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of Delaware without regard to its rules
pertaining to conflicts of laws. To the extent permitted by applicable law, the
parties hereby waive any provisions of law that render any provision of this
Agreement unenforceable in any respect.
16. Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressed, on the date of such
receipt, or (ii) if delivered by facsimile transmission to the recipient
followed by a copy sent by mail on the same date as the facsimile transmission,
on the date of receipt of such facsimile transmission, or (iii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
17. Mutual Acknowledgment. Both the Corporation and Indemnitee
acknowledge that in certain instances, federal law or applicable public policy
may prohibit the Corporation from indemnifying its directors and officers under
this Agreement or otherwise. Indemnitee understands and acknowledges that the
Corporation has undertaken or may be required in the future to undertake with
the Securities and Exchange Commission to submit the question of indemnification
to a court in certain circumstances for a determination of the Corporation's
right under public policy to indemnify Indemnitee.
18. Counterparts. This Agreement may be executed in several
counterparts, each of which shall constitute an original.
19. Amendment and Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.
FIRST ALLIANCE CORPORATION,
a Delaware corporation
By:
---------------------------------
Title:
------------------------------
17305 Von Karman Avenue
Irvine, California 92714
Attention: President
INDEMNITEE:
______________________________
[Indemnitee]
______________________________
______________________________
(Address)
7
<PAGE>
Exhibit 10.11
REIMBURSEMENT AGREEMENT
This Reimbursement Agreement (the "Agreement") is entered into this 21st
day of June 1996 by and between First Alliance Mortgage Company (the "Company"),
Brian Chisick, Trustee of the Chisick Trust No. 1 U/D/T dated March 30, 1996
("Trust No. 1), Brian Chisick, Trustee of the Chisick Trust No. 2 U/D/T dated
March 30, 1996 ("Trust No. 2"), and Brian and Sarah Chisick, as Co-Trustees of
The Brian and Sarah Chisick Revocable Trust U/A dated March 7, 1979 ("Family
Trust") (each a "Stockholder" and collectively the "Stockholders").
RECITALS
1. Trust No. 1, Trust No. 2 and the Family Trust own, respectively, 20%,
20% and 60% of the outstanding common stock of the Company.
2. The Company is an S corporation under the applicable provisions of the
Internal Revenue Code (the "Code");
3. The Company is in the process of effecting a public offering (the
"Public Offering") of its common stock pursuant to a registration statement on
Form S-1 filed with the Securities and Exchange Commission on May 13, 1996; and
4. The Stockholders intend to reimburse the Company for certain increases
in the Company's taxes for periods after the Public Offering.
ARTICLE I
DEFINITIONS
"Accumulated Adjustment Account" means the account of the Company as
defined under Section 1368(a)(1) of the Code.
"Audit Adjustment" means any net decrease, as a result of any Final
Adjustment to the Company's federal or state income or franchise tax return for
any S period, in the Company's Accumulated Adjustment Account on the date of
revocation of the Company's S corporation status, as reflected on Schedule M-2
of the Company's federal income tax return or equivalent state tax schedules (or
any successor schedule) for the taxable period ending on such termination date.
"C Corporation Taxable Year" means any taxable year that will commence on
or after the revocation, pursuant to section 1362(d)(1) of the Code, of the
Company's S status in connection with the Public Offering.
"Final Adjustment" means a final adjustment to the Company's federal or
state income or franchise tax return for any S period.
"S period" means the period defined under Section 1368(e)(2) of the Code.
<PAGE>
ARTICLE II
AGREEMENT TO REIMBURSE
1. The Stockholders agree to reimburse the Company for any aggregate
increase, in any C Corporation Taxable Year, in the Company's federal and state
income and franchise tax liability, including interest and penalties
attributable thereto, that results from an Audit Adjustment(the "Reimbursement
Amount"). The obligation of each Stockholder shall be several but not joint,
and shall be equal to the Reimbursement Amount multiplied by such Stockholder's
ownership percentage in the Company as set forth under Recital No. 1 above. The
parties agree that the Reimbursement Amount shall be the only obligation of the
Stockholders with respect to the tax liabilities of the Company, and the
Stockholders shall have no obligation to reimburse the Company for any tax
liabilities of the Company if the Company is treated as a C corporation at any
time prior to the Public Offering.
2. The Reimbursement Amount shall be computed by the Company in good
faith, and a notice thereof with an explanation shall be sent to the
Stockholders. The Stockholders shall pay the Reimbursement Amount within 30
days of the delivery of the notice to the Stockholders' addresses as set forth
in this Agreement. If the Stockholders disagree with the computation of the
Reimbursement Amount, the Stockholders and the Company shall make their best
efforts to resolve any differences. If the parties are unable to resolve their
differences after a good faith effort, the Company and the Stockholders shall
jointly and in good faith appoint an independent accounting firm to review the
computations. The decision of the accounting firm shall be binding on both
parties.
3. The parties shall cooperate in good faith to effect the purposes of
this Agreement, and shall provide to each other any information necessary to
determine the Reimbursement Amount and to resolve any differences.
4. In the case of an audit of the Company's S period by any federal or
state authority, the Company shall provide notice to Stockholder, and shall keep
the Stockholder reasonably informed of the audit process. However, the
Stockholder shall not have any right to participate in such audit, and the
Company shall have full power and authority to compromise, settle, or dispute
claims of the taxing authority.
FIRST ALLIANCE MORTGAGE COMPANY
By:
----------------------------
BRIAN CHISICK, TRUSTEE OF THE CHISICK
TRUST NO. 1 U/D/T DATED MARCH 30, 1996
-------------------------------
BRIAN CHISICK, TRUSTEE OF THE CHISICK
TRUST NO. 2 U/D/T DATED MARCH 30, 1996
-------------------------------
BRIAN AND SARAH CHISICK, AS
CO-TRUSTEES OF THE BRIAN AND SARAH
CHISICK REVOCABLE TRUST U/A DATED
MARCH 7, 1979
-------------------------------
-------------------------------
2
<PAGE>
Exhibit 10.2
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated , 1996 by
and between First Alliance Mortgage Company, a California corporation ("FAMCO"),
FAM Acquisition Corporation, a California corporation (the "Merger Subsidiary"),
and First Alliance Corporation, a Delaware corporation (the "Holding Company").
WHEREAS, the respective Boards of Directors and the stockholders of
each of FAMCO, Merger Subsidiary and Holding Company have determined that it is
advisable and in the best interests of such corporations and their stockholders
that Merger Subsidiary merge with and into FAMCO upon the terms and conditions
provided herein (the "Merger"), and have approved and adopted this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual agreements herein contained and of the mutual benefits provided hereby,
the parties hereto hereby agree as follows:
1. Merger. The effective time and date of the Merger shall be ____
a.m. on July __, 1996 (the "Effective Date"). On the Effective Date, Merger
Subsidiary shall be merged with and into FAMCO and the separate existence of
Merger Subsidiary shall thereupon cease. FAMCO shall survive the Merger and
continue its corporate existence in the State of California after the Effective
Date of the Merger.
2. Certificate of Incorporation. The Certificate of Incorporation of
FAMCO, as in effect immediately prior to the Effective Date, shall continue to
be the Certificate of Incorporation of FAMCO without change or amendment until
duly amended in accordance with the provisions thereof and applicable law.
3. Directors and Officers. The persons who are directors and
officers of FAMCO immediately prior to the Effective Date shall continue in
their same positions as the directors and officers, respectively, of FAMCO on
and after the Effective Date, and shall hold office until their successors are
duly elected and qualified in accordance with applicable law.
4. Conversion of Shares. On the Effective Date, by virtue of the
Merger and without any action on the part of any holder thereof:
(i) each share and each certificate representing shares of the
Common Stock of FAMCO outstanding immediately prior thereto
shall automatically be changed and converted into and shall
thereafter represent, with respect to each such share, one (1)
validly issued, fully paid and nonassessable share of the Class
B Common Stock, $.01 par value per share, of Holding Company;
<PAGE>
(ii) each share and each certificate representing shares of the Class
A Common Stock, $.01 par value, of Holding Company outstanding
immediately prior thereto shall automatically be cancelled for
no consideration; and
(iii) each share and each certificate representing shares of the
Common Stock of Merger Subsidiary outstanding immediately prior
thereto shall automatically be changed and converted into and
shall thereafter represent, with respect to each such share, one
(1) validly issued, fully paid and nonassessable share of the
Common Stock, $.01 par value per share, of FAMCO.
5. Subsequent Action. If at any time after the Effective Date it
shall be necessary or desirable to take any action or execute, deliver or file
any instrument or document in order to vest, perfect or confirm of record in
FAMCO the title to any property or any rights of Merger Subsidiary, or otherwise
to carry out the provisions of this Agreement, the directors and officers of
FAMCO are hereby authorized and empowered on behalf of Merger Subsidiary and in
its name to take such action and execute, deliver and file such instruments and
documents.
6. Undertaking to Furnish Copies of Agreement and Plan of Merger.
FAMCO shall furnish a copy of this Agreement to any of its shareholders or to
any person who was a shareholder of Merger Subsidiary or FAMCO upon written
request and without charge.
7. Rights and Duties of FAMCO. On the Effective Date, FAMCO shall
thereupon and thereafter possess all rights, privileges, immunities, licenses,
and permits (whether of a public or private nature) of Merger Subsidiary; and
all property (real, personal and mixed), all debts due on whatever account, all
chooses in action, and all and every other interest of or belonging to or due to
Merger Subsidiary shall continue and be taken and deemed to be transferred to
and vested in FAMCO, without further act or deed; and FAMCO shall thenceforth be
responsible and liable for all the liabilities and obligations of Merger
Subsidiary.
8. Assignment and Assumption of Certain Obligations. FAMCO hereby
assigns and delegates to Holding Company, and Holding Company hereby assumes,
effective upon the Effective Date, all of FAMCO's rights and obligations under
(i) that certain Employment Agreement, dated as of October 1, 1995 by and
between Mark K. Mason and FAMCO, and (ii) the 1996 Stock Incentive Plan of FAMCO
(the "FAMCO Plan"); provided, however, that the capital stock of Holding Company
that shall be subject to such assumed plan shall be the Class A Common Stock of
Holding Company, except with respect to shares that have been issued, as of the
date hereof, pursuant to the FAMCO Plan and converted hereby into shares of
Class B Common Stock of Holding Company, with respect to which shares the Class
B Common Stock of Holding Company shall be subject to the assumed plan.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
FIRST ALLIANCE CORPORATION,
a Delaware Corporation
By:____________________________
Brian Chisick
President
Attest:
By:______________________________
_________
Secretary
FIRST ALLIANCE MORTGAGE
COMPANY,
a California corporation
By:________________________________
Brian Chisick
President
Attest:
By:______________________________
Secretary
3
<PAGE>
FAM ACQUISITION CORPORATION,
a California corporation
By:________________________
Brian Chisick
President
Attest:
By:___________________________________
Secretary
4
<PAGE>
CERTIFICATE OF APPROVAL OF MERGER AGREEMENT
Brian Chisick and ________ certify that:
1. They are the President and Secretary, respectively, of First
Alliance Mortgage Company, a California corporation.
2. The Agreement of Merger in the form attached hereto was duly
approved by the Board of Directors of the corporation.
3. The corporation has only one class of shares and the total number
of outstanding shares is __________. The principal terms of the Agreement of
Merger were approved by the vote of the holders of all of the outstanding
shares, which exceeded the vote required.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: ___________
______________________________
Brian Chisick
President
_____________________________
Secretary
5
<PAGE>
CERTIFICATE OF APPROVAL OF MERGER AGREEMENT
Brian Chisick and ________ certify that:
1. They are the President and Secretary, respectively, of FAM
Acquisition Corporation, a California corporation.
2. The Agreement of Merger in the form attached hereto was duly
approved by the Board of Directors of the corporation.
3. The corporation has only one class of shares and the total number
of outstanding shares is One Thousand (1,000). The principal terms of the
Agreement of Merger were approved by the vote of the holders of all of the
outstanding shares, which exceeded the vote required.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: ___________
__________________________________
Brian Chisick
President
__________________________________
Secretary
6
<PAGE>
CERTIFICATE OF APPROVAL OF MERGER AGREEMENT
Brian Chisick and ________ certify that:
1. They are the President and Secretary, respectively, of First
Alliance Corporation, a Delaware corporation.
2. The Agreement of Merger in the form attached hereto was duly
approved by the Board of Directors of the corporation.
3. The corporation has only one class of shares outstanding and the
total number of outstanding shares is One Thousand (1,000). The principal terms
of the Agreement of Merger were approved by the vote of the holders of all of
the outstanding shares, which exceeded the vote required.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: ___________
___________________________
Brian Chisick
President
___________________________
Secretary
7
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
---------------------------
1. First Alliance Mortgage Company, a California company
2. First Alliance Mortgage Company Limited, a corporation organized under the
laws of the United Kingdom
3. First Alliance Company Limited, a corporation organized under the laws of
the United Kingdom
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-3633 of First Alliance Corporation on Form S-1 of our report on the
statement of financial condition of First Alliance Corporation dated June 30,
1996 and of our report on the financial statements of First Alliance Mortgage
Company dated March 18, 1996 (June 24, 1996 as to Note 2), appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Costa Mesa, California
July 23, 1996
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-3633 of First Alliance Corporation on Form S-1 of our report on the
financial statements of First Alliance Mortgage Company dated March 18, 1996
(June 24, 1996 as to Note 2), appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Costa Mesa, California
July 3, 1996
