<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1996
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST ALLIANCE MORTGAGE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6162 95-2944875
(STATE OR OTHER JURISDIC- (PRIMARY STANDARD INDUSTRIAL) (I.R.S. EMPLOYER
TION OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
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 MORTGAGE COMPANY
17305 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92714
(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. ROGER M. COHEN, 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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
========================================================================================================
<CAPTION>
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock............. 4,020,000 $19.00 $76,380,000 $26,338
========================================================================================================
</TABLE>
(1) Includes 670,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
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 MORTGAGE COMPANY
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
Registered............................... Prospectus Summary; Description of
Capital Stock
10. Interests of Named Experts and Counsel... Legal Matters; Experts
11. Information With Respect to the
Registrant............................... 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
Liabilities.............................. 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 MAY 13, 1996
PROSPECTUS
3,350,000 SHARES
FIRST ALLIANCE MORTGAGE COMPANY
CLASS A COMMON STOCK
-----------
All of the shares of the Class A Common Stock, no par value per share (the
"Class A Common Stock"), offered hereby (the "Public Offering") are being sold
by First Alliance Mortgage Company (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 National
Association of Securities Dealers Automated Quotation System ("Nasdaq") under
the symbol "FAMG."
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, no 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 92.8% of the combined voting power
of all outstanding shares of capital stock of the Company.
SEE "RISK FACTORS" ON PAGES 7 THROUGH 13 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 $869,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase from the Company up to 670,000
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>
[ART/MAP SHOWING BRANCH OFFICE LOCATIONS]
----------------
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 TERMS USED HEREIN ARE DEFINED IN THE
GLOSSARY ON PAGE 57. THIS PROSPECTUS IS WRITTEN GIVING EFFECT TO THE
REINCORPORATION OF THE COMPANY IN DELAWARE PURSUANT TO THE MERGER OF THE
COMPANY WITH AND INTO ITS WHOLLY OWNED SUBSIDIARY, WHICH WILL OCCUR IMMEDIATELY
PRIOR TO THE CLOSING OF THE PUBLIC OFFERING. ALL REFERENCES TO THE COMPANY
SHALL BE DEEMED TO INCLUDE THE COMPANY AND ITS PREDECESSORS.
First Alliance Mortgage Company, founded in 1971, 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 16 offices located in ten
states. The Company intends to expand its existing 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 certain affiliated
originators, and has recently begun to originate loans referred by unaffiliated
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 by the Company's high degree of personalized service
and timely response to loan applications. The Company believes each category of
customers generally is not adverse to paying 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 from operations,
after consideration of warehouse financing, due principally to the magnitude of
its retail loan origination fees. For the years 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 for those years
were 15.5%, 15.8% and 18.6%, 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 $751.5 million of loans through nine 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 December 31, 1995,
the Servicing Portfolio consisted of 8,809 loans with an outstanding balance of
$613.8 million.
3
<PAGE>
THE PUBLIC OFFERING
<TABLE>
<C> <S>
Class A Common Stock offered by the Company: 3,350,000 shares
Capital Stock to be Outstanding after the Public Offering:
Class A Common Stock....................... 3,350,000 shares(1)
Class B Common Stock....................... 10,750,000 shares(2)
------------
Total.................................... 14,100,000 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 $43 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. 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....................... FAMG
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 additional grants under the Company's
Stock Option Plan. None of the options granted to date are currently
exercisable. See "Management-1996 Stock Option 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>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Loan origination and sale........................ $ 22,489 $ 27,902 $ 35,493
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
Total expense.................................... 24,987 30,568 27,860
-------- -------- --------
Income before provision for income taxes......... 10,963 15,234 31,020
Provision for income taxes....................... 222 363 478
-------- -------- --------
Net income....................................... $ 10,741 $ 14,871 $ 30,542
======== ======== ========
Cash dividends(1)................................ $ 5,853 $ 17,341 $ 12,205
PRO FORMA INCOME STATEMENT DATA(2):
Income before provision for income taxes......... $ 10,963 $ 15,234 $ 31,020
Provision for income taxes....................... 4,403 6,200 12,772
-------- -------- --------
Net income....................................... $ 6,560 $ 9,034 $ 18,248
======== ======== ========
LOANS ORIGINATED OR PURCHASED:
Retail Branch Originations....................... $148,718 $151,408 $201,261
Portfolio Refinancing Originations............... 47,189 70,501 15,304
Wholesale purchases.............................. 81,241 87,785 26,190
-------- -------- --------
Total........................................... $277,148 $309,694 $242,755
======== ======== ========
LOANS SOLD:
Securitizations.................................. $141,795 $350,331 $167,899
Wholesale........................................ -- -- 51,547
Private.......................................... 67,098 19,582 15,895
-------- -------- --------
Total........................................... $208,893 $369,913 $235,341
======== ======== ========
SERVICING PORTFOLIO(3):
Private investor loans........................... $232,387 $112,287 $ 96,169
Securitized loans................................ 153,183 443,398 517,622
-------- -------- --------
Total........................................... $385,570 $555,685 $613,791
======== ======== ========
FINANCIAL RATIOS AND OTHER DATA:
Number of retail branches(3)..................... 11 13 17
Weighted average interest rate on loan
originations and purchases...................... 9.5% 8.7% 10.3%
Weighted average initial combined loan-to-value
ratio:
Retail Branch and Portfolio Refinancing
Originations................................... 52.4% 54.4% 58.6%
Wholesale purchases............................. 61.6% 60.5% 66.5%
Total delinquencies as a percentage of the dollar
amount of Servicing Portfolio at end of period . 4.0% 4.3% 5.9%
Real estate acquired through foreclosure ("REO")
as a percentage of average Servicing
Portfolio(4).................................... 1.21% .79% .69%
REO losses as a percentage of average Servicing
Portfolio during the period..................... .02% .01% .03%
Effective annual yield on Residual Interests(3).. 29.4% 46.1% 44.1%
Pre-tax income as a percentage of total revenue.. 30.5% 33.3% 52.7%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 4,387 $ 5,298 $ 4,019
Residual Interests..................................... 6,879 11,645 19,705
Total assets........................................... 99,855 48,226 66,987
Total borrowings....................................... 68,773 14,839 19,356
Stockholders' equity................................... 26,454 23,984 42,321
</TABLE>
- --------
(1) Historical cash dividends are not necessarily indicative of cash 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 a S corporation.
(3) As of the end of the applicable period.
(4) Includes REOs owned by the Company as well as REOs owned by REMIC Trusts
and serviced by the Company; however, excludes private investor REOs not
serviced by 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
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
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. While the
Company believes that the underwriting criteria and collection methods it
employs enable it 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.
REGULATORY AND LEGISLATIVE COMPLIANCE RISKS
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 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 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
7
<PAGE>
recently enacted regulations may 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 believes that it 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."
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.
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 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.
INTEREST RATE RISK
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.
The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against interest rate risks. However,
an effective hedging strategy is complex and no hedging strategy can
completely insulate the Company from interest rate risks. 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.
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
8
<PAGE>
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 interest rate spreads 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."
DEPENDENCE ON LOAN ORIGINATION FEES
The Company has historically generated positive operating cash flow, after
consideration of warehouse financing, due, in large part, to its customary
loan origination fees. Net loan origination fees constituted 43.3%, 62.7% and
54.5% of the Company's total revenues 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 years
were 18.6%, 15.8% and 15.5%, respectively. Any reduction in the amount of the
Company's loan origination fees, whether by 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."
AVAILABILITY OF FUNDING SOURCES
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 value of the Residual Interests received in the REMIC Trust by the
Company and on retained mortgage servicing rights related to such loans. The
values of such Residual Interests and retained mortgage servicing rights are
in turn based in part on projected loan prepayment and credit loss rates.
Higher than anticipated rates of loan prepayments or credit losses 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."
9
<PAGE>
DEPENDENCE ON CREDIT ENHANCEMENT
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 timely 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.
COMPETITION
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 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
10
<PAGE>
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
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 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
At December 31, 1995, approximately 84.3% 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 (aggregate Regular Interests of
$458,037,125), 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 four 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 most recent Securitization includes language that modifies the
cumulative loss figures to 6.63% within the first five years and 9.94% after
year five.
At December 31, 1995, 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
11
<PAGE>
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 92.0% 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; 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."
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. 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 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,
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.
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."
12
<PAGE>
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 from the Public Offering price per share of Class A Common Stock. 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."
THE COMPANY
First Alliance Mortgage Company was founded in 1971 and was incorporated in
California in 1975. Prior to the consummation of the Public Offering, the
Company will reincorporate in the State of Delaware (the "Reorganization").
The Company and its predecessors have been actively involved in the mortgage
lending business since its founding. The Company is owned by the Chisick
Family and a certain member of management. The Company and its predecessors
have been located in Orange County, California. Approximately 165 of the
Company's 280 employees are located at the corporate headquarters. The balance
of the employees work in 16 branch offices, five 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 and Pennsylvania.
The Company maintains its principal office at 17305 Von Karman Avenue,
Irvine, California 92714. 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 its shareholders 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 shareholders of
the Company are expected to revoke the Company's S corporation status and the
Company will make a distribution 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 $43 million and $47 million prior to considering the S Corporation
Distribution). The S Corporation Distribution will be comprised of promissory
notes bearing interest at 5.61% per annum if distributed in May 1996 or, if
distributed subsequent to May 1996, the short-term applicable Federal rate
under Section 1274 of the Code for instruments issued at that time (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 shareholders of the Company have 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 shareholders 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 shareholders'
reimbursement right is embodied in the S Distribution Notes.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,350,000 shares of
Class A Common Stock offered by the Company hereby are estimated to be
approximately $55.8 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 $43.0 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. 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. The annual interest rate currently applicable to borrowing under the
Company's Warehouse Financing Facility is 30 day London Interbank Offered Rate
("LIBOR") plus 0.875%. See "Prior S Corporation Status and Reincorporation."
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."
14
<PAGE>
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 December 31, 1995 was $42.3 million or
approximately $3.00 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. After giving effect to
the S Corporation Distribution and the sale by the Company of 3,350,000 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 December 31, 1995 would have been $59.2 million or $4.20 per share.
This represents an immediate increase in net tangible book value of $3.97 per
share to existing stockholders and an immediate dilution in net tangible book
value of $13.80 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 December 31, 1995...... $3.00
Decrease attributable to issuance of S Distribution Notes...... (3.10)
Increase attributable to establishment of net deferred tax
assets........................................................ 0.33
-----
Net tangible book value per share before the Public Offering... 0.23
Increase per share attributable to new investors............... 3.97
-----
Pro forma net tangible book value per share after the Public
Offering (2).................................................... 4.20
------
Dilution per share to new investors.............................. $13.80
======
</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 Option Plan. See "Management--1996
Stock Option Plan."
The following table summarizes, on a pro forma as adjusted basis as of
December 31, 1995, 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 76.2% $ 1,642,000 2.7% $ 0.15
New Investors........... 3,350,000 23.8 60,300,000 97.3 18.00
--------------- ---------- ----------- -----
Total................. 14,100,000 100.0% $61,942,000 100.0%
=============== ========== =========== =====
</TABLE>
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and short-term debt of the
Company at December 31, 1995 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 Company's previously earned and undistributed taxable S corporation
earnings at December 31, 1995; and (ii) $4,713,000 of net deferred tax assets
that would have been recorded had the Company's S corporation status been
revoked as of December 31, 1995; and as adjusted further to reflect (i) the
sale of 3,350,000 shares of Class A Common Stock by the Company in the Public
Offering and the application of the estimated net proceeds therefrom and (ii)
the grant of 107,489 shares of restricted Class B Common Stock to an officer
of the Company. 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 DECEMBER 31, 1995
------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt................................. $18,233 $18,233 $ 6,111
------- ------- -------
Long-term debt:
S Distribution Notes.......................... -- 43,691 --
Notes payable................................. 1,123 1,123 1,123
------- ------- -------
Total....................................... 1,123 44,814 1,123
------- ------- -------
Stockholders' equity:
Preferred Stock, no par value; 1,000,000
shares authorized; no shares outstanding.....
Common Stock, no par value; 15,000,000 shares
authorized; 10,642,511 shares issued and
outstanding.................................. 42 42 --
Class A Common Stock, no par value; 25,000,000
shares authorized; no shares issued and
outstanding (actual and as adjusted);
3,350,000 shares issued and outstanding (as
further adjusted)(1)......................... 55,813
Class B Common Stock, no par value; 15,000,000
shares authorized; no shares issued and
outstanding (actual and as adjusted);
10,750,000 shares issued and outstanding (as
further adjusted)............................ 1,642
Retained earnings(2).......................... 42,279 3,301 2,921
Deferred stock compensation................... (1,220)
------- ------- -------
Total stockholders' equity.................. 42,321 3,343 59,156
------- ------- -------
Total capitalization........................ $43,444 $48,157 $60,279
======= ======= =======
</TABLE>
- --------
(1) Does not include 750,000 shares of Class A Common Stock issuable upon
exercise of options granted pursuant to the Stock Option Plan. See
"Management--1996 Stock Option Plan."
(2) No adjustment has been made to give effect to the Company's earned and
undistributed taxable S corporation earnings for the period January 1,
1996 through the Closing Date, which earnings will be distributed as part
of the S Corporation Distribution. See "Prior S Corporation Status."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1991 1992 1993 1994 1995
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Loan origination and sale.. $ 16,661 $ 20,006 $ 22,489 $ 27,902 $ 35,493
Loan servicing and other
fees...................... 5,344 7,145 8,989 9,106 8,543
Interest................... 2,038 2,285 4,452 8,650 14,668
Other...................... 116 32 20 144 176
--------- -------- -------- -------- --------
Total revenue............. 24,159 29,468 35,950 45,802 58,880
Total expense.............. 14,885 18,805 24,987 30,568 27,860
--------- -------- -------- -------- --------
Income before provision for
income taxes.............. 9,274 10,663 10,963 15,234 31,020
Provision for income taxes. 262 268 222 363 478
--------- -------- -------- -------- --------
Net income................. $ 9,012 $ 10,395 $ 10,741 $ 14,871 $ 30,542
========= ======== ======== ======== ========
Cash dividends(1).......... $ 4,991 $ 3,987 $ 5,853 $ 17,341 $ 12,205
PRO FORMA INCOME STATEMENT
DATA(2):
Income before provision for
income taxes.............. $ 9,274 $ 10,663 $ 10,963 $ 15,234 $ 31,020
Provision for income taxes. 3,724 4,282 4,403 6,200 12,772
--------- -------- -------- -------- --------
Net income................. $ 5,550 $ 6,381 $ 6,560 $ 9,034 $ 18,248
========= ======== ======== ======== ========
LOANS ORIGINATED OR
PURCHASED:
Retail Branch Originations. $ 88,249 $ 93,596 $148,718 $151,408 $201,261
Portfolio Refinancing
Originations.............. -- -- 47,189 70,501 15,304
Wholesale purchases........ -- 19,078 81,241 87,785 26,190
--------- -------- -------- -------- --------
Total..................... $ 88,249 $112,674 $277,148 $309,694 $242,755
========= ======== ======== ======== ========
LOANS SOLD:
Securitizations............ $ -- $ 39,024 $141,795 $350,331 $167,899
Wholesale.................. -- -- -- -- 51,547
Private.................... 76,476 74,688 67,098 19,582 15,895
--------- -------- -------- -------- --------
Total..................... $ 76,476 $113,712 $208,893 $369,913 $235,341
========= ======== ======== ======== ========
SERVICING PORTFOLIO(3):
Private investor loans..... $ 209,012 $204,975 $232,387 $112,287 $ 96,169
Securitized loans.......... -- 35,246 153,183 443,398 517,622
--------- -------- -------- -------- --------
Total..................... $ 209,012 $240,221 $385,570 $555,685 $613,791
========= ======== ======== ======== ========
FINANCIAL RATIOS AND OTHER
DATA:
Number of retail
branches(3)............... 10 11 11 13 17
Weighted average interest
rate on loan originations
and purchases............. 14.1% 13.6% 9.5% 8.7% 10.3%
Weighted average initial
combined loan-to-value
ratio:
Retail Branch and
Portfolio Refinancing
Originations............. 49.0% 46.6% 52.4% 54.4% 58.6%
Wholesale purchases....... -- 61.4% 61.6% 60.5% 66.5%
Total delinquencies as a
percentage of the dollar
amount of Servicing
Portfolio at end of
period.................... 2.7% 5.0% 4.0% 4.3% 5.9%
REO as a percentage of
average Servicing
Portfolio(4).............. .35% .72% 1.21% .79% .69%
REO losses as a percentage
of average Servicing
Portfolio during the
period.................... 0% .02% .02% .01% .03%
Effective annual yield on
Residual Interests(3)..... -- 9.0% 29.4% 46.1% 44.1%
Pre-tax income as a
percentage of total
revenue................... 38.4% 36.2% 30.5% 33.3% 52.7%
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------
1991 1992 1993 1994 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.. $ 2,777 $ 1,111 $ 4,387 $ 5,298 $ 4,019
Residual Interests......... -- 2,792 6,879 11,645 19,705
Total assets............... 20,973 24,517 99,855 48,226 66,987
Total debt................. 4,319 966 68,773 14,839 19,356
Stockholders' equity....... 15,158 21,566 26,454 23,984 42,321
</TABLE>
17
<PAGE>
- --------
(1) Historical cash dividends are not necessarily indicative of cash 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 a S corporation.
(3) As of the end of the applicable period.
(4) Includes REOs owned by the Company as well as REOs owned by REMIC Trusts
and serviced by the Company; however, excludes private investor REOs not
serviced by the Company.
18
<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 16 offices, five 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 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 as described
below), net of transaction costs. The allocated cost of the loans Securitized
is determined by taking
19
<PAGE>
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.
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, except that the Company uses a discount rate of 25%.
As of December 31, 1995, mortgage servicing rights totaled $4.0 million.
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 determines the fair value of the Residual Interests at the time
each Securitization closes utilizing prepayment and credit loss assumptions
appropriate for each particular Securitization. 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%. The Company utilizes a CPR range of 25.0% to
30.0% to value its Residual Interests. The Company expects its Securitized
pools to have average lives of three to five years. In addition, the Company
currently applies a constant annual credit loss rate of .5%. In order to
determine the fair value of this excess cash flow, the Company currently
applies an estimated market discount rate of 18.0% to the expected cash flow.
As of December 31, 1995, the Company's investments in Residual Interests
totaled $19.7 million.
There can be no assurance that the Company's estimates used to determine the
fair value of Residual Interests and 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 Residual Interests and 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 Residual Interests and mortgage
servicing rights in subsequent periods. The Company has never written down the
book value of its Residual Interests or 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 referral
fees.
A significant portion of gain on sale of loans is the recognition of Net
Deferred Origination Fees, which equaled $25.5 million, or 71.8% of loan
origination and sale revenue, during the year ended December 31, 1995.
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.
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 on the balance of Residual Interests over the expected lives of
the Securitized loans.
20
<PAGE>
Additionally, cash received by the Company from Residual Interests is recorded
as a reduction in the balance of the related Residual Interests and accrued
interest income is recorded as an increase in the balance of the Residual
Interests. 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. At December 31, 1995, the weighted average
effective yield for all Residual Interests to be used for the recognition of
interest in the subsequent reporting period was 44.1%.
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 in the Company's
increased loan origination volume since 1992.
Retail Branch Originations have increased 128.1% to $201.3 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 250.9% to a high of $309.7 million in 1994 from $88.2 million in
1991. In 1995, the Company ceased purchasing loans from one affiliated loan
broker, due to dissatisfaction with the volume and quality of these loans, who
was providing the majority of the Company's wholesale loan purchase volume at
that time.
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan originations and pur-
chases:
Retail Branch
Originations............. $ 88,249 $ 93,596 $148,718 $151,408 $201,261
Portfolio Refinancing
Originations............. 47,189 70,501 15,304
Wholesale purchases....... 19,078 81,241 87,785 26,190
-------- -------- -------- -------- --------
Total originations...... $ 88,249 $112,674 $277,148 $309,694 $242,755
======== ======== ======== ======== ========
Number of retail branches as
of the end of the period 10 11 11 13 17
Weighted average loan
origination and processing
fees as a percent of gross
loans originated as
applicable:
Retail Branch
Originations............. 23.0% 23.4% 18.6% 15.8% 15.5%
Portfolio Refinancing
Originations............. -- -- 2.5% 7.5% 13.7%
Wholesale purchases....... -- -- -- -- --
Average retail loan size.... $ 35.6 $ 35.9 $ 53.6 $ 66.1 $ 68.8
Weighted average interest
rate....................... 14.1% 13.6% 9.5% 8.7% 10.3%
Weighted average initial
combined loan-to-value
ratio...................... 49.0% 48.5% 55.2% 56.2% 59.4%
Servicing Portfolio as of
the end of the period...... $209,012 $240,221 $385,570 $555,685 $613,791
</TABLE>
21
<PAGE>
Loan Sales
The Company sells substantially all of the loans it originates or purchases,
either through loan sales or Securitizations. During 1995, 1994, 1993 and
1992, the Company sold $235.3 million, $369.9 million, $208.9 million and
$113.7 million of loans, respectively. The volume of loans sold decreased $
134.6 million, or 36.4%, to $235.3 million in 1995 from $369.9 million in 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 years, 71.3%, 94.7%, 67.9% and 34.3%, respectively,
were through Securitizations. The decrease in Securitizations during 1995 is
attributable to the Company's implementation of wholesale loan sales to other
mortgage bankers of loans that did not meet the Company's criteria for
inclusion in a Securitization.
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.
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>
FOR THE YEARS ENDED
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Loan Origination and Sale:
Gain on sale of loans (excluding net
origination and referral fees)..... 5.7% (3.4%) 15.3%
Net loan origination and referral
fees............................... 56.8 64.3 45.0
Loan servicing and other fees......... 25.0 19.9 14.5
Interest.............................. 12.4 18.9 24.9
Other................................. 0.1 0.3 0.3
----- ----- -----
Total revenue....................... 100.0 100.0 100.0
----- ----- -----
Expense:
Compensation and benefits............. 30.2 20.9 17.7
Professional services................. 3.6 3.3 1.2
Advertising........................... 8.2 7.2 7.4
Subservicing and other fees........... 1.8 2.2 2.1
Rents................................. 2.3 2.1 2.2
Supplies.............................. 2.2 1.8 1.7
Depreciation and amortization of
property............................. 1.3 1.1 1.5
Interest.............................. 5.9 8.2 7.1
Legal................................. 8.5 15.6 2.5
Other................................. 5.6 4.2 4.0
----- ----- -----
Total expense....................... 69.5 66.7 47.3
----- ----- -----
Net income before provision for income
taxes.................................. 30.5 33.3 52.7
Provision for income taxes 0.6 0.8 0.8
----- ----- -----
Net income.............................. 29.9% 32.5% 51.9%
===== ===== =====
</TABLE>
22
<PAGE>
RESULTS OF OPERATIONS
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)............. $ 2,057 $(1,548) $ 8,982
Net loan origination and referral fees...... 20,432 29,450 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 referral 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 referral
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
3.8% 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 $14,000, or less than .01% 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 $134.6 million, or 36.4%, to $235.3 million,
from $369.9 million in 1994 primarily as a result of decreased Portfolio
Refinancing Originations and wholesale loan purchases due to the curtailment
of certain loan 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 referral
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
23
<PAGE>
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).
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 referral 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 referral 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 1.18% in 1994 to 0.90% 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 revenue is due to the 75.3% increase in Securitized loans paid
off during 1995 as compared to 1994. Prepayment penalties increased during
1995 due to an increase in overall portfolio prepayments.
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 represents the recognition of the yield on Residual
Interests in securities retained by the Company, interest earned on loans
originated or purchased by the Company during the Warehousing Period from
their origination or purchase until their sale and interest earned on loans
receivable held to maturity. 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, which increased
from 27.3% in 1994 to
24
<PAGE>
47.4% in 1995. Interest income from loans held for sale increased $0.9 million
in 1995 due to an increase in the weighted average coupon 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 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, which increased from 15.7% in
1993 to 27.3% in 1994. Interest income from loans held for sale increased $1.5
million in 1994 primarily due to an increase in the average balance of loans
held for sale (excluding Net Deferred Loan Origination Fees), which increased
from $42.4 million in 1993 to $60.7 million in 1994. 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.
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>
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 primarily is
due to a bonus paid to Mr. Chisick of $3.0 million in 1993 and was offset by a
$1.7 million increase in 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 branches. Retail
Branch Originations increased $49.9 million, or 32.9%, in 1995 over 1994.
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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
an increase in the average balance outstanding of $32.3 million, or 125.3%,
coupled with an increase in the weighted average interest rate on the
Warehouse Financing Facility, which increased from approximately 5.81% in 1993
to 5.96% in 1994. Decreased interest expense associated with stockholder notes
payable was due to an decrease in the average balance outstanding during 1994.
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.
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 stockholders for Federal and state income tax purposes.
Immediately prior to the Closing Date, the shareholders of the Company 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).
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow from operations
after consideration of warehouse financing. 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.
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, 1993 and 1992, the Company recognized gain on sale of
loans through Securitization, including the recognition of Net Deferred
Origination Fees, of $26.6 million, $25.6 million, $14.4 million and $6.4
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 $241.4 million, $314.4
million and $273.0 million, respectively, for new loan originations and
purchases. During the same periods, the Company received cash of proceeds from
the sale and Securitization of loans of $235.3 million, $367.1 million and
$208.2 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 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 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 June 28, 1996. This Warehouse Financing Facility was
originated in 1993 and has been renewed in varying amounts for 11 consecutive
quarters. 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
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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 provided its
stockholders with funds 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 shareholders of the Company 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."
Capital expenditures totaled $1.0 million, $0.9 million and $0.6 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
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 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
Option Plan.
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BUSINESS
GENERAL
First Alliance Mortgage Company, founded in 1971, 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 originates
loans through its centralized telemarketing operations, its direct mailing
campaigns and its expanding retail branch network of 16 offices currently
located in ten states. The Company also purchases loans from certain
affiliated originators, and has recently begun to originate loans referred by
unaffiliated 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. The Company believes each category
of customers generally is not adverse to paying 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 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. 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. The Company believes that
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
March 31, 1996, the Company has effected the majority of its loan sales
through Securitizations; during such period approximately $751.5 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
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underwriting 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, $221.9 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 $68,784, a weighted
average initial interest rate of 10.4%, and a weighted average initial
combined loan-to-value ratio of 58.6%.
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. 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. The Company analyzes these common characteristics and integrates
them with information obtained from a number of outside sources with respect
to the homeowner pool in new or existing markets. Management compares the
characteristics of individual homeowners and their properties in the homeowner
pool 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 the Company's subjective
analysis include credit characteristics, 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.
While the Company has utilized mass marketing in the past, management
believes 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 Company believes 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.
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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. Any information produced by the Company's focused
marketing efforts that is inconsistent with the Company's underwriting
guidelines is immediately referred for a fee to other mortgage companies.
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 16 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 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.
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.
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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 inspection 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, the title to the subject property and credit history
information.
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 departments. 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 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 during the final underwriting phase.
See "Business--Underwriting."
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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 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 training to learn the
Company's sales presentation and procedure prior to their placement in a
retail branch. Existing retail branch 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. 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.
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 believes its portfolio
refinancing programs allow 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.
Use and Qualifications of Originators
The Company from time to time purchases the originations of two affiliated
mortgage originators. The Company has guidelines with respect to such
purchases. The Company has entered into a mortgage loan purchase agreement
with each originator prior to purchasing loans. Under its mortgage loan
purchase agreement, each originator is generally required to have a specified
minimum level of experience in originating non-conventional mortgage loans,
and provide representations, warranties, and buyback provisions identical to
the representations and warranties required of the Company for the
Securitization of its own loan originations. The Company purchases loans from
the affiliated originators at market terms and Securitizes such loans in order
to maximize its return. See "Related Transactions." In addition, the Company
has recently begun to originate loans referred by unaffiliated brokers.
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
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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>
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. Any information produced by the Company's focused marketing
efforts that is inconsistent with the Company's guidelines with respect to
such factors is immediately referred for a fee to independent mortgage
companies.
34
<PAGE>
The following table reflects the risk classification for the Company's loan
originations and purchases for the year ended December 31, 1995.
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......................... $132,033 54.4% 9.8%
"B" Risk......................... 48,793 20.1 10.4
"C" Risk......................... 42,488 17.5 11.3
"D" Risk......................... 19,441 8.0 11.9
-------- -----
Total.......................... $242,755 100.0% 10.3%
======== =====
</TABLE>
RECENT 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 YEAR ENDED
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Type of property securing loan:
Single family....................................... 92.4% 95.0%
Multi family........................................ 5.4 2.7
Planned Unit Development and Other.................. 2.2 2.3
--------- ---------
Total................................................. 100.0% 100.0%
========= =========
Type of mortgage securing loan:
First mortgage...................................... 95.4% 94.5%
Second mortgage..................................... 4.4 5.4
Third mortgage...................................... .2 .1
--------- ---------
Total................................................. 100.0% 100.0%
========= =========
Weighted average interest rate........................ 8.7% 10.3%
Weighted average initial combined loan-to-value ra-
tio(1)............................................... 56.2% 59.4%
</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 Facility
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.
35
<PAGE>
Advances under the Warehouse Financing Facility bear interest at .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 completed negotiations on 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 .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 March 31, 1996,
the Company has sold $751.5 million of loans through nine publicly
underwritten and two privately placed Securitizations, all of which were rated
"AAA/Aaa." During the year ended December 31, 1995, the Company Securitized
$167.9 million or 69.2% of its loan origination and purchase volume,
representing 77.2% of the Company's total gain on sale of loans for that
period. 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 represents the
subordinated right to receive cash flows from the pool of Securitized loans
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
36
<PAGE>
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 from time to time may utilize various hedging strategies. These
strategies may include selling short and selling forward United States
Treasury securities and prefunding loan originations in its Securitizations,
as well as forward sales of mortgage loans or mortgage-backed securities,
interest rate caps and floors and buying and selling of futures and options on
futures. 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.
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 year ended December 31, 1995,
the Company sold $51.5 million, or 21.2%, 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 8,809 loans with an outstanding balance of $613.8 million as of
December 31, 1995. 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
37
<PAGE>
currently services only Company originated or purchased loans and does not
service outside loans. Revenue generated from loan servicing amounted to 14.5%
of total revenues for the year ended December 31, 1995.
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.
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.
38
<PAGE>
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.
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
-------------------- --------------------
(DOLLARS % OF (DOLLARS % OF
IN SERVICING IN SERVICING
THOUSANDS) PORTFOLIO THOUSANDS) PORTFOLIO
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Servicing Portfolio................ $555,685 100.00% $613,791 100.00%
-------- ------ -------- ------
30-59 days delinquent.............. $ 6,084 1.09% $ 8,339 1.36%
60-89 days delinquent.............. 4,471 .80 6,538 1.07
90 days or more delinquent......... 13,589 2.45 21,002 3.42
-------- ------ -------- ------
Total delinquencies................ $ 24,144 4.34% $ 35,879 5.85%
REO (1)............................ $ 3,704 .67% $ 4,051 .66%
</TABLE>
- --------
(1) Includes REOs owned by the Company as well as REOs owned by REMIC Trusts
and serviced by the Company; however, excludes private investor REOs 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
DECEMBER 31, 1994 DECEMBER 31, 1995
------------------ ------------------
<S> <C> <C>
Average Servicing Portfolio balance
outstanding (1)..................... $470,627 $584,738
Net losses (2)....................... 44 169
As a percent of average Servicing
Portfolio balance outstanding....... .01% .03%
</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 statutory 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
39
<PAGE>
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.
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 ten states
through its 16 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 ten 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 44.6% of the Company's total loan origination volume for
the year ended December 31, 1995. Five of the 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 five at December 31, 1995.
40
<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,
-----------------------
1994 1995
----- -----
<S> <C> <C>
States
California........ 94.3% 43.0%
Illinois.......... -- 14.1
Washington........ 3.4 14.9
Florida........... 0.1 8.1
Colorado.......... 0.4 6.7
Oregon............ 0.2 5.9
Utah.............. -- 2.5
Arizona........... 0.4 1.7
Georgia........... 0.2 2.7
Others............ 1.0 0.4
----- -----
Total: ......... 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.
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 branch from the new market. Managers of new branches are generally
managers of existing branches or loan officers promoted from existing
branches. 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.
First Alliance Credit Card
The Company is currently exploring the feasibility of a real estate secured
credit card. This card will be secured by the residence owned by the card
holder. The Company expects the card may be popular with its customers due to
the ease of application and the deductibility, in most cases, for Federal and
state income tax purposes of interest charged on the card. Conventional
secured credit cards require the borrower to secure the amount of credit
extended with cash or other deposits at financial institutions.
41
<PAGE>
The Company expects to market the card initially to its existing customer
base. The card will be marketed in a similar manner to that utilized for its
mortgage products. As such, the incremental cost of marketing this product is
expected to be minimal.
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 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 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 apply to all Covered Loans underwriting criteria
that take into consideration the borrower's ability to repay.
42
<PAGE>
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 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 which must be followed by, mortgage lenders and servicers, and
disclosures which 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.
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 March, 31 1996, the Company had a total of 280 employees, six of whom
were part-time employees and 274 of whom were full-time employees. The Company
has 165 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.
43
<PAGE>
PROPERTIES
The Company's corporate headquarters are located at 17305 Von Karman Avenue,
Irvine, California 92714, 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 Agreement with Chisick." 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 16 retail
branch offices in ten states. The average size of these retail branches is
approximately 1,600 square feet, with an annual average base rent of
approximately $31,800. 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, a class action suit was filed on behalf of certain
borrowers related to the origination of 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 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.
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors is divided into three classes: Class I, Class II and
Class III. 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 following the annual meetings 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.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY CLASS
---- --- -------------------------- -----
<S> <C> <C> <C>
Brian Chisick......................... 57 President, Chief Executive
Officer and Director II
Sarah Chisick......................... 55 Vice President and Director II
Peggy A. Tom.......................... 54 Vice President, Foreclosure,
Legal and Collections
Mark K. Mason......................... 37 Executive Vice President,
Chief Financial Officer
and Nominee for Director I
John M. Michel........................ 36 Vice President, Finance
Jeffrey W. Smith...................... 34 Executive Vice President,
Sales and Marketing
and Nominee for Director I
Bruce Bollong......................... 48 Vice-President,
Administration
Patricia G. Sullivan.................. 50 Vice President, Staff
Development
Catalina Arellano..................... 44 Vice President, Processing
and Disbursement
Beverly Allen......................... 43 Vice President, Loan
Servicing
Randall K. McPhillips................. 38 Vice President, Portfolio
Refinancing Operations
Merrill Butler........................ 71 Nominee for Director III
George Gibbs, Jr. .................... 65 Nominee for Director III
Albert L. Lord........................ 50 Nominee for Director III
</TABLE>
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 included projects in the loan servicing, foreclosure,
marketing and investment departments.
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.
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 immediately prior to the completion of the Public Offering.
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
45
<PAGE>
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.
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.
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 immediately prior to the completion of the Public Offering.
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 Arellano has been Vice President, Processing and Disbursement, of
the Company, since 1993. From 1982 to 1993, Ms. Arellano was manager of the
Company's Processing and Disbursement Department.
Beverly Allen has been Vice President, Loan Servicing of the Company since
1993. From 1982 to 1993, Ms. Allen was Manager, Loan Servicing.
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.
The Company intends to appoint three independent directors immediately prior
to the completion of the Public Offering. The additional 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 immediately
prior to the completion of the Public Offering. Mr. Butler is President of
Merrill Butler, Inc., an organization formed in 1983 to consult with savings
and loans on real estate related matters. From February 1995 to July 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. In 1991, Mr. Butler served as the Chairman Emeritus of
the American Real Estate Group, which assisted the Resolution Trust
Corporation in developing disposition programs regarding real estate assets
owned by New West Federal Savings & Loan. Mr. Butler is the past President,
Chief Executive Officer and Chairman of the Resolution Trust Corporation, 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.
George Gibbs, Jr. has agreed to become a Director of the Company immediately
prior to 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 immediately
prior to 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).
46
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Company anticipates creating a compensation committee and an audit
committee of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Reorganization, the Company has not had a compensation
committee.
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.
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
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
47
<PAGE>
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 May 3, 1996, 107,498
shares of Class B Common Stock (after giving effect to a May 1996 stock split),
representing 1% of the total issued and outstanding shares of Class B Common
Stock. The shares of Class B Common Stock are convertible into shares of Class
A Common Stock upon certain occurrences, subject to vesting. The shares of
Class B Common Stock will initially be subject to substantial restrictions on
transfer but will vest over time and thereafter not be subject to any transfer
restrictions. Mr. Mason's vesting in the shares of Class B Common Stock may be
accelerated upon certain conditions, including a change of control (as defined
in the employment agreement) or in any event ratably over a five year period
beginning October 1, 1995. In the event that Mr. Mason's vested shares of Class
A Common Stock are not freely tradable under applicable Federal and state
securities laws, Mr. Mason is entitled to sell such vested shares of Class A
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 OPTION PLAN
The company plans to establish a stock option plan (the "Stock Option Plan")
to enable directors, executive officer, independent contractors and other key
employees of the Company to participate in the ownership of the Company.
Initially, 750,000 shares of Class A Common Stock will be reserved for grants
under the Stock Option Plan. Options to acquire an aggregate of 370,000 shares
of Class A Common Stock are planned to be granted under the Stock Option Plan
effective upon completion of the Public Offering. The Stock Option Plan is
designed to attract and retain directors, executive officers, independent
contractors and other key employees of the Company. The Stock Option 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
Option Plan also provides for automatic grants of non-qualified options to non-
employee directors which are subject to special provisions discussed below.
The Stock Option Plan will be administered by the Compensation Committee,
which is authorized to select from among the eligible employees of the Company
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 Compensation
Committee is also authorized to adopt, amend and rescind the rules relating to
the administration of the Stock Option Plan. Except for the automatic grants of
non-qualified options referred to below, no member of the Compensation
Committee will be eligible to participate in the Stock Option 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.
48
<PAGE>
In addition, the Stock Option Plan provides that each non-employee director
automatically receives on the date of his or her appointment to the Board of
Directors, and on the date of any subsequent re-election to the Board of
Directors, an option to purchase 37,500 shares of Class A Common Stock, at an
exercise price equal to the fair market value of the Class A Common Stock on
the date of the grant. 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 non-employee
director's termination of service as a director.
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 Option Plan
and the Code, non-employee directors are not permitted to receive incentive
stock options.
49
<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 approximately $223,000 in interest payments to
Brian and Sarah Chisick, as co-trustees of the Chisick Trust, 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 prior to December 31, 1995.
In addition, the Company borrowed $1.5 million from Brian and Sarah Chisick,
as co-trustees of the Chisick Trust, 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.
In order to increase the volume of its Securitizations, the Company
purchases loans originated by certain affiliated brokers.
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 affiliated entities 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 $525,000 at December 31, 1995. The line of credit bears an
interest rate of 10.0% per annum. The line of credit will be terminated on May
31, 1996.
During 1995, the Company received referral fees of $233,000 and $481,000
from Nationscapital and Coast Security, respectively. The referral fees, which
were negotiated on an arms-length basis, reflected payments to the Company for
information obtained by the Company in its marketing efforts but with respect
to which the Company has not been able to originate loans. Nationscapital and
Coast Security may utilize this information
50
<PAGE>
and originate loans, and, if such loans satisfy the Company's underwriting
guidelines, the Company may purchase such loans for inclusion in a
Securitization.
SERVICING OF CERTAIN LOANS
During 1995, the Company serviced mortgage loans for certain related parties
for which no service fees were charged. At the end of 1995, the outstanding
balances of such loans serviced on behalf of Brian Chisick, Brad Chisick, Mark
Chisick, Jamie Chisick and Randall K. McPhillips were $7.6 million, $810,000,
$423,000, $345,000 and $136,000, respectively. Brad, Mark and Jamie Chisick
are the sons of Brian and Sarah Chisick. Upon the completion of the Public
Offering, the Company will charge such related parties servicing fees
consistent with the servicing fees applicable to loans sold to unaffiliated
private investors.
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 purchases were
effectuated pursuant to written agreements similar to those entered into with
unaffiliated entities. The Company ceased purchasing loans from this entity in
May 1995.
The Company paid consulting fees of approximately $76,000 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. It is expected that the operations of Orange Coast Computer
Services will be contributed to a newly formed corporation which in turn will
be contributed to the Company immediately prior to the consummation of the
Public Offering.
During 1995, the Company received referral fees of approximately $146,000
from a corporation that is no longer in existence and that was beneficially
owned by Brian and Sarah Chisick.
During 1995, the Company sold $3.2 million of loans to Brian Chisick. The
Company services such loans, but does not charge Mr. Chisick servicing fees.
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.
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 AFFILIATE TRANSACTIONS
At this time, the Company anticipates that following the completion of the
Public Offering, its transactions with affiliated parties will be limited to
the Company's relationships with Nationscapital and Coast Security and that
the Company will continue to conduct such relationships on an arms-length
basis.
51
<PAGE>
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(3)
------------------ ------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
- --------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Brian and Sarah Chisick............... 10,642,511 99.0%(2) 10,642,511 75.5%
Mark K. Mason......................... 107,489 1.0% 107,489 .8%
All directors and executive officers
as a group........................... 10,750,000 100.0% 10,750,000 76.3%
</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 beneficial ownership with respect to Chisick Trust Nos. 1 and 2,
grantor trusts of which Brian Chisick is the trustee.
(3) Assumes no exercise of the Underwriters' over-allotment option.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 1,000,000 shares
of preferred stock, no par value ("Preferred Stock"), (ii) 25,000,000 shares
of Class A common stock, no par value (the "Class A Common Stock") and
15,000,000 shares of Class B common stock, no 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 3,350,000 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,
52
<PAGE>
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 91.8% 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. 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.
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. 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 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. This
would permit the Chisick Family, assuming approval by the Board of Directors,
to
53
<PAGE>
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.
The Class A Common Stock has been approved for inclusion on the National
Market System of Nasdaq under the symbol "FAMG."
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
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 Option Plan.
54
<PAGE>
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 approximately
92.0% of the voting power of the issued and outstanding Common Stock. See
"Principal Stockholders" and "Risk Factors-Anti-Takeover Effect of Capital
Structure."
TRANSFER AGENT
The transfer agent and registrar for the Class A Common Stock is
[ ].
SHARES ELIGIBLE FOR FUTURE SALE
The 3,350,000 shares of Class A Common Stock to be sold in the Public
Offering, which will constitute all of the oustanding shares of Class A Common
Stock (4,020,000 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.
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 (33,500 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.
55
<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 ( )...............................................
===
</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 670,000
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 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 3,350,000 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 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. 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.
56
<PAGE>
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 financial statements of the 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.
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.
57
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933, as amended (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, may be obtained from the Commission's principal office in Washington,
D.C., upon payment of the fees prescribed by the Commission, or may be
examined without charge at the offices of the Commission.
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.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report........................................... F-2
Statements of Financial Condition as of December 31, 1994 and 1995..... F-3
Statements of Income for each of the three years in the period ended
December 31, 1995..................................................... F-4
Statements of Stockholders' Equity for each of the three years in the
period ended
December 31, 1995..................................................... F-5
Statements of Cash Flows for each of the three years in the period
ended December 31, 1995............................................... F-6
Notes to Financial Statements.......................................... F-7
</TABLE>
F-1
<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 to the financial statements, on January 1, 1995, the
Company adopted Statement of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights.
Costa Mesa, California
March 18, 1996 (May 11, 1996 as to the effects of the stock split described in
Notes 2 and 15)
F-2
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
PRO FORMA
1994 1995 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................. $ 5,298,000 $ 4,019,000 $ 4,019,000
Receivable from trusts.................... 3,906,000 4,722,000 4,722,000
Loans held for sale....................... 18,676,000 24,744,000 24,744,000
Loans receivable held for investment...... 2,521,000 2,261,000 2,261,000
Residual interests in securities
(estimated fair value of $15,015,000 and
$30,599,000 at December 31, 1994 and
1995, respectively)...................... 11,645,000 19,705,000 19,705,000
Mortgage servicing rights................. 763,000 4,021,000 4,021,000
Real estate owned, net.................... 1,635,000 1,474,000 1,474,000
Property, net............................. 2,080,000 2,141,000 2,141,000
Deferred taxes............................ 73,000 4,713,000
Prepaid expenses and other assets......... 1,629,000 3,900,000 3,900,000
----------- ----------- -----------
Total assets............................ $48,226,000 $66,987,000 $71,700,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facility.............. $13,390,000 $18,233,000 $18,233,000
Accounts payable and accrued liabilities.. 9,403,000 5,310,000 5,310,000
Notes payable............................. 1,449,000 1,123,000 1,123,000
S distribution notes...................... 43,691,000
----------- ----------- -----------
Total liabilities....................... 24,242,000 24,666,000 68,357,000
----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock--no par value; 15,000,000
shares authorized; 10,642,511 shares
issued and outstanding................... 42,000 42,000 42,000
Retained earnings......................... 23,942,000 42,279,000 3,301,000
----------- ----------- -----------
Total stockholders' equity.............. 23,984,000 42,321,000 3,343,000
----------- ----------- -----------
Total liabilities and stockholders'
equity............................... $48,226,000 $66,987,000 $71,700,000
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF INCOME
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Loan origination and sale................ $22,489,000 $27,902,000 $35,493,000
Loan servicing and other fees............ 8,989,000 9,106,000 8,543,000
Interest................................. 4,452,000 8,650,000 14,668,000
Other.................................... 20,000 144,000 176,000
----------- ----------- -----------
Total revenue.......................... 35,950,000 45,802,000 58,880,000
EXPENSE:
Compensation and benefits................ 10,847,000 9,559,000 10,395,000
Professional services.................... 1,288,000 1,521,000 697,000
Advertising.............................. 2,958,000 3,316,000 4,345,000
Subservicing and other fees.............. 659,000 1,019,000 1,212,000
Rent..................................... 815,000 974,000 1,278,000
Supplies................................. 791,000 831,000 992,000
Depreciation and amortization of
property................................ 483,000 514,000 907,000
Interest................................. 2,106,000 3,744,000 4,167,000
Legal.................................... 3,044,000 7,162,000 1,491,000
Other.................................... 1,996,000 1,928,000 2,376,000
----------- ----------- -----------
Total expense.......................... 24,987,000 30,568,000 27,860,000
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES... 10,963,000 15,234,000 31,020,000
PROVISION FOR INCOME TAXES................. 222,000 363,000 478,000
----------- ----------- -----------
NET INCOME................................. $10,741,000 $14,871,000 $30,542,000
=========== =========== ===========
PRO FORMA (unaudited):
Historical income before provision for
income taxes............................ $10,963,000 $15,234,000 $31,020,000
Pro forma income taxes................... 4,403,000 6,200,000 12,772,000
----------- ----------- -----------
PRO FORMA NET INCOME....................... $ 6,560,000 $ 9,034,000 $18,248,000
=========== =========== ===========
PRO FORMA NET INCOME PER SHARE............. $ 1.39
===========
WEIGHTED AVERAGE SHARES USED IN PRO FORMA
COMPUTATION............................... 13,088,417
===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993........ 10,642,511 $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...... 10,642,511 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...... 10,642,511 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...... 10,642,511 $42,000 $ 42,279,000 $ 42,321,000
========== ======= ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
FIRST ALLIANCE MORTGAGE CMOPANY
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income....................... $ 10,741,000 $ 14,871,000 $ 30,542,000
Adjustments to reconcile net
income to net cash (used in)
provided by operating
activities:
Depreciation and amortization
of property................... 483,000 514,000 907,000
Amortization of mortgage
servicing rights.............. 988,000 683,000 638,000
Deferred income taxes.......... (184,000) (63,000) 73,000
Provision for estimated losses
on real estate owned.......... 240,000 8,000
Loss (gain) on sales of
property...................... 75,000 23,000 (19,000)
Noncash gain recognized on
capitalization of residual
interests in securities and
mortgage servicing rights..... (4,171,000) (807,000) (9,822,000)
Loss (gain) on sales of real
estate owned.................. 76,000 (109,000) 65,000
Accretion of discounts on loan
receivable.................... (1,022,000)
Net accretion of residual
interests in securities....... (128,000) (1,128,000) (2,120,000)
Loans originated or purchased
for sale, net of loan fees.... (273,009,000) (314,393,000) (241,409,000)
Proceeds from sale of loans.... 67,098,000 19,582,000 67,442,000
Sale of regular interests in
securities.................... 141,056,000 347,500,000 167,885,000
Changes in assets and
liabilities:
Receivable from trusts....... (788,000) 163,000 (816,000)
Prepaid expenses and other
assets...................... (1,418,000) 802,000 (2,271,000)
Accounts payable and accrued
liabilities................. 2,643,000 4,775,000 (4,093,000)
------------- ------------- -------------
Net cash (used in) provided
by operating activities... (56,298,000) 72,421,000 5,980,000
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Loans receivable issued.......... (789,000) (1,949,000) (1,604,000)
Collections on loans receivable.. 519,000 1,341,000 2,905,000
Capital expenditures............. (610,000) (851,000) (978,000)
Proceeds from sales of property.. 723,000 29,000
Additions to real estate owned... (200,000) (336,000)
Proceeds from sales of real es-
tate owned...................... 1,028,000 3,566,000 523,000
------------- ------------- -------------
Net cash provided by in-
vesting activities........ 671,000 2,107,000 539,000
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Net borrowings (repayments) on
warehouse financing facility.... 66,835,000 (53,445,000) 4,843,000
Payments on notes payable........ (2,079,000) (2,831,000) (436,000)
Cash dividends................... (5,853,000) (17,341,000) (12,205,000)
Proceeds from issuance of notes
payable to stockholder.......... 11,000,000 3,000,000 4,500,000
Payments on notes payable to
stockholder..................... (11,000,000) (3,000,000) (4,500,000)
------------- ------------- -------------
Net cash provided by (used
in) financing activities.. 58,903,000 (73,617,000) (7,798,000)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............ 3,276,000 911,000 (1,279,000)
CASH AND CASH EQUIVALENTS, begin-
ning of year.................... 1,111,000 4,387,000 5,298,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of
year............................ $ 4,387,000 $ 5,298,000 $ 4,019,000
============= ============= =============
SUPPLEMENTAL INFORMATION:
Interest paid.................... $ 1,805,000 $ 3,605,000 $ 4,114,000
============= ============= =============
Income taxes paid................ $ 698,000 $ 100,000 $ 486,000
============= ============= =============
SUPPLEMENTAL INFORMATION ON
NONCASH INVESTING AND FINANCING
ACTIVITIES:
Loans funded in connection with
sales of real estate owned...... $ 390,000 $ 290,000 $ 19,000
============= ============= =============
Assumption of debt through acqui-
sition of real estate through
foreclosure..................... $ 3,051,000 $ 2,342,000 $ 110,000
============= ============= =============
Exchange of loans for regular and
residual interests in securi-
ties............................ $ 141,795,000 $ 350,331,000 $ 167,899,000
============= ============= =============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Held for Sale--Loans held for sale are loans the Company plans to sell
or securitize. Loans held for sale 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--Loans receivable are notes the Company
has purchased or originated and intends 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.
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 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 Statement of Financial
Accounting Standards (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.
F-7
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
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 in securities. 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 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.
The Company values residual interests at origination and analyzes carrying
values based on a discounted cash flow analysis. 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 as of the origination date. The
weighted average rates used to discount the cash flows at origination were
26.6%, 23.6% and 18.0% for the years ended December 31, 1993, 1994 and 1995,
respectively. Since the inception of the Company's securitization program in
1992, the overall market for regular and residual interests in asset-backed
securities has grown. In conjunction with the overall growth in the market for
such securities, rates of return to investors have decreased. As such,
discount rates utilized by the Company to value residual interests in
securities have decreased. In accordance with Emerging Issues Task Force Issue
89-4, Collateralized Mortgage Obligation Residuals, residual interests in
securities are separately analyzed at each reporting date, and new effective
yields which will be used to accrue income in the subsequent periods are
calculated. At December 31, 1995, the weighted average effective yield for all
residual interests to be used for the recognition of interest in the
subsequent reporting period was 44.1%.
Although the Company believes it has made reasonable estimates of the future
rates of prepayment and losses, such amounts are estimates and actual
experience may vary from these estimates. Differences between estimated and
actual prepayments and losses may indicate an impairment of the carrying value
of residual interests. At the end of each reporting period, the Company
separately analyzes the carrying values of residual interests for impairment
and, if indicated, the carrying values of such residual interests are reduced
to the estimated fair value and the difference charged to current earnings.
In 1994, the Company adopted SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Company intends to hold
residual interests in securities until their maturity and, as such, classifies
them as "held to maturity securities" which are carried at amortized cost.
At December 31, 1994, differences between amortized cost and fair value for
all residual interests represented unrealized gains. At December 31, 1995,
gross unrealized gains and gross unrealized losses for all residual interests
were $11,613,000 and $719,000, respectively.
F-8
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
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 (Note 12).
Revenue Recognition--The Company derives its revenue principally from fees
for the origination of loans, referral 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 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.
F-9
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
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 during the warehousing period (the period prior to
their sale or securitization) and the recognition of interest income on
residual interests in securities.
Loans are placed on non-accrual status when the continued accrual of
interest or fees is not considered collectible.
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 PROFORMA INFORMATION
Since May 1, 1988, the Company has been treated as an S corporation pursuant
to the Internal Revenue Code. The proforma financial information shows what
the significant effects on the historical financial information might have
been had the Company not been treated as an S corporation for income tax
purposes since that time as the stockholders of the Company are expected to
revoke the Company's S corporation status prior to the consummation of the
planned initial public offering of stock (the Offering). The following
proforma adjustments have been made for the years ended December 31, 1993,
1994 and 1995.
Pro Forma Net Income--Pro forma net income represents the results of
operations adjusted to reflect a provision for income taxes on historical
income before provision for income taxes, which gives effect to the change in
the Company's income tax status to a C corporation as a result of the
Offering. When the Company's S corporation status is revoked, which is
expected to occur just prior to consummation of the Offering, the Company will
record an earnings benefit resulting from the establishment of net deferred
tax assets. The amount of the benefit to be recorded (approximately $4,713,000
at December 31, 1995) will be dependent upon temporary differences existing at
the date of revocation of the Company's S corporation status. The principal
component of the deferred tax assets relates to mark to market adjustments,
legal reserves and differences in accounting for residual interests in REMICs.
The principal difference between the pro forma income tax rate and federal
statutory rate of 35% relates to the state tax provision, net of the federal
benefit.
Pro Forma Net Income Per Share--Historical net income per common share is
not presented because it is not indicative of the ongoing entity.
F-10
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
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 (see Note 15). 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.
Pro Forma Statement of Financial Condition Information--In accordance with a
regulation of the Securities and Exchange Commission, pro forma balance sheet
information as of December 31, 1995 has been presented to reflect (i) the
planned distribution to the Company's stockholders of previously earned but
undistributed S corporation taxable earnings and (ii) an estimated $4,713,000
of net deferred tax assets that would have been recorded had the Company's S
corporation status been revoked on December 31, 1995.
NOTE 4. LOAN ORIGINATION AND SALE REVENUE
Loan origination and sale revenue are comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net proceeds from the sale of
loans............................ $209,999,000 $368,365,000 $240,427,000
------------ ------------ ------------
Cost of loans sold................ 208,893,000 369,913,000 235,341,000
Allocated to mortgage servicing
rights........................... (951,000) (3,896,000)
------------ ------------ ------------
207,942,000 369,913,000 231,445,000
Origination fees.................. (24,639,000) (33,987,000) (31,880,000)
Origination costs................. 5,037,000 5,271,000 6,387,000
------------ ------------ ------------
Net cost of loans sold............ 188,340,000 341,197,000 205,952,000
------------ ------------ ------------
Gain on sale of loans............. 21,659,000 27,168,000 34,475,000
Referral fees..................... 830,000 734,000 1,018,000
------------ ------------ ------------
Loan origination and sale revenue. $ 22,489,000 $ 27,902,000 $ 35,493,000
============ ============ ============
</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-11
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
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 $2,878,000, $2,387,000 and $5,783,000 at December
31, 1993, 1994 and 1995, respectively. Such funds, which are maintained in
separate bank accounts, are excluded from the Company's assets and
liabilities.
Total loans serviced amounted to $385,570,000, $555,685,000 and $613,791,000
as of December 31, 1993, 1994 and 1995, respectively. Included in such amounts
are adjustable rate mortgage loans totaling approximately $153,224,000,
$281,551,000 and $251,349,000 as of December 31, 1993, 1994 and 1995,
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 years ended
December 31:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
Weighted average interest rate for
the period........................ 5.81% 5.96% 7.10%
Interest rate at the end of the pe-
riod.............................. 5.75% 7.38% 6.56%
Weighted average amount outstanding
for the period.................... $25,785,000 $ 58,088,000 $ 52,610,000
Maximum amount outstanding at any
month-end......................... $77,351,000 $110,551,000 $108,217,000
</TABLE>
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
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. Rental expense for the years ended December 31, 1993,
1994 and 1995 was $797,000, $954,000 and $1,237,000, respectively (Note 11).
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 (see note 15) 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 $2,308,000 are
included in accrued liabilities at December 31, 1995.
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.
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
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, 1993, 1994 and 1995, the Company
purchased approximately $69,995,000, $91,501,000 and $15,126,000,
respectively, in loans from a company in which a principal stockholder has a
controlling ownership.
During 1993, 1994 and 1995, 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 $6,800,000, $8,763,000
and $12,909,000 at December 31, 1993, 1994 and 1995, respectively.
Interest expense related to notes payable to stockholders amounted to
approximately $561,000, $10,000 and $223,000 for the years ended December 31,
1993, 1994 and 1995, respectively, all of which was paid prior to the
respective year ends.
During the years ended December 31, 1993, 1994 and 1995, the Company paid
consulting fees of approximately $223,000, $161,000 and $76,000, respectively,
to a company owned by the stockholders and received referral fees of
approximately $705,000, $514,000 and $146,000, respectively, from a company in
which the stockholders have a controlling ownership interest.
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
During the years ended December 31, 1993, 1994 and 1995, the Company sold,
at par, loans held for sale of $7,061,000, $6,783,000 and $3,188,000,
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 $18,000 for each of the years
ended December 31, 1993, 1994 and 1995. 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 $525,000 at
December 31, 1995. Referral fees received in 1995 from companies owned by the
stockholders' family members was $715,000. 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 provision for income taxes for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current provision.............................. $406,000 $426,000 $405,000
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
======== ======== ========
</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 utilizing financial futures. The Company
classifies these futures 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 futures contracts at December 31, 1993, 1994 and
1995. Realized gains or losses on futures contracts were not significant for
the years ended December 31, 1993, 1994 and 1995.
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
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
-----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents............................ $ 4,019,000 $ 4,019,000
Loans held for sale.................................. 24,744,000 25,610,000
Loans receivable held for investment................. 2,261,000 2,340,000
Residual interests in securities..................... 19,705,000 30,599,000
Liabilities:
Warehouse financing facility......................... 18,233,000 18,233,000
Notes payable........................................ 1,123,000 1,174,000
</TABLE>
The estimated fair value of loans is based upon quoted market prices.
The fair value of residual interests in securities is determined based on
third-party estimates of the market value.
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 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 in
securities 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 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 December 31, 1995, the Company had outstanding commitments to extend
credit or purchase loans in the amount of $4,181,000.
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
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 $45,000 and $97,000 in the years ended December 31, 1994 and 1995,
respectively.
NOTE 15. SUBSEQUENT EVENTS
Immediately prior to the closing of the Offering that the Company is
contemplating, the Company intends to merge with and into a wholly-owned
subsidiary to be formed and incorporated in Delaware (the Merger). Pursuant to
the Merger, the bylaws and capital structure of the wholly-owned subsidiary
will survive and the authorized capital stock of the Company is expected to
consist of (i) 1,000,000 authorized shares of no par value Preferred Stock;
(ii) 25,000,000 authorized shares of no par value Class A Common Stock; and
(iii) 15,000,000 authorized shares of no par value Class B Common Stock. The
previously outstanding shares of no par value common stock of the Company will
be exchanged on a one-to-one basis into shares of Class B Common Stock.
Initially there will be no shares of Preferred Stock or Class A Common Stock
outstanding. 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.
In April 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 May 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 (except for a
termination due to cause, death or disability). This officer shall receive an
annual salary of $495,000, 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. (See Note 3).
On May 3, 1996, the Company granted 107,489 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. Approximately 24% of these shares will vest
upon consummation of the Offering; the balance will vest 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. Such shares will be
exchanged for Class B Common Stock pursuant to the Merger.
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.
F-17
<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............................................................... 13
Prior S Corporation Status................................................ 13
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Selected Consolidated Financial and Other Data............................ 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 29
Management................................................................ 45
Certain Transactions...................................................... 50
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Glossary.................................................................. 57
Available Information..................................................... 58
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.
================================================================================
================================================================================
3,350,000 SHARES
[LOGO of FIRST ALLIANCE]
FIRST ALLIANCE MORTGAGE COMPANY
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............. $ 26,338
NASD filing fee................................................. 8,138
Printing expenses............................................... 200,000
Accounting fees and expenses.................................... 175,000
Legal fees and expenses......................................... 250,000
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
Miscellaneous................................................... 125,000
--------
Total......................................................... $869,476
========
</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.
The Company anticipates binding 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.
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
May 3, 1996, the Company issued 107,498 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 was 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.
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, as amended
3.2* Bylaws of the Company, as amended
4.1* 1996 Stock Option Plan
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 Stock Option Agreement
10.8* Form of Directors' Indemnity Agreement
10.9* Mortgage Loan Master Transfer Agreement dated as of June 30, 1995
between Nationscapital Mortgage Corporation and the Company
10.10* Mortgage Loan Master Transfer Agreement dated as of June 30, 1995
between Coast Security Mortgage Inc. and the Company
21.1* Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2* 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
</TABLE>
- --------
* To be filed by Amendment.
II-3
<PAGE>
(b) FINANCIAL STATEMENTS
(c) FINANCIAL DATA SCHEDULE
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this 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 May 13, 1996.
FIRST ALLIANCE MORTGAGE COMPANY
By /s/ Brian Chisick
_____________________________________
Brian Chisick
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Brian
Chisick and Mark K. Mason, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or his
substitute or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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, and Chief May 13, 1996
____________________________________ Executive Officer and
Brian Chisick Director (Principal
Executive Officer)
/s/ Sarah Chisick Director May 13, 1996
____________________________________
Sarah Chisick
/s/ Mark K. Mason Executive Vice President and May 13, 1996
____________________________________ Chief Financial Officer
Mark K. Mason (Principal Financial and
Accounting Officer)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIALLY
NO. ----------- NUMBERED PAGE
------- -------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1* Certificate of Incorporation of the Company, as
amended
3.2* Bylaws of the Company, as amended
4.1* 1996 Stock Option Plan
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 Stock Option Agreement
10.8* Form of Directors' Indemnity Agreement
10.9* Mortgage Loan Master Transfer Agreement dated as of
June 30, 1995 between Nationscapital Mortgage
Corporation and the Company
10.10* Mortgage Loan Master Transfer Agreement dated as of
June 30, 1995 between Coast Security Mortgage Inc.
and the Company
21.1* Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2* 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
</TABLE>
- --------
* To be filed by Amendment.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of First Alliance
Mortgage Company on Form S-1 of our report dated March 18, 1996 (May 11, 1996
as to effects of the stock split described in Notes 2 and 15), 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.
Costa Mesa, California May 13, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,019,000
<SECURITIES> 19,705,000
<RECEIVABLES> 31,727,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,385,000
<PP&E> 6,416,000
<DEPRECIATION> 4,275,000
<TOTAL-ASSETS> 66,987,000
<CURRENT-LIABILITIES> 23,543,000
<BONDS> 0
0
0
<COMMON> 42,000
<OTHER-SE> 42,279,000
<TOTAL-LIABILITY-AND-EQUITY> 66,987,000
<SALES> 35,493,000
<TOTAL-REVENUES> 58,880,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,693,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,167,000
<INCOME-PRETAX> 31,020,000
<INCOME-TAX> 478,000
<INCOME-CONTINUING> 30,542,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,542,000
<EPS-PRIMARY> 2,036.13
<EPS-DILUTED> 2,036.13
</TABLE>
<PAGE>
EXHIBIT 99.1
CONSENT TO SERVE AS DIRECTOR
The undersigned hereby consents to becoming a director of First Alliance
Mortgage Company (the "Company") upon consummation of the Company's initial
public offering of equity securities in 1996 (the "IPO") and further consents
to being named as a future director of the Company in the Company's prospectus
and registration statement relating to its IPO.
/s/ JEFFREY W. SMITH
-------------------------------------
Jeffrey S. Smith
Date May 13, 1996
<PAGE>
EXHIBIT 99.2
CONSENT TO SERVE AS DIRECTOR
The undersigned hereby consents to becoming a director of First Alliance
Mortgage Company (the "Company") upon consummation of the Company's initial
public offering of equity securities in 1996 (the "IPO") and further consents
to being named as a future director of the Company in the Company's prospectus
and registration statement relating to its IPO.
/s/ MERRILL BUTLER
-------------------------------------
Merrill Butler
Date May 10, 1996
<PAGE>
EXHIBIT 99.3
CONSENT TO SERVE AS DIRECTOR
The undersigned hereby consents to becoming a director of First Alliance
Mortgage Company (the "Company") upon consummation of the Company's initial
public offering of equity securities in 1996 (the "IPO") and further consents
to being named as a future director of the Company in the Company's prospectus
and registration statement relating to its IPO.
/s/ GEORGE GIBBS
-------------------------------------
George Gibbs
Date May 10, 1996
<PAGE>
EXHIBIT 99.4
CONSENT TO SERVE AS DIRECTOR
The undersigned hereby consents to becoming a director of First Alliance
Mortgage Company (the "Company") upon consummation of the Company's initial
public offering of equity securities in 1996 (the "IPO") and further consents
to being named as a future director of the Company in the Company's prospectus
and registration statement relating to its IPO.
/s/ ALBERT L. LORD
-------------------------------------
Albert L. Lord
Date May 11, 1996
