<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 5, 1996
REGISTRATION NO. 333-3633
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST ALLIANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6162 95-2944875
(STATE OR OTHER JURISDIC-
TION OF (PRIMARY STANDARD INDUSTRIAL) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZA-
TION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
17305 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92714-6203
(714) 224-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MARK K. MASON
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
FIRST ALLIANCE CORPORATION
17305 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92714-6203
(714) 224-8403
(FACSIMILE) (714) 224-6696
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
<TABLE>
<S> <C>
DHIYA EL-SADEN, ESQ. BRUCE R. HALLETT, ESQ.
GIBSON, DUNN & CRUTCHER LLP BROBECK, PHLEGER & HARRISON LLP
333 SOUTH GRAND AVENUE 4675 MACARTHUR COURT, SUITE 1000
LOS ANGELES, CALIFORNIA 90071 NEWPORT BEACH, CALIFORNIA 92660-1846
(213) 229-7196 (714) 752-7535
(FACSIMILE) (213) 229-7520 (FACSIMILE) (714) 752-7522
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock............. 4,025,000 $19.00 $76,475,000 $26,371
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 525,000 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.
(3) Includes $26,338 previously paid by the Registrant on May 13, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FIRST ALLIANCE CORPORATION
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(A) AND ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS
- ----------------------------------------------- -----------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of Outside Front Cover Page
Prospectus...............................
2. Inside Front and Outside Back Cover Pages
of Inside Front and Outside Back Cover Pages
Prospectus...............................
3. Summary Information and Risk Factors..... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................... Prospectus Summary; Use of Proceeds
5. Determination of Public Offering Price... Outside Front Cover Page; Underwriting
6. Dilution................................. Dilution; Risk Factors
7. Selling Security Holders................. Not Applicable
8. Plan of Distribution..................... Outside Front Cover Page; Underwriting
9. Description of Securities to be Regis- Prospectus Summary; Description of Capi-
tered.................................... tal Stock
10. Interests of Named Experts and Counsel... Legal Matters; Experts
11. Information With Respect to the Regis- Prospectus Summary; Risk Factors; The
trant.................................... Company; Prior S Corporation Status and
Reincorporation; Use of Proceeds;
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Principal
Stockholders; Certain Transactions;
Description of Capital Stock; Shares
Eligible for Future Sale; Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Lia- Not Applicable
bilities.................................
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT IS +
+DECLARED EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 5, 1996
PROSPECTUS
3,500,000 SHARES
FIRST ALLIANCE CORPORATION
CLASS A COMMON STOCK
----------
All of the shares of the Class A Common Stock, $.01 par value per share (the
"Class A Common Stock"), offered hereby (the "Public Offering") are being sold
by First Alliance Corporation (together with its subsidiaries, the "Company").
Prior to the Public Offering, there has been no public market for the Class A
Common Stock. It is currently estimated that the Public Offering price will
range from $17.00 to $19.00 per share. See "Underwriting" for information
relating to the factors considered in determining the Public Offering price.
The Class A Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "FACO."
The Company has two classes of common stock. The Class A Common Stock, which
is offered hereby, has one vote per share, and the Class B common stock, $.01
par value per share (the "Class B Common Stock"), has four votes per share. See
"Description of Capital Stock." Upon completion of the Public Offering and
assuming the Underwriters' over-allotment option is not exercised, the issued
and outstanding shares of Class A Common Stock and Class B Common Stock that
will be held by certain of the executive officers and directors of the Company
and related parties will have approximately 92.5% of the combined voting power
of all outstanding shares of capital stock of the Company.
SEE "RISK FACTORS" ON PAGES 7 THROUGH 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
THE ATTORNEY GENERAL OF THE STATE OF
NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS
OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS
UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total(3)....................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated to be $920,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase from the Company up to 525,000
additional shares of Class A Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The shares of Class A Common Stock are offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or part. It is
expected that delivery of the shares of Class A Common Stock will be made
against payment therefor at the offices of Friedman, Billings, Ramsey & Co.,
Inc., Arlington, Virginia, the representative of the several Underwriters (the
"Representative"), or in book entry form through the book entry facilities of
the Depository Trust Company on or about , 1996.
----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996.
<PAGE>
FIRST ALLIANCE CORPORATION
RETAIL BRANCH OFFICE LOCATIONS
[UNITED STATES MAP SHOWING BRANCH OFFICE LOCATIONS]
Irvine, CA; Long Beach, CA; Oakland, CA; Encino, CA; West Covina, CA; San
Jose, CA; Atlanta, GA; Bellevue, WA; Denver, CO; Oakbrook Terrace, IL;
Arlington Heights, IL; Miami, FL; Ft. Lauderdale, FL; Portland, OR; Beachwood,
OH; Phoenix, AZ; Salt Lake City, UT; Wayne, PA; Little Falls, NJ
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER THE
COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
----------------
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING". CERTAIN CAPITALIZED FINANCIAL TERMS USED HEREIN ARE DEFINED IN
THE FINANCIAL GLOSSARY ON PAGE 64. THIS PROSPECTUS GIVES EFFECT TO THE
REORGANIZATION OF THE COMPANY, PURSUANT TO WHICH, IMMEDIATELY PRIOR TO THE
CLOSING OF THE PUBLIC OFFERING, FIRST ALLIANCE MORTGAGE COMPANY, A CALIFORNIA
CORPORATION ("FAMCO"), WILL BECOME A WHOLLY-OWNED SUBSIDIARY OF A NEWLY-FORMED
DELAWARE CORPORATION, FIRST ALLIANCE CORPORATION (THE "COMPANY"). ALL
REFERENCES TO THE COMPANY SHALL BE DEEMED TO INCLUDE THE COMPANY AND ITS
SUBSIDIARIES.
The Company originates, purchases, sells and services non-conventional
mortgage loans secured primarily by first mortgages on single family
residences. The Company focuses on a distinct segment of the home equity
lending market by narrowly targeting its marketing efforts at homeowners
believed by management of the Company, based on historic customer profiles, to
be pre-disposed to using the Company's products and services while satisfying
its underwriting guidelines. The Company originates loans through its
centralized telemarketing operations, its direct mailing campaigns and its
expanding retail branch network of 19 offices located in 12 states. Since
January 1, 1996, the Company has opened 3 new retail branch offices in
Pennsylvania, Ohio and New Jersey. The Company intends to continue to expand
its retail branch network in selected states on a nationwide basis and
currently plans to open at least four new retail branches per year. The Company
has also recently organized a subsidiary to pursue retail and wholesale loan
originations and purchases in the United Kingdom. The Company also purchases
loans from other originators.
The Company's customers, who principally use the loans from the Company to
consolidate indebtedness or to finance other consumer needs rather than to
purchase homes, consist of two primary groups. The first category of the
Company's customers are individuals who are unable to obtain mortgage financing
from banks, savings and loan institutions and other companies that have
historically provided loans to individuals with favorable credit
characteristics ("Conventional Lending Institutions"). These individuals often
have impaired or unsubstantiated credit characteristics and/or unverifiable
income and respond favorably to the Company's marketing. The Company's second
category of customers consists of individuals who could qualify for loans from
Conventional Lending Institutions but instead choose to use the Company's
products and services. See "Business--Underwriting." The Company's experience
has shown that these individuals are attracted by the Company's high degree of
personalized service and timely response to loan applications. Each category of
customers has historically been willing to pay the Company's loan origination
fees and interest rates that are typically higher than the fees and rates
charged by Conventional Lending Institutions.
The Company has historically generated positive cash flow due principally to
the magnitude of its retail loan origination fees. For the quarter ended March
31, 1996 and the years ended December 31, 1995, 1994 and 1993, the Company's
weighted average retail loan origination and processing fees as a percentage of
gross loans originated in the retail branches were 14.8%, 15.3%, 15.6% and
17.8%, respectively. The loan origination fee charged to the borrower is
included in the principal balance of the loan originated. The Company then
borrows approximately the principal amount of the loan (subject to collateral
valuation) under its Warehouse Financing Facility and disburses to the borrower
the loan amount less the loan origination fee. Thus, the Company generally
receives cash in the amount of the loan origination and processing fee at the
time of the Warehouse Financing Facility borrowing and prior to the time the
Company recognizes such fee for accounting purposes as a component of loan
origination and sale revenue, which occurs upon the sale of the loan.
The Company's ability to fund and subsequently Securitize loans has
significantly improved its financial performance and enabled it to offer new
and enhanced loan products. The Company's significant expansion of its retail
branch network and the ability to Securitize its loans have contributed
significantly to the increase in the Company's loan origination volume to
$216.6 million in 1995 from $93.6 million in 1992. Since 1992, the Company has
Securitized $826.8 million of loans through ten public and two private
"AAA/Aaa" rated Securitizations. While the Company anticipates Securitizing a
majority of its loan originations in 1996 and thereafter, the Company will
continue to sell those loans which are originated through its proprietary
marketing system that do not satisfy the Company's criteria for Securitization.
Such loans are sold on a servicing released basis to unaffiliated wholesale
purchasers on either a bulk or flow-through basis. These wholesale loan sales
enable the Company to realize a return on all loans generated by its marketing
efforts by retaining loan origination fees without the associated credit risk.
Additionally, the Company continues to sell a small number of loans to private
investors and service the loans that it has previously sold through
Securitizations as well as those to private investors. As of March 31, 1996,
the Servicing Portfolio consisted of 8,787 loans with an outstanding balance of
$611.7 million.
3
<PAGE>
THE PUBLIC OFFERING
<TABLE>
<C> <S>
Class A Common Stock offered by the Company: 3,500,000 shares
Capital Stock to be Outstanding after the Public Offering:
Class A Common Stock....................... 3,500,000 shares(1)
Class B Common Stock....................... 10,750,000 shares(2)
------------
Total.................................... 14,250,000 shares
------------
------------
Voting Rights............................... Each share of Class A Common
Stock is entitled to one vote and
each share of Class B Common
Stock is entitled to four votes
on most matters requiring a
shareholder vote. See
"Description of Capital Stock-
Common Stock."
Use of Proceeds............................. The Company intends to use
between $42 million and $47
million of the net proceeds to
repay, immediately after the
Closing Date (or as soon
thereafter as is practicable),
the principal and interest
outstanding under the
S Distribution Notes. See "Prior
S Corporation Status." To the
extent that the balance of the
net proceeds exceeds the amount
due under the S Distribution
Notes, such excess will be used
initially to repay any
outstanding borrowings on the
Company's Warehouse Financing
Facility, then to fund costs
associated with the Company's
retail branch network and United
Kingdom expansions and for
general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market Symbol for the
Class A Common Stock....................... FACO
Risk Factors................................ See "Risk Factors" for a
discussion of certain material
factors that should be considered
in connection with an investment
in the Class A Common Stock
offered hereby.
</TABLE>
- --------
(1) Excludes 750,000 shares of Class A Common Stock reserved for issuance upon
the exercise of options available for grants under the Company's Stock
Incentive Plan. None of the options has been granted to date. See
"Management-1996 Stock Incentive Plan" and "Description of Capital Stock."
(2) Class B Common Stock is convertible into Class A Common Stock on a one for
one basis at the option of the holder and in certain other circumstances.
See "Description of Capital Stock."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The financial data set forth below should be read in conjunction with the
Financial Statements of the Company and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ------------------
1993 1994 1995 1995(5) 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Loan origination and sale.... $ 22,489 $ 27,902 $ 35,493 $ 1,086 $ 9,371
Loan servicing and other
fees........................ 8,989 9,106 8,543 1,977 2,243
Interest..................... 4,452 8,650 14,668 2,871 3,158
Other........................ 20 144 176 29 38
-------- -------- -------- -------- --------
Total revenue............... 35,950 45,802 58,880 5,963 14,810
Total expense................ 24,987 30,568 27,860 6,263 6,950
-------- -------- -------- -------- --------
Income (loss) before income
tax provision (benefit)..... 10,963 15,234 31,020 (300) 7,860
Income tax provision
(benefit)................... 222 363 478 (5) 118
-------- -------- -------- -------- --------
Net income (loss)............ $ 10,741 $ 14,871 $ 30,542 $ (295) $ 7,742
======== ======== ======== ======== ========
Dividends declared(1)........ $ 5,853 $ 17,341 $ 12,205 $ 2,874 $ 15,101
PRO FORMA INCOME STATEMENT
DATA(2):
Income (loss) before income
tax provision (benefit)..... $ 10,963 $ 15,234 $ 31,020 $ (300) $ 7,860
Income tax provision
(benefit)................... 4,403 6,200 12,772 (123) 3,233
-------- -------- -------- -------- --------
Net income (loss)............ $ 6,560 $ 9,034 $ 18,248 $ (177) $ 4,627
======== ======== ======== ======== ========
LOANS ORIGINATED OR
PURCHASED(6):
Retail Branch Originations... $148,718 $151,338 $200,371 $ 32,298 $ 56,693
Portfolio Refinancing
Originations................ 47,189 70,501 16,195 9,045 5,586
Wholesale purchases.......... 84,034 91,826 24,078 10,602 13,455
-------- -------- -------- -------- --------
Total....................... $279,941 $313,665 $240,644 $ 51,945 $ 75,734
======== ======== ======== ======== ========
LOANS SOLD(6):
Securitizations.............. $141,795 $350,331 $167,974 $ -- $ 52,420
Wholesale.................... -- -- 51,542 3,528 21,536
Private...................... 70,554 22,857 13,709 4,032 438
-------- -------- -------- -------- --------
Total....................... $212,349 $373,188 $233,225 $ 7,560 $ 74,394
======== ======== ======== ======== ========
SERVICING PORTFOLIO(3):
Private investor loans....... $150,657 $ 87,659 $ 65,404 $ 78,422 $ 61,431
Securitized loans(7)......... 234,913 468,026 548,387 497,560 550,287
-------- -------- -------- -------- --------
Total....................... $385,570 $555,685 $613,791 $575,982 $611,718
======== ======== ======== ======== ========
FINANCIAL RATIOS AND OTHER
DATA:
Number of retail branch
offices(3).................. 11 13 17 14 18
Weighted average interest
rate on loan originations
and purchases............... 9.5% 8.7% 10.3% 10.8% 9.2%
Weighted average initial
combined loan-to-value
ratio:
Retail Branch and Portfolio
Refinancing Originations... 52.4% 54.4% 58.6% 55.4% 60.4%
Wholesale purchases......... 61.6% 60.5% 66.5% 64.0% 70.4%
Average retail loan size..... $ 53.6 $ 66.1 $ 68.8 $ 58.3 $ 80.5
Weighted average loan
origination and processing
fees as a percent of gross
loans originated as
applicable:
Retail Branch Originations.. 17.8% 15.6% 15.3% 16.1% 14.8%
Portfolio Refinancing
Originations:.............. 2.5% 7.5% 13.0% 13.3% 5.6%
Total delinquencies as a
percentage of Servicing
Portfolio at end of period . 4.0% 4.3% 5.8% 4.7% 6.3%
Real estate acquired through
foreclosure ("REO") as a
percentage of Servicing
Portfolio at end of
period(4)................... .9% .6% 1.3% .7% 1.4%
REO losses as a percentage of
average Servicing Portfolio
during the period(4)........ .02% .01% .03% -- .08%
Pre-tax income (loss) as a
percentage of total revenue. 30.5% 33.3% 52.7% (5.0)% 53.1%
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------- ---------------
1993 1994 1995 1995(5) 1996
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 4,387 $ 5,298 $ 4,019 $ 1,809 $ 2,206
Loans held for sale(5)................. 74,196 18,676 24,744 58,631 26,325
Residual Interests..................... 6,879 11,645 19,705 12,283 20,732
Total assets........................... 99,855 48,226 66,987 86,792 71,355
Total borrowings(5).................... 68,773 14,839 19,356 59,733 22,038
Stockholders' equity................... 26,454 23,984 42,321 20,815 34,962
</TABLE>
- --------
(1) Historical dividends are not necessarily indicative of dividends expected
to be declared in the future. See "Dividend Policy."
(2) Amounts reflect adjustments for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation.
(3)As of the end of the applicable period.
(4) Includes REO of the Company as well as REO of the REMIC Trusts and serviced
by the Company; however, excludes private investor REO not serviced by the
Company.
(5) The Company did not close a Securitization during the quarter ended March
31, 1995. As such, Loan origination and sale revenue for the quarter is
significantly lower and the balance of Loans held for sale and total
borrowings are significantly higher than if a Securitization were closed
within the quarter.
(6) Principal balance of loans.
(7) Includes Loans held for sale and loans receivable held for investment of
the Company.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
SHARES OF CLASS A COMMON STOCK OFFERED BY THIS PROSPECTUS.
DECLINE OF COLLATERAL VALUE MAY ADVERSELY AFFECT LOAN-TO-VALUE RATIOS
The Company's business may be adversely affected by declining real estate
values. Any material decline in real estate values reduces the ability of
borrowers to use home equity to support borrowings and increases the loan-to-
value ratios of loans previously made by the Company, thereby weakening
collateral coverage and increasing the possibility of a loss in the event of a
borrower default. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. Because of the Company's
focus on borrowers who are unable to obtain mortgage financing from
conventional mortgage sources, the actual rates of delinquencies, foreclosures
and losses on such loans could be higher under adverse economic conditions
than those currently experienced in the mortgage lending industry in general.
Any sustained period of such increased delinquencies, foreclosures or losses
could adversely affect the Company's results of operations and financial
condition.
CREDIT IMPAIRED BORROWERS MAY RESULT IN INCREASED DELINQUENCY RATES
The Company focuses its marketing efforts on borrowers who may be unable to
obtain mortgage financing from conventional mortgage sources. Loans made to
such borrowers may entail a higher risk of delinquency and higher losses than
loans made to borrowers who utilize conventional mortgage sources. As of March
31, 1996 and December 31, 1995, total delinquent loans as a percentage of the
Company's Servicing Portfolio were 6.3% and 5.8%, respectively, as compared to
4.2% and 4.5% for the portfolios of the mortgage banking industry as a whole
according to the Mortgage Bankers Association. While the Company employs
underwriting criteria and collection methods to mitigate the higher risks
inherent in loans made to these borrowers, no assurance can be given that such
criteria or methods will afford adequate protection against such risks. In the
event that pools of loans sold and serviced by the Company experience higher
delinquencies, foreclosures or losses than anticipated, the Company's results
of operations or financial condition could be adversely affected.
IMPACT OF REGULATION AND LEGISLATION
The Company's business is subject to extensive regulation, supervision and
licensing by Federal, state and local governmental authorities and is subject
to various laws, regulations and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations. The
Company's consumer lending activities are subject to the Truth-in-Lending Act
(including the Home Ownership and Equity Protection Act of 1994), the Fair
Housing Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Real Estate Settlement Procedures Act ("RESPA"), the Home Mortgage
Disclosure Act and the Fair Debt Collection Practices Act and regulations
promulgated thereunder, as well as other Federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of, and examinations by, state regulatory
authorities with respect to originating, processing, underwriting, selling,
Securitizing and servicing loans. These rules and regulations, among other
things, (i) impose licensing obligations on the Company, (ii) establish
eligibility criteria for mortgage loans, (iii) prohibit discrimination, (iv)
provide for inspections and appraisals of properties, (v) require credit
reports on loan applicants, (vi) regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, (vii) mandate certain disclosures and notices to borrowers
and (viii) in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to termination or
suspension of the Company's servicing rights without compensation to the
Company, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Recent Federal legislation, the Riegle Community Development and Regulatory
Improvement Act (the "Riegle Act"), has focused additional regulation on
mortgage loans having relatively higher origination fees 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.
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The Company's placement of insurance covering improvements on real property
that secures the Company's loan to a borrower is subject to state and federal
statutes and regulations applicable to "force placed" insurance. The Company
receives a fee in connection with its placement of such insurance in
California, which activity is not required to be licensed. Historically the
Company also received a fee in connection with the placement of such insurance
outside California. While the Company does not believe that it was required to
be licensed in connection with such activity, a state insurance regulator or a
court could take a different interpretation. The rules and regulations
governing force placed insurance impose certain disclosure and notice
requirements on the Company prior to effecting such insurance coverage, impose
limitations on the Company's ability to accept or reject insurance coverage
offered by a borrower and impose restrictions on the fees and costs which the
Company may charge the borrower with respect to such insurance. The Company's
sale of credit life insurance and credit disability insurance in the state of
California is subject to statutes and regulations in that state applicable to
insurance producers. Failure to comply with any of the foregoing state and
federal requirements could lead to imposition of civil penalties on the
Company, class action lawsuits and administrative enforcement actions.
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead
to regulatory investigations or enforcement actions and private causes of
action, such as class action lawsuits, with respect to the Company's
compliance with the applicable laws and regulations. As a mortgage lender, the
Company has been, and expects to continue to be, subject to regulatory
enforcement actions and private causes of action from time to time with
respect to its compliance with applicable laws and regulations.
Although the Company utilizes systems and procedures to facilitate
compliance with these legal requirements and believes that it is in compliance
in all material respects with applicable Federal, state and local laws, rules
and regulations, there can be no assurance that more restrictive laws, rules
and regulations will not be adopted in the future, or that existing laws and
regulations will not be interpreted in a more restrictive manner, that could
make compliance more difficult or expensive. See "Business--Regulation."
ELIMINATION OF DEDUCTIBILITY OF MORTGAGE INTEREST COULD ADVERSELY AFFECT
RESULTS OF OPERATIONS
Members of Congress, government officials and political candidates have from
time to time suggested the elimination of the mortgage interest deduction for
Federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans
are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs, the competitive advantages of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for loans of the kind offered by the Company.
RISK OF LITIGATION
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and investors who have purchased loans from the
Company arising from, among other things, losses that are claimed to have been
incurred as a result of alleged breaches of fiduciary obligations,
misrepresentations, errors and omissions of employees, officers and agents of
the Company (including its appraisers), incomplete documentation and failures
by the Company to comply with various laws and regulations applicable to its
business. The Company believes that liability with respect to any currently
asserted claims or legal actions is not likely to be material to the Company's
consolidated results of operations or financial condition; however, any claims
asserted in the future may result in legal expenses or liabilities that could
have a material adverse effect on the Company's results of operations and
financial condition and could distract members of management from the
operations of the Company.
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FLUCTUATIONS IN INTEREST RATES MAY ADVERSELY AFFECT PROFITABILITY
The profitability of the Company is likely to be adversely affected during
any period of rapid changes in interest rates. A substantial and sustained
increase in interest rates could adversely affect the spread between the rate
of interest received by the Company on its loans and the interest rates
payable under the Warehouse Financing Facility during the Warehousing Period
or the pass-through rate for Regular Interests issued in Securitizations. Such
rate increases could also affect the ability of the Company to originate and
purchase loans. A significant decline in interest rates could decrease the
size of the Company's Servicing Portfolio by increasing the level of loan
prepayments.
An effective hedging strategy is complex and no hedging strategy can
completely insulate the Company from interest rate risks. The nature and
timing of hedging transactions may impact the effectiveness of hedging
strategies. Poorly designed strategies or improperly executed transactions may
increase rather than mitigate risk. In addition, hedging involves transaction
and other costs, and such costs could increase as the period covered by the
hedging protection increases or in periods of rising and fluctuating interest
rates. Therefore, the Company may be prevented from effectively hedging its
interest rate risks, which could have a material adverse effect on the
Company's results of operations and financial condition. See "Business--
Financing and Sale of Loans--Interest Rate Risk Management."
DEPENDENCE ON SECURITIZATIONS AND IMPACT ON QUARTERLY OPERATING RESULTS
Gain on sale of loans generated by the Company's Securitizations represents
a significant portion of the Company's revenues and net income. Furthermore,
the Company relies significantly on Securitizations to generate cash proceeds
for repayment of its Warehouse Financing Facility and enable the Company to
originate and purchase additional loans. Several factors affect the Company's
ability to complete Securitizations, including conditions in the securities
markets generally, conditions in the Asset-Backed Securities markets
specifically, the credit quality of the Company's Servicing Portfolio and the
Company's ability to obtain credit enhancement. Any substantial reductions in
the size or availability of the Securitization market for the Company's loans
could have a material adverse effect on the Company's results of operations
and financial condition.
The Company's revenues and net income have fluctuated in the past and are
expected to fluctuate in the future principally as a result of the timing and
size of its Securitizations. Several factors affecting the Company's business
can cause significant variations in its quarterly results of operations. In
particular, variations in the volume of the Company's loan originations and
purchases, the differences between the Company's cost of funds and the average
interest rates of originated or purchased loans, the effectiveness of the
Company's hedging strategies, the pass-through rate for Regular Interests
issued in Securitizations, and the timing and size of Securitizations can
result in significant increases or decreases in the Company's revenues from
quarter to quarter. A delay in closing a Securitization during a particular
quarter would postpone recognition of gain on sale of loans. In addition,
unanticipated delays in closing a Securitization could also increase the
Company's exposure to interest rate fluctuations by increasing the Warehousing
Period for its loans. If the Company were unable to profitably Securitize a
sufficient number of its loans in a particular reporting period, the Company's
revenues for such period would decline and would result in lower net income
and possibly a net loss for such period, and could have a material adverse
effect on the Company's results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LOSS OF HISTORICAL LOAN ORIGINATION FEES COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS
The Company has historically generated positive cash flow due, in large
part, to its customary loan origination fees. Net loan origination fees
constituted 52.3%, 43.1%, 61.9% and 51.6% of the Company's total revenues for
the first quarter of 1996 and for the years 1995, 1994 and 1993, respectively.
Weighted average loan origination and processing fees as a percentage of gross
loans originated in the retail branches for those periods were 14.8%, 15.3%,
15.6% and 17.8%, respectively. Any reduction in the amount of the Company's
loan origination fees, whether by reason of regulation, competition or
otherwise, will negatively impact the
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Company's cash flow and could have a material adverse effect on the Company's
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
LOSS OF FUNDING SOURCES COULD ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company funds substantially all of the loans which it originates or
purchases through borrowings under the Warehouse Financing Facility and
internally generated funds. These borrowings are in turn repaid with the
proceeds received by the Company from selling such loans through loan sales or
Securitizations. Any failure to renew or obtain adequate funding under the
Warehouse Financing Facility, or other borrowings, or any substantial
reduction in the size of or pricing in the markets for the Company's loans,
could have a material adverse effect on the Company's results of operations
and financial condition. To the extent that the Company is not successful in
maintaining or replacing existing financing, it would have to curtail its loan
production activities or sell loans earlier than is optimal, thereby having a
material adverse effect on the Company's results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
IMPAIRMENT OF VALUE OF RESIDUAL INTERESTS AND MORTGAGE SERVICING RIGHTS
The Company records gains on sale of loans through Securitization based in
part on the fair value of the Residual Interests received in the REMIC Trust
by the Company and on the fair value of retained mortgage servicing rights
related to such loans. The fair values of such Residual Interests and retained
mortgage servicing rights are in turn based in part on market interest rates
and projected loan prepayment and credit loss rates. Increases in interest
rates or higher than anticipated rates of loan prepayments or credit losses of
these or similar securities may require the Company to write down the value of
such Residual Interests and mortgage servicing rights and result in a material
adverse impact on the Company's results of operations and financial condition.
The Company is not aware of an active market for the Residual Interests. No
assurance can be given that the Residual Interests could in fact be sold at
their carrying value, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Accounting
Considerations."
LOSS OF CREDIT ENHANCEMENT COULD RESULT IN INCREASED INTEREST COSTS
In order to gain access on favorable terms to the public Securitization
market, the Company has relied on credit enhancement to achieve a "AAA/Aaa"
rating for the Regular Interests in its Securitizations. The credit
enhancement has generally been in the form of an insurance policy issued by
the Certificate Insurer insuring the repayment of Regular Interests in each of
the REMIC Trusts sponsored by the Company. The Certificate Insurer is not
required to insure future Securitizations nor is the Company restricted in its
ability to obtain credit enhancement from providers other than the Certificate
Insurer or to use other forms of credit enhancement. There can be no assurance
that the Company will be able to obtain credit enhancement in any form from
the Certificate Insurer or any other provider of credit enhancement on
acceptable terms or that future Securitizations will be similarly rated. A
downgrading of Regular Interests already outstanding or the Certificate
Insurer's credit rating or its withdrawal of credit enhancement could result
in higher interest costs for future Securitizations. Such events could have a
material adverse effect on the Company's results of operations and financial
condition.
STRONG OR INCREASED COMPETITION COULD ADVERSELY AFFECT RESULTS OF OPERATIONS
Competition in the mortgage financing business is intense. The mortgage
financing market is highly fragmented and has been serviced by mortgage
brokers, mortgage banking companies, commercial banks, credit unions, thrift
institutions, and finance companies. Many of these competitors have greater
financial resources and 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
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to charge its customary origination fees and interest rates. In addition, as
the Company expands into new geographic markets, it will face competition from
lenders with established positions in these locations. There can be no
assurance that the Company will be able to continue to compete successfully in
the markets it serves. Such an event could have a material adverse effect on
the Company's results of operations and financial condition. See "Business--
Competition."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 85.8% of the dollar volume of the Servicing Portfolio at, and
approximately 43.0% of the dollar volume of loans originated or purchased by
the Company during the year ended, December 31, 1995 were secured by
properties located in California. Although the Company is expanding its retail
branch network outside California, the Company's Servicing Portfolio and loan
originations and purchases are likely to remain concentrated in California for
the foreseeable future. Consequently, the Company's results of operations and
financial condition are dependent upon general trends in the California
economy and its residential real estate market. The California economy has
experienced a slowdown or recession over the last several years that has been
accompanied by a sustained decline in the California real estate market.
Residential real estate market declines may adversely affect the values of the
properties securing loans such that the principal balances of such loans,
together with any primary financing on the mortgaged properties, will equal or
exceed the value of the mortgaged properties. In addition, California
historically has been vulnerable to certain natural disaster risks, such as
earthquakes and erosion-caused mudslides, which are not typically covered by
the standard hazard insurance policies maintained by borrowers. Uninsured
disasters may adversely impact borrowers' ability to repay loans made by the
Company. The existence of adverse economic conditions or the occurrence of
such natural disasters in California could have a material adverse effect on
the Company's results of operations and financial condition.
ABILITY OF THE COMPANY TO IMPLEMENT ITS GROWTH STRATEGY
The Company's growth strategy is dependent upon its ability to increase its
loan origination volume through the growth of its retail branch network while
maintaining its customary origination fees, interest rate spreads and
underwriting criteria with respect to such increased loan origination and
purchase volume. Implementation of this strategy, which includes nationwide
and international geographic expansion, will depend in large part on the
Company's ability to: (i) expand its retail branch network in markets with a
sufficient concentration of borrowers meeting the Company's underwriting
criteria; (ii) obtain adequate financing on favorable terms to fund its growth
strategy; (iii) profitably Securitize its loans in the secondary market on a
regular basis; (iv) hire, train and retain skilled employees; and (v) continue
to expand in the face of increasing competition from other mortgage lenders.
The Company's failure with respect to any or all of these factors could impair
its ability to successfully implement its growth strategy which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business--Current Markets and Expansion Plans."
LOAN DELINQUENCIES AND DEFAULTS MAY REDUCE VALUE OF RESIDUAL INTERESTS
After a loan has been originated or purchased by the Company, the loan is
held as part of the Servicing Portfolio and is subject to sale or
Securitization. During the period a loan is so held, the Company is at risk
for loan delinquencies and defaults. Following the sale of the loan on a
servicing released basis, the Company's loan delinquency and default risk with
respect to such loan is limited to those circumstances in which it is required
to repurchase such loan due to a breach of a representation or warranty in
connection with the loan sale. On Securitized loans, the Company also has this
risk of loan delinquency or default to the extent that losses are paid out of
reserve accounts or by reducing the over-collateralization to the extent that
funds are available. Such 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."
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TERMINATION OF SERVICING RIGHTS MAY ADVERSELY AFFECT RESULTS OF OPERATIONS
At March 31, 1996, approximately 84.8% of the dollar volume of the Company's
Servicing Portfolio consisted of loans Securitized by the Company and sold to
REMIC Trusts. The Company's form of pooling and servicing agreement for each
of these REMIC Trusts provides that the Certificate Insurer insuring the
senior interests in the related REMIC Trust may terminate the Company's
servicing rights under particular circumstances. With respect to six of the
Company's Securitizations (with loan balances of $280.5 million at March 31,
1996), the Certificate Insurer may terminate the servicing rights of the
Company if, among other things, the number of loans in the REMIC Trust that
are delinquent 91 days or more (including foreclosures and REO properties)
exceeds 10.0% of the total number of loans in the REMIC Trust for four
consecutive months.
With respect to the Company's five most recent Securitizations, the
Certificate Insurer may terminate the servicing rights of the Company if,
among other things, (i) the three month average of the quotient of the
principal balance of all loans that are delinquent 91 days or more (including
foreclosures and REO properties) divided by the pool principal balance for the
related period exceeds 7.0%; (ii) the annual cumulative realized losses for
any year exceed 2.0% of the average pool principal balance for the same year;
or (iii) with respect to the two transactions completed in 1995, if within the
first five years of the REMIC Trust, the cumulative losses exceed 5.75% of the
original principal balance of the REMIC Trust or if cumulative losses after
year five exceed 8.63% of the original principal balance of the REMIC Trust.
The Company's two most recent Securitizations include language that modifies
the cumulative loss figures to 6.63% within the first five years and 9.94%
after year five.
At March 31, 1996, none of the REMIC Trusts exceeded the foregoing
delinquency or loss calculations. There can be no assurance that delinquency
and loss rates with respect to the Company's Securitized loans will not exceed
these rates in the future or, if exceeded, that the servicing rights would not
be terminated. Any termination of servicing rights could have a material
adverse effect on the Company's results of operations and financial condition.
See "Business--Loan Servicing."
ANTI-TAKEOVER EFFECT OF CAPITAL STRUCTURE; VOTING CONTROL OF COMPANY
The Company has two classes of authorized Common Stock, Class A Common
Stock, which is offered hereby, and Class B Common Stock. While the holder of
each share of Class A Common Stock is entitled to one vote per share, the
holder of each share of Class B Common Stock is entitled to four votes per
share. The Class A Common Stock and the Class B Common Stock generally vote
together as a single class. Brian Chisick and his wife, Sarah Chisick, and the
grantor trusts for which they have the beneficial voting interests
(collectively, the "Chisick Family") are the beneficial owners of
substantially all of the outstanding Class B Common Stock. As a result, upon
completion of the Public Offering (assuming the Underwriters' over-allotment
option is not exercised), the Chisick Family will hold approximately 91.6% of
the aggregate voting power of the Company, which will allow it to control all
actions to be taken by the stockholders, including the election of all
directors to the Board of Directors. The Board of Directors is expected to be
comprised entirely of designees of the Chisick Family. This voting control may
have the effect of discouraging offers to acquire the Company because the
consummation of any such acquisition would require the consent of the Chisick
Family. In addition, the Board of Directors is authorized to issue shares of
preferred stock from time to time with such rights and preferences as the
Board may determine; such preferred stock could be issued in the future with
terms and conditions that could further discourage offers to acquire the
Company. See "Principal Stockholders" and "Description of Capital Stock."
ANTI-TAKEOVER EFFECT OF DELAWARE LAW
The Company is a Delaware corporation and is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prevents an "interested stockholder" (defined generally as a
person owning 15% or more of the Company's outstanding voting stock) from
engaging in a "business combination" with the Company for three years
following the date that person became an interested
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stockholder unless the business combination is approved in a prescribed
manner. This statute could make it more difficult for a third party to acquire
control of the Company. See "Description of Capital Stock--Certain Provisions
of Delaware Law."
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Brian Chisick, Chief Executive Officer and President of
the Company. Although the Company has been able to hire and retain other
qualified and experienced management personnel, the loss of Brian Chisick's
services for any reason could have a material adverse effect on the Company.
The Company has entered into an employment agreement with Brian Chisick. The
Company does not carry "key man" life insurance on the life of Brian Chisick.
See "Management--Executive Compensation--Employment Agreements."
ENVIRONMENTAL LIABILITIES
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans that are in default. There is a risk
that hazardous substances or waste, contaminants, pollutants or sources
thereof could be discovered on such properties after acquisition by the
Company. In such event, the Company may be required by law to remove such
substances from the affected properties at its sole cost and expense. There
can be no assurance that (i) the cost of such removal would not substantially
exceed the value of the affected properties or the loans secured by the
properties, (ii) the Company would have adequate remedies against the prior
owner or other responsible parties or (iii) the Company would not find it
difficult or impossible to sell the affected properties either prior to or
following such removal.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Public Offering, there has been no public market for the Class
A Common Stock. There can be no assurance that an active trading market will
develop or that the purchasers of the Class A Common Stock will be able to
resell their Class A Common Stock at prices equal to or greater than the
Public Offering price. The Public Offering price of the Class A Common Stock
was determined through negotiations between the Company and the Representative
of the Underwriters and may not reflect the market price of the Class A Common
Stock after the Public Offering. See "Underwriting" for a discussion of
factors considered in determining the Public Offering price. The trading price
of the Class A Common Stock could be subject to wide fluctuations in response
to quarterly variations in changes in financial estimates by securities
analysts and other events or facts. These broad market fluctuations may
adversely affect the market price of the Class A Common Stock. See
"Underwriting."
RESTRICTIONS ON FUTURE SALES BY STOCKHOLDERS; EFFECT ON SHARE PRICE OF SHARES
AVAILABLE FOR FUTURE SALE
Shares of Class B Common Stock are not being offered hereby. The Chisick
Family is the record and beneficial holder of substantially all of the
outstanding shares of Class B Common Stock and will be subject to certain
lock-up restrictions with respect to its ability to sell or otherwise dispose
of any of its shares of Class B Common Stock (which shares, upon transfer by
the Chisick Family to unrelated parties, convert to Class A Common Stock)
without the prior written consent of the Representative of the Underwriters
and the Company. When such lock-up restrictions lapse (180 days after the
consummation of the Public Offering), such shares of Class B Common Stock may
be sold in the public market or otherwise disposed of, subject to compliance
with applicable securities laws. The Company's Certificate of Incorporation
authorizes the issuance of 25,000,000 shares of Class A Common Stock and
15,000,000 shares of Class B Common Stock. Upon completion of the Public
Offering, there will be outstanding 3,500,000 shares of Class A Common Stock
and 10,750,000 shares of Class B Common Stock (assuming no exercise of the
Underwriters' over-allotment option). Sales of a substantial number of shares
of Class B Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Class A Common Stock. See
"Shares Eligible for Future Sale."
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DILUTION
Purchasers of the Class A Common Stock will experience immediate and
substantial dilution in net tangible book value per share of Class A Common
Stock of $13.59 per share based upon an assumed initial public offering price
of $18.00 per share. See "Dilution."
NO CASH DIVIDENDS
Following the Public Offering, the Company intends to retain its earnings,
if any, for use in its business and does not anticipate declaring or paying
any cash dividends in the foreseeable future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources" and "Dividend Policy."
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THE COMPANY
FAMCO was founded in 1971 and was incorporated in California in 1975.
Immediately prior to the consummation of the Public Offering, FAMCO will
become a wholly-owned subsidiary of the Company (the "Reorganization"). The
Company 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. Approximately 186 of the Company's 322 employees are located at
the corporate headquarters. The balance of the employees work in 19 retail
branch offices, six of which are located in California, two of which are
located in each of Illinois and Florida and one of which is located in each of
Oregon, Washington, Colorado, Utah, Arizona, Georgia, New Jersey, Pennsylvania
and Ohio.
The Company maintains its principal office at 17305 Von Karman Avenue,
Irvine, California 92714-6203. Its telephone number is (714) 224-8500.
PRIOR S CORPORATION STATUS
Since May 1, 1988, the Company has elected to be treated for Federal income
and certain state tax purposes as an S corporation under Subchapter S of the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable state
laws. As a result, earnings of the Company during such period have been
included in the taxable income of the Chisick Family for Federal and state
income tax purposes, and the Company has not been subject to income tax on
such earnings, other than California franchise tax. Prior to the date of the
consummation of the Public Offering (the "Closing Date"), the Chisick Family
expects to revoke the Company's S corporation status. The Company has made
distributions to its shareholders of notes (the "S Corporation Distribution")
which includes all of its previously earned and undistributed S corporation
earnings through the Closing Date (estimated to be between $42.0 million and
$47.0 million prior to considering the S Corporation Distribution). The S
Corporation Distribution was comprised of promissory notes bearing interest
rates ranging from 5.61% to 5.88% per annum (the "S Distribution Notes"). See
"Use of Proceeds." On and after the Closing Date, the Company will no longer
be treated as an S corporation and, accordingly, will be fully subject to
Federal and state income taxes.
The Chisick Family has agreed to reimburse the Company for any increase in
the Company's Federal or state(s) income tax liability for 1996 and future
years that may be triggered as a result of possible Internal Revenue Service
and state taxing authority audit adjustments ("Audit Adjustments") to the
Company's taxable income for the years during which the Company was an S
corporation. Conversely, the Company has agreed to reimburse the Chisick
Family for any decrease in the Company's Federal or state(s) income tax
liability for 1996 and future years that may be triggered as a result of
possible Audit Adjustments to the Company's taxable income for the years
during which the Company was an S corporation. The Company's reimbursement
right is embodied in the Reimbursement Agreement, and the Chisick Family's
reimbursement right is embodied in the S Distribution Notes.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Class A Common Stock offered by the Company hereby are estimated to be
approximately $58.3 million, based on an assumed Public Offering price of
$18.00 per share, the midpoint of the price range shown on the cover of this
Prospectus. The Company intends to use between $42.0 million and $47.0 million
of such net proceeds to repay, immediately after the Closing Date (or as soon
thereafter as is practicable), the principal and interest outstanding under
the S Distribution Notes. The S Distribution Notes bear interest at rates
ranging from 5.61% to 5.88% per annum and have maturity dates ranging from
March 30, 1999 through April 30, 1999. The S Distribution Notes were
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issued by the Company to distribute to the shareholders the previously earned
and undistributed S corporation earnings. To the extent that the balance of
the net proceeds exceeds the amount due under the S Distribution Notes, such
excess will be used initially to repay any outstanding borrowings on the
Company's Warehouse Financing Facility, the Company's $125 million secured 90-
day revolving line of credit used to finance loan originations and purchases
which matures on September 30, 1996 and then to fund costs associated with the
Company's retail branch network and United Kingdom expansions and for general
corporate purposes. The annual interest rate currently applicable to borrowing
under the Company's Warehouse Financing Facility is equal to the sum of 0.875%
plus the 30 day London Interbank Offered Rate ("LIBOR"). See "Prior
S Corporation Status."
DIVIDEND POLICY
The Company intends, after payment of the S Distribution Notes, to retain
its earnings, if any, for use in its business and does not anticipate
declaring or paying any cash dividends in the foreseeable future. Purchasers
of shares of Class A Common Stock in the Public Offering will not receive any
portion of the S Distribution Notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation-Liquidity and Capital
Resources."
DILUTION
The net tangible book value of the Company's Common Stock (which, for
purposes of this discussion, shall include both the Class A Common Stock and
the Class B Common Stock) as of March 31, 1996 was $35 million or
approximately $2.45 per share. Net tangible book value per share represents
the amount of the Company's stockholders' equity, less intangible assets,
divided by shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Public
Offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Public Offering. Shares used in the
computation of per share amounts below include 10,642,500 shares outstanding
at March 31, 1996, 107,500 shares of restricted stock issued to an officer of
the Company and 3,500,000 shares to be issued in the Offering. See
"Management-- Executive Compensation." After giving effect to the
S Distribution Notes, the establishment of net deferred tax assets upon
conversion to a C Corporation and the sale by the Company of 3,500,000 shares
of Class A Common Stock in the Public Offering and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company at March 31, 1996 would have been $62.9 million or $4.41 per share.
This represents an immediate increase in net tangible book value of $4.09 per
share to existing stockholders and an immediate dilution in net tangible book
value of $13.59 per share to purchasers of Class A Common Stock in the Public
Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed Public Offering price per share (1)..................... $18.00
Net tangible book value per share as of March 31, 1996........ $ 2.45
Decrease attributable to issuance of S Distribution Notes..... (2.36)
Increase attributable to establishment of net deferred tax
assets....................................................... 0.23
------
Net tangible book value per share before the Public Offering.. 0.32
Increase per share attributable to new investors.............. 4.09
------
Pro forma net tangible book value per share after the Public
Offering (2)................................................... 4.41
------
Dilution per share to new investors............................. $13.59
======
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and commissions and
estimated expenses of the Public Offering payable by the Company.
(2) Excludes 750,000 shares of Common Stock issuable upon exercise of options
to be granted pursuant to the Stock Incentive Plan. See "Management--1996
Stock Incentive Plan."
16
<PAGE>
The following table summarizes, on a pro forma as adjusted basis as of March
31, 1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share of
Common Stock paid by the existing stockholders and the new investors in the
Public Offering:
<TABLE>
<CAPTION>
SHARES OWNED AVERAGE
AFTER THE PUBLIC OFFERING TOTAL CONSIDERATION PRICE
------------------------------------------------ PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------------- ------------------------ ------- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Existing Stockholders... 10,750,000 75.4% $ 2,936,000 4.5% $ 0.27
New Investors........... 3,500,000 24.6 63,000,000 95.5 18.00
--------------- ---------- ----------- -----
Total................. 14,250,000 100.0% $65,936,000 100.0%
=============== ========== =========== =====
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization and Warehouse Financing
Facility of FAMCO at March 31, 1996 and as adjusted as of that date to give
effect to (i) an S corporation distribution of notes with total principal
amounts equal to the FAMCO's previously earned and undistributed S corporation
earnings at March 31, 1996; (ii) $3,237,000 of net deferred tax assets that
would have been recorded had FAMCO's S corporation status been revoked as of
March 31, 1996; and (iii) the grant of 107,500 shares of restricted Class B
Common Stock of the Company to an officer of the Company; and as further
adjusted to reflect (i) the reorganization pursuant to which FAMCO will become
a wholly-owned subsidiary of the Company; (ii) the sale of 3,500,000 shares of
Class A Common Stock by the Company in the Public Offering and the application
of the estimated net proceeds therefrom; and (iii) the vesting of 24.6% of the
restricted Class B Common Stock. See "Prior S Corporation Status," "Use of
Proceeds" and "Management--Executive Compensation." This information below
should be read in conjunction with the Company's audited Financial Statements
and the Notes thereto which are included elsewhere herein. See also "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Capital
Stock."
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Warehouse Financing Facility................... $20,015 $20,015 --
------- ------- -------
Long-term debt:
S Distribution Notes......................... -- 33,626 --
Notes payable................................ 1,023 1,023 $ 1,023
------- ------- -------
Total...................................... 1,023 34,649 1,023
------- ------- -------
Stockholders' equity:
Preferred Stock, $.01 par value per share;
1,000,000 shares authorized; no shares
outstanding................................. -- -- --
Common Stock, no par value; 15,000,000 shares
authorized; 10,642,500 shares issued and
outstanding (actual); 10,750,000 shares
issued and outstanding (as adjusted)........ 42 2,936 --
Class A Common Stock, $.01 par value per
share; 25,000,000 shares authorized; no
shares issued and outstanding (actual and as
adjusted); 3,526,404 shares issued and
outstanding (as further adjusted)(1)........ -- -- 35
Class B Common Stock, $.01 par value per
share; 15,000,000 shares authorized; no
shares issued and outstanding (actual and as
adjusted); 10,723,596 shares issued and
outstanding (as further adjusted)........... -- -- 107
Additional paid in capital................... 61,094
Retained earnings(2)......................... 34,920 3,237 2,844
Deferred stock compensation.................. (1,600) (1,207)
------- ------- -------
Total stockholders' equity................. 34,962 4,573 62,873
------- ------- -------
Total capitalization....................... $35,985 $39,222 $63,896
======= ======= =======
</TABLE>
- --------
(1) Does not include 750,000 shares of Class A Common Stock issuable upon
exercise of options available to be granted pursuant to the Stock
Incentive Plan. See "Management--1996 Stock Incentive Plan."
(2) No adjustment has been made to give effect to the Company's previously
earned and undistributed S corporation earnings for the period April 1,
1996 through the Closing Date, which earnings were distributed as part of
the S Corporation Distribution. See "Prior S Corporation Status."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995(5) 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME:
Revenue:
Loan origination and
sale................... $ 16,661 $ 20,006 $ 22,489 $ 27,902 $ 35,493 $ 1,086 $ 9,371
Loan servicing and other
fees................... 5,344 7,145 8,989 9,106 8,543 1,977 2,243
Interest................ 2,038 2,285 4,452 8,650 14,668 2,871 3,158
Other................... 116 32 20 144 176 29 38
-------- -------- -------- -------- -------- -------- --------
Total revenue.......... 24,159 29,468 35,950 45,802 58,880 5,963 14,810
Total expense........... 14,885 18,805 24,987 30,568 27,860 6,263 6,950
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income tax provision
(benefit).............. 9,274 10,663 10,963 15,234 31,020 (300) 7,860
Income tax provision
(benefit).............. 262 268 222 363 478 (5) 118
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 9,012 $ 10,395 $ 10,741 $ 14,871 $ 30,542 $ (295) $ 7,742
======== ======== ======== ======== ======== ======== ========
Dividends declared(1)... $ 4,991 $ 3,987 $ 5,853 $ 17,341 $ 12,205 $ 2,874 $ 15,101
PRO FORMA INCOME
STATEMENT DATA(2):
Income (loss) before
income tax provision
(benefit).............. $ 9,274 $ 10,663 $ 10,963 $ 15,234 $ 31,020 $ (300) $ 7,860
Income tax provision
(benefit).............. 3,724 4,282 4,403 6,200 12,772 (123) 3,233
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 5,550 $ 6,381 $ 6,560 $ 9,034 $ 18,248 $ (177) $ 4,627
======== ======== ======== ======== ======== ======== ========
LOANS ORIGINATED OR
PURCHASED(6):
Retail Branch
Originations........... $ 88,249 $ 93,596 $148,718 $151,338 $200,371 $ 32,298 $ 56,693
Portfolio Refinancing
Originations........... -- -- 47,189 70,501 16,195 9,045 5,586
Wholesale purchases..... -- 13,622 84,034 91,826 24,078 10,602 13,455
-------- -------- -------- -------- -------- -------- --------
Total.................. $ 88,249 $107,218 $279,941 $313,665 $240,644 $ 51,945 $ 75,734
======== ======== ======== ======== ======== ======== ========
LOANS SOLD(6):
Securitizations......... $ -- $ 39,024 $141,795 $350,331 $167,974 $ -- $ 52,420
Wholesale............... -- -- -- -- 51,542 3,528 21,536
Private................. 86,217 69,298 70,554 22,857 13,709 4,032 438
-------- -------- -------- -------- -------- -------- --------
Total.................. $ 86,217 $108,322 $212,349 $373,188 $233,225 $ 7,560 $ 74,394
======== ======== ======== ======== ======== ======== ========
SERVICING PORTFOLIO(3):
Private investor loans.. $194,024 $191,497 $150,657 $ 87,659 $ 65,404 $ 78,422 $ 61,431
Securitized loans(7).... 14,988 48,724 234,913 468,026 548,387 497,560 550,287
-------- -------- -------- -------- -------- -------- --------
Total.................. $209,012 $240,221 $385,570 $555,685 $613,791 $575,982 $611,718
======== ======== ======== ======== ======== ======== ========
FINANCIAL RATIOS AND
OTHER DATA:
Number of retail branch
offices(3)............. 10 11 11 13 17 14 18
Weighted average
interest rate on loan
originations and
purchases.............. 14.1% 13.6% 9.5% 8.7% 10.3% 10.8% 9.2%
Weighted average initial
combined loan-to-value
ratio:
Retail Branch and
Portfolio Refinancing
Originations.......... 49.0% 46.6% 52.4% 54.4% 58.6% 55.4% 60.4%
Wholesale purchases.... -- 61.4% 61.6% 60.5% 66.5% 64.0% 70.4%
Average retail loan
size................... $ 35.6 $ 35.9 $ 53.6 $ 66.1 $ 68.8 $ 58.3 $ 80.5
Weighted average loan
origination and
processing fees as a
percent of gross loans
originated as
applicable:
Retail Branch
Originations.......... 21.7% 22.2% 17.8% 15.6% 15.3% 16.1% 14.8%
Portfolio Refinancing
Originations.......... -- -- 2.5% 7.5% 13.0% 13.3% 5.6%
Total delinquencies as a
percentage of Servicing
Portfolio at end of
period................. 2.7% 5.0% 4.0% 4.3% 5.8% 4.7% 6.3%
REO as a percentage of
Servicing Portfolio at
end of period(4)....... .3% .6% .9% .6% 1.3% .7% 1.4%
REO losses as a
percentage of average
Servicing Portfolio
during the period(4)... -- .02% .02% .01% .03% -- .08%
Pre-tax income (loss) as
a percentage of total
revenue................ 38.4% 36.2% 30.5% 33.3% 52.7% (5.0)% 53.1%
</TABLE>
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
--------------------------------------- ---------------
1991 1992 1993 1994 1995 1995(5) 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 2,777 $ 1,111 $ 4,387 $ 5,298 $ 4,019 $ 1,809 $ 2,206
Loans held for sale(5).. 10,914 10,080 74,196 18,676 24,744 58,631 26,325
Residual Interests...... -- 2,792 6,879 11,645 19,705 12,283 20,732
Total assets............ 20,973 24,517 99,855 48,226 66,987 86,792 71,355
Total borrowings(5)..... 4,319 966 68,773 14,839 19,356 59,733 22,038
Stockholders' equity.... 15,158 21,566 26,454 23,984 42,321 20,815 34,962
</TABLE>
- --------
(1) Historical dividends are not necessarily indicative of dividends expected
to be declared in the future. See "Dividend Policy."
(2) Amounts reflect adjustments for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than as an S corporation.
(3) As of the end of the applicable period.
(4) Includes REO of the Company as well as REO of the REMIC Trusts and
serviced by the Company; however, excludes private investor REO not
serviced by the Company.
(5) The Company did not close a Securitization during the quarter ended March
31, 1995. As such, Loan origination and sale revenue for the quarter is
significantly lower and the balance of Loans held for sale and total
borrowings are significantly higher than if a Securitization were closed
within the quarter.
(6) Principal balance of loans.
(7) Includes Loans held for sale and loans receivable held for investment of
the Company.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data," the financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
GENERAL
Overview
The Company originates, purchases, sells and services non-conventional
mortgage loans secured primarily by first mortgages on single family
residences. The Company focuses on a distinct segment of the home equity
lending market by narrowly targeting its marketing efforts at homeowners
believed by management of the Company, based on historic customer profiles, to
be pre-disposed to using the Company's products and services while satisfying
its underwriting guidelines. The Company originates loans through its retail
branch network of 19 offices, six of which are located in California, two of
which are located in each of Illinois and Florida and one of which is located
in each of Oregon, Washington, Colorado, Utah, Arizona, New Jersey, Ohio,
Georgia and Pennsylvania. In addition, the Company purchases loans from
affiliated and qualified mortgage bankers that the Company has selected based
upon the quality of their origination process and has recently begun to
originate loans referred by unaffiliated brokers.
Prior to 1992, the Company sold its loans to private investors on a
servicing retained basis. Since that time, the Company has sold the majority
of its loans in the secondary market primarily through Securitization and
recently, to a lesser extent, through wholesale loan sales in which the
Company does not retain servicing rights. The Company's underwriting
guidelines require threshold credit criteria and combined loan-to-value limits
for loans sold through Securitizations. Accordingly, the Company sells on a
servicing released loan basis those loans which do not meet its risk criteria
for Securitization. The Company retains the right to service loans which it
has Securitized.
The Company's strategy of originating, as compared to purchasing, the
majority of its loan volume results in the generation of a significant amount
of loan origination fees. This income has allowed the Company to generate
positive operating cash flow. There can be no assurance, however, that the
Company's operating cash flow will continue to be positive in the future.
Certain Accounting Considerations
As a fundamental part of its business and financing strategy, the Company
sells the majority of its loans in Securitizations to REMIC Trusts in exchange
for Regular and Residual Interests. A significant portion of the Company's
income is derived by recognizing gains on sales of loans made pursuant to
these Securitizations. The Company records gains on sales of loans differently
for wholesale servicing released loan sales and for servicing retained sales
of loans through Securitization or to private investors.
Purchased loans are carried on the books of the Company at their acquisition
cost, while the net carrying value on the Company's books of originated loans
is equal to their principal balance less Net Deferred Origination Fees.
Gains on wholesale servicing released loan sales equal the difference
between the net proceeds to the Company from such sales and the loans'
acquisition cost (for purchased loans) or net carrying value (for originated
loans).
Gains on servicing retained sales of loans through Securitizations equal the
difference between the net proceeds to the Company in the Securitization and
the allocated cost of loans Securitized. Such net proceeds received in
Securitizations consist of the fair value of Regular Interests (determined by
the cash price for which they are then sold to the public) and the fair value
of the Residual Interests retained by the Company (determined
21
<PAGE>
as described below), net of transaction costs. The allocated cost of the loans
Securitized is determined by taking their acquisition cost (for purchased
loans) or net carrying value (for originated loans), and allocating such cost
or carrying value between the loans Securitized and the mortgage servicing
rights retained with respect thereto based upon their relative fair values.
The net proceeds of a Securitization consist of the Regular and Residual
Interests received by the Company. The Regular Interests are immediately sold
for cash by the Company. As the holder of the Residual Interests, the Company
is entitled to receive certain excess cash flows. These excess cash flows are
calculated as the difference between (a) principal and interest paid by
borrowers and (b) the sum of (i) pass-through interest and principal to be
paid to the holders of the Regular Interests, (ii) trustee fees, (iii) third-
party credit enhancement fees, (iv) servicing fees and (v) estimated loan pool
losses. The Company's right to receive this excess cash flow begins after
certain reserve requirements have been met, which are specific to each
Securitization and are used as a means of credit enhancement.
The Company carries Residual Interests at fair value. As such, the carrying
value of these securities is impacted by changes in market interest rates and
prepayment and loss experiences of these and similar securities. The Company
determines the fair value of the Residual Interests utilizing prepayment and
credit loss assumptions appropriate for each particular Securitization. To the
Company's knowledge, there is no active market for the sale of these Residual
Interests. The range of values attributable to the factors used in determining
fair value is broad. Accordingly, the Company's estimate of fair value is
subjective. Prepayments are expressed through a market convention known as a
constant prepayment rate ("CPR"). In its past Securitizations, the Company has
experienced a CPR on the Securitized loans ranging from 4.1% to 37.9%. Non-
conventional mortgage loans, and the Company's loans, historically prepay at a
faster rate than conventional mortgage loans. For the three years ended March
31, 1996, conventional fixed rate mortgage loans in the form of Federal
National Mortgage Association 30 year fixed rate mortgage pools have had CPRs
ranging from below 1.0% to almost 10.0%. At origination the Company utilized
prepayment assumptions ranging from 25.0% to 30.0%, estimated loss factor
assumptions of 0.5% and weighted average discount rates of 18.0%, 23.6% and
26.6%, for the years ended December 31, 1995, 1994 and 1993, respectively, to
value Residual Interests. Based upon the historical performance of its loans,
the Company expects its Securitized pools to have average lives of three to
five years. As of March 31, 1996, the Company's investments in Residual
Interests totaled $20.7 million.
To determine the fair value of the mortgage servicing rights, the Company
projects net cash flows expected to be received over the life of the loans.
Such projections assume certain servicing costs, prepayment rates and credit
losses. These assumptions are similar to those used by the Company to value
the Residual Interests. As of March 31, 1996, mortgage servicing rights
totaled $4.6 million.
There can be no assurance that the Company's estimates used to determine the
fair value of mortgage servicing rights will remain appropriate for the life
of each Securitization. If actual loan prepayments or credit losses exceed the
Company's estimates, the carrying value of the Company's mortgage servicing
rights may have to be written down through a charge against earnings. The
Company will not write up such assets to reflect slower than expected
prepayments, although slower prepayments may increase future earnings as the
Company will receive cash flows in excess of those anticipated. Fluctuations
in interest rates may also result in a write- down of the Company's mortgage
servicing rights in subsequent periods. The Company has never written down the
book value of its mortgage servicing rights for such reasons.
The three primary components of the Company's revenues are loan origination
and sale revenue, loan servicing and other fees and interest income. Loan
origination and sale revenue consists of gain on sale of loans and other fees.
A significant portion of gain on sale of loans is the recognition of Net
Deferred Origination Fees, which equaled $25.4 million, or 71.5% of loan
origination and sale revenue, during the year ended December 31, 1995.
22
<PAGE>
Loan servicing and other fee income represents fee income and other
ancillary fees received for servicing the loans. Mortgage servicing rights are
amortized against loan servicing and other fees over the period of estimated
net future servicing fee income.
As such, the carrying value of these securities is impacted by changes in
market interest rates and prepayment and loss experiences of these securities
and the overall market.
Interest income is comprised of two primary components: (i) interest on
loans held for sale during the Warehousing Period and (ii) the effective yield
on the Residual Interests. The Company recognizes interest income on a level
yield basis over the expected lives of the Securitized loans. As of each
reporting date the Company analyzes Residual Interests and new effective
yields are calculated which are used to accrue interest income in the
subsequent period.
Loan Origination and Purchases
The Company's ability to Securitize loans in the secondary market, and to
utilize the associated Warehouse Financing Facility pending such
Securitization, has allowed it to increase the overall return on loans sold.
Additionally, secondary market acceptance of 30 year fully amortizing fixed
and adjustable rate mortgages for the Company's customer base has allowed the
Company to offer loan products with more favorable payment terms to borrowers.
The Company believes that the wider array of loan products allowed by
increased secondary market liquidity, in conjunction with the expansion of its
retail branch network, have contributed significantly to the Company's
increased loan origination volume since 1992.
Retail Branch Originations have increased 127.1% to $200.4 million for 1995
from $88.2 million for 1991, and, in conjunction with Portfolio Refinancing
Originations and wholesale purchases, total loan originations and purchases
increased by 255.4% to a high of $313.0 million in 1994 from $88.2 million in
1991. In 1995, the Company ceased purchasing loans from one affiliated lender,
due to the lender's termination of lending operations. This lender was
providing the majority of the Company's wholesale loan purchase volume at that
time. See "Business-Loan Origination and Acquisition Through Brokers and
Lenders."
The Company's Portfolio Refinancing Originations consist primarily of loans
originated by the Company's centralized marketing and sales efforts. Such
efforts focus on preserving the Company's existing portfolio through
refinancing loans to borrowers who have inquired about prepaying their
existing loans. Loan origination fees for Portfolio Refinancing Originations
are less than fees for Retail Branch Originations as customary fees are waived
or reduced as an incentive to refinance with the Company. The Company does not
earn loan origination fees on loan purchases.
23
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Loan originations and
purchases:
Retail Branch
Originations......... $ 88,249 $ 93,596 $148,718 $151,338 $200,371 $ 32,298 $ 56,693
Portfolio Refinancing
Originations......... -- -- 47,189 70,501 16,195 9,045 5,586
Wholesale purchases... -- 13,622 84,034 91,826 24,078 10,602 13,455
-------- -------- -------- -------- -------- -------- --------
Total originations.. $ 88,249 $107,218 $279,941 $313,665 $240,644 $ 51,945 $ 75,734
======== ======== ======== ======== ======== ======== ========
Number of retail
branches as of the end
of the period
California.............. 10 11 11 11 7 10 7
Other States............ -- -- -- 2 10 4 11
-------- -------- -------- -------- -------- -------- --------
Total............... 10 11 11 13 17 14 18
======== ======== ======== ======== ======== ======== ========
Weighted average loan
origination and
processing fees as a
percent of gross loans
originated as
applicable:
Retail Branch
Originations......... 21.7% 22.2% 17.8% 15.6% 15.3% 16.1% 14.8%
Portfolio Refinancing
Originations......... -- -- 2.5% 7.5% 13.0% 13.3% 5.6%
Wholesale purchases... -- -- -- -- -- -- --
Average retail loan
size................... $ 35.6 $ 35.9 $ 53.6 $ 66.1 $ 68.8 $ 58.3 $ 80.5
Weighted average
interest rate.......... 14.1% 13.6% 9.5% 8.7% 10.3% 10.8% 9.2%
Servicing Portfolio as
of the end of the
period................. $209,012 $240,221 $385,570 $555,685 $613,791 $575,982 $611,718
</TABLE>
Loan Sales
The Company sells substantially all of the loans it originates or purchases,
either through loan sales or Securitizations. During the 1996 quarter 1995,
1994, 1993 and 1992, the Company sold $74.4, $233.2 million, $373.2 million,
$212.3 million and $108.3 million of loans, respectively. The volume of loans
sold decreased $140.0 million, or 37.5%, in 1995 from 1994 primarily because
of decreased Portfolio Refinancing Originations and wholesale loan purchases
due to curtailment of certain loan origination and purchase programs as well
as the timing of loan sales during such years. Of the loan sales in such
periods, 70.5%, 72.0%, 93.9%, 66.8%, and 36.0 %, respectively, were through
Securitizations.
Loan Servicing
Since its inception, the Company has generally sold loans, whether to
private investors or through Securitizations, and retained the right to
service the loans. Additionally, in 1995, the Company began selling loans on a
servicing released basis to other mortgage bankers. At December 31, 1995, the
Servicing Portfolio consisted of 8,809 loans with an aggregate principal
balance of $613.8 million. Revenue associated with loan servicing amounted to
14.5% of total revenues for the year ended December 31, 1995.
24
<PAGE>
Composition of Revenue and Expense
The following table summarizes certain components of the Company's
statements of operations set forth as a percentage of total revenue for the
periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
DECEMBER 31, MARCH 31,
-------------------- -----------------
1993 1994 1995 1995 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Loan Origination and Sale:
Gain (loss) on sale of loans
(excluding net loan origination
and other fees).................. 5.7% (3.4)% 15.3% -- % 9.5%
Net loan origination and other
fees............................. 56.8 64.3 45.0 18.2 53.8
Loan servicing and other fees....... 25.0 19.9 14.5 33.2 15.1
Interest............................ 12.4 18.9 24.9 48.1 21.3
Other............................... 0.1 0.3 0.3 0.5 0.3
----- ----- ----- ------- -------
Total revenue..................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ------- -------
Expense:
Compensation and benefits........... 30.2 20.9 17.7 46.6 21.6
Professional services............... 3.6 3.3 1.2 4.4 1.8
Advertising......................... 8.2 7.2 7.4 18.0 6.3
Subservicing and other fees......... 1.8 2.2 2.1 4.5 1.3
Rents............................... 2.3 2.1 2.2 4.8 2.5
Supplies............................ 2.2 1.8 1.7 4.1 2.3
Depreciation and amortization of
property........................... 1.3 1.1 1.5 2.4 0.9
Interest............................ 5.9 8.2 7.1 10.3 5.2
Legal............................... 8.5 15.6 2.5 3.5 1.0
Other............................... 5.5 4.3 3.9 6.4 4.0
----- ----- ----- ------- -------
Total expense..................... 69.5 66.7 47.3 105.0 46.9
----- ----- ----- ------- -------
Net income (loss) before income tax
provision (benefit).................. 30.5 33.3 52.7 (5.0) 53.1
Income tax provision (benefit)........ 0.6 0.8 0.8 (0.1) 0.8
----- ----- ----- ------- -------
Net income (loss)..................... 29.9% 32.5 % 51.9% (4.9)% 52.3%
===== ===== ===== ======= =======
</TABLE>
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995
Revenue
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED
MARCH 31,
------------------
1995 1996
------ -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Loan origination and sale:
Gain (loss) on sale of loans(1)............................ $ -- $ 1,404
Net loan origination and other fees........................ 1,086 7,967
Loan servicing and other fees................................ 1,977 2,243
Interest..................................................... 2,871 3,158
Other........................................................ 29 38
------ -------
Total revenue............................................ $5,963 $14,810
====== =======
</TABLE>
- --------
(1) Excluding net loan origination and other fees.
25
<PAGE>
Total revenue increased to $14.8 million for the quarter ended March 31,
1996 from $6.0 million for the quarter ended March 31, 1995. The increase was
principally in loan origination and sale revenue due to the closing of a
Securitization of $52.4 million in loans in the quarter ended March 31, 1996.
No Securitizations were closed in the quarter ended March 31, 1995.
Loan origination and sale revenue increased to $9.4 million for the quarter
ended March 31, 1996 from $1.1 million for the quarter ended March 31, 1995.
For the quarter ended March 31, 1995, the Company did not realize any gain
(loss) on sale of loans (excluding net loan origination and other fees) on
loan sales of $7.6 million. For the quarter ended March 31, 1996, loan sales
totaled $74.4 million and the weighted average gain on sales of loans as a
percentage of loan principal balances was 1.9%, including recognition of $1.0
million of capitalized mortgage servicing rights. The increase in loan sales
was primarily due to an increase in volume of wholesale loan sales, which
increased from $3.5 million in the quarter ended March 31, 1995, to $21.5
million in the quarter ended March 31, 1996, and the closing of a
Securitization of $52.4 million in the quarter ended March 31, 1996. No
Securitizations were closed in the quarter ended March 31, 1995. Loans held
for sale totaled $26.3 million and $58.6 million at March 31, 1996 and March
31, 1995, respectively.
Loan origination fees are deferred and recognized only upon sale of the
loan. Net loan origination and other fees increased $6.9 million from $1.1
million for the quarter ended March 31, 1995 to $8.0 million for the quarter
ended March 31, 1996 due to the increased volume of loan sales.
Loan servicing and other fees increased $0.3 million in the quarter ended
March 31, 1996 as compared to the quarter ended March 31, 1995, primarily due
to an increase in prepayment penalties of $0.5 million, or 88.1%, resulting
from an increase in overall portfolio prepayments for which the Company
receives prepayment penalties. This increase in prepayments is the result of
an increasing servicing portfolio and a change in 1994 in the terms of loans
originated by the Company that has enabled the Company to collect prepayment
fees on a greater percentage of adjustable rate loans.
Interest income represents the recognition of the yield on Residual
Interests in securities retained by the Company, interest earned on loans
originated or purchased during the Warehousing Period from their origination
or purchase until their sale, and interest earned on loans receivable held for
investment. Interest income increased $0.3 million in the quarter ended March
31, 1996 as compared to the quarter ended March 31, 1995 primarily due to an
increase in interest income from Residual Interests of $0.8 million, offset by
a decrease in interest earned on loans held for sale of $0.4 million and
interest earned on loans receivable held for investment of $0.3 million. The
58.7% increase in interest income from Residual Interests was primarily due to
the growth of the Company's portfolio of Residual Interests from an average of
$12.0 million in the quarter ended March 31, 1995 to $20.2 million for the
quarter ended March 31, 1996 as a result of net Residual Interests originated.
Interest income on loans held for sale decreased 35.8% in the quarter ended
March 31, 1996, as a result of a decrease in average interest rates on loans
held for sale and a decrease in the average balance of loans held for sale.
The decrease in the interest income from loans receivable held for investment
was principally the result of a decrease of 37.6% in the average gross balance
of loans held for investment.
26
<PAGE>
Expense
The following table sets forth the components of the Company's expenses for
the periods indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED
MARCH 31,
-----------------------
1995 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Compensation and benefits............................... $2,780 $3,196
Professional services................................... 264 269
Advertising............................................. 1,071 940
Subservicing and other fees............................. 266 192
Rent.................................................... 285 370
Supplies................................................ 246 335
Depreciation and amortization of property............... 144 139
Interest................................................ 613 763
Legal................................................... 206 146
Other................................................... 388 600
------ ------
Total expense......................................... $6,263 $6,950
====== ======
</TABLE>
Total expense increased 11.0% to $7.0 million for the quarter ended March
31, 1996 from $6.3 million for the quarter ended March 31, 1995. The increase
is primarily due to expenses associated with the increases in the Company's
loan origination volume.
Compensation and benefits increased by $0.4 million and advertising expense
decreased by $0.1 million in the quarter ended March 31, 1996 as compared to
the the quarter ended March 31, 1995, primarily as a result of the increased
loan origination volume in the quarter ended March 31, 1996 and the Company's
decisions to reduce the use of outside telemarketing services in 1996 and
increase the number of employees in its internal telemarketing operations.
Interest expense increased 24.5% to $0.8 million in the quarter ended March
31, 1996 as compared to the quarter ended March 31, 1995, primarily as a
result of a 47.8% increase in the average outstanding balance of the Warehouse
Financing Facility, offset by a 15.2% decrease in the average interest rate
charged on such Facility.
Other expenses increased by $0.2 million in the quarter ended March 31, 1996
as compared to the quarter ended March 31, 1995, primarily as a result of
expenses incurred in the moving of the Company's administrative offices in
February 1996 and increased travel and employee relocation expenses as the
Company continues to expand its retail branch operations outside of
California.
Income Taxes
Since May 1, 1988, the Company has elected to be treated for Federal income
and certain state tax purposes as an S corporation under Subchapter S of the
Code and comparable state laws. As a result, the Company's provisions for
income taxes have in the past reflected modest corporate level state income or
franchise taxes for those states in which the Company operates. The taxable
income of the Company during such periods has been included in the individual
taxable income of its shareholders for Federal and state income tax purposes.
Immediately prior to the Closing Date, the Chisick Family will revoke the
Company's S corporation status and, after the Closing Date, the Company will
be fully subject to Federal and state taxes. At that time, the Company's
effective income tax rate will approximate the Federal and composite state
income and franchise tax rates (net of Federal benefit).
27
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Revenue
The following table sets forth the components of the Company's revenue for
the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan origination and sale:
Gain (loss) on sale of loans(1)..................... $ 2,056 $(1,547) $ 8,982
Net loan origination and other fees................. 20,433 29,449 26,511
Loan servicing and other fees......................... 8,989 9,106 8,543
Interest.............................................. 4,452 8,650 14,668
Other................................................. 20 144 176
------- ------- -------
Total revenue..................................... $35,950 $45,802 $58,880
======= ======= =======
</TABLE>
- --------
(1) Excluding net loan origination and other fees.
Total revenues increased 28.6% to $58.9 million for 1995 from $45.8 million
for 1994, which in turn represented an increase of 27.4% from $36.0 million
for 1993. The increases in both years were primarily due to increased loan
origination and sale revenue and increased interest income from Residual
Interests.
Loan origination and sale revenue increased 27.2% to $35.5 million for 1995
from $27.9 million for 1994, which in turn represented an increase of 24.1%
from $22.5 million in 1993.
Gain (loss) on sales of loans (excluding net loan origination and other
fees) increased to a gain of $9.0 million in 1995 from a loss of $1.5 million
in 1994. This increase was due primarily to increased premiums on loan sales
which was partially offset by a decrease in the volume of loans sold. The
weighted average gain (loss) on sales of loans as a percentage of loan
principal balances increased to a weighted average gain on sale of loans of
3.9% in 1995 from a weighted average loss on sale of loans in 1994 of 0.4%.
Such increase was primarily the combined result of (i) increased interest rate
spreads (the difference between the weighted average loan interest rates for
the Securitized pools and the weighted average pass-through rates paid to
holders of the Regular Interests less servicing, trustee and insurance fees
and estimated credit losses) in Residual Interests created in 1995
Securitizations over 1994 Securitizations, which increased to 2.04% in 1995
from a weighted average initial interest rate spread of 1.20% in 1994
primarily as a result of more stable interest rates during 1995; (ii)
decreased levels of initial required REMIC overcollateralization, which
decreased from $2.8 million, or .81% of the related Regular Interests
balances, in 1994 to $0.1 million or .04% of the related Regular Interests
balances in 1995 Securitizations; and (iii) recognition of $3.9 million of
capitalized mortgage servicing rights originated during 1995 due to the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 122 in
1995 (accordingly no such assets were recognized in 1994). The 1995 volume of
loans sold decreased $140.0 million, or 37.5%, to $233.2 million, from $373.2
million in 1994 primarily as a result of decreased Portfolio Refinancing
Originations and wholesale loan purchases due to the curtailment of certain
loan origination programs and the timing of loan sales during such years. At
December 31, 1995, 1994 and 1993, loans held for sale totaled $24.7 million,
$18.7 million and $74.2 million, respectively.
Gain (loss) on sales of loans (excluding net loan origination and other
fees) decreased in 1994 by $3.6 million to a loss of $1.5 million from a gain
of $2.1 million in 1993 due primarily to decreased premiums received over the
principal balance recognized on loan sales which was partially offset by a
increase in the volume of loans sold. The weighted average gain (loss) on
sales of loans as a percentage of loan principal balances decreased to a
weighted average loss on sale of loans of 0.4% in 1994 from a weighted average
gain on sale of loans in 1993 of 1.0%. Such decrease was primarily the
combined result of (i) decreased interest rate spreads in Residual Interests
created in 1994 Securitizations from 1993 Securitizations, which decreased
from a
28
<PAGE>
weighted average initial interest spread of 3.24% in 1993 to 1.20% in 1994
primarily as a result of sharply rising interest rates during 1994; (ii)
increased levels of initial required REMIC Trust overcollateralization, which
increased from $0.7 million, or .52% of the related Regular Interests
balances, in 1993 Securitizations to $2.8 million, or .81% of related Regular
Interests balances, in 1994 Securitizations; and (iii) recognition of $1.0
million of capitalized excess servicing receivables associated with sales of
loans to private investors originated in 1993 (no such assets were recognized
in 1994).
Included in gain on sales of loans (excluding net loan origination and other
fees) in 1995 and 1994 are losses of $255,000 and gains of $800,000,
respectively, resulting from the Company's hedging of interest rate risk
related to loans held for sale during such periods. The Company did not
initiate its hedging activities until 1994. The Company from time to time
hedges against the impact of rapid changes in interest rates on the value of
such loans from the time the Company commits to fund or purchase such loans
until the date of their securitization or sale. During 1995 and 1994, hedging
transactions were limited to selling short United States Treasury securities
and prefunding loan originations in its Securitizations. The timing, nature
and quantity of such hedging transactions is determined by the management of
the Company based on various factors, including market conditions and the
expected volume of commitments to fund or purchase mortgage loans.
Loan origination fees are deferred and recognized only upon sale of the
loan. While Retail Branch Originations increased in 1995 over 1994 net loan
origination and other fees decreased $2.9 million, or 10.0%, to $26.5 million
for 1995 primarily due to lower sales of Retail Branch Originations in 1995.
The volume of sales of such loans decreased in 1995 due to the postponement
until 1994 of a significant volume of 1993 Retail Branch Originations held for
sale at year end 1993. Retail Branch Originations generally carry higher loan
origination fees than Portfolio Refinancing Originations. The Company does not
earn loan origination fees on wholesale loan purchases.
Net loan origination and other fees increased $9.0 million, or 44.1%, to
$29.4 million for 1994 due to higher sales of Retail Branch Originations in
1994. Retail loan originations did not increase materially in 1994 over 1993,
however, the volume of retail loan sales increased in 1994 due to the sale in
1994 of a significant volume of 1993 retail loan originations held for sale at
year end 1993.
Loan servicing and other fees decreased $0.6 million, or 6.2%, in 1995 as
compared to 1994 primarily due to a decrease in loan servicing fees of $0.4
million and an increase of $0.2 million in compensating interest paid by the
Company as servicer with respect to prepayments of Securitized loans. This
decrease was partially offset by an increase in prepayment penalty fees of
$0.2 million. Loan servicing fees decreased in 1995 due to a decrease in the
weighted average servicing rate earned on the Company's Servicing Portfolio
which was partially offset by an increase in the dollar volume of the
Company's Servicing Portfolio. The weighted average servicing rate decreased
from 1.10% in 1994 to 0.82% in 1995 primarily as a result of the amortization
of prepayments of the portfolio of loans sold to private investors that
generally carry higher servicing rates than Securitized loans. The Company's
average outstanding Servicing Portfolio balance increased to $584.7 million in
1995 from $470.6 million in 1994. In conjunction with the servicing of
Securitized loan pools, the Company is required to remit one entire month's
interest to the REMIC Trust for all loans which are paid off prior to their
maturity. This amount includes both actual interest collected and
"compensating interest" which together equal one full month of interest on the
prior month's loan balance. The increase in compensating interest offsetting
loan servicing 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
29
<PAGE>
loans comprised 46.7% of total prepayments as compared to 17.2% in 1993. The
increase in compensating interest offsetting loan servicing revenue is due to
the 152.6% increase in Securitized loans paid off during 1994 as compared to
1993.
Interest income increased $6.0 million, or 69.6%, in 1995 as compared to
1994. Interest income from Residual Interests in securities increased $4.0
million in 1995 due to the combined effect of growth in the Company's
portfolio of Residual Interests, which increased from an average of $10.3
million in 1994 to $14.5 million in 1995, and an increase in the weighted
average effective yield on Residual Interests. The increase in the effective
yield in Residual Interests is primarily due to the favorable performance of
the Residual Interests acquired in 1993 and 1994 as compared to assumptions
for loss, prepayment and delinquency rates used in computing their fair value
at origination. Interest income from loans held for sale increased $0.9
million in 1995 due to an increase in the weighted average interest rate on
loans originated and purchased which increased from approximately 8.7% in 1994
to 10.3% in 1995. The average balance of loans held for sale did not change
significantly, even though total loan originations decreased, due to a longer
Warehousing Period in 1995. Interest on loans receivable held for investment
increased $1.0 million from 1994 to 1995 due to increases in the average
balance of loans receivable held for investment and the accretion of related
purchase discounts.
Interest income increased $4.2 million, or 94.3%, in 1994 as compared to
1993. Interest income from Residual Interests increased $2.2 million in 1994
due to growth of Residual Interests, which increased from an average of $4.1
million in 1993 to $10.3 million in 1994, and an increase in the weighted
average effective yield on Residual Interests. Interest income from loans held
for sale increased $1.5 million in 1994 primarily due to a 43.2% increase in
the average balance of loans held for sale. This increase was partially offset
by a decrease in the weighted average interest rate on loans held for sale as
the weighted average interest rate on loans originated and purchased decreased
from approximately 9.5% in 1993 to 8.7% in 1994. Interest on loans receivable
held for investment increased $0.3 million from 1993 to 1994 due primarily to
increases in the average balance of loans receivable held for investment.
Expense
The following table sets forth the components of the Company's expenses
during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Compensation and benefits.............................. $10,847 $ 9,559 $10,395
Professional services.................................. 1,288 1,521 697
Advertising............................................ 2,958 3,316 4,345
Subservicing and other fees............................ 659 1,019 1,212
Rent................................................... 815 974 1,278
Supplies............................................... 791 831 992
Depreciation and amortization of property.............. 483 514 907
Interest............................................... 2,106 3,744 4,167
Legal.................................................. 3,044 7,162 1,491
Other.................................................. 1,996 1,928 2,376
------- ------- -------
Total expense........................................ $24,987 $30,568 $27,860
======= ======= =======
</TABLE>
Total expense decreased 8.9% to $27.9 million for 1995 from $30.6 million in
1994, which in turn represented an increase of 22.3% from $25.0 million for
1993. The decrease in 1995 was primarily due to decreases in legal expense and
professional services offset by increases in compensation and benefits,
advertising and interest expense. The increase in 1994 was due primarily to
increases in legal and interest expense offset by a decrease in compensation
and benefits.
30
<PAGE>
Compensation and benefits expense increased by 8.7% to $10.4 million for
1995 from $9.6 million for 1994, which in turn represented a decrease of 11.9%
from $10.8 million in 1993. The 1995 increase primarily relates to an 11%
increase in average employee headcount, which was partially offset by a $0.2
million decrease in health insurance costs related to the Company's conversion
of employee coverage to a more affordable health maintenance organization
program. The 1994 decrease in compensation and benefits expense is primarily
due to a bonus paid to Mr. Chisick of $3.0 million in 1993 and was offset by
an increase in other compensation and benefits that was the combined result of
a 10% increase in average employee headcount during 1994 and compensation
increases for existing employees.
Professional services expense decreased $0.8 million, or 54.2%, in 1995 as
compared to 1994. In 1994, certain of the Company's Portfolio Refinancing
Origination programs included the utilization of outside consultants.
Advertising expense increased $1.0 million, or 31.0%, in 1995 over 1994
primarily as a result of the increase in the number of retail branch offices.
Retail Branch Originations increased $49.0 million, or 32.4%, in 1995 over
1994.
Sub-servicing and other fees incurred by the Company increased by $0.2
million, or 18.9%, during 1995 as compared to 1994, and by $0.4 million, or
54.6%, during 1994 as compared to 1993. From the introduction of adjustable
rate mortgages in 1993 until February 1996, the Company contracted with a
third party to sub-service such loans. In the first quarter of 1996, the
Company terminated the third party and now services all adjustable and fixed
rate loans in its Servicing Portfolio. In 1995, 1994 and 1993, the Company's
average portfolio of adjustable rate loans serviced was $275.1 million, $242.3
million and $33.6 million, respectively.
Rent expense increased by $0.3 million, or 31.2%, during 1995 as compared to
1994. In addition to scheduled rent increases on existing properties, the
Company entered into leases on nine new retail branch offices related to the
national expansion of the retail branch network during 1995.
Depreciation and amortization of property increased $0.4 million, or 76.5%,
in 1995 over 1994. This increase is primarily related to the write off in 1995
of the remaining book value of the Company's loan servicing system of $0.2
million due to implementation of a new software system.
Interest expense increased $0.4 million, or 11.3%, in 1995 as compared to
1994 due to increases in interest expense on the Warehouse Financing Facility
of $0.3 million and interest expense related to stockholder notes payable of
$0.2 million. Increased interest expense associated with the Warehouse
Financing Facility was due to an increase in the weighted average interest
rate on the Warehouse Financing Facility, which increased to 7.10% in 1995
from 5.96% in 1994 and which was partially offset by a decrease in the average
balance outstanding. Increased interest expense associated with stockholder
notes payable was due to an increase in the average balance outstanding during
1995.
Interest expense increased $1.6 million, or 77.8%, in 1994 as compared to
1993 due to an increase in interest expense on the Warehouse Financing
Facility of $2.1 million which was partially offset by a decrease in interest
expense related to stockholder notes payable of $0.6 million. Increased
interest expense associated with the Warehouse Financing Facility was due to a
140.9% increase in the average balance outstanding. Decreased interest expense
associated with stockholder notes payable was due to an decrease in the
average balance outstanding during 1994.
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.
31
<PAGE>
Other expense increased $0.4 million, or 23.2%, during 1995 as compared to
1994. Such increase is primarily due to an increase in travel expenses of $0.3
million during 1995 related to the Company's national retail branch network
expansion.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow. The Company's
sources of cash flow include loan sales, loans sold through Securitizations,
net interest income and borrowings under its Warehouse Financing Facility. At
origination of a loan, the Company includes the loan origination fee in the
principal balance. The Company then borrows approximately the principal amount
of the loan (subject to collateral valuation limitations) under the Warehouse
Financing Facility and disburses to the borrower the loan amount less the loan
origination fee. Thus, the Company receives cash in the amount of the loan
origination fee at the time of the Warehouse Financing Facility funding and
prior to the time the Company recognizes such fee as a component of gain on
sale of loans, which occurs upon the sale of the loan. The magnitude of the
Company's loan origination fees is a significant factor in the Company's
historical positive operating cash flow.
The Company's uses of cash include the funding of loan originations and
purchases, payment of interest expenses, repayment of the Warehouse Financing
Facility, funding of initial overcollateralization requirements for
Securitizations, operating and administrative expenses, income taxes and
capital expenditures. Capital expenditures totaled $1.0 million, $0.9 million
and $0.6 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Prepaid expenses and other assets increased $2.3 million from
$1.6 million at December 31, 1994 to $3.9 million at December 31, 1995. A $0.5
million balance outstanding under a line of credit extended to a related party
loan broker at December 31, 1995 did not exist at December 31, 1994 and
receivables related to Residual Interest distributions and interest on loans
increased by $0.9 million. In addition, refundable deposits and deposits on
property acquisitions increased by $0.5 million.
The Company's sale of loans through Securitizations has generally resulted
in gains on Securitization recognized by the Company. Substantially all of the
proceeds of a Securitization, net of fees and costs of the Securitization, are
used to repay the Warehouse Financing Facility. Additionally, in a
Securitization, the Company receives Residual Interests and capitalizes
mortgage servicing rights, each of which creates non-cash taxable income. The
value of the mortgage servicing rights capitalized represents the present
value of estimated net cash flows to be received in the future and constitutes
a non-cash gain on which the Company is required to pay income tax. Therefore,
the income tax payable and the expenses related to the Securitization on these
factors negatively impact the Company's cash flow. For the years ended
December 31, 1995, 1994, and 1993, the Company recognized gain on sale of
loans through Securitization, including the recognition of Net Deferred
Origination Fees, of $26.7 million, $25.0 million and $14.0 million,
respectively. The Company anticipates that the majority of future loan sales
will be through Securitization.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans, are essential to the continuation of the
Company's ability to originate and purchase loans. During 1995, 1994 and 1993,
the Company used cash in the approximate amounts of $213.9 million, $289.3
million and$257.9 million, respectively, for new loan originations and
purchases. During the same periods, the Company received cash of proceeds from
the sale of loans and Regular Interests in securities of $232.3 million,
$368.0 million and $209.5 million, respectively. After utilizing available
working capital, the Company borrows money to fund its loan originations and
purchases, and repays these borrowings as the loans are sold. Upon the sale of
loans and the subsequent repayment of borrowings, the Company's working
capital and Warehouse Financing Facility then become available to fund
additional loan originations and purchases. The Company's Warehouse Financing
Facility is secured by loans originated or purchased by the Company and
currently bears interest at the rate of .875% over 30 day LIBOR. Amounts
borrowed under the Warehouse Financing Facility and not used to originate or
purchase loans that are included in a Securitization in which the lender under
the Warehouse Financing Facility is the underwriter are subject to an
additional fee equal to 25 basis points of such borrowings. The Warehouse
Financing Facility contains affirmative, negative and financial covenants
typical of such credit facilities. This Warehouse Financing Facility is
renewable by the lender on a quarterly basis and currently expires
32
<PAGE>
on the sooner of the closing of a Securitization or September 30, 1996. This
Warehouse Financing Facility was originated in 1993 and has been renewed in
varying amounts over the last 3 years. Management expects, although there can
be no assurance, that the Company will be able to maintain this Warehouse
Financing Facility (or obtain replacement or additional financing) in the
future.
As indicated above, the Company's ability to continue to originate and
purchase loans is dependent, in part, upon its ability to sell the loans in
the secondary market in order to generate cash proceeds for new originations
and purchases. The value of and market for the Company's loans are dependent
upon a number of factors, including general economic conditions, interest
rates and governmental regulations. Adverse changes in such factors may affect
the Company's ability to sell loans for acceptable prices within a reasonable
period of time. A prolonged, substantial reduction in the size of the
secondary market for loans of the type originated or purchased by the Company
may adversely affect the Company's ability to sell loans in the secondary
market with a consequent adverse impact on the Company's results of
operations, financial condition and ability to fund future originations and
purchases.
As a result of the Company's treatment as an S corporation for Federal and
state income tax purposes, the Company historically has made distributions to
its shareholders for the payment of income taxes on the earnings of the
Company and to provide them with a return on their investment. The Company
paid dividends, including amounts for taxes of $12.2 million, $17.3 million
and $5.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Prior to the Closing Date, the Chisick Family will revoke the
Company'sS corporation status. The Company anticipates that, after payment of
the S Distribution Notes, any earnings will be retained for the foreseeable
future in the operations of the business. "See Prior S Corporation Status" and
"Dividend Policy."
The Company believes that cash flow from operations, the net proceeds of the
Public Offering, the net proceeds from Securitizations and the availability
under the Warehouse Financing Facility will be sufficient to fund operating
needs, capital expenditures and payment of the S Distribution Notes for the
ensuing 12 months.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 122 "Accounting for Mortgage Servicing Rights." SFAS No. 122 amends SFAS
No. 65 "Accounting for Certain Mortgage Banking Activities," to require that
mortgage banking entities recognize as a separate asset rights to service
mortgage loans for others. Mortgage banking entities that acquire or originate
loans and subsequently sell or Securitize those loans with retained servicing
rights are required to allocate the total cost of the loans to the mortgage
servicing rights and the mortgage loans. As a result of the adoption of SFAS
No. 122, in the future the Company will recognize a greater amount of revenue
at the time a loan is sold and a lesser amount of revenue during the time such
loan is serviced. The Company is also required on an ongoing basis to assess
the servicing rights for impairment based upon the fair value of those rights.
SFAS No. 122 was adopted by the Company as of January 1, 1995, and resulted in
additional income of approximately $3.9 million, included in loan origination
and sale revenue, for the year ended December 31, 1995.
In 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which encourages companies to account for stock compensation
awards based on their fair value at the date the awards are granted. SFAS No.
123 does not require the application of the fair value method and allows for
the continuance of current accounting method, which requires accounting for
stock compensation awards based on their intrinsic value as of the grant date.
However, SFAS No. 123 requires proforma disclosure of net income and, if
presented, earnings per share, as if the fair value based method of accounting
defined in this Statement had been applied. The accounting and disclosure
requirements of this statement are effective for financial statements for
fiscal years beginning after December 15, 1995, though earlier adoption is
encouraged. The Company, at this time, has not determined whether or not to
adopt the recognition provisions of SFAS No. 123 with respect to the Stock
Incentive Plan.
33
<PAGE>
BUSINESS
GENERAL
The Company originates, purchases, sells and services non-conventional
mortgage loans secured primarily by first mortgages on single family
residences. The Company focuses on a distinct segment of the home equity
lending market by narrowly targeting its marketing efforts at homeowners
believed by management of the Company, based on historic customer profiles, to
be pre-disposed to using the Company's products and services and satisfying
its underwriting guidelines. The Company does not market to individuals
seeking to buy a home because it is unlikely such individuals would meet the
Company's loan-to-value requirements. The Company originates loans through its
centralized telemarketing operations, its direct mailing campaigns and its
expanding retail branch network of 19 offices currently located in 12 states.
The Company also purchases loans from certain related party originators, and
has recently begun to originate loans referred by other third party brokers.
The Company's customers, who principally use the loans from the Company to
consolidate indebtedness or to finance other consumer needs rather than to
purchase homes, consist of two primary groups. The first category of the
Company's customers are individuals who are unable to obtain mortgage
financing from banks, savings and loan institutions and other companies that
have historically provided loans to individuals with favorable credit
characteristics ("Conventional Lending Institutions"). These individuals often
have impaired or unsubstantiated credit characteristics and/or unverifiable
income and respond favorably to the Company's marketing. The Company's second
category of customers consists of individuals who could qualify for loans from
Conventional Lending Institutions but instead choose to use the Company's
products and services. The Company's experience has shown that these
individuals are attracted to the Company's high degree of personalized service
and timely response to loan applications. Each category of customers has
historically been willing to pay the Company's loan origination fees and
interest rates, which are typically higher than the fees and rates charged by
Conventional Lending Institutions.
The Company believes its concentrated marketing effort on a potential
customer pool that, based on historic customer profiles, displays a
statistical pre-disposition for being consumers of the Company's products and
services and satisfying the Company's underwriting guidelines provides a more
efficient use of its marketing expenditures and leads to a higher marketing
success rate than a broad indiscriminate marketing approach aimed at a wide
array of homeowners. To produce these potential customer pools, the Company
utilizes a proprietary marketing methodology that generally consists of the
subjective analysis and comparison of certain statistical characteristics of
its traditional customers. See "Business--Marketing and Sales--Marketing."
Management of the Company applies this analysis to information obtained from a
number of outside sources with respect to new or existing markets to develop a
list of homeowners who display characteristics that make them likely customers
for the Company's products and services and acceptable underwriting risks. The
Company then focuses its telemarketing and mailing efforts on these identified
homeowners.
The Company's ability to fund and subsequently Securitize loans in the
secondary market has significantly improved its financial performance and
allowed it to offer new and enhanced loan products. These benefits of
Securitization, in conjunction with the Company's retail branch network
expansion, have contributed significantly to the increase in the Company's
loan origination volume to $216.6 million in 1995 from $93.6 million in 1992.
The Company sells substantially all of its loans in the secondary market
either through Securitization or, to a lesser extent, loan sales. Since the
Company's initial use of Securitization in 1992 and
through June 30, 1996, the Company has effected the majority of its loan sales
through Securitizations; during such period $826.8 million of loans were
Securitized and sold by the Company. The Company anticipates selling a
significant portion of its loan origination volume during 1996 and thereafter
through Securitizations. The Company intends to hold the residual interests in
its Securitizations until their maturity. Accordingly, the Company's policy
has been to require threshold credit criteria and combined loan-to-value
limits for loans included in the REMIC Trusts. The Company sells a smaller
amount of its loans through servicing released sales of whole loans that do
not meet the Company's risk criteria for inclusion in the REMIC Trusts. When
the marketing representatives of the Company originate a potential loan that
does not meet the underwriting
34
<PAGE>
guidelines of the Company, the Company sells the loan to unaffiliated
companies on a servicing-released basis, allowing the Company to generate
origination fees without incurring credit risk. The Company continues to
service the loans that it has sold through Securitizations and to private
investors.
The Company's loan originations during the years ended December 31, 1995,
1994 and 1993 were $216.6 million, $221.8 million and $ 195.9 million,
respectively. The Company's retail loan originations during the year ended
December 31, 1995 had an average principal balance of $68,800, a weighted
average initial interest rate of 10.3%, and a weighted average initial
combined loan-to-value ratio of 58.6%.
The Company is a holding company that owns, directly or indirectly, all of
the outstanding capital stock of (i) FAMCO, (ii) First Alliance Services,
Inc., a company recently formed to provide financial, accounting and computer
services to the Company and others, and (iii) two corporations recently
organized under the laws of the United Kingdom to facilitate the Company's
proposed expansion. Immediately prior to the consummation of the Public
Offering, the Chisick Family will contribute to the Company the newly-formed
corporations described above and will receive no consideration therefor,
except as a stockholder of the Company.
MARKETING AND SALES
Marketing
The Company's marketing efforts are designed to identify, locate and focus
on individuals who, based on the Company's historic customer profiles, display
a statistical pre-disposition for being a consumer of the Company's products
and services and satisfying the Company's underwriting guidelines. Based on
the experience of management, the Company believes its focused marketing
effort provides a more efficient use of its marketing expenditures and leads
to a higher marketing success rate than a broad indiscriminate marketing
approach aimed at a wide array of homeowners.
The Company utilizes a proprietary marketing methodology. Under this
proprietary marketing methodology, management subjectively analyzes the
Company's historical customer base to find characteristics common to its
customers. These common characteristics are integrated with information
obtained from a number of outside sources with respect to the homeowner pool
in new or existing markets. The characteristics of individual homeowners and
their properties in the homeowner pool are compared with the characteristics
common to the Company's historical base to identify and locate homeowners and
their properties ("Targeted Homeowners") displaying characteristics that make
them likely to be customers for the Company's products and services and to
satisfy its underwriting guidelines.
In general, the factors analyzed by the Company in identifying Targeted
Homeowners include prior consumer finance borrowing, home value, the amount of
equity in the home and the length of time a homeowner has owned the home.
Credit problems, a lack of a significant credit history and prior borrowings
from consumer finance companies indicate a homeowner is unlikely to be able to
obtain loans from Conventional Lending Institutions, and thus is a more likely
candidate for the Company's products and services. Similarly, the Company's
experience indicates that a longer ownership period usually results in
significant equity in the home for the homeowner, creating an opportunity for
a loan that will satisfy the Company's conservative loan-to-value
requirements.
Management continually refines the Company's proprietary marketing
methodology. The Company uses statistical models from time to time, but
management may adjust the variables to more accurately identify potential
customers in a given market. The Company continually monitors the performance
of its marketing campaigns in evaluating the effectiveness of its methodology
in identifying Targeted Homeowners in each market.
35
<PAGE>
While the Company has utilized mass marketing in the past, management has
decided that focusing its marketing efforts on Targeted Homeowners produces a
greater yield for its marketing expenditures and leads to more opportunities
for loan origination. The majority of the Targeted Homeowners who become
customers of the Company generally use the proceeds of their loans from the
Company to consolidate outstanding mortgage and consumer debt, lower their
monthly payments or make home improvements, and rarely purchase homes with the
proceeds of such loans.
Targeted Marketing
By focusing its marketing efforts on Targeted Homeowners who, based on the
Company's historic customer profile, are statistically pre-disposed to satisfy
the Company's underwriting guidelines, the Company eliminates from its
marketing efforts many homeowners and subject properties that would not
satisfy such guidelines. The Company's marketing personnel, including
telemarketing staff, appraisers, loan officers, branch managers and
headquarters personnel are trained to be aware of the Company's underwriting
guidelines and, as described below, review each loan lead to eliminate
Targeted Homeowners whose overall qualifications and properties would not
satisfy such guidelines.
Mailing Campaigns and Telemarketing
The Company's mailing and telemarketing campaigns focus on the Targeted
Homeowners generated by the Company's proprietary marketing methodology. The
Company targets the communities surrounding its 19 retail branch offices by
utilizing many different mailing campaigns focusing on the multiple benefits
of the Company's services and loan products. The Company distributes over 1
million pieces of mail monthly. All of the Company's mailing campaigns
originate from its mail processing center in Orange, California. The Company's
mailing campaigns result in over 4,000 inbound loan inquiry calls from
Targeted Homeowners monthly. The Company continually monitors the
effectiveness of each of its mailing campaigns and will continue, modify or
discontinue a particular mailing campaign based on the results of such
monitoring.
The Company's telemarketing department handles both inbound and outbound
calls from and to Targeted Homeowners and existing customers. Substantially
all of the inbound calls are from Targeted Homeowners responding to the
Company's mailing campaigns. The Company monitors the effectiveness of each
mailing campaign by tracking which campaign is the source of each inbound
call. The outbound telemarketing department uses computerized predictive
dialers to continually solicit the Targeted Homeowners and the Company's
current customers. Telemarketing representatives also place follow up calls to
prospective borrowers who have previously set and canceled appointments to
have a Company appraiser visit and inspect the subject property and obtain
information about the applicant (an "Appraisal Appointment"), failed to show
up for an appointment with a loan officer in a retail branch office to prepare
loan documents (a " Sales Appointment") or declined a loan program offered to
them by the Company.
The Company understands its practice to be different from that of its
competitors in that the centralized telemarketing department at the Company's
facilities in southern California handles all screening and produces all
initial Appraisal Appointments with the Targeted Homeowners. The centralized
telemarketing department, not the retail branch office personnel, is
responsible for converting loan inquiries into appointments. The Company
believes its centralized telemarketing practice creates greater operating
efficiencies by allowing task specialization and periodic reallocation of
telemarketing resources to meet geographic needs.
The telemarketing representative's responsibility is to sell the benefits of
the Company's products and services, obtain information from the Targeted
Homeowner about themselves, the subject property, the equity in the subject
property and the purpose of the loan, and, assuming this initial information
satisfies the Company's underwriting guidelines, to schedule an Appraisal
Appointment. By focusing on the equity in the subject property, the
telemarketing phase screens out Targeted Homeowners and properties whose
characteristics would not satisfy the Company's underwriting guidelines.
36
<PAGE>
Individual telemarketing representatives are rated and compensated based on
the number of Appraisal Appointments set. The Company monitors the performance
of its telemarketing staff on a weekly and monthly basis.
Appraisal
The Company's valuation process occurs throughout the loan application
process. In some cases, the first stage valuation occurs immediately after a
telemarketing representative sets an Appraisal Appointment. Staff at the
Company's headquarters gathers publicly available information with respect to
recent sales of comparable properties in the same area as the subject
property. The value of the subject property is verified by the comparable
sales data. Only inquiries of applicants that satisfy this stage of the
initial underwriting process will be verified and forwarded to the respective
branches for Appraisal Appointments.
The property is appraised typically within two days of the initial
telemarketing contact and provides a valuable marketing opportunity. This
appraisal is the applicant's first face-to-face contact with the Company's
representatives and the Company stresses to its appraisers the importance of
the marketing aspect of their positions. The appraiser's responsibilities are
to obtain additional information and required documentation about the
applicant, perform a complete appraisal of the subject property, and schedule
a Sales Appointment. The appraiser gathers and delivers to the branch office
the applicant's relevant documents, including the current mortgage documents,
if any, evidence of ownership to the subject property and information
regarding other bills to be refinanced with the new loan.
Appraisers at the Company's headquarters, not third party fee appraisers,
perform a review of the property appraisal on the following loan applications:
(i) all properties with a market value above $150,000, (ii) all loans with a
loan-to-value ratio of equal to or greater than 62%, (iii) all loan
applications prepared by a new branch office for the first 90 days of its
existence, (iv) all income properties, and (v) all non-California loans with a
loan-to-value ratio equal to or greater than 55% or with values less than
$100,000 not otherwise reviewed.
Unlike many of its competitors, the Company does not use independent fee-
based appraisers. Instead, the Company recruits, hires and trains its own
field and desk appraisers. In connection with the Securitization of the
Company's loans, independent appraisers have conducted appraisals of a sample
of the subject properties that are the collateral for the Securitized loans.
The appraisals performed by the Company's appraisers have been within 1.5% of
the aggregate appraisal values on Securitization pools to date as calculated
by the independent appraisers.
The Company hires certified appraisers in those states which require such
designation. Individual appraisers are rated and incented based on the number
of Sales Appointments set and the ongoing quality of the appraisals performed.
The Company monitors the performance of its appraisers on a weekly and monthly
basis.
Loan Production
The retail branch offices are responsible for the sales process that, if
successful, converts the Sales Appointments set by the appraisers into
packaged and underwritten loan files to be submitted to the Company's quality
control department. Each Sales Appointment allows the sales personnel to
clearly determine the applicant's need for financing, tailor a loan program to
fit the applicant's financial needs, continue to underwrite the loan package
and provide to the applicant a choice of loan products and a detailed
explanation thereof.
The loan officer utilizes a loan origination software system developed by
the Company to preliminarily determine an applicant's qualification for the
various products of the Company, and the terms that will be applicable to such
products. The loan origination system incorporates the Company's underwriting
guidelines with respect to the relevant collateral, credit quality, character,
and capacity to repay. For over a decade, the Company has relied upon a
proprietary credit scoring system in its underwriting process. Prior to each
Sales Appointment, the retail branch loan officer or branch manager will run a
credit report for each applicant and determine the applicant's overall credit
score. All accounts on an applicant's credit report, including mortgage
37
<PAGE>
loans, are reviewed and assigned a value based on the performance of the
account. Based upon applicants' credit scores, they are preliminarily
designated as an "A", "B", "C" or "D" risk. This designation is reviewed by
the Company's centralized quality control department before the final
underwriting phase. See "Business--Underwriting."
Once an applicant has agreed to the terms of the proposed loan, loan
documents reflecting such terms are executed by such applicant in two distinct
phases in accordance with the requirements of the Home Ownership Equity
Protection Act of 1994 and forwarded to the Company's centralized quality
control department.
The typical retail branch office consists of a branch manager, one to two
loan officers, one to two appraisers and one to two loan processors. The
Company generally recruits and hires its managers and loan officers in the
location of the branch office. The Company focuses on the professional sales
experience of candidates for loan officer positions. Candidates are required
to submit evidence of substantial recent personal income from sales
employment. The interviewing process includes a panel interview that requires
candidates to perform a simulated loan presentation utilizing the Company's
proprietary sales script. Loan officer and branch manager candidates are
required to successfully complete four weeks of sales and technical
underwriting training to learn the Company's sales presentation and procedures
prior to their placement in a retail branch. Existing retail branch office
sales personnel return to corporate headquarters quarterly for continuing
sales training.
Loan officers and branch managers are rated and compensated based on the
number of loans signed, approved by the loan committee and closed. The Company
strives to develop its loan officers and to promote the most qualified loan
officers to branch managers. The Company monitors the performance of its loan
officers and branch managers on a weekly and monthly basis.
Repeat Business and Preservation of Loan Portfolio
A significant number of the Company's borrowers are repeat borrowers of the
Company. Once a loan is funded, the Company maintains a relationship with its
borrowers to ensure borrower satisfaction and to respond to any future
borrowing needs. For the quarter ended March 31, 1996 and the full year 1995,
34.3% and 13.4%, respectively, of the total volume of loan originations were
to repeat borrowers.
Many competitors in the Company's markets obtain publicly available
information with respect to the Company's borrowers and solicit such borrowers
for additional borrowing or refinancing. The Company 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.
LOAN ORIGINATION AND ACQUISITION THROUGH BROKERS AND LENDERS
The Company has historically augmented its loan production by purchasing
loans from other affiliated, unaffiliated and related party brokers and
lenders. Currently, the Company purchases loans originated by Nationscapital
Mortgage Corporation ("Nationscapital") and Coast Security Mortgage ("Coast
Security"), which are beneficially owned by the sons of Brian and Sarah
Chisick. Additionally, the Company funds loans originated by unaffiliated loan
brokers. The Company has entered into mortgage loan purchase agreements with
each originator which require specified minimum levels of experience in
origination of non-conventional mortgage loans and provide representations,
warranties and buy-back provisions identical to the representations and
warranties required of the Company for the Securitization of its own loan
originations.
Historically, the Company has made wholesale loan purchases from other
affiliated, unaffiliated and related party brokers and lenders to augment the
volume of the Company's loan sales and securitization activity. Recently, the
Company has decided to limit its acquisition of loans from brokers and lenders
to those loans which meet its criteria for Securitization due to
dissatisfaction with the profitability of wholesale purchase and sales of
loans.
38
<PAGE>
During 1994 and 1995, the Company purchased the majority of its wholesale
loan purchase volume from a subsidiary of First Alliance Securities
Corporation, a company wholly-owned by Brian and Sarah Chisick. These
purchases were made pursuant to agreements similar to those entered into with
unaffiliated sellers of loans to the Company. In 1995, First Alliance
Securities Corporation and its subsidiary permanently terminated their lending
operations.
UNDERWRITING
The Company believes its underwriting process begins with the marketing of
its products and services. The Company has designed its marketing programs to
screen out each time information is gathered during its marketing efforts
those homeowners and subject properties that do not meet the Company's
underwriting guidelines. As an integral part of its marketing programs, the
Company trains its telemarketing representatives, appraisers and loan officers
to assess each loan application and subject property against the Company's
underwriting guidelines.
The main underwriting and quality control functions are centralized at the
Company's headquarters. The most significant of the Company's underwriting
functions at headquarters are performed by senior management. The Company
maintains a quality control department and a loan committee. Each loan
application file is reviewed by the Company's loan committee. The loan
committee works in conjunction with the quality control department to provide
a final review of the underwriting and the terms of the potential loan. The
Company strives to process each loan application received from its retail
branch network as quickly as possible in accordance with the Company's loan
application approval procedures. Accordingly, most loan applications receive
decisions within three days of receipt and are funded within ten days of
approval.
Each retail branch office submits executed initial applications to the
quality control department. The quality control department reviews in its
entirety every loan file originated by the retail branch offices as well as
wholesale originators. Loan files are reviewed for completeness, accuracy, and
compliance with the Company's underwriting criteria and applicable
governmental regulations. Based on their initial review, quality control
personnel inform branch office personnel of additional requirements that must
be fulfilled to complete the loan file, such as additional proof of income.
After a full review by quality control personnel, each initial loan
application file is forwarded to the loan committee for approval. These
documents are again subjected to a full review. Loans that clearly conform to
the Company's underwriting guidelines are approved at the first level. Loans
that present certain underwriting issues are forwarded to senior underwriting
personnel.
The decision of the loan committee to approve a loan is based upon a number
of factors, including the appraised value of the property, the applicant's
creditworthiness and the Company's perception of the applicant's ability to
repay the loan. With respect to the value of the collateral, generally, loans
secured by first mortgages are limited to a maximum of 75% loan-to-value
ratio; however, the Company will originate loans with a loan-to-value ratio of
up to 85% for loans expected to be sold. Loans secured by second mortgages are
limited to a maximum of 70% loan-to-value ratio. With respect to
creditworthiness, the Company has established classifications with respect to
the credit profiles of loans and subject properties based on certain of the
applicant's characteristics. Each loan application is placed into one of the
Company's four ratings ("A" through "D," with subratings within those
categories), depending upon the following three primary factors: (i) an
applicant's credit score under the Company's proprietary credit scoring
system, which uses information obtained from national credit bureau reports,
(ii) loan-to-value ratios and (iii) debt-to-income ratios. Terms of loans made
by the Company vary depending upon the classification of the application.
Applications with lower classifications generally are subject to higher
interest rates. A loan application must obtain the following thresholds with
respect to each of the three primary factors to be included in the particular
ratings shown below:
<TABLE>
<CAPTION>
"A" "B" "C" "D"
------ ----- ----- ----
<S> <C> <C> <C> <C>
Borrower Credit Score 100-87 86-64 63-36 35-0
Maximum of Loan-to-Value 75% 73% 72% 65%
Maximum of Debt-to-Income Ratio 40% 49% 59% 65%
</TABLE>
39
<PAGE>
While the Company primarily analyzes the three factors noted above, the
Company also reviews other factors to determine whether an application will be
subject to a higher interest rate than the interest rate applicable to the
rating under which such application has initially been placed. These include
factors such as an unsubstantiated employment history, a recent foreclosure
proceeding, a number of recent delinquent payments on an existing mortgage, a
recent bankruptcy filing, the presence of a senior mortgage or zoning
restrictions on the subject property or a loan-to-value ratio in excess of
71%. Based on this analysis, the loan committee approves, rejects or
restructures the proposed loan.
The following table reflects the risk classification for the Company's loan
originations and purchases for the periods indicated.
CLASSIFICATION OF LOAN ORIGINATIONS AND PURCHASES FOR THE QUARTER ENDED MARCH
31, 1996
<TABLE>
<CAPTION>
LOAN TOTAL % OF WEIGHTED
CLASSIFICATION (AMOUNT IN THOUSANDS) TOTAL AVERAGE COUPON
-------------- --------------------- ----- --------------
<S> <C> <C> <C>
"A" Risk......................... $41,065 54.2% 8.6%
"B" Risk......................... 16,382 21.6 9.3
"C" Risk......................... 12,345 16.3 10.0
"D" Risk......................... 5,942 7.9 11.1
------- -----
Total.......................... $75,734 100.0% 9.2%
======= =====
</TABLE>
CLASSIFICATION OF LOAN ORIGINATIONS AND PURCHASES
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
LOAN TOTAL % OF WEIGHTED
CLASSIFICATION (AMOUNT IN THOUSANDS) TOTAL AVERAGE COUPON
-------------- --------------------- ----- --------------
<S> <C> <C> <C>
"A" Risk......................... $129,922 54.0% 9.8%
"B" Risk......................... 48,793 20.3 10.4
"C" Risk......................... 42,488 17.7 11.3
"D" Risk......................... 19,441 8.0 11.9
-------- -----
Total.......................... $240,644 100.0% 10.3%
======== =====
</TABLE>
LOAN ORIGINATIONS AND PURCHASES
The following table highlights certain selected information relating to the
origination of loans by the Company during the periods shown.
LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
FOR THE
QUARTER
FOR THE YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------
1994 1995 1995 1996
--------- --------- ----- -----
<S> <C> <C> <C> <C>
Type of property securing loan:
Single family.................. 92.4% 95.0% 96.3% 95.9%
Multi family................... 5.4 2.7 2.4 2.2
Planned Unit Development and
Other......................... 2.2 2.3 1.3 1.9
--------- --------- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0%
========= ========= ===== =====
Type of mortgage securing loan:
First mortgage................. 95.4% 94.5% 90.2% 98.6%
Second mortgage................ 4.4 5.4 9.4 1.4
Third mortgage................. .2 .1 0.4 --
--------- --------- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0%
========= ========= ===== =====
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
FOR THE
QUARTER
FOR THE YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ----------
1994 1995 1995 1996
--------- --------- ---- ----
<S> <C> <C> <C> <C>
Weighted average interest rate..... 8.7% 10.3% 10.8% 9.2%
Weighted average initial combined
loan-to-value ratio(1)............ 56.2% 59.4% 57.1% 62.2%
</TABLE>
- --------
(1) The loan-to-value ratio of a loan secured by a senior mortgage is
determined by dividing the amount of the loan by the appraised value of
the mortgaged property at origination. The combined loan-to-value ratio of
a loan secured by any junior mortgage is determined by taking the sum of
the loan secured by such mortgage and any senior mortgages and dividing by
the appraised value of the mortgaged property at origination.
FINANCING AND SALE OF LOANS
The Company finances the origination and purchase of loans with borrowings
under the Warehouse Financing Facility and internally generated cash flows.
See "Liquidity and Capital Resources" for a discussion of the basis for
positive operating cash flows. Securitization allows the Company to manage its
credit risk and cash flow and diversify its exposure to the potential
volatility of the capital markets. In addition, the Company sells on a
servicing released basis those loans that do not meet its criteria for
Securitization. Following the Public Offering, the Company will continue to
rely on these sources of capital, in addition to the proceeds of the Public
Offering, to finance its operations.
Warehouse Financing Facilities
The Company has a secured revolving line of credit of up to $125 million.
Under the Warehouse Financing Facility, the Company may borrow and repay
during the 90-day revolving period up to $125 million. Advances under the
Warehouse Financing Facility bear interest at 0.875% over 30 day LIBOR.
Amounts borrowed under the Warehouse Financing Facility and not used to
originate or purchase loans that are included in a Securitization in which the
lender under the Warehouse Financing Facility is the underwriter are subject
to an additional fee equal to 25 basis points of such borrowings. The
Warehouse Financing Facility contains affirmative, negative and financial
covenants typical of such credit facilities.
The Company recently executed a letter of intent with another lender with
respect to a supplemental warehousing facility (the "Supplemental Warehousing
Facility") in the amount of $25 million. Advances under the Supplemental
Warehousing Facility will bear interest at 0.80 % over 30 to 90 day LIBOR.
Securitization
The Company's Securitization program is an integral part of the Company's
business plan because it allows the Company to increase its loan origination
and purchase volume, more efficiently service its Servicing Portfolio and
reduce the risks associated with interest rate fluctuations. Since the
Company's initial use of Securitization in 1992 and up through June 30, 1996,
the Company has sold $826.8 million of loans through ten publicly underwritten
and two privately placed Securitizations, all of which were rated "AAA/Aaa."
For the quarter ended March 31, 1996 and for the year ended December 31, 1995,
the Company Securitized $52.4 and $168.0 million or 69.2% and 69.8% of its
loan origination and purchase volume, respectively, representing 68.1% and
75.4% of the Company's loan origination and sale revenue for those periods.
The Company currently intends to complete quarterly Securitizations either in
private placements or in public offerings.
In a Securitization, the Company sells a pool of loans to a REMIC Trust in
exchange for Residual Interests and Regular Interests. While the Company
retains the Residual Interests, it immediately sells the Regular Interests and
uses the proceeds to repay borrowings under the Warehouse Financing Facility
to finance the pool of loans. The holders of the Regular Interests are
entitled to receive scheduled principal collected on the pool of Securitized
loans and interest at the pass-through interest rate on the certificate
balance. The Residual Interests held by the Company represent the subordinated
right to receive cash flows from the pool of Securitized loans
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<PAGE>
after payment of the required amounts to the holders of the Regular Interests
and the costs associated with the Securitization. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Certain
Accounting Considerations" for a discussion of the Company's accounting
treatment of the gain on sale of loans and other aspects of its
Securitizations.
To improve the level of profitability from the sale of Securitized loans,
the Company arranges for credit enhancement to achieve an improved credit
rating on the Regular Interests issued. This credit enhancement generally
takes the form of an insurance policy, issued by a monoline insurance company,
insuring the holders of the Regular Interests of timely payment of the
scheduled pass-through interest and principal. In addition, the pooling and
servicing agreements that govern the distribution of cash flows from the loan
pool included in the REMIC Trusts typically require overcollateralization as
an additional means of credit enhancement. Overcollateralization requires an
initial deposit, the sale of loans at less than par or retention in the REMIC
Trust of collections from the pool until a specified overcollateralization
amount has been attained. This retention of excess cash flow creates a faster
amortization of the scheduled balance of the Regular Interests than the
amortization of the principal balance of the Securitized loan pool. The
purpose of the overcollateralization is to provide a source of payment in the
event of higher than anticipated credit loss. Losses resulting from defaults
by borrowers on the payment of principal or interest on the loans in the
Securitized pool will reduce the overcollateralization to the extent that
funds are available and may result in a reduction in the value of the Residual
Interests held by the Company. If payment defaults exceed the amount of
overcollateralization and current excess cash flow, the insurance policy will
pay any further losses experienced by holders of the Regular Interests in the
related REMIC Trust. In the event of a shortfall, the insurance policy for
such Securitization pays interest when due and all principal.
Generally, the Company sells to the REMIC Trust, the loans at face value
except when it sells loans at less than par for overcollateralization purposes
and without recourse except that certain representations and warranties with
respect to the loans are provided by the Company. The Company may be required
either to repurchase or to replace loans that do not conform to such
representations and warranties. To date, the Company has not been required
under the pooling and servicing agreements to substitute or repurchase any
loans sold in completed Securitizations.
The Company retains the servicing rights to the loans it Securitizes. The
Company also receives prepayment and other fees on Securitized loans.
Interest Rate Risk Management
The Company's profitability is in part determined by the difference, or
"spread," between the effective rate of interest received on the loans
originated or purchased by the Company and the interest rates payable under
its Warehouse Financing Facility during the Warehousing Period or for Regular
Interests issued in Securitizations. The spread can be adversely affected
after a loan is originated or purchased and while it is held during the
Warehousing Period by increases in the interest rate demanded by investors in
Securitizations. In addition, because the loans originated or purchased by the
Company have fixed and variable rates, the Company bears the risk of narrowing
of the spread because of interest rate increases during the period from the
date the loans are originated or purchased until the closing of the sale or
Securitizations of such loans.
The Company has implemented a hedging program designed to provide a level of
protection against the impact of rapid changes in interest rates on the value
of fixed rate loans from the time the Company commits to fund or purchase such
loans to the date of their Securitization or sale. The Company does not hedge
the interest rate risk associated with holding adjustable rate mortgages
pending their sale or Securitization due to the decreased significance of such
risk because the pass-through rates for Regular Interests related to the
Company's adjustable rate mortgage pools are also adjustable although not
necessarily in the same period.
42
<PAGE>
The Company's hedging program was initiated in 1994. During the first
quarter of 1996, 1995 and 1994, hedging transactions were limited to selling
short United States Treasury securities and prefunding loan originations in
its Securitizations. United States Treasury securities are utilized by the
Company due to the liquidity of the market for such securities and the high
degree of correlation between such securities and the pass-through interest
rates for Regular Interests in the Company's fixed rate mortgage pools.
Prefunding accounts are structured in some of the Company's Securitizations
from time to time. Prefunding allows the Company to deliver loans to a REMIC
Trust after the date of its closing, allowing the Company to fix the
relationship between the interest rates charged on loans and the pass-through
rates for Regular Interests in the mortgage pools.
The Company may from time to time utilize various financial instruments in
its hedging activities. The nature and quantity of hedging transactions are
determined by the Company's management based on various factors, including
market conditions and the expected volume of mortgage loan originations and
purchases. To decrease market risk, only highly liquid instruments are
utilized in the Company's hedging activities. By their nature, however, all
such instruments involve risk, and the maximum potential loss may exceed the
value at which such instruments are carried. As is customary for these types
of instruments, the Company does not require collateral or other security from
counterparties to these instruments. The Company manages its credit exposure
to counterparties through credit approvals, credit limits and other monitoring
procedures.
Wholesale Loan Sales
Certain loans originated or purchased by the Company are not chosen for
inclusion in a REMIC Trust. These loans may include loans with higher than
acceptable loan-to-value ratios or loans that have unacceptable credit risk.
The Company will originate these loans because it earns the origination fees
and will sell such loans on a servicing released basis in order to avoid
credit risk related to such loans. During the quarter endedMarch 31, 1996 and
the year ended December 31, 1995, the Company sold $21.5 million and $51.5
million, or 28.4% and 21.4%, respectively, of its loan origination and
purchase volume through loan sales in which servicing rights are transferred.
The Company anticipates that it will continue to sell certain loans on a
wholesale basis.
Private Investor Sales
Prior to 1992, the Company sold its loan origination volume to private
investors. Since the Company's utilization of Securitization in 1992, its use
of loan sales to private investors has declined. The Company has retained the
servicing rights to the loans it has sold to private investors. The Company
does not anticipate selling more than an insignificant amount of its loan
origination or purchase volume to private investors in the future.
SERVICING
The Company retains the right to service the loans it originates and
purchases (other than loans sold through wholesale loan sales). Loan servicing
includes collecting payments from borrowers, remitting payments to investors
who have purchased the loans, investor reporting, accounting for principal and
interest, contacting delinquent borrowers, conducting foreclosure proceedings
and disposing of foreclosed properties. The Company's Servicing Portfolio
includes 8,787 loans with an outstanding balance of $611.7 million as of March
31, 1996. The Company receives servicing fees ranging from .50% to 2.5% per
annum for fixed rate loans and .50% to 1.0% per annum for adjustable rate
loans, based upon the outstanding balance of the pool of loans in a REMIC
Trust for its duties relating to the accounting for and collection of the
loans. The Company currently services only Company originated or purchased
loans and does not service outside loans. Revenue generated from loan
servicing amounted to 15.1% of total revenues for the quarter ended March 31,
1996.
The Company has recently installed a sophisticated computer-based loan
servicing software that it believes enables it to provide effective and
efficient processing of loans. The system, which is able to service fixed and
adjustable rate loans, provides the Company with, among other things, payment-
processing, cashiering, collection and reporting functions.
43
<PAGE>
The Company believes its aggressive collection practices contribute to the
relatively low loss rates on its Servicing Portfolio. The following table
illustrates the time line of the Company's collection practices, assuming (i)
the loan is originated in California and (ii) a ten day grace period applies
by contract or under applicable law:
<TABLE>
<CAPTION>
TIME EVENT
---- -----
<C> <S>
1st day of the month Borrower loan payments
due
11th day of the month Payment not received is
late
13th day of the month Notice of past due
payment mailed to
borrower
20th day of the month Foreclosure notice
mailed to borrower
26th day of the month Final notice mailed to
borrower
42 days after due date File forwarded to
foreclosure department
which records notice of
default on 45th day of
delinquency
After notice of default or similar notice is recorded Borrower informed of
status and the Company's
reinstatement period
dates
During the Company's reinstatement period Pre-foreclosure
appraisal performed
End of the Company's reinstatement period Notice of sale recorded
and trustee's sale date
scheduled Property sold
to third party or
acquired on behalf of
the Company
</TABLE>
The borrower is contacted by telephone subsequent to recording the notice of
default to inform the borrower of the situation and of the date that will
permit a sale of the subject property by the trustee. If the borrower does not
bring the loan current within the the Company's reinstatement period, a notice
of sale is published and a trustee's sale date is scheduled. During this
period of time, the Company performs a pre-foreclosure appraisal of the
property to determine whether changes in the value of the property have
occurred since the date of origination. If the loan is not reinstated, the
property is either sold to a third party at the trustee's sale or acquired on
behalf of the Company. The Company forecloses as quickly as state regulations
allow. The Company contracts on a nationwide basis with an independent
foreclosure service to facilitate the foreclosure process on properties
located outside of California. For delinquent loans originated within
California, the Company performs foreclosure procedures internally. Properties
acquired by the Company ("REO") are managed by the Company with the objective
of immediate refurbishment and sale.
In other states, the Company's collection procedures described above may
occur sooner or later depending upon state specific foreclosure regulations.
In September 1993, the Company began originating adjustable rate loans. At
that time, the Company contracted with a third party to sub-service all
adjustable rate loan originations. Over the past year, the Company's
acquisition of loan servicing software has enabled the Company to service
adjustable rate loans and, as of October 1995, the Company terminated its sub-
servicing contract with the third party. Effective February 1, 1996, the
portion of the Company's loan portfolio previously sub-serviced was
transferred to the Company.
The Company's loan servicing software also allows the Company to track and
maintain hazard insurance information. Periodic expiration reports list all
policies scheduled to expire within 30 days. When policies lapse, a letter is
issued advising the borrower of the lapse and that the Company will obtain
force placed insurance at the borrower's expense. Additionally, the Company
has a blanket insurance policy in place that provides coverage for the Company
in the event that the Company fails to obtain force placed insurance in a
timely manner upon expiration of the homeowner's policy.
44
<PAGE>
The following table provides data on delinquency experience and REO
Properties for the Company's Servicing Portfolio.
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
-------------------- -------------------- --------------------
(DOLLARS % OF (DOLLARS % OF (DOLLARS % OF
IN SERVICING IN SERVICING IN SERVICING
THOUSANDS) PORTFOLIO THOUSANDS) PORTFOLIO THOUSANDS) PORTFOLIO
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Servicing Portfolio..... $555,685 100.00% $613,791 100.00% $611,718 100.00%
-------- ------ -------- ------ -------- ------
30-59 days delinquent... $ 6,084 1.1% $ 8,339 1.4% $ 11,800 1.9%
60-89 days delinquent... 4,471 0.8 6,538 1.0 5,166 0.8
90 days or more 13,589 2.4 21,002 3.4 21,800 3.6
delinquent............. -------- ------ -------- ------ -------- ------
Total delinquencies..... $ 24,144 4.3% $ 35,879 5.8% $ 38,766 6.3%
REO (1)................. $ 3,386 0.6% $ 7,854 1.3% $ 8,677 1.4%
</TABLE>
- --------
(1) Includes REO of the Company as well as REO of the REMIC Trusts and
serviced by the Company; however, excludes private investor REO not
serviced by the Company.
The following table provides data on loan loss experience on the Company's
loans (in thousands).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE QUARTER
DECEMBER 31, 1994 DECEMBER 31, 1995 ENDED MARCH 31, 1996
------------------ ------------------ --------------------
<S> <C> <C> <C>
Average Servicing
Portfolio balance
outstanding (1) $470,628 $584,738 $612,755
Net losses (2).......... 44 169 465
As a percent of average
Servicing Portfolio
balance outstanding.... .01% .03% .08%
</TABLE>
- --------
(1) Average Servicing Portfolio balance equals the average of the Servicing
Portfolio balance at the beginning and ending period.
(2) Net losses means actual net losses realized with respect to the
disposition of the REO.
Foreclosure
Regulation and practices in the United States regarding the liquidation of
properties (e.g., foreclosure) and the rights of the mortgagor in default vary
greatly from state to state. Loans originated by the Company are secured by
mortgages, deeds of trust, trust deeds, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action and/or non-judicial sale, and is subject to
various notice and filing requirements. If foreclosure is effected by judicial
action, the foreclosure proceedings may take several months.
In general, the borrower, or any person having a junior encumbrance on the
real estate, may cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation during a statutorily prescribed reinstatement period. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorneys' fees, which may be recovered by a lender.
There are a number of restrictions that may limit the Company's ability to
foreclose on a property. A lender may not foreclose on the property securing a
junior mortgage loan unless it forecloses subject to each senior mortgage, in
which case the junior lender or purchaser at such a foreclosure sale will take
title to the property subject to the lien securing the amount due on the
senior mortgage. Moreover, if a borrower has filed for bankruptcy protection,
a lender may be stayed from exercising its foreclosure rights. Also, certain
states provide
45
<PAGE>
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 twelve states
through its 19 retail branch offices. The Company believes that its strategy
of originating loans through an extensive retail branch office network
represents the most profitable loan origination strategy due to the
significant level of loan origination fees earned by the Company.
Additionally, such a strategy allows the Company to maintain its underwriting
quality standards when compared to competitors using independent mortgage
brokers. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Although the Company is licensed to originate loans in twelve states, it has
historically concentrated its business in California. While this concentration
has declined, California remains a significant part of the Company's business
and has contributed 44.0% and 43.0% of the Company's total loan originations
and purchases for the quarter ended March 31, 1996 and year ended December 31,
1995, respectively. Six of the retail branch offices are in California's major
metropolitan areas. Expansion outside California began in late 1994. The
number of retail branch offices within California has declined from a
historical high of 11 in 1992 to six at June 30, 1996.
46
<PAGE>
The following table shows the geographic distribution of the Company's loan
originations and purchases for the periods indicated.
GEOGRAPHIC DISTRIBUTION OF LOAN ORIGINATIONS AND PURCHASES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
----------------------- -----------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
States
California......... 94.3% 43.0% 51.0% 44.0%
Illinois........... -- 14.1 8.7 14.7
Washington......... 3.4 14.9 23.1 11.3
Florida............ 0.1 8.1 0.4 8.2
Colorado........... 0.4 6.7 6.6 5.4
Oregon............. 0.2 5.9 5.2 6.1
Utah............... -- 2.5 0.1 4.9
Arizona............ 0.1 1.7 -- 2.8
Georgia............ 0.2 2.7 3.6 1.7
Others............. 1.3 0.4 1.3 0.9
----------- ----------- ----------- -----------
Total: .......... 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== ===========
</TABLE>
Nationwide and International Geographic Expansion
The Company intends to expand its existing retail branch network in selected
states on a nationwide basis. The Company currently plans to open at least
four new retail branches per year. The Company has also recently organized a
subsidiary under the laws of the United Kingdom to pursue retail originations
and wholesale purchases in the United Kingdom. The Company's expansion
strategy involves (i) identifying areas with demographic statistics that are
comparable to existing markets where the Company has been successful in
originating loans, (ii) understanding each new market's regulatory
requirements and tailoring the Company's loan programs and practices to comply
with such requirements and (iii) identifying and training branch managers and
loan officers for each new retail branch office.
The Company believes that its products and services are best suited for
those housing markets with home values near the national averages. After
identifying a potential new market, the Company contracts with regional or
national companies to gather publicly available information with respect to
such market and to integrate such information with the Company's proprietary
marketing methodology. These companies produce a list of Targeted Homeowners
that the Company believes, based on its historic customer profile, are more
likely to utilize the Company's products and services and satisfy the
Company's underwriting guidelines than the average homeowner. The Company then
focuses its marketing efforts in the new market on the Targeted Homeowners
identified on the list.
The Company has generally entered short term leases for the offices and
purchased the equipment and materials necessary to start a new retail branch.
The Company has usually recruited and hired the personnel required to staff
the retail branch office from the new market. Managers of new branches are
generally managers of existing branches or loan officers promoted from
existing retail branch offices. Personnel from headquarters or individuals
with previous experience at the Company's branches spend some time at the new
branch training the new personnel. The Company plans to continue these
practices in any future expansion.
COMPETITION
As a consumer finance company, the Company faces intense competition.
Traditional competitors in the financial services business include other
mortgage banking companies, mortgage brokers, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies. Many of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and
47
<PAGE>
marketing resources than the Company. Competition can take many forms
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, loan origination fees, and
interest rates. In addition, the current level of gains realized by the
Company and its existing competitors on the sale of loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales owing to increased loan origination competition.
The Company believes that it is able to compete on the basis of providing
prompt and responsive service, consistent underwriting and competitive loan
programs to borrowers whose needs are not met by Conventional Leading
Institutions.
REGULATION
The Company's business is subject to extensive regulation at both the
Federal and state level. Regulated matters include loan origination, credit
activities, maximum interest rates and finance and other charges, disclosure
to customers, the terms of secured transactions, the collection, repossession
and claims handling procedures utilized by the Company, multiple qualification
and licensing requirements for doing business in various jurisdictions and
other trade practices.
TRUTH IN LENDING. The Truth in Lending Act ("TILA") and Regulation Z
promulgated thereunder contain certain disclosure requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of loans and credit transactions in order to give them
the ability to compare credit terms. TILA also guarantees consumers a three
day right to cancel certain credit transactions including loans of the type
originated by the Company. Management of the Company believes that it is in
compliance with TILA in all material respects. If the Company were found not
to be in compliance with TILA, aggrieved borrowers could have the right to
rescind their loans and to demand, among other things, the return of finance
charges and fees paid to the Company.
In September 1994, the Riegle Act was enacted. Among other things, the
Riegle Act makes certain amendments to TILA (the "TILA Amendments"). The TILA
Amendments generally apply to mortgage loans (other than mortgage loans to
finance the acquisition or initial construction of a dwelling) with (i) total
loan origination fees and other fees upon origination in excess of the greater
of eight percent of the total loan amount or a certain dollar amount
(currently $400) or (ii) an annual percentage rate of more than ten percentage
points higher than comparably maturing U.S. treasury securities ("Covered
Loans"). The Company estimates that substantially all of the loans currently
originated or purchased by the Company are Covered Loans.
The TILA Amendments impose additional disclosure requirements on lenders
originating Covered Loans and prohibit lenders from engaging in a pattern or
practice of originating Covered Loans that are underwritten solely on the
basis of the borrower's home equity without regard to the borrower's ability
to repay the loan. As the Riegle Act became effective on October 1, 1995, the
Company believes 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.
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
48
<PAGE>
restrictions on balloon payments and negative amortization features, which the
Company does not believe will have a material impact on its operations.
OTHER LENDING LAWS. The Company is also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on certain prohibited bases, including
race, color, religion, national origin, sex, age or marital status. Regulation
B promulgated under ECOA restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. In addition,
the Company is subject to the Fair Housing Act and regulations thereunder,
which broadly prohibit certain discriminatory practices in connection with the
Company's business. The Company is also subject to the Real Estate Settlement
Procedures Act of 1974, as amended, and the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
such laws, as well as with the laws described above, may result in civil and
criminal liability.
INSURANCE REGULATORY LAWS. As a condition to funding of its loans, the
Company requires each borrower to obtain and maintain in force a policy of
insurance providing coverage for improvements on any real property securing
the borrower's loan. If the borrower fails to provide such coverage prior to
closing of the borrower's loan or if the borrower's coverage is subsequently
cancelled or nonrenewed at any time during the loan period and the borrower
fails to obtain new coverage, the Company will provide coverage on the
borrower's behalf under policies insuring the Company's interest in the
collateral. Such practice is commonly referred to a "forced placement" of
insurance. The Company receives a fee in connection with its placement of such
insurance in California, which activity is not required to be licensed.
Historically, the Company also received a fee in connection with the placement
of such insurance outside California. While the Company does not believe that
it was required to be licensed in connection with such activity, a state
insurance regulator or a court could take a different interpretation.
Insurance which is force placed is subject to regulation under TILA, the
National Flood Insurance Act, and state insurance regulatory and lender
statutes. Such laws and regulations generally impose disclosure and notice
requirements which must be satisfied prior to forced placement of coverage,
limitations on the amount of coverage that a lender may obtain to protect its
interest in the collateral and restrictions on fees and charges that the
Company may assess in connection with such insurance.
In addition, in the state of California only, the Company provides insurance
agency services with respect to credit life insurance and credit disability
insurance. The Company's sale of these insurance products in California is
subject to statutes and regulations in that state applicable to insurance
producers.
Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil penalties on the Company,
class action lawsuits and administrative enforcement actions.
UNITED KINGDOM REGULATIONS. A portion of the Company's mortgage banking
business in the United Kingdom is subject to regulations promulgated under the
United Kingdom Consumer Credit Act 1974 (the "CCA") applicable to loans made
to individuals or partnerships with principal balances of (Pounds)15,000 or
less. Loans with principal balances in excess of (Pounds)15,000 are not
currently regulated within the United Kingdom. The CCA and regulations
promulgated thereunder, among other things, impose licensing obligations on
the Company's English subsidiaries, set down certain requirements relating to
the form, content, legibility, execution and delivery of loan documents,
restrict communication with the borrower prior to completion of a transaction,
require information and notice of enforcement to be given to the borrower,
require rebates to the borrower on
49
<PAGE>
early settlement and create a cause of action for "extortionate credit
bargains." A license is required to service loans in the United Kingdom
irrespective of the size of the loan. Failure to comply with the requirements
of these rules and regulations can result in the revocation or suspension of
the license to do business and render the mortgage unenforceable in the
absence of a court order.
The Company's planned operations in the United Kingdom will involve loans
with principal balances in excess of (Pounds)15,000 and will therefore be
largely unregulated.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean up activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future.
In the course of its business, the Company has acquired and may acquire in
the future properties securing loans that are in default. Although the Company
primarily lends to owners of residential properties, there is a risk that the
Company could be required to investigate and clean up hazardous or toxic
substances or chemical releases at such properties after acquisition by the
Company, and may be held liable to a governmental entity or to third parties
for property damage, personal injury and investigation and cleanup costs
incurred by such parties in connection with the contamination. In addition,
the owner or former owners of a contaminated site may be subject to common law
claims by third parties based on damages and costs resulting from
environmental contamination emanating from such property.
EMPLOYEES
As of May 31, 1996, the Company had a total of 322 employees. The Company
has 186 employees working at its corporate headquarters. None of the Company
employees are covered by a collective bargaining agreement. The Company
considers its relations with its employees to be good.
PROPERTIES
The Company's corporate headquarters are located at 17305 Von Karman Avenue,
Irvine, California 92714-6203, where the Company leases from a partnership
beneficially owned by Brian and Sarah Chisick approximately 40,000 square feet
of office space. See "Certain Transactions--Lease of Corporate Headquarters."
The lease expires on January 31, 2003, and the Company has an option to renew
the lease for five years. The Company also leases office space for its 19
retail branch offices in 12 states. The average size of these retail branch
offices is approximately 1,700 square feet, with an annual average base rent
of approximately $32,000. The Company believes its facilities are both
suitable and adequate for the current business activities conducted at its
corporate headquarters and at its existing retail branch offices.
LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse affect
on the results of operations or financial condition of the Company.
In December 1989, Edward and Rosa Dunning filed on behalf of certain
borrowers a class action suit related to the origination of loans by the
Company. The suit was filed in the Superior Court of California in the County
of Alameda. The plaintiffs alleged that disclosure statements given to them by
the Company were insufficient under the Truth-in-Lending Act. Plaintiffs
sought declaratory and injunctive relief as well as monetary damages. The
Company, in order to avoid the cost of continued litigation and without
admitting to any wrong-doing, agreed to settle the case in December 1994. The
terms of the settlement provide cash distributions to the plaintiffs in the
amount of $6,850,000, which is to be paid out over a three-year period and
secured by a pledge of cash collateral. As of March 31, 1996, remaining future
payments to plaintiffs totaled approximately $1,833,000.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors is divided into three classes: Class I, Class II and
Class III. After his or her initial term, each director serves for a term
ending following the third annual meeting following the annual meeting at
which such director is elected and until his or her successor is elected. The
terms of office of directors in Class I, Class II and Class III end after the
annual meetings of stockholders of the Company in 1997, 1998 and 1999,
respectively. The following table sets forth the name, age and position with
the Company of each person who is an executive officer or director of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY CLASS
---- --- -------------------------- -----
<C> <C> <S> <C>
Brian Chisick......................... 57 President, Chief Executive
Officer and Director II
Sarah Chisick......................... 55 Vice President and Director II
Jeffrey W. Smith...................... 34 Executive Vice President,
Sales and Marketing
and Future Director I
Mark K. Mason......................... 37 Executive Vice President,
Chief Financial Officer
and Future Director I
Randall K. McPhillips................. 38 Vice President, Portfolio
Refinancing Operations
John M. Michel........................ 37 Vice President, Finance
Peggy A. Tom.......................... 54 Vice President,
Foreclosure, Legal and
Collections
Bruce Bollong......................... 48 Vice-President,
Administration
Patricia G. Sullivan.................. 50 Vice President, Staff
Development
Catalina Alvarez...................... 44 Vice President, Processing
and Disbursement
Beverly Allen......................... 43 Vice President, Loan
Servicing
Merrill Butler........................ 71 Future Director III
George Gibbs, Jr. .................... 65 Future Director III
Albert L. Lord........................ 50 Future Director III
</TABLE>
Each individual named as a Future Director in the foregoing table has been
elected as a Director of the Company effective upon the completion of the
Public Offering and has consented to be named as such.
The name and business experience during the past five years of each director
and executive officer of the Company are described below.
Brian Chisick has been the Chairman of the Board, Chief Executive Officer
and President of the Company since its founding in 1971. Mr. Chisick has held
a real estate broker's license since 1971. In 1985, Mr. Chisick was Vice
President of the Mortgage Brokers Institute, a statewide trade association of
over 120 mortgage brokers and served as a member of the legislative committee
of the Mortgage Brokers Institute.
Sarah Chisick has been Vice President and a Director of the Company since
1971. Her duties have in the past included projects in the loan servicing,
foreclosure, marketing and investment departments. She is not currently
involved in the day to day operations of the Company.
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.
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
51
<PAGE>
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.
Randall K. McPhillips has been with the Company since 1982. Mr. McPhillips
has worked as a Loan Officer, Branch Manager, Regional Sales Manager, and
became a Vice President in 1987. Currently, Mr. McPhillips is responsible for
the Portfolio Refinancing Operations of the Company.
John M. Michel, a certified public accountant, has been Vice President,
Finance of the Company since April 1996. From 1995 to April 1996, Mr. Michel
was Senior Vice President and Director of Corporate Planning for Fidelity
Federal Bank. From 1989 to 1995, he was Vice President of Finance and
Accounting for Akins Companies, a diversified company in the residential
property development business.
Peggy A. Tom has been Vice President of the Foreclosure, Legal and
Collections departments of the Company since 1982. From 1982 to 1996, Ms. Tom
was a Director of the Company.
Bruce Bollong has been Vice President, Administration of the Company since
1995. From 1985 to 1995, Mr. Bollong was Vice President, Finance of the
Company.
Patricia G. Sullivan has been Vice President, Staff Development since
September 1993. From 1990 to 1993, Ms. Sullivan was the Company's Sales
Manager.
Catalina Alvarez has been Vice President, Processing and Disbursement, of
the Company, since 1993. From 1982 to 1993, Ms. Alvarez was manager of the
Company's Processing and Disbursement Department.
Beverly Allen has been Vice President, Loan Servicing of the Company since
1993. From 1976 to 1993, Ms. Allen was Manager, Loan Servicing.
The following future directors, Merrill Butler, George Gibbs, Jr. and Albert
L. Lord, are not affiliated with the Company.
Merrill Butler has agreed to become a Director of the Company immediately
prior to the completion of the Public Offering. Mr. Butler formed Merrill
Butler, Inc., in 1983 to consult with savings and loans on real estate
matters. During 1995, Mr. Butler served on the Volunteer Executive Team
organized to advise Orange County, California after the County had declared
bankruptcy. Mr. Butler was a co-creator of the Butler Popejoy Group, a general
partnership, which, from 1992 to 1994, capitalized home builders with equity
funds to develop entry level housing projects. Mr. Butler served from 1986 to
1989 as the President, Chief Executive Officer, and, in 1988, as the Chairman
of the American Real Estate Group. From 1955 to 1983, Mr. Butler was President
of his own home building and development companies, which developed 12,500
homes, apartments, etc., in Southern California and Arizona. Mr. Butler is
also a past director of the Federal National Mortgage Association (Fannie Mae)
and a former member of both the Advisory Committee of the Federal Home Loan
Mortgage Corporation (Freddie Mac) and the Federal Savings & Loan Advisory
Council to the Federal Home Loan Bank Board. Mr. Butler was also a United
States delegate to the United Nations for the European Economic Commission on
Housing. Mr. Butler has previously served on the Boards of Directors of
Financial Corporation of America, American Savings and Loan, The Commodore
Corporation, Far Western Bank, National Association of Home Builders and the
Building Industry Association of Southern California.
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
52
<PAGE>
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).
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Promptly following the closing of the Public Offering, the
Board of Directors will establish an audit committee (the "Audit Committee").
The Audit Committee, among other things, will make recommendations to the
Board concerning the engagement of independent public accountants; monitor and
review the quality and activities of the Company's internal audit function and
those of its independent accountants; and monitor the adequacy of the
Company's operating and internal controls as reported by management and the
independent or internal auditors. The members of the Audit Committee are
anticipated to be Messrs. Lord, Gibbs and Smith.
Compensation Committee. Promptly following the closing of the Public
Offering, the Board of Directors will establish a compensation committee (the
"Compensation Committee"). The Compensation Committee, among other things,
will review salaries, benefits and other compensation, excluding stock based
compensation, of Directors, officers and other employees of the Company and
make recommendations to the Board. The members of the Compensation Committee
are anticipated to be Messrs. Gibbs, Butler and Chisick. Mr. Chisick will not
vote on any matters affecting his or Mrs. Chisick's compensation.
Stock Incentive Committee. Promptly following the closing of the Public
Offering, the Board of Directors will establish a stock incentive committee
(the "Stock Incentive Committee"). The Stock Incentive Committee will be
authorized to make stock based compensation grants under a stock incentive
plan to be adopted (See "Management--1996 Stock Incentive Plan"). The members
of the Stock Incentive Committee are anticipated to be Mr. and Mrs. Chisick.
Except for grants that are approved by a majority of the disinterested members
of the Compensation Committee, no member of the Stock Incentive Committee will
be eligible to participate in the Stock Incentive Plan.
NON-EMPLOYEE DIRECTORS COMPENSATION
Non-employee directors of the Company receive an annual retainer of $15,000,
a committee chair retainer of $1,500, a meeting fee of $1,000 and are
reimbursed for reasonable expenses incurred in connection with attendance at
Board of Directors' meetings or committee meetings. A meeting fee of $500 will
be paid to non-employee directors for telephonic meetings of 30 minutes or
less. Immediately prior to the effective date of the Registration Statement of
which this Prospectus constitutes a part, the Company intends to grant options
to its non-employee directors under the 1996 Stock Incentive Plan to purchase
an aggregate of 112,500 shares of Class A Common Stock at an exercise price
equal to the offering price. See "Management--1996 Stock Incentive Plan."
53
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and long-
term compensation earned by the Company's chief executive officer and each of
the four other most highly compensated executive officers whose annual salary
and bonus during the fiscal years presented exceeded $100,000 (the "Named
Executive Officers").
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
--------------------------- ------ -------- ----------
<S> <C> <C> <C>
Brian Chisick.................................... 1995 $288,000 $ 500,000
President & CEO 1994 288,000 --
1993 288,000 3,000,000
Randall K. McPhillips............................ 1995 332,118 10,000
Vice President, Portfolio Refinancing 1994 373,920 110,000
1993 245,536 50,000
Jeffrey W. Smith................................. 1995 167,259 30,000
Executive Vice President, Marketing 1994 155,780 45,000
1993 122,984 20,000
Patricia G. Sullivan............................. 1995 166,232 10,000
Vice President, Staff Development 1994 166,232 20,000
1993 157,003 26,000
Bruce E. Bollong................................. 1995 120,083 10,000
Vice President, Administration 1994 133,356 20,000
1993 109,808 20,000
</TABLE>
- --------
Employment Agreements
Chisick Agreement
The Company has entered into an employment agreement with Mr. Chisick
providing for an initial term of three years, subject to automatic three-year
renewal unless either party provides notice of an intention not to renew.
Under this Agreement, Mr. Chisick will receive an annual salary of $395,000,
subject to annual increases (but not decreases) and bonuses as may be
determined by the Board of Directors, as well as certain other benefits
including medical, insurance, death and disability benefits, use of an
automobile and reimbursement of employment related expenses.
Mason Agreement
The Company has entered into an employment agreement with Mr. Mason. The
employment agreement provides for an indefinite employment term beginning on
October 1, 1995. The Company or Mr. Mason may terminate the employment
agreement at any time. Under the terms of the employment agreement, Mr. Mason
is entitled to receive an annual salary of at least $240,000, subject to
annual increases (but not decreases) as determined by the Board of Directors.
Pursuant to the employment agreement Mr. Mason was granted, on May 3, 1996,
107,500 shares of Class B Common Stock under the Company's Stock Incentive
Plan (after giving effect to a May 1996 stock split), representing 1% of the
total issued and outstanding shares of Class B Common Stock, subject to
vesting. Approximately 24% of these shares will vest upon the closing of the
Public Offering and the remaining shares, to the extent not vested, will vest
in 20% increments over 5 years beginning October 1, 1995 (subject to
acceleration upon certain conditions). In the event that Mr. Mason's vested
shares of Class B Common Stock are not freely tradeable under applicable
Federal and state securities laws, Mr. Mason is entitled to sell such vested
shares of Class B Common Stock to the Company for the fair value of such stock
at that time. Additionally, in the event that vested shares are not publicly
traded at the termination date of the agreement, the Company has a right of
first refusal to purchase such shares for the fair value of such stock at that
time.
54
<PAGE>
1996 STOCK INCENTIVE PLAN
The Company has established a stock incentive plan (the "Stock Incentive
Plan") to enable directors, executive officers, independent contractors and
other key employees of the Company, to participate in the ownership of the
Company. The Stock Incentive Plan covers 750,000 shares of Class A Common
Stock. The initial issuance under the Stock Incentive Plan consisted of
107,500 shares of Class B Common Stock issued to Mark K. Mason. See
"Management--Executive Compensation--Mason Employment Agreement." Immediately
prior to the effectiveness of the Registration Statement of which this
Prospectus constitutes a part, the Company intends to grant options to acquire
an aggregate of 510,000 shares of Class A Common Stock. These options will
vest 25% six months from the date of grant and 25% each year thereafter until
fully vested and expire on the earlier of ten years from the date of grant or
90 days after a holder's termination of service. The Stock Incentive Plan is
designed to attract and retain directors, executive officers, independent
contractors and other key employees of the Company. The Stock Incentive Plan
provides for the award to eligible employees of the Company of a broad variety
of stock-based compensation alternatives such as non-qualified stock options,
incentive stock options, restricted stock and performance awards.
The Stock Incentive Plan will be administered by the Stock Incentive
Committee, which is authorized to select from among the eligible participants
the individuals to whom options, restricted stock purchase rights and
performance awards are to be granted and to determine the number of shares to
be subject thereto and the terms and conditions thereof. The Stock Incentive
Committee is also authorized to adopt, amend and rescind the rules relating to
the administration of the Stock Incentive Plan. Except for grants that are
approved by a majority of the disinterested members of the Compensation
Committee, no member of the Stock Incentive Committee will be eligible to
participate in the Stock Incentive Plan.
Non-qualified stock options granted to the employee directors, officers and
employees will provide for the right to purchase shares of Class A Common
Stock at a specified price which may be less than fair market value on the
date of grant, and usually will become exercisable in installments after the
grant date. Non-qualified stock options may be granted to employee directors,
officers, employees and consultants for any reasonable term.
Incentive stock options will be designed to comply with the provisions of
the Code and will be subject to restrictions contained in the Code, including
a requirement that exercise prices are equal to at least 100% of fair market
value of the shares of Class A Common Stock on the grant date and a ten-year
restriction on the option term, but may be subsequently modified to disqualify
them from treatment as incentive stock options. Under the Stock Incentive Plan
and the Code, non-employee directors are not permitted to receive incentive
stock options.
55
<PAGE>
CERTAIN TRANSACTIONS
LEASE OF CORPORATE HEADQUARTERS
The Company leases approximately 40,000 square feet of office space for its
corporate headquarters from MJB Associates, a California limited partnership
of which Borgi-Hesis, Inc. is the general partner. Brian Chisick is the
President of Borgi-Hesis, Inc., and Brian and Sarah Chisick are the beneficial
owners of Borgi-Hesis, Inc. The lease agreement provides for an aggregate
annual rent payment in 1996 of approximately $464,000. The term of the lease
expires on January 31, 2003, at which time the Company has an option to renew
the lease for additional period of five years.
STOCKHOLDER NOTES
During 1995, the Company paid $223,000 in interest payments to Brian and
Sarah Chisick, under the terms of a note with a principal amount of $4.5
million. The interest rate on such note was 10% per annum. Such note was paid
in full in 1995.
In addition, the Company borrowed $1.5 million from Brian and Sarah Chisick
on January 30, 1996. The note evidencing this debt, which was repaid in full
in May 1996, had an interest rate of 10% per annum.
The Company has from time to time borrowed from affiliates to fund certain
distributions to shareholders, however, the Company does not intend to borrow
from its affiliates in the future.
TRANSACTIONS WITH NATIONSCAPITAL MORTGAGE CORPORATION AND COAST SECURITY
MORTGAGE, INC.
Primarily to increase the volume of its Securitizations, the Company
purchases loans originated by certain brokers that are controlled by the sons
of Brian and Sarah Chisick.
Pursuant to an agreement between the Company and Nationscapital Mortgage
Corporation ("Nationscapital"), the Company purchased on a servicing released
basis, $215,000 of loans from Nationscapital during 1995. Jamie Chisick and
Brad Chisick are the President and majority shareholder, and the Vice
President and minority shareholder, of Nationscapital, respectively, and the
sons of Brian and Sarah Chisick.
Pursuant to an agreement between the Company and Coast Security Mortgage
Inc. ("Coast Security"), the Company purchased on a servicing released basis,
$9.8 million of loans from Coast Security during 1995. Mark Chisick and Brad
Chisick are the President and majority shareholder, and the Vice President and
a minority shareholder, of Coast Security, respectively, and the sons of Brian
and Sarah Chisick.
The Company's purchases of the loans originated by Nationscapital and Coast
Security are documented by agreements similar to those entered into with
unaffiliated entities. In the future, the Company intends to purchase from
such related parties only loans that meet the Company's criteria for
Securitization. Certain deferred premiums on such loans remain payable by the
Company to Nationscapital and Coast Security and will become due upon the
Securitization by the Company of such loans.
Coast Security's outstanding balance pursuant to a line of credit with the
Company was $335,000 and $525,000 at March 31, 1996 and December 31, 1995
respectively. The line of credit bears an interest rate of 10.0% per annum.
The line of credit was terminated on June 30, 1996.
During the 1996 quarter and the 1995 year, the Company received fees of
$72,000 and $234,000 from Nationscapital and $72,000 and $481,000 from Coast
Security, respectively, from the sale of marketing lists. The fees, which were
consistent with those charged to unaffiliated third-parties, reflected
payments to the Company for customer lists developed by the Company in its
marketing efforts but with respect to which the potential customers did not
fit the Company's lending criteria or the Company had not been able to
originate
56
<PAGE>
loans. Nationscapital and Coast Security may utilize this information and
originate loans, and, if such loans satisfy the Company's underwriting
guidelines, the Company may purchase such loans.
SERVICING OF CERTAIN LOANS
During 1995, the Company serviced mortgage loans for certain related parties
for which no service fees were charged. At March 31, 1996, the outstanding
balances of such loans serviced on behalf of Brian Chisick, Brad Chisick, Mark
Chisick, Jamie Chisick and Randall K. McPhillips were $7.2 million, $716,000,
$311,000, $345,000 and $145,000, respectively. Brad, Mark and Jamie Chisick
are the sons of Brian and Sarah Chisick. Due to the related party nature of
this servicing, upon the completion of the Public Offering, the Company will
charge such related parties servicing fees consistent with the servicing fees
charged by third parties for such services.
OTHER TRANSACTIONS
During 1995, the Company purchased on a servicing released basis, $15.1
million of loans from a subsidiary of First Alliance Securities Corporation, a
company wholly owned by Brian and Sarah Chisick. These affiliate purchases
were made pursuant to written agreements similar to those entered into with
unaffiliated entities. The Company ceased purchasing loans from this entity in
May 1995 due to the permanent cessation of lending operation by First Alliance
Securities Corporation and that subsidiary.
The Company paid $76,000 during 1995 to Orange Coast Computer Services as
reimbursement for expenses advanced on behalf of the Company during 1995.
Brian and Sarah Chisick beneficially own Orange Coast Computer Services.
During 1995, the Company received fees of $146,000 from the sale of
marketing lists to a corporation that is no longer in existence and that was
beneficially owned by Brian and Sarah Chisick. The fees were consistent with
those charged to unaffiliated third parties.
During the quarter ended March 31, 1996 and the year 1995, the Company sold
loans in the amounts of $0.3 million and $3.2 million, respectively, to Brian
Chisick. Due to the related party nature of such transactions, upon the
completion of the Public Offering, the Company will no longer sell loans to
Brian Chisick or any of his affiliates.
Brian and Sarah Chisick have recently formed two corporations in the United
Kingdom for the purposes of initiating retail and wholesale loan operations,
and a California corporation for the purpose of providing accounting,
financial and computer services to the Company. All outstanding shares of
capital stock of such corporations will be contributed to the Company
immediately prior to the consummation of the Public Offering.
FUTURE AFFILIATED OR RELATED PARTY TRANSACTIONS
At this time, the Company anticipates that following the completion of the
Public Offering, its transactions with affiliated or related parties will be
limited to the Company's relationships with Nationscapital and Coast Security.
The Company's Bylaws require that all transactions between the Company and the
Chisick Family or its affiliates must be approved by a majority of the
independent directors.
57
<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(4)
------------------ ------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
- --------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Brian and Sarah Chisick (2).............. 10,642,500 99.0% 10,642,500 74.7%
Mark K. Mason (3)........................ 107,500 1.0% 107,500 .7%
All directors and executive officers as a
group................................... 10,750,000 100.0% 10,750,000 75.4%
</TABLE>
- --------
(1) Unless otherwise indicated and subject to community property laws where
applicable, each of the stockholders named in this table has sole voting
and investment power with respect to the shares shown as beneficially
owned by it. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options and warrants. Each beneficial
owner's percentage ownership is determined by assuming that options that
are held by such person (but not those held by any other person) and that
are exercisable within 60 days from the date of this Prospectus have been
exercised.
(2) Includes shares held by The Chisick Trust No. 1 U/D/T 3-30-96 and The
Chisick Trust No. 2 U/D/T 3-30-96, of which Brian Chisick is the sole
trustee, and the Brian and Sarah Chisick Revocable Trust U/A 3-7-79, of
which Brian and Sarah Chisick are the trustees.
(3) Represents restricted shares of Class B Common Stock subject to a vesting
schedule. See Management-- Executive Compensation--Mason Employment
Agreement."
(4) Assumes no exercise of the Underwriters' over-allotment option.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 1,000,000 shares
of preferred stock, $.01 par value ("Preferred Stock"), (ii) 25,000,000 shares
of Class A common stock, $.01 par value (the "Class A Common Stock") and
15,000,000 shares of Class B common stock, $.01 par value (the "Class B Common
Stock" or, together with the Class A Common Stock, the "Common Stock").
COMMON STOCK
As of the date hereof, there are no shares of Class A Common Stock
outstanding and 10,750,000 shares of Class B Common Stock outstanding. All of
the outstanding Class B Common Stock is beneficially owned by the Chisick
Family and Mark K. Mason. Upon completion of the Public Offering, there will
be 3,500,000 shares of Class A Common Stock and 10,750,000 shares of Class B
Common Stock outstanding (assumes no exercise of the Underwriters' over-
allotment option). The issued and outstanding shares of Class A Common Stock
and Class B Common Stock have been, and the shares of Class A Common Stock
offered hereby will be, duly authorized, validly issued, fully paid and
nonassessable.
Holders of Class A Common Stock are entitled to one vote for each share held
of record, and holders of Class B Common Stock are entitled to four votes for
each share held of record. The Class A Common Stock and the Class B Common
Stock vote together as a single class on all matters submitted to a vote of
stockholders (including the election of directors which will be by proxy),
except that, (i) in the case of a proposed amendment to the Company's
Certificate of Incorporation that would alter the powers, preferences or
special rights of either the Class A Common Stock or the Class B Common Stock,
the class of Common Stock to be altered shall vote
58
<PAGE>
on the amendment as a separate class and (ii) in the case of a proposed
issuance of Class B Common Stock, such issuance will require the affirmative
vote of the holders of a majority of the outstanding shares of Class B Common
Stock. Shares of Common Stock do not have cumulative voting rights with
respect to the election of directors. Immediately after the Public Offering,
the Chisick Family will hold shares of Class B Common Stock constituting
approximately 91.6% of the voting power of the outstanding Common Stock, which
will allow them to control all actions to be taken by the stockholders,
including the election of all directors to the Board of Directors. While the
Chisick Family will have the voting power to control the votes on any matter
requiring stockholder approval, the Company intends to submit all such matters
to a vote of all stockholders. However, because the Company's Certificate of
Incorporation provides that any action that can be taken at a meeting of the
stockholders may be taken by written consent in lieu of the meeting if the
Board of Directors of the Company has approved the action and the Company
receives consents signed by stockholders having the minimum number of votes
that would be necessary to approve the action at a meeting at which all shares
entitled to vote on the matter were present, the Chisick Family, assuming
approval by the Board of Directors, may take all actions required to be taken
by the stockholders without providing the other stockholders the opportunity
to make nominations or raise other matters at a meeting. See "Principal
Stockholders" and "Risk Factors-Anti-Takeover Effect of Capital Structure;
Voting Control of Company."
Each share of Class A Common Stock and Class B Common Stock will be equal in
respect of dividends and other distributions in cash, stock or property
(including distributions upon liquidation of the Company and consideration to
be received upon a merger or consolidation of the Company or a sale of all or
substantially all of the Company's assets), except that in the case of
dividends or other distributions pursuant to stock splits or dividends, only
shares of Class A Common Stock will be distributed with respect to the Class A
Common Stock and only shares of Class B Common Stock will be distributed with
respect to Class B Common Stock, except if the Board of Directors determines
that shares of Class A Common Stock shall be distributed with respect to the
Class B Common Stock. In no event will either Class A Common Stock or Class B
Common Stock be split, divided or combined unless the other class is
proportionately split, divided or combined.
Holders of Common Stock do not have any preemptive rights or rights to
subscribe for additional securities of the Company. Shares of Common Stock are
not redeemable and there are no sinking fund provisions.
While the shares of Class A Common Stock are not convertible into any other
series or class of the Company's securities, each share of Class B Common
Stock is freely convertible into one share of Class A Common Stock at the
option of the Class B stockholder. All shares of Class B Common Stock shall
automatically convert to an equal number of shares of Class A Common Stock on
the earliest record date for an annual meeting of the Company's stockholders
on which the number of shares of Class B Common Stock outstanding is less than
10% of the total number of shares of Common Stock outstanding. Shares of Class
B Common Stock may not be transferred to third parties (except for transfers
to certain family members and in other limited circumstances). Any
impermissible transfer of shares of Class B Common Stock will result in the
automatic conversion of such shares.
Subject to the preferences applicable to Preferred Stock outstanding at the
time, holders of shares of Common Stock are entitled to dividends if, when and
as declared by the Board of Directors from funds legally available therefor,
and are entitled, in the event of liquidation, to share ratably in all assets
remaining after payment of liabilities and Preferred Stock preferences, if
any.
The Company's Board of Directors will have seven members following
completion of the Public Offering. Either the directors or the stockholders
may amend the Bylaws to change the size of the Board, subject to the
requirement in the Certificate of Incorporation that the entire Board must
consist of at least three and no more than 11 directors. After the initial
term, each director serves for a term ending following the third annual
meeting following the annual meeting at which such director is elected and
until his or her successor is elected. Any stockholder entitled to vote at a
meeting regarding the election of directors may nominate a person for election
as a director, provided that the stockholder gives the Company written notice
of the nomination at least 90 days
59
<PAGE>
before the meeting (or if later, the seventh day after the first public
announcement of the date of such meeting), which notice must contain specified
information about the stockholder and the nominee.
The Class A Common Stock has been approved for inclusion on the Nasdaq
National Market under the symbol "FACO."
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority to issue up to 1,000,000 shares of Preferred Stock
in one or more series with such designations, rights, preferences and voting
rights as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a way of
discouraging, delaying or preventing an acquisition or change in control of
the Company. The Company does not currently intend to issue any shares of its
Preferred Stock.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person became an interested stockholder unless: (i)
before that person became an interested stockholder, the Board approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon completion of the
transaction that resulted in the interested stockholders becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the Company outstanding at the time the transaction commenced
(excluding stock held by directors who are also officers of the Company and by
employee stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (iii) on or following the date on which that
person became an interested stockholder, the business combination is approved
by the Company's Board and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock of the Company not owned by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who was not an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if that extraordinary transaction is
approved or not opposed by a majority of the directors (but not less than one)
who were directors before any person became an interested stockholder in the
previous three years or who were recommended for election or elected to
succeed such directors by a majority of such directors then in office.
Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing
a change of control of the Company. Other than pursuant to the Public
Offering, the Company has no plan or arrangement for the issuance of any
shares of capital stock other than in the ordinary course pursuant to the
Stock Incentive Plan.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation provides that the stockholders
may act only in a meeting that has been duly called and noticed, except that
stockholders may approve by written consent any proposal that has already been
approved by the Board of Directors.
60
<PAGE>
The Company's Bylaws require stockholders to provide advance notice of any
stockholder nominations for director and of any business to be brought before
any meeting of stockholders. Stockholders are not entitled to cumulative
voting in connection with the election of directors. As a result, a person or
a group controlling the majority of shares of Common Stock can elect all of
the directors. Following the Public Offering, the Chisick Family will
beneficially own shares of Class B Common Stock constituting 91.6% of the
voting power of the issued and outstanding Common Stock. See "Principal
Stockholders" and "Risk Factors-Anti-Takeover Effect of Capital Structure."
TRANSFER AGENT
The transfer agent and registrar for the Class A Common Stock is American
Stock Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
25,000,000 shares of Class A Common Stock and 15,000,000 shares of Class B
Common Stock. Upon completion of the Public Offering, there will be
outstanding 3,500,000 shares of Class A Common Stock and 10,750,000 shares of
Class B Common Stock (assuming no exercise of the Underwriters' over-allotment
option).
The 3,500,000 shares of Class A Common Stock to be sold in the Public
Offering, which will constitute all of the outstanding shares of Class A
Common Stock (4,025,000 shares if the Underwriters' over-allotment option is
exercised in full) will be available for resale in the public market without
restriction or further registration under the Securities Act, except for
shares purchased by affiliates of the Company (in general, any person who has
a control relationship with the Company), which shares will be subject to the
resale limitations of Rule 144 promulgated under the Securities Act ("Rule
144"). All outstanding shares of Class B Common Stock are deemed to be
"restricted securities," as that term is defined in Rule 144, and are eligible
for sale in the public market in compliance with Rule 144. The Chisick Family
and Mark Mason have agreed, subject to certain exceptions, that they will not
offer, sell or otherwise dispose of any of the shares of Class B Common Stock
owned by them for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representative of the Underwriters;
provided that Mark Mason may sell, after December 29, 1996, up to 29,025
shares of Class B Common Stock, in order to pay certain Federal and state
income taxes. The Company has agreed, subject to certain limited exceptions,
not to offer, sell or otherwise dispose of any shares of Class A Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representative of the Underwriters.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years is entitled to sell, within any three-month period, a number of
shares which does not exceed the greater of 1% of the then-outstanding shares
of the Company's Class A Common Stock (35,000 shares immediately after the
Public Offering assuming no exercise of the Underwriters' over-allotment
option) or the average weekly trading volume of the Company's Class A Common
Stock during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. Sales under Rule 144 may also be subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the three months preceding a sale, and who has
beneficially owned shares within the definition of "restricted securities"
under Rule 144 for at least three years, is entitled to sell such shares under
Rule 144(k) without regard to the volume limitation, manner of sale
provisions, public information requirements or notice requirements.
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") through their Representative,
have severally agreed to purchase from the Company the following respective
number of shares of Class A Common Stock at the Public Offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.................................
Total Underwriters ( )............................................... 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the shares of the Class A Common Stock offered hereby if any
of such shares are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Class A Common Stock to the public at the
Public Offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the Public
Offering, the offering price and other selling terms may be changed by the
Representative of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 525,000
additional shares of Class A Common Stock at the Public Offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Class A Common Stock to
be purchased by it shown in the above table bears to 3,500,000 and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Class A Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 3,500,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). The Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities is asserted by the Underwriters
in connection with the shares of Class A Common Stock offered hereby, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of competent jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
62
<PAGE>
The Chisick Family and Mark K. Mason have agreed, subject to certain
exceptions, that they will not offer, sell or otherwise dispose of any of the
shares of Class B Common Stock owned by them for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Representative of the Underwriters; provided, however, that Mark Mason may
sell, after December 29, 1996, up to 29,025 shares of Class B Common Stock, in
order to pay certain Federal and State income taxes. See "Shares Eligible for
Future Sale."
The Representative of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Los Angeles, California. Certain legal matters will be passed
upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Newport Beach,
California.
EXPERTS
The statement of financial condition of First Alliance Corporation as of
June 30, 1996 included in this Prospectus, has been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and is included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of First Alliance Mortgage Company as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 included in this Prospectus, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
63
<PAGE>
FINANCIAL GLOSSARY
ASSET-BACKED SECURITIES: A general reference to securities that are backed
by financial assets, such as home equity, credit card or trade receivables,
equipment or automobile loans or leases.
CERTIFICATE INSURER: Monoline insurance company providing credit enhancement
by issuing insurance in favor of holders of Regular Interests in the REMIC
Trusts sponsored by the Company.
NET DEFERRED ORIGINATION FEES: Loan origination fees net of direct loan
origination costs which are deferred until the sale of the related loans.
PORTFOLIO REFINANCING ORIGINATIONS: Loan originations associated with
centralized marketing and sales efforts focused on the preservation of the
Company's existing portfolio through refinancing loans to borrowers who have
made inquiries of the Company regarding prepayment of existing loans.
REGULAR INTEREST: The senior interest in a REMIC Trust that represents the
right to receive scheduled pass-through interest and principal.
REMIC TRUST: A real estate mortgage investment conduit trust.
RESIDUAL INTERESTS: The subordinated interest in a REMIC Trust that
represents the right to receive certain excess cash flow generated by the
Securitized loans.
RETAIL BRANCH ORIGINATIONS: Loans originated through the Company's retail
branch network.
SECURITIZATION OR SECURITIZED: The process through which loans are pooled
and sold to a REMIC Trust that issues Regular Interests and the Residual
Interests to the Company in exchange for loans sold to the Trust.
SERVICING PORTFOLIO: The aggregate of all loans serviced by the Company.
WAREHOUSE FINANCING FACILITY: The Company's $125 million secured 90-day
revolving line of credit used to finance loan originations and purchases.
WAREHOUSING PERIOD: The period of time between the funding or purchase of a
mortgage loan and its sale.
64
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (File No. 333-3633) under the Securities Act with respect to the Class A
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Class A Common Stock, reference is hereby made to such Registration Statement
and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies
of the Registration Statement, including all exhibits thereto, can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 500 West Madison Street, Room
1400, Chicago, Illinois 60606 and at 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, Washington, D.C.
20549, at prescribed rates. The Commission also maintains a web site that
contains reports, proxy and information statements and other information
regarding Registrants that file electronically with the Commission, including
the Company, and the address is http://www.SEC.GOV.
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements and an opinion thereon expressed by
the Company's independent auditors as well as quarterly reports for the first
three fiscal quarters of each fiscal year containing unaudited consolidated
condensed financial statements. The Company also intends to provide annual
financial statements to each person to whom a copy of this Prospectus has been
delivered, upon the request of such person.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FIRST ALLIANCE CORPORATION:
Independent Auditors' Report........................................... F-2
Statement of Financial Condition as of June 30, 1996................... F-3
Note to Financial Statement............................................ F-4
FIRST ALLIANCE MORTGAGE COMPANY:
Independent Auditors' Report........................................... F-5
Statements of Financial Condition as of December 31, 1994 and 1995 and
March 31, 1996 (unaudited)............................................ F-6
Statements of Income for each of the three years in the period ended
December 31, 1995 and for the quarters ended March 31, 1995 and 1996
(unaudited)........................................................... F-7
Statements of Stockholders' Equity for each of the three years in the
period ended
December 31, 1995 and for the quarter ended March 31, 1996
(unaudited)........................................................... F-8
Statements of Cash Flows for each of the three years in the period
ended December 31, 1995 and for the quarters ended March 31, 1995 and
1996 (unaudited)...................................................... F-9
Notes to Financial Statements.......................................... F-11
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
First Alliance Corporation:
We have audited the accompanying statement of financial condition of First
Alliance Corporation (the Company) as of June 30, 1996. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of financial condition
is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statement of
financial condition. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement of financial condition presentation. We
believe that our audit of the statement of financial condition provides a
reasonable basis for our opinion.
In our opinion, such statement of financial condition presents fairly, in
all material respects, the financial position of First Alliance Corporation as
of June 30, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
June 30, 1996
F-2
<PAGE>
FIRST ALLIANCE CORPORATION
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
<TABLE>
<S> <C>
ASSETS
Cash...................................................................... $100
====
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized; no shares outstanding......................
Class A common stock, $.01 par value; 25,000,000 shares authorized; no
shares issued and outstanding...........................................
Class B common stock, $.01 par value; 15,000,000 shares authorized;
one share issued and outstanding........................................
Additional paid in capital............................................... $100
----
Total stockholder's equity............................................ $100
====
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FIRST ALLIANCE CORPORATION
NOTE TO FINANCIAL STATEMENT
AS OF JUNE 30, 1996
NOTE 1. GENERAL
First Alliance Corporation (the Company) was formed to be a holding company
whose assets will consist entirely of all of the outstanding capital stock of
First Alliance Mortgage Company (FAMCO), and First Alliance Services, Inc.,
each of which are California corporations, and First Alliance Mortgage
Company, Limited, and First Alliance Company, Limited, each of which are
United Kingdom corporations.
The Company is contemplating an initial public offering (the Offering)
whereby the Company intends to acquire all of the outstanding shares of FAMCO
in exchange for 10,750,000 shares of Class B Common Stock. Shares of Class A
Common Stock are being offered for sale in the Offering. Holders of Class A
Common Stock will be entitled to one vote for each share held of record and
holders of Class B Common Stock will be entitled to four votes for each share
held of record. Each share of Class B Common Stock will be freely convertible
into one share of Class A Common Stock at the option of the Class B
stockholder. With limited exception, shares of Class B Common Stock may not be
transferred to third parties.
The acquisition will be accounted for similar to a pooling of interests. The
consolidated financial position and consolidated results of operations of the
Company will substantially consist of FAMCO.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
First Alliance Mortgage Company:
We have audited the accompanying statements of financial condition of First
Alliance Mortgage Company (the Company) as of December 31, 1994 and 1995, and
the related statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of First Alliance Mortgage Company as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As described in Note 2, on January 1, 1995, the Company adopted Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights.
As described in Note 2, the accompanying 1994 and 1995 financial statements
have been restated.
Deloitte & Touche LLP
Costa Mesa, California
March 18, 1996 (June 24, 1996 as to Note 2)
F-5
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------- MARCH 31, MARCH 31,
1994 1995 1996 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents..... $ 5,298,000 $ 4,019,000 $ 2,206,000 $ 2,206,000
Receivable from trusts........ 3,906,000 4,722,000 7,467,000 7,467,000
Loans held for sale........... 18,676,000 24,744,000 26,325,000 26,325,000
Loans receivable held for
investment................... 2,521,000 2,261,000 2,075,000 2,075,000
Residual interests in
securities--at fair value ... 11,645,000 19,705,000 20,732,000 20,732,000
Mortgage servicing rights..... 763,000 4,021,000 4,641,000 4,641,000
Real estate owned, net........ 1,635,000 1,474,000 1,904,000 1,904,000
Property, net................. 2,080,000 2,141,000 2,154,000 2,154,000
Deferred taxes................ 73,000 3,237,000
Prepaid expenses and other
assets....................... 1,629,000 3,900,000 3,851,000 3,851,000
----------- ----------- ----------- -----------
Total assets................ $48,226,000 $66,987,000 $71,355,000 $74,592,000
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse financing facility.. $13,390,000 $18,233,000 $20,015,000 $20,015,000
Accounts payable and accrued
liabilities.................. 9,403,000 5,310,000 5,355,000 5,355,000
Dividends payable............. 9,000,000 9,000,000
Notes payable................. 1,449,000 1,123,000 1,023,000 1,023,000
Notes payable to stockholders. 1,000,000 1,000,000
S distribution notes.......... 33,626,000
----------- ----------- ----------- -----------
Total liabilities........... 24,242,000 24,666,000 36,393,000 70,019,000
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock--no par value;
15,000,000 shares authorized;
10,642,500 shares issued and
outstanding.................. 42,000 42,000 42,000 1,336,000
Retained earnings............. 23,942,000 42,279,000 34,920,000 3,237,000
----------- ----------- ----------- -----------
Total stockholders' equity.. 23,984,000 42,321,000 34,962,000 4,573,000
----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity..... $48,226,000 $66,987,000 $71,355,000 $74,592,000
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Loan origination and
sale................. $22,489,000 $27,902,000 $35,493,000 $1,086,000 $ 9,371,000
Loan servicing and
other fees........... 8,989,000 9,106,000 8,543,000 1,977,000 2,243,000
Interest.............. 4,452,000 8,650,000 14,668,000 2,871,000 3,158,000
Other................. 20,000 144,000 176,000 29,000 38,000
----------- ----------- ----------- ---------- -----------
Total revenue....... 35,950,000 45,802,000 58,880,000 5,963,000 14,810,000
EXPENSE:
Compensation and
benefits............. 10,847,000 9,559,000 10,395,000 2,780,000 3,196,000
Professional services. 1,288,000 1,521,000 697,000 264,000 269,000
Advertising........... 2,958,000 3,316,000 4,345,000 1,071,000 940,000
Subservicing and other
fees................. 659,000 1,019,000 1,212,000 266,000 192,000
Rent.................. 815,000 974,000 1,278,000 285,000 370,000
Supplies.............. 791,000 831,000 992,000 246,000 335,000
Depreciation and
amortization of
property............. 483,000 514,000 907,000 144,000 139,000
Interest.............. 2,106,000 3,744,000 4,167,000 613,000 763,000
Legal................. 3,044,000 7,162,000 1,491,000 206,000 146,000
Other................. 1,996,000 1,928,000 2,376,000 388,000 600,000
----------- ----------- ----------- ---------- -----------
Total expense....... 24,987,000 30,568,000 27,860,000 6,263,000 6,950,000
----------- ----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION
(BENEFIT).............. 10,963,000 15,234,000 31,020,000 (300,000) 7,860,000
INCOME TAX PROVISION
(BENEFIT) ............. 222,000 363,000 478,000 (5,000) 118,000
----------- ----------- ----------- ---------- -----------
NET INCOME (LOSS)....... $10,741,000 $14,871,000 $30,542,000 $ (295,000) $ 7,742,000
=========== =========== =========== ========== ===========
PRO FORMA (unaudited):
Historical income
(loss) before income
tax provision
(benefit)............ $10,963,000 $15,234,000 $31,020,000 $ (300,000) $ 7,860,000
Pro forma income tax
provision (benefit).. 4,403,000 6,200,000 12,772,000 (123,000) 3,233,000
----------- ----------- ----------- ---------- -----------
PRO FORMA NET INCOME
(LOSS)................. $ 6,560,000 $ 9,034,000 $18,248,000 $ (177,000) $ 4,627,000
=========== =========== =========== ========== ===========
PRO FORMA NET INCOME PER
SHARE.................. $ 1.39 $ 0.37
=========== ===========
WEIGHTED AVERAGE SHARES
USED IN PRO FORMA
COMPUTATION............ 13,088,417 12,529,250
=========== ===========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993........ 10,642,500 $42,000 $ 21,524,000 $ 21,566,000
Dividends....................... (5,853,000) (5,853,000)
Net income...................... 10,741,000 10,741,000
---------- ------- ------------ ------------
BALANCE, December 31, 1993...... 10,642,500 42,000 26,412,000 26,454,000
Dividends....................... (17,341,000) (17,341,000)
Net income...................... 14,871,000 14,871,000
---------- ------- ------------ ------------
BALANCE, December 31, 1994...... 10,642,500 42,000 23,942,000 23,984,000
Dividends....................... (12,205,000) (12,205,000)
Net income...................... 30,542,000 30,542,000
---------- ------- ------------ ------------
BALANCE, December 31, 1995...... 10,642,500 42,000 42,279,000 42,321,000
Dividends (Unaudited)........... (15,101,000) (15,101,000)
Net income (Unaudited).......... 7,742,000 7,742,000
---------- ------- ------------ ------------
BALANCE, March 31, 1996
(Unaudited).................... 10,642,500 $42,000 $ 34,920,000 $ 34,962,000
========== ======= ============ ============
</TABLE>
See notes to financial statements.
F-8
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 QUARTERS ENDED MARCH 31
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ 10,741,000 $ 14,871,000 $ 30,542,000 $ (295,000) $ 7,742,000
Adjustments to reconcile
net income (loss) to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization of
property............. 483,000 514,000 907,000 144,000 139,000
Amortization of
mortgage servicing
rights............... 988,000 683,000 638,000 107,000 340,000
Deferred income taxes. (184,000) (63,000) 73,000
Provision for
estimated losses on
real estate owned.... 240,000 8,000 74,000
Gain on sale of loans
held for sale ....... (16,423,000) (25,976,000) (24,539,000) (823,000) (7,094,000)
Noncash gain
recognized on
capitalization of
residual interests in
securities and
mortgage servicing
rights............... (4,171,000) (807,000) (9,833,000) (2,060,000)
Loss (gain) on sales
of real estate owned. 76,000 (109,000) 65,000 (94,000)
Loss (gain) on sales
of property.......... 75,000 23,000 (19,000)
Accretion of discounts
on loan receivable... (1,022,000) (256,000) (56,000)
Net accretion of
residual interests in
securities........... (128,000) (1,128,000) (2,048,000) (638,000) 74,000
Loans originated or
purchased for sale,
net of loan fees..... (257,928,000) (289,338,000) (213,903,000) (46,692,000) (68,412,000)
Proceeds from sale of
loans................ 68,440,000 20,503,000 64,400,000 7,560,000 21,318,000
Sale of regular
interests in
securities........... 141,056,000 347,500,000 167,899,000 52,419,000
Changes in assets and
liabilities:
Receivable from
trusts............. (788,000) 163,000 (816,000) (300,000) (2,745,000)
Prepaid expenses and
other assets....... (1,418,000) 802,000 (2,271,000) (633,000) 49,000
Accounts payable and
accrued
liabilities........ 2,643,000 4,775,000 (4,093,000) (3,159,000) 45,000
------------- ------------- ------------- ------------ ------------
Net cash (used in)
provided by
operating
activities....... (56,298,000) 72,421,000 5,980,000 (44,985,000) 1,739,000
------------- ------------- ------------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Loans receivable issued. (789,000) (1,949,000) (1,579,000) (785,000)
Collections on loans re-
ceivable............... 519,000 1,341,000 2,880,000 395,000 242,000
Capital expenditures.... (610,000) (851,000) (978,000) (156,000) (443,000)
Proceeds from sales of
property............... 723,000 29,000 31,000
Additions to real estate
owned.................. (200,000) (355,000) (16,000)
Proceeds from sales of
real estate owned...... 1,028,000 3,566,000 523,000 64,000 37,000
------------- ------------- ------------- ------------ ------------
Net cash provided
by investing ac-
tivities......... 671,000 2,107,000 520,000 (498,000) (133,000)
------------- ------------- ------------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net borrowings (repay-
ments) on warehouse fi-
nancing
facility............... 66,835,000 (53,445,000) 4,843,000 40,414,000 1,782,000
Proceeds from issuance
of notes payable....... 19,000 18,000
Payments on notes pay-
able................... (2,079,000) (2,831,000) (436,000) (64,000) (100,000)
Cash dividends.......... (5,853,000) (17,341,000) (12,205,000) (2,874,000) (6,101,000)
Proceeds from issuance
of notes payable to
stockholder............ 11,000,000 3,000,000 4,500,000 4,500,000 1,000,000
Payments on notes pay-
able to stockholder.... (11,000,000) (3,000,000) (4,500,000)
------------- ------------- ------------- ------------ ------------
Net cash provided
by (used in) fi-
nancing activi-
ties............. 58,903,000 (73,617,000) (7,779,000) 41,994,000 (3,419,000)
------------- ------------- ------------- ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 3,276,000 911,000 (1,279,000) (3,489,000) (1,813,000)
CASH AND CASH EQUIVA-
LENTS, beginning of
year................... 1,111,000 4,387,000 5,298,000 5,298,000 4,019,000
------------- ------------- ------------- ------------ ------------
CASH AND CASH EQUIVA-
LENTS, end of year..... $ 4,387,000 $ 5,298,000 $ 4,019,000 $ 1,809,000 $ 2,206,000
============= ============= ============= ============ ============
</TABLE>
See notes to financial statements.
F-9
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
YEARS ENDED DECEMBER 31 MARCH 31
-------------------------------------- -----------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL INFORMA-
TION:
Interest paid........... $ 1,805,000 $ 3,605,000 $ 4,114,000 $ 442,000 $ 801,000
============ ============ ============ =========== ===========
Income taxes paid....... $ 698,000 $ 100,000 $ 486,000 $ 30,000
============ ============ ============ ===========
SUPPLEMENTAL INFORMATION
ON NONCASH INVESTING
AND FINANCING
ACTIVITIES:
Loans funded in connec-
tion with sales of real
estate owned........... $ 390,000 $ 290,000 $ 19,000
============ ============ ============
Assumption of debt
through acquisition of
real estate through
foreclosure............ $ 3,051,000 $ 2,342,000 $ 91,000 $ 26,000
============ ============ ============ ===========
Exchange of loans for
regular and residual
interests in
securities............. $141,795,000 $350,331,000 $167,974,000 $52,420,000
============ ============ ============ ===========
Dividends declared and
unpaid................. $ 9,000,000
===========
Transfer of property to
real estate owned...... $ 260,000
===========
Acquisition of real es-
tate through foreclo-
sure of loans.......... $ 113,000
===========
</TABLE>
See notes to financial statements.
F-10
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995 AND FOR THE
QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
NOTE 1. GENERAL
First Alliance Mortgage Company (the Company) is engaged in the origination,
purchase, sale and servicing of home-equity loans collateralized by deeds of
trust. The majority of the Company's loans are made to owners of single family
residences who use the loan proceeds for such purposes as debt consolidation
and financing of home improvements, among others. The Company sells loans to
investors or securitizes them in the form of a Real Estate Mortgage Investment
Conduit (REMIC). A significant portion of the mortgages are sold on a
servicing retained basis. The Company is currently licensed or registered to
do business in ten states. The Company's business may be affected by many
factors including real estate and other asset values, the level of and
fluctuations in interest rates, changes in the securitization market and
competition.
Interim Unaudited Financial Information--In the opinion of management, the
accompanying unaudited financial statements contain all adjustments
(consisting only of various normal accruals) necessary to present fairly the
Company's financial position, results of operations and cash flows. The
financial position at March 31, 1996 is not necessarily indicative of the
financial position to be expected at December 31, 1996 and results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of the results of operations to be expected for the year ending
December 31, 1996.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115 Accounting for Certain Investments in Debt and Equity Securities, the
Company has restated its 1994 and 1995 financial statements to present its
Residual Interests in Securities (Residual Interests) as trading securities.
As a result, the Company has reestimated the fair value of such securities.
The restatement did not result in any changes to previously reported results
of operations or financial condition as of and for the years ended December
31, 1995 and 1994.
Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments purchased with an original maturity of no more than three months
to be cash equivalents.
Receivable From Trusts--In the normal course of servicing loans previously
sold or securitized, the Company may advance payments and other costs to
REMICs or private investor trusts on behalf of borrowers. In such cases, funds
advanced are reflected in the balance sheet as receivable from trusts.
Advances are recovered through subsequent collections from trusts or
borrowers.
Loans--Loans held for sale are loans the Company plans to sell or securitize
which are carried at the lower of aggregate cost or market value. Loan
origination and processing fees and related direct origination costs are
deferred until the related loan is sold. Loans receivable held for investment
are notes the Company has purchased or originated and has the intent and
ability to hold to maturity. Loan origination and commitment fees and direct
loan origination costs are deferred and offset against the related notes, and
the net fee or cost is amortized into interest income over the contractual
lives of the related notes. When a loan becomes over 90 days contractually
delinquent, it is placed on non-accrual status and unpaid interest income is
reversed. While a loan is on non-accrual status, interest is recognized only
as cash is received.
Allowances for Estimated Losses on Loans and Real Estate Owned--The
allowances for estimated losses on loans and real estate owned (REO) represent
the Company's estimate of identified and unidentified losses in the Company's
portfolios. These estimates, while based upon historical loss experience and
other relevant data, are ultimately subjective and inherently uncertain. The
Company has established valuation allowances for estimated losses on specific
loans and REO. When these estimated losses are determined to be permanent,
such
F-11
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
as when a loan is foreclosed and the related property is transferred to REO,
specific valuation allowances are charged off and are then reflected as
writedowns.
Effective January 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures. SFAS No. 114
prescribes the recognition criteria for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are modified in
troubled debt restructurings. SFAS No. 114 states that a loan is impaired when
it is probable that a creditor will be unable to collect all principal and
interest amounts due according to the contractual terms of the loan agreement.
SFAS No. 118 amends the disclosure requirements of SFAS No. 114 to require
information about the recorded investment in certain impaired loans and how a
creditor recognizes interest income related to those impaired loans. There was
no impact on the Company's financial condition or results of operations upon
adoption of such statements.
Residual Interests in Securities--The Company securitizes a majority of
loans held for sale into the form of a REMIC. A REMIC is a multi-class
security with certain tax advantages to investors and which derives its cash
flow from a pool of underlying mortgages. The senior classes of the REMICs are
sold, and the subordinated classes are retained by the Company. The
subordinated classes are in the form of residual certificates and are
classified as Residual Interests. The documents governing the Company's
securitizations require the Company to establish initial overcollateralization
or build overcollateralization levels through retention of distributions by
the REMIC trust otherwise payable to the Company as the Residual Interest
holder. This overcollateralization causes the aggregate principal amount of
the loans in the related pool and/or cash reserves to exceed the aggregate
principal balance of the outstanding investor certificates. Such excess
amounts serve as credit enhancement for the related REMIC trust. To the extent
that borrowers default on the payment of principal or interest on the loans,
losses will reduce the overcollateralization to the extent that funds are
available. If payment defaults exceed the amount of overcollateralization, as
applicable, the insurance policy maintained by the related REMIC trust will
pay any further losses experienced by holders of the senior interests in the
related REMIC trust. The Company does not have any recourse obligations for
credit losses in the REMIC trust. The Residual Interests are amortized to
operations over the contractual lives of the loans, considering future
estimated prepayments utilizing an amortization method which approximates the
level yield method.
In 1994, the Company adopted SFAS No. 115, and, in accordance with
provisions of SFAS No. 115, the Company classifies Residual Interests as
trading securities which are recorded at fair value with any unrealized gains
or losses recorded in the results of operations in the period of the change in
fair value. Valuations at origination and at each reporting period are based
on discounted cash flow analyses. The cash flows are estimated as the excess
of the weighted average coupon on each pool of loans sold over the sum of the
pass-through interest rate, a servicing fee, a trustee fee, an insurance fee
and an estimate of annual future credit losses related to the loans
securitized, over the life of the loans. These cash flows are projected over
the life of the loans using prepayment, default, loss, and interest rate
assumptions that market participants would use for similar financial
instruments subject to prepayment, credit and interest rate risk and are
discounted using an interest rate that a purchaser unrelated to the seller of
such a financial instrument would demand. At origination, the Company utilized
prepayment assumptions ranging from 25.0% to 30.0%, estimated loss factor
assumptions of 0.5% and weighted average discount rates of 18.0%, 23.6% and
26.6% for the years ended December 31, 1995, 1994 and 1993, respectively, to
value Residual Interests. The valuation includes consideration of
characteristics of the loans including loan type and size, interest rate,
origination date, term and geographic location. The Company also uses other
available information such as externally prepared reports on prepayment rates,
collateral value, economic forecasts and historical default and prepayment
rates of the portfolio under review. To the Company's knowledge, there is no
active market for the sale of these Residual Interests. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective.
F-12
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
In 1993, the Company valued Residual Interests at amortized cost which
approximated fair value in accordance with Emerging Issues Task Force No. 89-4
Collateralized Mortgage Obligation Residuals. The adoption of SFAS No. 115 did
not have a material impact on the financial position or results of operation
of the Company.
Mortgage Servicing Rights--Effective January 1, 1995, the Company adopted
SFAS No. 122, Accounting for Mortgage Servicing Rights, which requires that
upon sale or securitization of servicing retained mortgages, companies
capitalize the cost associated with the right to service mortgage loans based
on their relative fair values. The Company determines fair value based on the
present value of estimated net future cash flows related to servicing income.
The cost allocated to the servicing rights is amortized in proportion to and
over the period of estimated net future servicing fee income.
The Company capitalized, at fair value, $3,896,000 of mortgage servicing
rights for the year ended December 31, 1995. During the same period, related
amortization of such mortgage servicing rights was $208,000. At December 31,
1995, the capitalized servicing rights approximated fair value. The Company
periodically reviews capitalized servicing fees receivable to evaluate for
impairment. This review is performed on a disaggregated basis based on loan
type. The Company generally makes loans to credit impaired borrowers whose
borrowing needs may not be met by traditional financial institutions due to
credit exceptions. The Company has found that credit impaired borrowers are
payment sensitive rather than interest rate sensitive. Therefore, the Company
does not consider interest rates a predominant risk characteristic for
purposes of evaluating impairment. Impairment is recognized in a valuation
allowance for each pool in the period of impairment.
Property--Property is stated at cost and depreciated over the estimated
useful lives of the assets using accelerated methods. Leasehold improvements
are amortized on the straight-line method over the lesser of the useful lives
of the assets or the terms of the related leases. Useful lives generally range
from three to seven years.
Real Estate Owned--Real estate acquired in settlement of loans generally
results when property collateralizing a loan is foreclosed upon or otherwise
acquired by the Company in satisfaction of the loan. Real estate acquired
through foreclosure is carried at either the lower of fair value less costs to
dispose or the recorded investment in the loan. Fair value is based on the net
amount that the Company could reasonably expect to receive for the asset in a
current sale between a willing buyer and a willing seller, that is, other than
in a forced or liquidation sale. Adjustments to the carrying value of REO are
made through valuation allowances and charge-offs, recognized through a charge
to earnings.
Income Taxes--For federal and state income tax purposes, the Company has
elected to be taxed as an S corporation whereby its taxable income is included
in the individual returns of the stockholders. As an S corporation, the
Company is subject to certain state taxes, primarily in the State of
California.
The Company accounts for taxes under SFAS No. 109, Accounting for Income
Taxes, which requires an asset and liability approach to financial accounting
for income taxes. Deferred tax assets arise from temporary differences on
which the Company has paid income taxes or recognized income tax benefits that
will be realized as a reduction of future tax liabilities.
Revenue Recognition--The Company derives its revenue principally from fees
for the origination of loans, other fees, interest income, insurance
commissions, loan servicing fees and fees charged for services such as
appraisals and underwriting. The Company sells its loans through
securitization and other loan sales. Revenue
F-13
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
from loans pooled and securitized or sold in the secondary market is
recognized when such loan pools are sold. The Company retains the right to
service all loans it originates and securitizes. The Company receives a fee
for servicing loans based on a fixed percentage of the declining balance of
securitized loan pools. Through securitizations, the Company retains a
Residual Interest in the excess of the weighted average coupons on loans
securitized over the sum of pass-through interest rates on regular interests,
a servicing fee, a trustee fee, an insurance fee and credit losses.
Loan origination and sale revenue includes all mortgage related income other
than loan servicing and other fees, interest and other income.
Loan servicing and other fees are recorded as earned.
Interest income is recorded as earned. Interest income represents the
interest earned on loans held for sale during the period prior to their
securitization or sale, loans receivable held for investment, Residual
Interests and cash equivalents. In accordance with Emerging Issues Task Force
Issue number No. 89-4, the Company computes an effective yield based on the
carrying amount of each Residual Interest and its estimated future cash flows.
This yield is then used to accrue interest income on the Residual Interests.
Use of Estimates in the Preparation of Financial Statements--The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Stock split--As described in Note 15, on May 11, 1996, the Company's Board
of Directors approved a stock split of its common stock whereby approximately
710 shares of common stock were issued for each outstanding share of common
stock. All share and per share amounts included in the accompanying financial
statements and footnotes have been restated to reflect the stock split.
Reclassifications--Certain reclassifications have been made to conform the
1993 and 1994 financial statements to the 1995 presentation.
NOTE 3. UNAUDITED PRO FORMA INFORMATION
The pro forma financial information has been presented to show what the
significant effects on the historical financial position might have been had
the distribution of S Distribution Notes and the revocation of the Company's S
corporation status occurred as of March 31, 1996, and to show what the
significant effects on the historical results of operations might have been
had the Company not been treated as an S corporation for income tax purposes
as of the beginning of the earliest period presented.
Pro Forma Net Income and Pro Forma Statement of Financial Condition--Pro
forma net income represents the results of operations adjusted to reflect a
provision for income taxes which gives effect to the intended change in the
Company's income tax status from an S corporation to a C corporation. The
principal difference between the pro forma income tax rate and the federal
statutory rate of 35% relates to state income tax expense, net of the federal
income tax benefit. The pro forma statement of financial condition represents
the statement of financial condition as of March 31, 1996 adjusted to give
effect to (i) an S corporation distribution of notes with total principal
amounts of $33,626,000 equal to the Company's previously earned and
undistributed taxable S corporation earnings at March 31, 1996; (ii) the
reclassification of $1,294,000 of undistributed retained earnings to Common
Stock in accordance with Topic 4.B of the Compilation of Staff Accounting
Bulletins of the Securities and Exchange Commission; and, (iii) the
establishment of $3,237,000 of net deferred tax assets
F-14
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
that would have been recorded had the Company's S corporation status been
revoked as of March 31, 1996. The amount of the benefit to be recorded will be
dependent upon temporary differences existing at the date of revocation of the
Company's S corporation status. The principal components of the net deferred
tax assets relate to mark to market adjustments, legal reserves and
differences in accounting for residual interests in REMICs.
Pro Forma Net Income Per Share--Historical net income per common share is
not presented because it is not indicative of the ongoing entity.
Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of shares of common stock outstanding
during the year. In accordance with a regulation of the Securities and
Exchange Commission, pro forma net income per share data have been presented
to reflect the effect of the assumed issuance (at an assumed price of $18.00
per share) of that number of shares of common stock that would generate
sufficient cash to pay an S corporation distribution in an amount equal to
undistributed S corporation taxable earnings.
NOTE 4. LOAN ORIGINATION AND SALE REVENUE
Loan origination and sale revenue are comprised of the following:
<TABLE>
<CAPTION>
QUARTER
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net proceeds from the
sale of loans.......... $213,455,000 $371,641,000 $238,311,000 $ 7,560,000 $74,838,000
------------ ------------ ------------ ----------- -----------
Cost of loans sold...... 212,349,000 373,188,000 233,225,000 7,560,000 74,394,000
Allocated to mortgage
servicing rights....... (950,000) (3,896,000) (960,000)
------------ ------------ ------------ ----------- -----------
211,399,000 373,188,000 229,329,000 7,560,000 73,434,000
Origination fees........ (23,574,000) (33,601,000) (31,157,000) (1,010,000) (9,198,000)
Origination costs....... 5,037,000 5,271,000 5,767,000 187,000 1,448,000
------------ ------------ ------------ ----------- -----------
Net cost of loans sold.. 192,862,000 344,858,000 203,939,000 6,737,000 65,684,000
------------ ------------ ------------ ----------- -----------
Gain on sale of loans... 20,593,000 26,783,000 34,372,000 823,000 9,154,000
Other fees.............. 1,896,000 1,119,000 1,121,000 263,000 217,000
------------ ------------ ------------ ----------- -----------
Loan origination and
sale
revenue................ $ 22,489,000 $ 27,902,000 $ 35,493,000 $ 1,086,000 $ 9,371,000
============ ============ ============ =========== ===========
</TABLE>
NOTE 5. LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment are secured principally by single
family residences. The loans bear interest at fixed rates ranging up to 15.95%
per annum and are due in monthly installments of principal and interest
through August 2024.
F-15
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
NOTE 6. PROPERTY
Property at December 31 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Office equipment................................... $ 3,496,000 $ 4,245,000
Vehicles........................................... 288,000 388,000
Leasehold improvements............................. 152,000 160,000
Computer software.................................. 1,119,000 1,119,000
Building........................................... 406,000 406,000
Land............................................... 98,000 98,000
----------- -----------
5,559,000 6,416,000
Less accumulated depreciation and amortization..... (3,479,000) (4,275,000)
----------- -----------
Property, net...................................... $ 2,080,000 $ 2,141,000
=========== ===========
</TABLE>
NOTE 7. SERVICING PORTFOLIO
Trust and other custodial funds, relating to loans serviced for others,
amounted to approximately $8,517,000, $5,783,000, $2,387,000 and $2,878,000 at
March 31, 1996 and December 31, 1995, 1994 and 1993, respectively. Such funds,
which are maintained in separate bank accounts, are excluded from the
Company's assets and liabilities.
Total loans serviced amounted to $611,718,000, $613,791,000, $555,685,000
and $385,570,000 as of March 31, 1996 and December 31, 1995, 1994 and 1993,
respectively. Included in such amounts are adjustable rate mortgage loans
totaling approximately $251,349,000, $281,551,000 and $153,224,000 as of
December 31, 1995, 1994 and 1993, respectively, for which the Company has
subcontracted servicing through an outside agency through February 1, 1996.
NOTE 8. WAREHOUSE FINANCING FACILITY
The Company has a revolving line of credit with a secured asset-based
lender. At December 31, 1995, the Company may borrow and repay during a 90 day
revolving period up to $125,000,000. This line of credit bears interest at a
variable rate based upon the London Interbank Offered Rate (LIBOR) payable
monthly. This line of credit is renewable by the lender on a quarterly basis
and currently expires on the sooner of the closing of a loan securitization or
June 28, 1996. Outstanding borrowings under this line of credit are
collateralized by loans held for sale. Upon the sale or securitization of
loans, borrowings are repaid. This line of credit contains certain
affirmative, negative and financial covenants, with which the Company was in
compliance at December 31, 1995.
The following table presents data on the line of credit for the periods
indicated
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 THREE MONTHS
--------------------------------------- ENDED
1993 1994 1995 MARCH 31, 1996
----------- ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average inter-
est rate for the peri-
od..................... 5.81% 5.96% 7.10% 6.31%
Interest rate at the end
of the period.......... 5.75% 7.38% 6.56% 6.31%
Weighted average amount
outstanding for the
period................. $24,138,000 $ 58,139,000 $ 52,610,000 $45,693,000
Maximum amount
outstanding at any
month-end.............. $77,351,000 $110,551,000 $108,217,000 $55,347,000
</TABLE>
F-16
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
NOTE 9. NOTES PAYABLE
Notes payable principally represent amounts owed related to senior liens on
properties foreclosed upon by the Company. The notes bear fixed and variable
interest at rates ranging from 7% to 15.45% per annum at December 31, 1995 and
are payable in aggregate annual amounts as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996............................................................ $ 95,000
1997............................................................ 54,000
1998............................................................ 54,000
1999............................................................ 49,000
2000............................................................ 49,000
Thereafter...................................................... 822,000
----------
$1,123,000
==========
</TABLE>
NOTE 10. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
The Company's operations are conducted from leased facilities located in
various areas of the United States. These leases have clauses which provide
for increases in rent based on increases in the cost of living index and
options for renewal. The future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996........................................................... $1,258,000
1997........................................................... 1,155,000
1998........................................................... 870,000
1999........................................................... 649,000
2000........................................................... 601,000
Thereafter..................................................... 1,240,000
----------
$5,773,000
==========
</TABLE>
In the ordinary course of business, the Company has liability under
representations and warranties made to purchasers and insurers of mortgage
loans. Under certain circumstances, the Company may become liable for the
unpaid principal and interest on defaulted loans or other loans if there has
been a breach of representation or warranties.
The Company has negotiated an employment agreement with an officer. This
agreement provides for the payment of a base salary, the issuance of common
stock subject to certain restrictions and the payment of severance benefits
upon termination.
In December 1989, a class action suit was filed on behalf of certain
borrowers related to the origination of their loans by the Company. The
Company, without admitting to any wrong-doing, agreed to settle the case in
December 1994. The terms of the settlement provide for cash distributions to
the plaintiffs in the amount $6,850,000, which is to be paid out over a three-
year period. Remaining future payments to plaintiffs of $1,833,000 and
$2,308,000 are included in accrued liabilities at March 31, 1996 and December
31, 1995, respectively.
F-17
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
The Company is involved in certain litigation arising in the normal course
of business. The Company believes that any liability with respect to such
legal actions, individually or in the aggregate, is not likely to be material
to the Company's financial position or results of operations.
At December 31, 1995, the State of California accounted for approximately
86% of the total serviced loan portfolio while no other state accounted for
more than 6%.
Availability of Funding Sources--The Company funds substantially all of the
loans which it originates or purchases through borrowings under its warehouse
financing facility and internally generated funds. These borrowings are in
turn repaid with the proceeds received by the Company from selling such loans
through loan sales or securitizations. Any failure to renew or obtain adequate
funding under this warehouse financing facility, or other borrowings, or any
substantial reduction in the size of or pricing in the markets for the
Company's loans, could have a material adverse effect on the Company's
operations. To the extent that the Company is not successful in maintaining or
replacing existing financing, it would have to curtail its loan production
activities or sell loans earlier than is optimal, thereby having a material
adverse effect on the Company's results of operations and financial condition.
Dependence on Securitizations--Since 1992, the Company has pooled and sold
through securitizations an increasing percentage of the loans which it
originates. The Company derives a significant portion of its income by
recognizing gains upon the sale of loans through securitizations which are due
in part to the fair value, recorded at the time of sale, of residual interests
received. Adverse changes in the securitization market could impair the
Company's ability to purchase and sell loans through securitizations on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's results of operations and financial condition.
The Company has relied on credit enhancement to achieve a "AAA/aaa" rating
for the regular interests in its securitizations. The credit enhancement has
generally been in the form of an insurance policy issued by an insurance
company insuring the timely repayment of regular interests in each of the
REMIC trusts. There can be no assurance that the Company will be able to
obtain credit enhancement in any form from the current insurer or any other
provider of credit enhancement on acceptable terms or that future
securitizations will be similarly rated. A downgrading of the insurer's credit
rating or its withdrawal of credit enhancement could have a material adverse
effect on the Company's results of operations and financial condition.
NOTE 11. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1995, 1994 and 1993, the Company
purchased approximately $15,126,000, $91,501,000 and $69,995,000,
respectively, in loans from a company in which a principal stockholder has a
controlling ownership.
During 1995, 1994 and 1993, the Company serviced mortgage loans for
employees and other related parties for which no service fees were charged.
The aggregate balances of such loans were approximately $11,470,000,
$12,909,000, $8,763,000 and $6,800,000 at March 31, 1996, and December 31,
1995, 1994 and 1993, respectively.
Interest expense related to notes payable to stockholders amounted to
approximately $7,000, $223,000, $10,000, and $561,000 for the three months
ended March 31, 1996 and the years ended December 31, 1995, 1994 and 1993
respectively.
F-18
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
During the years ended December 31, 1995, 1994 and 1993, the Company paid
consulting fees of approximately $76,000, $161,000 and $223,000, respectively,
to a company owned by the stockholders and received fees of approximately
$146,000, $514,000 and $705,000, respectively, from a company in which the
stockholders have a controlling ownership interest.
During the three months ended March 31, 1996 and the years ended December
31, 1995, 1994 and 1993, the Company sold, at par, loans held for sale of
$285,000, $3,188,000, $6,783,000 and $7,061,000, respectively, to a principal
stockholder. Additionally, in 1993, the Company sold certain real property to
this principal stockholder for $600,000.
The Company leases facilities from a principal stockholder on a term and
month-to-month basis. Rent expense amounted to $2,000 for the three months
ended March 31, 1996 and to $18,000 for each of the years ended December 31,
1995, 1994 and 1993. In October 1995, the Company entered into a lease with a
principal stockholder for its corporate headquarters facility. For the years
ending December 31, 1996 through 2003, such lease requires annual lease
payments of $464,000, $521,000, $536,000, $552,000, $569,000, $586,000,
$603,000, and $50,000, respectively.
In 1995, companies owned by family members of the Company's stockholders had
lines of credit with the Company which had outstanding balances of $335,000
and $525,000 at March 31, 1996 and December 31, 1995, respectively. Fees
received in the 1996 quarter and in 1995 from companies owned by the
stockholders' family members were $144,000 and $715,000, respectively. In
1995, the Company also paid premiums of $193,000 to companies owned by the
principal stockholders' family members as these companies included loans in
the Company's securitizations. Additionally, in 1995, the Company purchased
approximately $9,841,000 in loans from a company owned by the principal
stockholders' family members.
NOTE 12. INCOME TAXES
The income tax provision (benefit) for the periods indicated is as follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
--------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current provision (benefit).... $ 406,000 $426,000 $405,000 $(5,000) $118,000
Deferred taxes (principally
resulting from the accrual and
payment of legal settlement
costs and reserves)........... (184,000) (63,000) 73,000
--------- -------- -------- ------- --------
$ 222,000 $363,000 $478,000 $(5,000) $118,000
========= ======== ======== ======= ========
</TABLE>
NOTE 13. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
Financial Instruments--SFAS No. 105, Disclosure of Information about
Financial Instruments with Concentrations of Credit Risk and SFAS No. 119,
Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments requires the disclosure of the notional amount or contractual
amounts of financial instruments.
The Company regularly securitizes and sells fixed and variable rate mortgage
loans. As part of its interest rate risk management strategy, the Company may
from time to time hedge its interest rate risk related to its loans held for
sale and origination commitments by selling short United States Treasury
Securities. The Company
F-19
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
classifies these transactions as hedges of specific loans receivable and
commitments. The gains and losses derived from these financial futures are
deferred and included in the carrying amounts of the related hedged items and
are recognized in earnings upon sale of the related items. There were no
deferred gains or losses on hedging activities at March 31, 1996 and December
31, 1995, 1994 and 1993. Realized gains and (losses) on hedging activities
were $(255,000) and $800,000 for the years ended December 31, 1995 and 1994.
The following disclosures of the estimated fair value of the financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosure About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.... $ 4,019,000 $ 4,019,000 $ 2,206,000 $ 2,206,000
Loans held for sale.......... 24,744,000 25,610,000 26,325,000 30,159,000
Loans receivable held for
investment.................. 2,261,000 2,340,000 2,075,000 2,521,000
Residual Interests........... 19,705,000 19,705,000 20,732,000 20,732,000
Liabilities:
Warehouse financing facility. 18,233,000 18,233,000 20,015,000 20,015,000
Notes payable................ 1,123,000 1,174,000 2,023,000 2,023,000
</TABLE>
The estimated fair value of loans is based upon quoted market prices.
The fair value of Residual Interests is determined based on estimates of the
market value using discounted cash flows.
Rates currently available to the Company for debt with similar terms and
remaining maturities were used to estimate the fair value of the warehouse
financing facility and notes payable.
The fair value estimates presented herein are based on pertinent information
available to management as of March 31, 1996 and December 31, 1995. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
Off-Balance Sheet Activities--The Company is exposed to on-balance sheet
credit risk related to its loans held for sale, Residual Interests and loans
receivable held for investment. The Company is exposed to off-balance sheet
credit risk related to loans which the Company has committed to originate or
buy.
The Company is party to financial instruments with off-balance sheet credit
risk in the normal course of business. These financial instruments include
commitments to extend credit to borrowers and commitments to
F-20
<PAGE>
FIRST ALLIANCE MORTGAGE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND FOR THE QUARTERS ENDED MARCH 31, 1995 AND 1996 (UNAUDITED)
purchase loans from others. The Company has a first or second lien position on
substantially all of its loans, and the maximum combined loan-to-value (LTV)
permitted by the Company's underwriting guidelines is 85%. The LTV represents
the combined mortgage balances as a percentage of the appraised value of the
mortgaged property. A title insurance policy is required for all loans.
As of March 31, 1996 and December 31, 1995, the Company had outstanding
commitments to extend credit or purchase loans in the amounts of $7,469,000
and $4,181,000 respectively.
NOTE 14. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan, which was established in
1994, available to all employees who have been with the Company for one year
and have reached the age of 21. Employees may generally contribute up to 15%
of their salary each year; and the Company, at its discretion, may match up to
25% of the first 7% contributed by the employee. The Company's contribution
expense was $32,000, $97,000 and $45,000 for the three months ended March 31,
1996 and the years ended December 31, 1995 and 1994, respectively.
NOTE 15. SUBSEQUENT EVENTS
First Alliance Corporation, a Delaware Corporation owned by the stockholders
of the Company, intends to acquire the Company in exchange for 10,750,000
shares of its Class B Common Stock. First Alliance Corporation is also
contemplating an initial public offering of 3,500,000 shares of its Class A
Common Stock (the "Offering").
In 1996, the Company entered into an employment agreement (the "Agreement")
with its president and chief executive officer. The Agreement provides for a
three year term ending July 1, 1999, and shall be automatically renewed for
successive three year terms unless terminated by either party. Under the
Agreement, this officer has agreed to serve as a consultant to the Company for
a period of three years after termination at the discretion of the Board of
Directors (except for a termination due to cause, death or disability). This
officer shall receive an annual salary of $395,000, which salary may be
increased at the discretion of the Board of Directors. This officer will
receive an annual fee of $248,500 during the three year consulting period.
On May 2, 1996, the Company distributed S distribution notes totalling
$40,000,000 to the Company's stockholders. Additional S distribution notes
will be distributed prior to consummation of the Offering.
On May 11, 1996, the Company's Board of Directors approved a split of its
common stock whereby approximately 710 shares of common stock were issued for
each outstanding share of common stock. All share and per share amounts
included in the accompanying financial statements and footnotes have been
restated to reflect this stock split.
In June 1996, the Company granted 107,500 shares of common stock to an
officer of the Company. A value of approximately $1,600,000 has been ascribed
to such shares by the Company. Upon consummation of the Offering 24.6% of
these shares will vest with the balance vesting over a five year period. For
purposes of computing pro forma net income per share information, 18,628 of
these shares have been treated as outstanding.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE PUBLIC OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 15
Prior S Corporation Status................................................ 15
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 16
Dilution.................................................................. 16
Capitalization............................................................ 18
Selected Consolidated Financial and Other Data............................ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 34
Management................................................................ 51
Certain Transactions...................................................... 56
Principal Stockholders.................................................... 58
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 62
Legal Matters............................................................. 63
Experts................................................................... 63
Glossary.................................................................. 64
Available Information..................................................... 65
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERING HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
FIRST ALLIANCE
CORPORATION
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the Public
Offering described in this registration statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 26,371
NASD filing fee................................................. 8,148
Printing expenses............................................... 200,000
Accounting fees and expenses.................................... 200,000
Legal fees and expenses......................................... 275,000
Listing fees.................................................... 50,000
Fees and expenses (including legal fees) for qualifications
under state securities laws.................................... 30,000
Transfer agent's fees and expenses.............................. 5,000
Portion of Directors' and Officers' Insurance Attributable to
the Public Offering............................................
Miscellaneous................................................... 125,000
--------
Total......................................................... $919,519
========
</TABLE>
All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "GCL") provides
that a Delaware corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if he or she acted under similar
standards, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action
or suit was brought shall determine that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to be indemnified for such expenses which the
court shall deem proper.
Section 145 of GCL further provides that to the extent a director or officer
of a corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, such officer or director shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the
II-1
<PAGE>
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against such officer
or director and incurred by him or her in any such capacity or arising out of
his or her status as such, whether or not the corporation would have the power
to indemnify him or her against such liabilities under Section 145.
As permitted by Section 102(b)(7) of the GCL, the Company's Certificate of
Incorporation provides that a director shall not be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director. However, such provision does not eliminate or limit the liability of
a director for acts or omissions not in good faith or for breaching his or her
duty of loyalty, engaging in intentional misconduct or knowingly violating a
law, paying a dividend or approving a stock repurchase which was illegal, or
obtaining an improper personal benefit. A provision of this type has no effect
on the availability of equitable remedies, such as injunction or rescission,
for breach of fiduciary duty.
The Company's Bylaws require the Company to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Company) by
reason of the fact that he is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Company, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
does not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, that he had reasonable cause to believe that his conduct was
unlawful.
In addition, the Company's Bylaws require the Company to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, except
that no indemnification may be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable for negligence
or misconduct in the performance of his duty to the Company unless and only to
the extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Any indemnification (unless ordered by a court) made by the Company may be
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct as set
forth above. Such determination must be made (i) by the Board by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders.
To the extent that a director, officer, employee or agent of the Company has
been successful on the merits or otherwise in defense of any covered action,
suit or proceeding, or in defense of any covered claim, issue or matter
therein, he will be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
II-2
<PAGE>
Expenses incurred by an officer or director in defending a civil or criminal
action, suit or proceeding may be paid by the Company in advance of the final
disposition of such action, suit or proceeding as authorized by the Board in
the specific case upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Company as authorized
in this Article. Such expenses incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the Board deems
appropriate.
The Company anticipates obtaining a policy of directors' and officers'
liability insurance prior to the completion of the Public Offering.
The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company, its
directors, officers and controlling persons against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to and in consideration for the performance of the duties of Mark
K. Mason under the employment agreement between the Company and Mr. Mason, on
June 29, 1996, the Company issued 107,500 shares of Class B Common Stock
(after giving effect to a May 1996 stock split) to Mr. Mason, the Executive
Vice President and Chief Financial Officer of the Company. The issuance to Mr.
Mason involved no public offering and will be a private placement exempt from
the registration requirements of the Securities Act of 1933, as amended,
pursuant to the exemption provided by Section 4(2) thereof.
During the last three years, the Company sold, on a servicing retained
basis, approximately $107 million of loans it had originated or purchased. The
loans were not publicly offered for sale and no underwriters were involved.
The Company effected the sales of the loans pursuant to the exemption from the
registration requirements of Section 5 of the Securities Act provided by
Section 3(a)(11) of the Securities Act and Rule 147 promulgated thereunder.
The Company disclosed in the materials used in the loan sales that it was
relying on such exemption and required each private investor to represent (i)
that it was, at the time of the sale, a resident of the State of California
and (ii) that it would not resell such loans to non-California residents for
at least nine months.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1 1996 Stock Incentive Plan
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* Form of Stock Option Agreement
10.7 Form of Directors' Indemnity Agreement
10.8 Mortgage Loan Master Transfer Agreement dated as of June 30, 1995
between Nationscapital Mortgage Corporation and the Company
10.9 Mortgage Loan Master Transfer Agreement dated as of June 30, 1995
between Coast Security Mortgage Inc. and the Company
10.10 Chisick Employment Agreement
10.11* Reimbursement Agreement
10.12 Agreement and Plan of Merger
21.1* Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte & Touche LLP re report dated March 18, 1996.
23.3 Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1)
Power of Attorney (included on signature page of Registration
24.1 Statement)
27 ** Financial Data Schedule
99.1** Consent of Jeffrey W. Smith
99.2** Consent of Merrill Butler
99.3** Consent of George Gibbs, Jr.
99.4** Consent of Albert L. Lord
99.5 Consent of Mark K. Mason
</TABLE>
- --------
* To be filed by Amendment.
** Previously filed.
(B) FINANCIAL STATEMENTS
(C) FINANCIAL DATA SCHEDULE
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the Public Offering of such
securities at that time shall be deemed to be the initial bona fide
Public Offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Irvine, State of California, on July 5, 1996.
FIRST ALLIANCE MORTGAGE COMPANY
By /s/ Brian Chisick
_____________________________________
Brian Chisick
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-1 has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Brian Chisick President, Chief Executive July 5, 1996
____________________________________ Officer and Director
Brian Chisick (Principal
Executive Officer)
/s/ Sarah Chisick Director July 5, 1996
____________________________________
Sarah Chisick
/s/ Mark K. Mason Executive Vice President and July 5, 1996
____________________________________ Chief Financial Officer
Mark K. Mason (Principal
Financial and Accounting
Officer)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
EXHIBIT DESCRIPTION SEQUENTIALLY
NO. ----------- NUMBERED PAGE
------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1 1996 Stock Incentive Plan
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* Form of Stock Option Agreement
10.7 Form of Directors' Indemnity Agreement
10.8 Mortgage Loan Master Transfer Agreement dated as of
June 30, 1995 between Nationscapital Mortgage
Corporation and the Company
10.9 Mortgage Loan Master Transfer Agreement dated as of
June 30, 1995 between Coast Security Mortgage Inc.
and the Company
10.10 Chisick Employment Agreement
10.11* Reimbursement Agreement
10.12 Agreement and Plan of Merger
21.1* Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
Consent of Deloitte & Touche LLP re report dated
23.2 March 18, 1996
Consent of Gibson, Dunn & Crutcher LLP (contained
23.3 in Exhibit 5.1)
Power of Attorney (included on signature page of
24.1 Registration Statement)
27 ** Financial Data Schedule
99.1** Consent of Jeffrey W. Smith
99.2** Consent of Merrill Butler
99.3** Consent of George Gibbs, Jr.
99.4** Consent of Albert L. Lord
99.5 Consent of Mark K. Mason
</TABLE>
- --------
* To be filed by Amendment.
** Previously filed.
<PAGE>
EXHIBIT 1
FIRST ALLIANCE CORPORATION
3,500,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
----------------------
July __, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
As Representative of the Several Underwriters
Dear Sirs:
First Alliance Corporation, a Delaware corporation (the "Company")
-------
hereby confirms its agreement with the several underwriters named in Schedule 1
----------
hereto (the "Underwriters"), for whom you have been duly authorized to act as
------------
representative (in such capacity, the "Representative"), as set forth below. If
--------------
you are the only Underwriters, all references herein to the Representative shall
be deemed to be to the Underwriters. All references herein to the Company and
representations and warranties relating thereto give effect to the merger of a
subsidiary of the Company with and into First Alliance Mortgage Company, a
California corporation ("FAMCO"), as a result of which FAMCO will become a
wholly-owned subsidiary of the Company, which merger shall be consummated on the
Firm Closing Date (as defined below). Accordingly, references to the Company
herein at all times prior to the Firm Closing Date shall mean FAMCO and
reference to the Company on and subsequent to the Firm Closing Date shall be
deemed to include the Company and FAMCO and the Company's other subsidiaries.
1. Securities. Subject to the terms and conditions herein contained, the
----------
Company proposes to issue and sell to the several Underwriters an aggregate of
3,500,000 shares (the "Firm Securities") of the Company's Class A Common Stock,
---------------
no par value per share ( the "Class A Common Stock"). The Company also proposes
--------------------
to issue and sell to the several Underwriters not more than 525,000 additional
shares of Class A Common Stock if requested by the Representative as provided in
Section 3 of this Agreement. Any and all shares of Class A Common Stock to be
purchased by the Underwriters pursuant to such option are referred to herein as
the "Option Securities," the Firm Securities and any Option Securities are
-----------------
collectively
- --------------------
/1/ Plus an option to purchase from First Alliance Mortgage Company up to
525,000 additional shares to cover over-allotments.
1
<PAGE>
referred to herein as the "Securities." The Class A Common Stock and Class B
----------
Common Stock of the Company are collectively referred to as the "Common Stock".
------------
2. Representations and Warranties of the Company and the Principal
---------------------------------------------------------------
Stockholders.
- ------------
(a) The Company represents and warrants to, and agrees with, each of
the several Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-03633)
with respect to the Securities, including a prospectus subject to
completion, has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
----------
(the "Act"), and one or more amendments to such registration statement may
---
have been so filed. After the execution of this Agreement, the Company
will file with the Commission either (i) if such registration statement, as
it may have been amended, has been declared by the Commission to be
effective under the Act, either (A) if the Company relies on Rule 434 under
the Act, a Term Sheet (as hereinafter defined) relating to the Securities,
that shall identify the Preliminary Prospectus (as hereinafter defined)
that it supplements containing such information as is required or permitted
by Rules 434, 430A and 424(b) under the Act or (B) if the Company does not
rely on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act, and in the case of either clause
(i)(A) or (i)(B) of this sentence, as have been provided to and approved by
the Representative prior to the execution of this Agreement, or (ii) if
such registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, an amendment to
such registration statement, including a form of prospectus, a copy of
which amendment has been furnished to and approved by the Representative
prior to the execution of this Agreement. The Company may also file a
related registration statement with the Commission pursuant to Rule 462(b)
under the Act for the purpose of registering certain additional Securities,
which registration statement shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
---------------------
Statement" means the registration statement initially filed relating to the
---------
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Rule 462(b)
-----------
Registration Statement" means any registration statement filed with the
----------------------
Commission pursuant to Rule 462(b) under the Act (including the
Registration Statement and any Preliminary Prospectus or Prospectus
incorporated therein at the time such Registration Statement becomes
effective); the term "Registration Statement" includes both the Original
----------------------
Registration Statement and any Rule 462(b) Registration Statement; the term
"Preliminary Prospectus" means each prospectus subject to completion filed
----------------------
with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means: (A) if the
----------
2
<PAGE>
Company relies on Rule 434 under the Act, the Term Sheet relating to the
Securities that is first filed pursuant to Rule 424(b)(7) under the Act,
together with the Preliminary Prospectus identified therein that such Term
Sheet supplements; (B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or (C) if the Company does not rely on Rule 434 under the
Act and if no prospectus is required to be filed pursuant to Rule 424(b)
under the Act, the prospectus included in the Registration Statement; and
the term "Term Sheet" means any term sheet that satisfies the requirements
----------
of Rule 434 under the Act. Any reference herein to the "date" of a
Prospectus that includes a Term Sheet shall mean the date of such Term
Sheet.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any Preliminary
Prospectus was filed with the Commission it (A) contained all statements
required to be stated therein in accordance with, and complied in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not include any untrue
statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, it (A)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with
the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading. When the Prospectus or any
Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or any part thereof or such amendment or supplement is not
required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and on the Firm Closing Date and any Option Closing
Date (both as hereinafter defined), the Prospectus, as amended or
supplemented at any such time, (A) contained or will contain all statements
required to be stated therein in accordance with, and complied or will
comply in all material respects with the requirements of, the Act and the
rules and regulations of the Commission thereunder and (B) did not or will
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (ii) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or
any amendment thereto or the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representative
specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement has not been declared effective (i) the
Company has filed a Rule 462(b) Registration Statement in compliance with
and that is effective upon filing pursuant to Rule 462(b) and has received
confirmation of its receipt and (ii) the
3
<PAGE>
Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the
Act or the Commission has received payment of such filing fee.
(iv) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under
the laws of their respective jurisdictions of incorporation and are duly
qualified to transact business as foreign corporations and are in good
standing under the laws of all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their respective
businesses requires such qualification, except where the failure to be so
qualified does not result in a material adverse change in the condition
(financial or otherwise), management, business, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a whole
(a "Material Adverse Effect").
(v) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and
conduct their respective businesses as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus); and the Company has full power
(corporate and other) to enter into this Agreement and to carry out all the
terms and provisions hereof to be carried out by it.
(vi) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned beneficially by the Company free and clear
of any security interests, liens, encumbrances, equities or claims.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus). All of the issued
shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. The Firm Securities
and the Option Securities have been duly authorized and at the Firm Closing
Date or the related Option Closing Date (as the case may be), after payment
therefor in accordance herewith, will be validly issued, fully paid and
nonassessable. At the Firm Closing Date or the Option Closing Date, no
holders of outstanding shares of capital stock of the Company will be
entitled as such to any preemptive or other rights to subscribe for any of
the Securities, and no holder of securities of the Company has any right
which has not been fully exercised or waived to require the Company to
register the offer or sale of any securities owned by such holder under the
Act in the public offering contemplated by this Agreement.
(viii) The capital stock of the Company conforms to the
description thereof contained in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
4
<PAGE>
(ix) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such subsidiary any such
capital stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any such subsidiary to
issue any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(x) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its consolidated subsidiaries and the results
of operations and cash flows as of the dates and periods therein specified.
Such financial statements and schedules have been prepared in accordance
with generally accepted accounting principles ("GAAP") consistently applied
throughout the periods involved (except as otherwise noted therein). The
selected financial data set forth under the captions "Capitalization" and
"Selected Consolidated Financial Data" in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present, in accordance with GAAP on the basis stated in the
Prospectus (or such Preliminary Prospectus), the information included
therein.
(xi) Deloitte & Touche LLP, who have audited certain financial
statements of the Company and its consolidated subsidiaries and delivered
their report with respect to the audited consolidated financial statements
included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
are independent public accountants as required by the Act and the
applicable rules and regulations thereunder.
(xii) The execution and delivery of this Agreement have been
duly authorized by the Company and this Agreement has been duly executed
and delivered by the Company, and is the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by the effect of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to
rights and remedies of creditors or by general equitable principles.
(xiii) No legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party or to which the property
of the Company or any of its subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectus and are not
described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), to the best of the Company's knowledge, and
no such proceedings have been threatened against the Company or any of its
subsidiaries or with respect to any of their respective properties; and no
contract or other document is required to be described in the Registration
Statement or the
5
<PAGE>
Prospectus or to be filed as an exhibit to the Registration Statement that
is not described therein (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) or filed as required.
(xiv) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained,
such as may be required under state securities or blue sky laws, such as
may be required by the National Association of Securities Dealers, Inc.
(the "NASD") and, if the registration statement filed with respect to the
Securities (as amended) is not effective under the Act as of the time of
execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (B) conflict with or result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, lease
or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties are bound, or the charter documents
or by-laws of the Company or any of its subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or any
of its subsidiaries.
(xv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
neither the Company nor any of its subsidiaries has sustained any loss or
interference with their respective businesses or properties having or
resulting in a Material Adverse Effect from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding and there has not
been any event, circumstance, or development that results in, or that the
Company believes would result in, a Material Adverse Effect, except in each
case as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xvi) The Company has not, directly or indirectly (except for
the sale of Securities under this Agreement), (i) taken any action designed
to cause or to result in, or that has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased, or paid anyone any compensation for soliciting
purchases of, the Securities or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(xvii) None of the Company, its subsidiaries or any employee of
the Company or its subsidiaries has made any payment of funds of the
Company or its subsidiaries prohibited by law and no funds of the Company
or its subsidiaries have been set aside to be used for any payment
prohibited by law.
6
<PAGE>
(xviii) No Default or Event of Default (as defined in that certain
Interim Warehouse and Security Agreement dated as of October 29, 1993, as
amended, between Prudential Securities Realty Funding Corporation and the
Company), no Events of Servicing Termination or increase in the Reserve
Account Required Amount (as defined in that certain Pooling and Servicing
Agreement relating to First Alliance Home Equity Trust 1992-1 Home Equity
Loan Certificates dated as of January 31, 1992, between the Company and
Chemical Bank in its capacity as Master Servicer and in its fiduciary
capacity as Trustee), no Events of Servicing Termination or increase in the
Reserve Account Required Amount (as defined in that certain Pooling and
Servicing Agreement relating to First Alliance Home Equity Trust 1992-2
Home Equity Loan Certificates dated as of October 1, 1992, between the
Company and Chemical Bank in its capacity as Master Servicer and in its
capacity as Trustee), no Events of Servicing Termination or increase in the
Specified Subordinated Amount (as defined in that certain Pooling and
Servicing Agreement relating to First Alliance Mortgage Loan Trust 1993-2
dated as of August 1, 1993, among the Company, the Company as Servicer and
Chemical Bank as Trustee and as Master Servicer), no Events of Servicing
Termination or increase in the Specified Subordinated Amount (as defined in
that certain Pooling and Servicing Agreement dated as of November 1, 1993,
relating to First Alliance Mortgage Loan Trust 1993-2 among the Company,
the Company as Servicer and Chemical Bank as Trustee and Master Servicer),
no Events of Servicing Termination or increase in the Specified
Subordinated Amount (as defined in that certain Pooling and Servicing
Agreement relating to First Alliance Mortgage Loan Trust 1994-1 dated as of
February 1, 1994, among the Company, the Company as Servicer and Chemical
Bank as Trustee and as Master Servicer), no Events of Servicing Termination
or increase in the Specified Subordinated Amount (as defined in that
certain Pooling and Servicing Agreement relating to First Alliance Mortgage
Loan Trust 1994-2 dated as of May 1, 1994 among the Company, the Company as
Servicer and Chemical Bank as Trustee and as Master Servicer), no Events of
Servicing Termination or increase in the Specified Subordinated Amount (as
defined in that certain Pooling and Servicing Agreement relating to First
Alliance Mortgage Loan Trust 1994-3, dated as of August 1, 1994, among the
Company, the Company as Servicer and Bankers Trust Company as Trustee and
as Master Servicer), no Events of Servicing Termination or increase in the
Specified Subordinated Amount (as defined in that certain pooling and
Servicing Agreement relating to First Alliance Mortgage Loan Trust 1994-4
dated as of December 1, 1994, among the Company, the Company as Servicer
and Bankers Trust Company of California, N.A. as trustee), no Events of
Servicing Termination or increase in the Specified Subordinated Amount (as
defined in that certain Pooling and Servicing Agreement relating to First
Alliance Mortgage Loan Trust 1995-1 dated as of May 1, 1995, among the
Company and the Company as Servicer and Bankers Trust Company of
California, N.A. as Trustee), no Events of Servicing Termination or
increase in the Specified Subordinated Amount (as defined in that certain
Pooling and Servicing Agreement relating to First Alliance Mortgage Loan
Trust 1995-2 dated as of December 1, 1995, among the Company, the Company
as Servicer and Bankers Trust Company of California, N.A. as Trustee), and
no event of default (as defined in that certain Pooling and Servicing
Agreement relating to First Alliance Mortgage Loan Trust 1996-1, dated
March 1, 1996 among the Company and the Company as Servicer,
7
<PAGE>
Prudential Securities Secured Financing Corporation, as Depositor, and
Bankers Trust Company of California, N.A., as Trustee) has occurred and, to
the best of the Company's knowledge, there is no event which, with the
giving of notice or the passage of time or both, would give rise to such a
Default, Event of Default or Events of Servicing Termination or increase in
the Specified Subordinated Amount.
(xix) The description of past securitization transactions
effected by the Company, as contained in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), is true and complete in all material respects and
to the Company's best knowledge, no event or series of events has occurred
that would result in any of the securities issued in connection with any of
such transactions being downgraded or placed on a watch list with negative
implications by any rating agency or similar organization, or that would
impair the Company's or its subsidiaries' ability to consummate future
securitization transactions upon economic terms consistent with past
securitization transactions or otherwise cause the Company and its
subsidiaries to suffer any material adverse effect with respect to any past
or future securitization transaction (other than any such event or series
of events described in the Prospectus, or, if the Prospectus is not yet in
existence, the most recent Preliminary Prospectus).
(xx) (a) The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their
respective businesses except where the failure to possess any such item
would not have a Material Adverse Effect, and (b) neither the Company nor
any such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
that, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect, except
as described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xxi) The Company is not an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and this
transaction will not cause the Company to become an investment company
subject to registration under the 1940 Act.
(xxii) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not have
a Material Adverse Effect and has paid all taxes required to be paid by it
and any other assessment, fine or penalty levied against it, to the extent
that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith
or as described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). FAMCO has
validly elected to be treated as an S corporation for federal and
California income tax purposes since May 1, 1988 and has continued to
qualify as an S corporation since that date. FAMCO will remain an S
corporation for federal and California tax purposes until termination of
such S
8
<PAGE>
corporation status immediately prior to the consummation of the sale of the
Securities pursuant to this Agreement.
(xxiii) Except for the shares of capital stock of each of the
subsidiaries owned by the Company, neither the Company nor any such
subsidiary owns any shares of stock or any other equity securities of any
corporation or has any equity interest in any firm, partnership,
association or other entity.
(xxiv) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (A) transactions are executed in accordance with
management's general or specific authorizations; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (C) access to assets is permitted only in accordance
with management's general or specific authorization; and (D) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxv) Except as described in the Registration Statement and the
Prospectus, no default exists, and no event has occurred that, with notice
or lapse of time or both, would constitute a default, in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, lease or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their respective properties is
bound or may be affected, in any respect that would have a Material Adverse
Effect.
(xxvi) The Company has not distributed and, prior to the later
of (A) the Firm Closing Date or any Option Closing Date and (B) the
completion of the distribution of the Securities, will not distribute any
offering material in connection with the offering and sale of the
Securities other than the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or Term Sheet or any amendment
or supplement thereto, or other materials, if any, permitted by the Act.
(xxvii) Neither the Company nor its subsidiaries own any items
of real property other than (A) real property obtained as a result of the
exercise of remedies under deeds of trust or mortgages securing loans made
in the ordinary course of business by the Company and (B) certain real
property located in Palm Springs, California, and each of them has
marketable title to all personal property owned by each of them, in each
case free and clear of any security interests, liens, encumbrances,
equities, claims and other defects, except such as do not have a Material
Adverse Effect on the value of such property and do not interfere with the
use made or proposed to be made of such property by the Company or such
subsidiary, and any real property and buildings held under lease by the
Company or any such subsidiary are held under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or such
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subsidiary, in each case except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxviii) No labor dispute with the employees of the Company or
any of its subsidiaries exists or, to the Company's knowledge, is
threatened or imminent that could result in a Material Adverse Effect,
except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xxix) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such subsidiary has received
any notice of infringement of or conflict with asserted rights of any third
party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of an unfavorable decisions, ruling or finding,
would have a Material Adverse Effect, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(xxx) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which they are engaged; and neither the Company nor any such subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not have a Material Adverse Effect, except as
described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xxxi) The merger of a subsidiary of the Company with and into
FAMCO, in order to effect the reorganization of the Company in Delaware
(the "Reorganization Merger"), has been approved by all necessary corporate
---------------------
action on behalf of the Company and FAMCO and the merger agreement and
related certificates, in appropriate form to effect the Reorganization
Merger, have been filed with the Secretary of State of California in order
to permit the Reorganization Merger to become effective at 8:00 A.M., New
York City time, on the Firm Closing Date.
(xxxii) The Company's conversion of its Servicing Portfolio to the
newly installed loan servicing software has been substantially completed and the
Company has no reason to believe that the reports generated by such software
contain any material inaccuracies.
(xxxiii) The Company has filed all reports required under the
Exchange Act with respect to the registration statements filed in connection
with the asset securitizations sponsored by the Company.
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(b) [Brian and Sarah Chisick, as Co-Trustees of the Brian and Sarah
Chisick Revocable Trust U/A 3-7-79, Brian Chisick as Trustee of The Chisick
Trust No. 1 U/D/T 3-30-96, and Brian Chisick as Trustee of The Chisick Trust No.
2 U/D/T 3-30-96], in their capacities as principal stockholders of the Company
(the "Principal Stockholders"), represent and warrant to, and agree with each of
the several Underwriters that the Registration Statement as amended as of the
Firm Closing Date, does not include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the Firm
Closing Date and as of Option Closing Date does not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(c) Any certificate signed by (i) any officer of the Company or (ii)
by the Principal Stockholders and delivered to the Representative or to counsel
for the Underwriters shall be deemed a representation and warranty by the
Company or the Principal Stockholders, respectively, to each Underwriter, as to
the matters covered thereby.
3. Purchase, Sale and Delivery of the Securities.
---------------------------------------------
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each of the Underwriters, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company, at
a purchase price of $____ per share, the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule 1 hereto. One or more
----------
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representative request
upon notice to the Company at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company to the Representative for the
respective accounts of the Underwriters, against payment by or on behalf of the
Underwriters of the aggregate purchase price therefor by wire transfer in same
day funds (the "Wired Funds") to the account of the Company. Such delivery of
-----------
and payment for the Firm Securities shall be made at the offices of Gibson, Dunn
& Crutcher LLP, 4 Park Plaza, Suite 1700, Irvine, California, 92714 at 9:30
A.M., New York City time, on ________, 1996, or at such other place, time or
date as the Representative and the Company may agree upon or as the
Representative may determine pursuant to Section 9 hereof, such time and date of
delivery against payment being herein referred to as the "Firm Closing Date."
-----------------
The Company will make such certificate or certificates for the Firm Securities
available for checking and packaging by the Representative at the offices in
[New York, New York] of the Company's transfer agent or registrar at least 24
hours prior to the Firm Closing Date.
(b) For the sole purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of this
Section 3. The option granted hereby may be exercised as to all or any part of
the Option
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Securities from time to time within thirty days after the date of the Prospectus
(or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next
business day thereafter when the New York Stock Exchange is open for trading).
The Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representative may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed within 24 hours in writing) to the Company setting forth
the aggregate number of Option Securities as to which the several Underwriters
are then exercising the option and the date and time for delivery of and payment
for such Option Securities. Any such date of delivery shall be determined by
the Representative but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representative and the
Company may agree upon or as the Representative may determine pursuant to
Section 9 hereof, is herein called the "Option Closing Date" with respect to
-------------------
such Option Securities. Upon exercise of the option as provided herein, the
Company shall become obligated to sell to each of the several Underwriters, and,
subject to the terms and conditions herein set forth, each of the Underwriters
(severally and not jointly) shall become obligated to purchase from the Company,
the same percentage of the total number of the Option Securities as to which the
several Underwriters are then exercising the option as such Underwriter is
obligated to purchase of the aggregate number of Firm Securities, as adjusted by
the Representative in such manner as it deems advisable to avoid fractional
shares. If the option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 3, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph 3(b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) It is understood that you, individually and not as the
Representative, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
(d) The Company hereby acknowledges that the wire transfer by or on
behalf of the Underwriters of the purchase price for any Securities does not
constitute closing of a purchase and sale of the Securities. Only execution and
delivery of a receipt (by facsimile or otherwise) for the Securities by the
Underwriters indicates completion of the closing of a purchase of the Securities
from the Company. Furthermore, in the event that the Underwriters wire funds to
the Company prior to the completion of the closing of a purchase of Securities,
the Company hereby acknowledges that until the Underwriters execute and deliver
a receipt for the Securities, by facsimile or otherwise, the Company will not be
entitled to the wired funds and shall return the wired funds to the Underwriters
as soon as practicable (by wire transfer of same-day funds) upon demand. In the
event that the closing of a purchase of Securities is not completed and the wire
funds are not returned by the Company to the Underwriters on the same day the
wired funds were received by the Company, the Company agrees to pay to the
Underwriters in respect of each day the wire funds are not returned by it, in
same-day funds,
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<PAGE>
interest at the Prime Rate as stated in the Wall Street Journal on the date
hereof on the amount of such wire funds.
4. Offering by the Underwriters. Upon your authorization of the release
----------------------------
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and agrees with each
------------------------
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible. If required, the Company will file
the Prospectus or any Term Sheet that constitutes a part thereof and any
amendment or supplement thereto with the Commission in the manner and within the
time period required by Rules 434 and 424(b) under the Act. During any time
when a prospectus relating to the Securities is required to be delivered under
the Act, the Company (i) will comply with all requirements imposed upon it by
the Act and the rules and regulations of the Commission thereunder to the extent
necessary to permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission the Prospectus, Term
Sheet or the amendment referred to in the second sentence of Section 2(a)
hereof, any amendment or supplement to such Prospectus, Term Sheet or any
amendment to the Registration Statement or any Rule 462(b) Registration
Statement of which the Representative shall not previously have been advised and
furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representative shall not have given its
consent. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon request by the
Representative or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be necessary or advisable in connection with the distribution of the Securities
by the several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the Representative,
promptly after receiving notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
provide to the Representative copies of each such filing.
(b) The Company will advise the Representative, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement or any amendment thereto or
any order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, (iii)
the institution, threatening or contemplation of any proceeding for any such
purpose, or (iv) any request made by the Commission for amending the Original
Registration Statement or any Rule 462(b) Registration Statement, for amending
or supplementing the Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any
13
<PAGE>
such stop order and, if any such stop order is issued, to obtain the withdrawal
thereof as promptly as possible.
(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representative may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection therewith
-------- -------
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representative thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representative and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of such
registration statement and any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representative may reasonably request; without
limiting the application of clause (iii) of this sentence, the Company, not
later than (A) 8:00 P.M., New York City time, on the date of determination of
the public offering price, if such determination occurred at or prior to 10:00
A.M., New York City time, on such date or (B) 2:00 P.M., New York City time, on
the business day following the date of determination of the public offering
price, if such determination occurred after 10:00 A.M., New York City time, on
such date, will deliver to the Underwriters, without charge, as many copies of
the Prospectus and any amendment or supplement thereto as the Representative may
reasonably request for purposes of confirming orders that are expected to settle
on the Firm Closing Date. The Company will provide or cause to be provided to
each of the Representative, and to each Underwriter that so requests in writing,
a copy of each report on Form SR filed by the Company as required by Rule 463
under the Act.
(f) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier
14
<PAGE>
of (i) 10:00 P.M., Eastern time on the date of this Agreement and (ii) the time
confirmations are sent or given, as specified by Rule 462(b)(2).
(g) The Company, as soon as practicable, will make generally available
to its securityholders and to the Representative a consolidated earnings
statement of the Company and its subsidiaries that satisfies the provisions of
Section 11(a) of the Act and Rule 158 thereunder.
(h) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will not, directly or indirectly, without the prior
written consent of the Representative, on behalf of the Underwriters, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 180 days
after the date hereof, except pursuant to this Agreement and except for the
grant of options to purchase an aggregate of 510,000 shares of Class A Common
Stock as disclosed in the Prospectus, issuances pursuant to the exercise of
warrants or employee stock options or pursuant to the terms of convertible
securities of the Company outstanding on the date hereof.
(j) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii)(A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.
(k) The Company will obtain the lockup agreements described in Section
7(j) hereof prior to the Firm Closing Date.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, your counsel and counsel to the
Company responding to or commenting on such rumor, publication or event.
(m) The Company will cause the Securities to be duly included for
quotation on the Nasdaq National Market prior to the Firm Closing Date. The
Company will use its best efforts to ensure that the Securities remain included
for quotation on the Nasdaq National Market following the Firm Closing Date.
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<PAGE>
(n) The Company will cause the Reorganization Merger to be effected as
of the Firm Closing Date, subject to completion of filing with the State of
California.
6. Expenses. The Company will pay all costs and expenses incident to the
--------
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Registration Statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the Securities and (vii)
any quotation of the Securities on the Nasdaq National Market. If the sale of
the Securities provided for herein is not consummated because any condition to
the obligations of the Underwriters set forth in Section 7 hereof is not
satisfied, because this Agreement is terminated pursuant to Section 11 hereof or
because of any failure, refusal or inability on the part of the Company to
perform all obligations and satisfy all conditions on its part to be performed
or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Representative upon demand for all
reasonable out-of-pocket expenses (including counsel fees and disbursements)
that shall have been incurred by it in connection with the proposed purchase and
sale of the Securities. The Company shall not in any event be liable to any of
the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
several Underwriters to purchase and pay for the Firm Securities shall be
subject to the accuracy of the representations and warranties of the Company
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of its covenants and agreements hereunder and to the
following additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Registration Statement or such amendment, and if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement, shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York City time, on the date on which the amendment to the
Registration Statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission, and (ii) the time confirmations are sent
16
<PAGE>
or given as specified by Rule 462(b) or, with respect to the Original
Registration Statement, such later time and date as shall have been consented to
by the Representative; if required, the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto shall have
been filed with the Commission in the manner and within the time period required
by Rules 434 and 424(b) under the Act; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall have
been issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Representative, shall be
contemplated by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) The Representative shall have received an opinion, dated the Firm
Closing Date, of Gibson, Dunn & Crutcher LLP, counsel for the Company, to the
effect that:
(i) the Company and each of its U.S. subsidiaries listed in
Schedule 2 hereto (the "Subsidiaries") have been duly organized and are
---------- ------------
validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under
the laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
does not or would not have a Material Adverse Effect;
(ii) the Company and each of the Subsidiaries have corporate
power to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and the
Prospectus, and the Company has corporate power to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it;
(iii) the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned by the Company free and clear of any
perfected security interests that have been in existence for at least 21
days preceding the date of such opinion or, to the best knowledge of such
counsel, any other security interests, liens, encumbrances or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, and, to the best knowledge of such
counsel, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities; the Firm
Securities have been duly authorized by all necessary corporate action of
the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully paid
and nonassessable; to the best knowledge of such counsel, no holders of
outstanding shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the Securities; and,
to the best knowledge of such counsel, no
17
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holders of securities of the Company are entitled to have such securities
registered under the Registration Statement;
(v) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide a
fair summary of such provisions; and the statements set forth under the
heading "Business--Governmental Regulation" and "Shares Eligible for Future
Sale" in the Prospectus, insofar as such statements constitute a summary of
the legal matters, documents or proceedings referred to therein, provide a
fair summary of such legal matters, documents and proceedings in all
material respects;
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company;
(vii) to the best knowledge of such counsel, (A) no legal or
governmental proceedings are pending to which the Company or any of the
Subsidiaries is a party or to which the property of the Company or any of
the Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein, and
no such proceedings have been threatened against the Company or any of the
Subsidiaries or with respect to any of their respective properties and (B)
no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that is not described therein or filed as
required;
(viii) to the knowledge of such counsel, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), (1) the Company and its
Subsidiaries have not incurred any material liability or obligation, direct
or contingent, nor entered into any material transaction not in the
ordinary course of business; and (2) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock, except in each
case as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus);
(ix) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained
and such as may be required under state securities or blue sky laws and by
the NASD, or (B) conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, lease or other agreement or instrument known to
such counsel to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of
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their respective properties are bound, or the charter documents or by-laws
of the Company or any of the Subsidiaries, or, so far as it is known to
such counsel, any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
having jurisdiction over the Company or any of the Subsidiaries, in each
case, where such conflict, breach, violation or default would have a
Material Adverse Effect;
(x) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner
and within the time period required by Rules 434 and 424(b); and, to such
counsel's best knowledge, no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or are
contemplated by the Commission;
(xi) the Registration Statement originally filed with respect to
the Securities and each amendment thereto, any Rule 462(b) Registration
Statement and the Prospectus (in each case, other than the financial
statements and other financial and statistical information contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements of the Act
and the rules and regulations of the Commission thereunder;
(xii) if the Company elects to rely on Rule 434, the Prospectus
is not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A);
(xiii) the Company is not, and the transactions contemplated by
this Agreement will not cause the Company to become, an investment company
subject to registration under the 1940 Act;
(xiv) the specimen stock certificate of the Company filed as an
exhibit to the Registration Statement is in due and proper form to evidence
shares of Common Stock, has been duly authorized and approved by the Board
of Directors of the Company and complies with all legal requirements
applicable under the Delaware General Corporation Law; and
(xv) the execution and delivery of the merger agreement effecting
the Reorganization Merger have been duly authorized by all necessary
corporate action on the part of the Company and FAMCO; the Reorganization
Merger has been consummated and is effective in accordance with California
law subject only to confirmation of the acceptance of the filing of the
merger agreement and related certificates by the State of California.
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<PAGE>
Such counsel shall also state that they have no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (except such counsel
need express no view as to the financial statements and notes thereto, schedules
and reports thereon, and other financial and statistical data included or
incorporated by reference in the Registration Statement or Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem(s) proper, on certificates of responsible
officers of the Company and public officials and opinions of such other counsel
as are reasonably acceptable to the Representative.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) [The Company] shall have received an opinion dated the Firm
Closing Date from Doss, Cavett and Page in form and substance satisfactory to
the Representative.
(d) The Representative shall have received from Arter & Hadden LLC an
opinion dated the Firm Closing Date to the effect that the description of past
securitization transactions effected by the Company (other than the financial
data as to which such counsel need express no opinion), as contained in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), is true and complete in all
material respects.
(e) [The Company] shall have received from Deloitte & Touche LLP
a letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representative, to the effect
that:
(i) they are independent accountants with respect to the Company
and its consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements examined by them and included in the Registration Statement and
the Prospectus comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iii) on the basis of carrying out certain specified procedures
(which do not constitute an examination made in accordance with generally
accepted auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the shareholders, the board of
directors and any committees thereof of the Company and
20
<PAGE>
each of its consolidated subsidiaries, and inquiries of certain officials
of the Company and its consolidated subsidiaries who have responsibility
for financial and accounting matters, nothing came to their attention that
caused them to believe that at a specific date not more than five business
days prior to the date of such letter, there were any changes in the
capital stock or total debt of the Company and its consolidated
subsidiaries or any decreases in net current assets or stockholders' equity
of the Company and its consolidated subsidiaries, in each case compared
with amounts shown on the December 31, 1995 consolidated balance sheet
included in the Registration Statement and the Prospectus, or for the
period from January 1, 1996 to such specified date there any decreases, as
compared with $58,880,000, $30,542,000, $1.39 in total revenues, net income
or pro forma net income per share, respectively, of the Company and its
consolidated subsidiaries, except in all instances for changes, decreases
or increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included in the
Registration Statement and the Prospectus, and have compared such amounts,
percentages and financial information with such records of the Company and
its consolidated subsidiaries and with information derived from such
records and have found them to be in agreement, excluding any questions of
legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases which, in the reasonable discretion of the
Representative, are likely to result in a Material Adverse Effect, it shall be a
further condition to the obligations of the Underwriters that such letters shall
be accompanied by a written explanation of the Company as to the significance
thereof, unless the Representative deems such explanation unnecessary.
References to the Registration Statement and the Prospectus in this
paragraph (e) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(f) [The Company] shall have received from Deloitte & Touche LLP a
certificate, dated the Firm Closing Date, in form and substance satisfactory to
the Representative, to the effect that, in their opinion, the Company has been
an S corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended, and comparable laws of the State of California since May 1, 1988 until
termination of such S corporation status immediately prior to the consummation
of the sale of Securities pursuant to this Agreement.
(g) The Representative shall have received a certificate, dated the
Firm Closing Date, of Brian Chisick and Mark K. Mason in their capacities as the
principal executive officer and the principal financial or accounting officer,
respectively, of the Company to the effect that:
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<PAGE>
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the
best of the Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has sustained any loss or interference
with their respective businesses or properties having or resulting in a
Material Adverse Effect from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding, and there has not been any event,
circumstance, or development that results in, or that the Company believes
would result in, a Material Adverse Effect, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment
or supplement thereto).
(h) The Representative shall have received a certificate, dated the
Firm Closing Date (or the Option Closing Date, as the case may be), of the
Principal Stockholders, to the effect that (i) the Registration Statement, as
amended as of the Firm Closing Date (or the Option Closing Date, as the case may
be), does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading, and
the Prospectus, as amended or supplemented as of the Firm Closing Date (or the
Option Closing Date, as the case may be), does not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(i) The Representative shall have received from each person who is a
director or officer of the Company or who owns more than [ ] shares of
Common Stock (as calculated on the Firm Closing Date) an agreement to the effect
that such person will not, except to the extent otherwise specifically permitted
by the terms of each such person's agreement, directly or indirectly, without
the prior written consent of the Representative, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of an option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of 180 days after the date of this
Agreement; provided, however, that Mark K. Mason shall not be prohibited after
-------- -------
22
<PAGE>
December 29, 1996 from selling up to [29,025] shares of Class B Common Stock,
solely in order to pay applicable federal and state income taxes relating to his
shares of Class B Common Stock.
(j) On or before the Firm Closing Date, the Representative and counsel
for the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.
(k) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
(l) The Representative shall have received an opinion, dated the Firm
Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and Prospectus, and such other related matters as the Representative
may reasonably require, and the Company shall have furnished to such counsel
such documents as they may reasonably request for the purpose of enabling them
to pass upon such matters.
(m) The charter of First Alliance Securities Corporation, a
____________ corporation, shall have been amended so that the name of such
corporation contains no reference to "First Alliance."
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representative and
counsel for the Underwriters. The Company shall furnish to the Representative
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representative and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution.
--------------------------------
(a) Except with respect to any losses, claims, damages or liabilities
arising out of or based upon untrue statements, alleged untrue statements,
omissions or alleged omissions made exclusively by the Company or upon Section
8(a)(i) of this Agreement, which shall apply only to the Company, the Company
and the Principal Stockholders jointly and severally agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), against any losses,
------------
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become
23
<PAGE>
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 2(a) of this Agreement,
(ii) any untrue statement or alleged untrue statement made by the
Principal Stockholders in Section 2(b) of this Agreement,
(iii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company or Principal
Stockholders filed in any jurisdiction in order to qualify the Securities
under the securities or blue sky laws thereof or filed with the Commission
or any securities association or securities exchange (each, an
"Application"),
-----------
(iv) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to
make the statements therein not misleading; or
(v) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in connection
with the marketing of the Securities, including without limitation, slides,
videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company and Principal
-------- -------
Stockholders will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representative
specifically for use therein; and provided, further, that neither the Company
-------- -------
nor any of the Principal Stockholders will be liable to any Underwriter or any
person controlling such Underwriter with respect to any such untrue statement or
omission made in any Preliminary Prospectus that is corrected in the Prospectus
(or any amendment or supplement thereto) if the person asserting any such loss,
claim, damage or liability purchased Securities from such Underwriter but was
not sent or given a copy of the Prospectus (as amended or supplemented) at or
prior to the written confirmation of the sale of such Securities to such person
in any case where such delivery of the Prospectus (as amended or supplemented)
is required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of
24
<PAGE>
noncompliance by the Company with Section 5(d) and (e) of this Agreement. This
indemnity agreement will be in addition to any liability that the Company and
Principal Stockholders may otherwise have. Neither the Company nor Principal
Stockholders will, without the prior written consent of the Representative,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not any Underwriter or any person who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of all of the Underwriters and such controlling persons from all liability
arising out of such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, Principal Stockholders and each person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act against any losses, claims, damages or
liabilities to which the Company or any such director, officer of the Company,
Principal Stockholders or controlling person of the Company or Principal
Stockholders may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application or (ii) the omission or the alleged omission to
state therein a material fact required to be stated in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representative specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company or any such director,
officer or controlling person or Principal Stockholders in connection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
-------- -------
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded or shall have been advised by its counsel that there
may be one or more
25
<PAGE>
legal defenses available to it and/or other indemnified parties that conflict
with those available to the indemnifying party, the indemnifying party shall not
have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representative in
the case of paragraph (a) of this Section 8, representing the indemnified
parties under such paragraph (a) who are parties to such action or actions) or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and Principal
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault of
the parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, Principal Stockholders or the Underwriters, the parties' relative
intents, knowledge, access to information and opportunity to correct or prevent
such statement or omission, and any other equitable considerations appropriate
in the circumstances. The Company, Principal Stockholders and the Underwriters
agree that it would
26
<PAGE>
not be equitable if the amount of such contribution were determined by pro rata
or per capita allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to above in this paragraph (d).
Notwithstanding any other provision of this paragraph (d), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Representative's Agreement Among Underwriters. For the purposes of this
paragraph 8(d), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each person, if any, who controls the Company or Principal Stockholders within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company or Principal Stockholders,
as the case may be.
27
<PAGE>
(e) In making a claim for indemnification under this Section 8, the
indemnified parties may proceed against either (i) both the Company and the
Principal Stockholders jointly or (ii) the Company only, but may not proceed
solely against the Principal Stockholders. In the event that the indemnified
parties are entitled to seek indemnity or contribution hereunder against any
loss, liability, claim, damage and expense incurred with respect to a settlement
or judgment from a trial court (the "First Judgment") then, as a precondition to
any indemnified party obtaining indemnification or contribution from the
Principal Stockholders, the indemnified parties shall first obtain a judgment
from a trial court that such indemnified parties are entitled to indemnity or
contribution under this Agreement with respect to such loss, liability, claim,
damage or expense (the "Final Judgment") from the Company and the Principal
Stockholders and shall seek to satisfy such Final Judgment in full from the
Company by making a written demand upon the Company for such satisfaction. The
indemnified parties may seek a Final Judgment either through a cross- or
counter-claim in the action which results in the First Judgment, or they may
bring a subsequent, separate action against the Company and the Principal
Stockholders for indemnification. Only in the event such Final Judgment shall
remain unsatisfied in whole or in part 45 days following the date of receipt by
the Company of such demand shall any indemnified party have the right to take
action to satisfy such Final Judgment by making demand directly on the Principal
Stockholders (but only if and to the extent the Company has not already
satisfied such Final Judgment, whether by settlement, release or otherwise).
The indemnified party or parties may exercise this right to first seek to obtain
payment from the Company and thereafter obtain payment from the Principal
Stockholders without regard to the pursuit by any party of its rights to the
appeal of such Final Judgment. The indemnified party or parties shall, however,
be relieved of their obligation to first obtain a Final Judgment, seek to obtain
payment from the Company with respect to such Final Judgment or, having sought
such payment, to wait such 45 days after failure by the Company to immediately
satisfy any such Final Judgment if (i) the Company files a petition for relief
under the United States Bankruptcy Code (the "Bankruptcy Code"), (ii) an order
for relief is entered against the Company in an involuntary case under the
Bankruptcy Code, (iii) the Company makes an assignment for the benefit of its
creditors, or (iv) any court orders or approves the appointment of a receiver or
custodian for the Company or a substantial portion of its assets.
(f) Notwithstanding any other provision of this Agreement, the
aggregate liability of the Principal Stockholders under this Agreement,
including this Section 8 hereof, shall not exceed the sum of Fifteen Million
Dollars ($15,000,000).
9. Default of Underwriters. If one or more Underwriters default in their
-----------------------
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may make
arrangements satisfactory to the Representative for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
28
<PAGE>
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representative are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters
as described in this Section 9, the Representative shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers,
Principal Stockholders and the several Underwriters set forth in this Agreement
or made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by or
on behalf of the Company, any of its officers or directors, Principal
Stockholders, any Underwriter or any controlling person referred to in Section 8
hereof and (ii) delivery of and payment for the Securities. The respective
agreements, covenants, indemnities and other statements set forth in Sections 6
and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
11. Termination.
-----------
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the Representative
by notice to the Company given prior to the Firm Closing Date or the related
Option Closing Date, respectively, in the event that the Company or the
Principal Stockholders shall have failed, refused or been unable to perform all
obligations and satisfy all conditions on its part to be performed or satisfied
hereunder at or prior thereto or, if at or prior to the Firm Closing Date or,
with respect to the Company, such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have, in the
sole judgment of the Representative, sustained any loss or interference
with their respective businesses or properties having or resulting in a
Material Adverse Effect from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or
any legal or governmental proceeding or there shall have been any event,
circumstance of development that results in, or that the Company believes
would result in, a Material Adverse Effect, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment
or supplement thereto);
29
<PAGE>
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange or Nasdaq National Market shall have been
suspended or minimum or maximum prices shall have been established on
either such exchange or market system;
(iii) a banking moratorium shall have been declared by New York
or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U.S. financial markets that, in the sole judgment
of the Representative, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. Information Supplied by Underwriters. The statements set forth in (i)
------------------------------------
the last paragraph on the front cover page, (ii) under the heading
"Underwriting" in any Preliminary Prospectus or the Prospectus and (iii) on page
2 in any Preliminary Prospectus or the Prospectus pertaining to stabilization
(to the extent such statements relate to the Underwriters) constitute the only
information furnished by any Underwriter through the Representative to the
Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters
confirm that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if
-------
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Friedman, Billings, Ramsey &
Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia
22209, Attention: _________________; and if sent to the Company, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at 17305 Von Karman Avenue, Irvine, California 92714,
Attention: Chief Executive Officer; and if sent to Principal Stockholders, shall
be delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to Principal Stockholders at 17305 Von Karman Avenue, Irvine, California
92714, Attention: Chief Executive Officer.
14. Successors. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, the Company, Principal Stockholders and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the
30
<PAGE>
indemnities of the Company and Principal Stockholders contained in Section 8 of
this Agreement shall also be for the benefit of any person or persons who
control any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 8 of this Agreement shall also be for the benefit of the directors of
the Company, the officers of the Company who have signed the Registration
Statement, Principal Stockholders and any person or persons who control the
Company or Principal Stockholders within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter
shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement,
--------------
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
----------------------------------------------
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of California, and
by execution and delivery of this Agreement, the Company and Principal
Stockholders each accepts for itself and in connection with their respective
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts and waives any defense of forum non conveniens and irrevocably
agree to be bound by any judgment rendered thereby in connection with this
Agreement. Principal Stockholders designate and appoint Brian Chisick, and the
Company designates and appoints Mark K. Mason and such other persons as may
hereafter be selected by the Company or Principal Stockholders irrevocably
agreeing in writing to so serve, as their respective agents to receive on its
behalf service of all process in any such proceedings in any such court, such
service being hereby acknowledged by the Company and Principal Stockholders to
be effective and binding service in every respect. A copy of any such process
so served shall be mailed by registered mail to the Company and/or Principal
Stockholders at their respective addresses provided in Section 13 hereof;
provided, however, that, unless otherwise provided by applicable law, any
- -------- -------
failure to mail such copy shall not affect the validity of service of such
process. If any agent appointed by the Company or Principal Stockholders
refuses to accept service, the Company and Principal Stockholders each hereby
agrees that service of process sufficient for personal jurisdiction in any
action against the Company or Principal Stockholders in the State of California
may be made by registered or certified mail, return receipt requested, to the
Company and/or Principal Stockholders, as applicable, at their respective
addresses provided in Section 13 hereof, and Principal Stockholders and the
Company each hereby acknowledge that such service shall be effective and binding
in every respect. Nothing herein shall affect the right to serve process in any
other manner permitted by law or shall limit the right of any Underwriter to
bring proceedings against the Company and Principal Stockholders in the courts
of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
31
<PAGE>
If the foregoing correctly sets forth our understanding please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and each
of the several Underwriters.
Very truly yours,
FIRST ALLIANCE CORPORATION
By
-------------------------------
Brian Chisick
Chief Executive Officer
FIRST ALLIANCE MORTGAGE COMPANY
By
-------------------------------
Brian Chisick
Chief Executive Officer
Principal Stockholders
BRIAN AND SARAH CHISICK REVOCABLE TRUST
U/A 3-7-79
By:
---------------------------------------
Brian Chisick
Co-Trustee
By:
---------------------------------------
Sarah Chisick
Co-Trustee
THE CHISICK TRUST NO. 1 U/D/T 3-30-96
By:
---------------------------------------
Brian Chisick
Trustee
THE CHISICK TRUST NO. 2 U/D/T 3-30-96
By:
---------------------------------------
Brian Chisick
Trustee
32
<PAGE>
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
By:
---------------------------
Name:
Title:
For itself and as the Representative.
33
<PAGE>
Schedule 1
UNDERWRITERS
Number of Firm Securities to be
Underwriting Purchased
- ------------ ---------
Friedman, Billings, Ramsey & Co., Inc... --------
Total................................... 3,500,000
=============
34
<PAGE>
Schedule 2
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- -----------------------------
[ ] UK
35
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
FIRST ALLIANCE CORPORATION
ARTICLE I
NAME OF CORPORATION
The name of this Corporation is First Alliance Corporation.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is at National Registered Agents, Inc., 9 East Loockerman Street, in
the City of Dover 19901, County of Kent, and the name of its registered agent at
that address is National Registered Agents, Inc.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
SECTION 1. Number of Authorized Shares. The total number of shares of all
----------------------------
classes of stock that the Corporation shall have authority to issue is forty-one
million (41,000,000) shares, consisting of forty million (40,000,000) shares of
common stock, $.01 par value per share (the "Common Stock"), and one million
(1,000,000) shares of preferred stock, $.01 par value per share (the "Preferred
Stock").
SECTION 2. Common Stock. The Common Stock shall consist solely of two
-------------
classes designated "Class A Common Stock" and "Class B Common Stock." The
authorized number of shares of Class A Common Stock shall be twenty-five million
(25,000,000) and the authorized number of shares of Class B Common Stock shall
be fifteen million (15,000,000). The Board of Directors of the Corporation may
authorize the issuance of shares of Class A Common Stock and shares of Class B
Common Stock from time to time subject to the foregoing. Shares of Common Stock
that are redeemed, purchased or otherwise acquired by the Corporation may be
reissued except as otherwise
<PAGE>
provided by law. The Board of Directors shall have no power to alter the rights
with respect to Class A Common Stock or Class B Common Stock.
SECTION 3. Dividends and Distributions. Subject to the preferences
----------------------------
applicable to Preferred Stock outstanding at any time, the holders of shares of
Class A Common Stock and the holders of shares of Class B Common Stock shall be
entitled to receive such dividends, payable in cash or otherwise, as may be
declared thereon by the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor, provided that the holders
of shares of Class A Common Stock and shares of Class B Common Stock shall be
entitled to share equally, on a per share basis, in such dividends, subject to
the limitations described below. If dividends or other distributions are
declared that are payable in shares of Class A Common Stock or shares of Class B
Common Stock, including distributions pursuant to stock subdivisions or
combinations of Class A Common Stock or Class B Common Stock which occur after
the first date upon which the Corporation has issued shares of both Class A
Common Stock and Class B Common Stock, only shares of Class A Common Stock shall
be distributed with respect to Class A Common Stock and only shares of Class B
Common Stock shall be distributed with respect to Class B Common Stock, unless
the Board of Directors of the Corporation determines in its discretion that it
is more desirable to distribute shares of Class A Common Stock with respect to
Class B Common Stock, in which case shares of Class A Common Stock shall be
distributed with respect to Class B Common Stock, provided that the number of
shares of Class A Common Stock that shall be distributed with respect to Class B
Common Stock shall be equal to the number of shares of Class B Common Stock that
otherwise would have been distributed. If the Corporation shall in any manner
subdivide or combine the outstanding shares of Class A Common Stock or Class B
Common Stock, the outstanding shares of the other such series of Common Stock
shall be proportionately subdivided or combined in the same manner and on the
same basis as the outstanding shares of Class A Common Stock or Class B Common
Stock, as the case may be, which have been subdivided or combined.
SECTION 4. Voting Rights. The holders of shares of Class A Common Stock
--------------
and of Class B Common Stock shall have the following voting rights:
A. Each share of Class A Common Stock shall entitle the holder thereof to
one vote on all matters submitted to a vote of the stockholders of the
Corporation.
B. Each share of Class B Common Stock shall entitle the holder thereof to
four votes on all matters submitted to a vote of the stockholders of the
Corporation.
C. The holders of shares of Class A Common Stock and the holders of shares
of Class B Common Stock shall vote together as one class on all matters
submitted to a vote of stockholders of the Corporation, except (i) as otherwise
required by applicable law and (ii) in the case of a proposed issuance of shares
of Class B Common Stock, which issuance shall require the affirmative vote of
the holders of a majority of the outstanding shares of Class B Common Stock.
2
<PAGE>
SECTION 5. Transfer of Class B Stock.
--------------------------
(A). Except as provided in Section 5(B) hereof, no person holding shares of
Class B Common Stock or any beneficial interest therein (a "Class B Holder") may
voluntarily or involuntarily transfer (including without limitation the power to
vote such Class B Shares by proxy or otherwise except for proxies given to any
Permitted Transferee of the Class B Holder), sell, assign, devise or bequeath
any of such Class B Holder's interest in his Class B Shares, and the Corporation
and the transfer agent for the Class B Common Stock, if any (the "Transfer
Agent"), shall not register the transfer of such shares of Class B Common Stock,
whether by sale, grant of proxy, assignment, gift, devise, bequest, appointment
or otherwise, except to a "Permitted Transferee" of such Class B Holder, which
term shall include the Corporation and shall have the following additional
meanings in the following cases:
(i) In the case of a Class B Holder who is a natural person
holding record and beneficial ownership of the shares of Class B
Common Stock in question, "Permitted Transferee" means: (a) the
spouse of such Class B Holder (the "Spouse"); (b) a lineal descendant,
or the spouse of such lineal descendant (collectively, "Descendants"),
of such Class B Holder or of the Spouse; (c) the trustee of a trust
(including a voting trust) for the benefit of such Class B Holder, the
Spouse, other Descendants, or an organization contributions to which
are deductible for federal income, estate or gift tax purposes (a
"Charitable Organization"), and for the benefit of no other person;
provided that such trust may grant a general or special power of
appointment to the Spouse or to the Descendants and may permit trust
assets to be used to pay taxes, legacies and other obligations of the
trust or of the estate of such Class B Holder payable by reason of the
death of such Class B Holder or the death of the Spouse or a
Descendant, and that such trust (subject to the grant of a power of
appointment as provided above) must prohibit transfer of shares of
Class B Common Stock or a beneficial interest therein to persons other
than Permitted Transferees as defined in subparagraph (ii) of this
Section 5(A) (a "Trust"); (d) a Charitable Organization established by
such Class B Holder or a Descendant; (e) an Individual Retirement
Account, as defined in Section 408(a) of the Internal Revenue Code, of
which such Class B Holder is a participant or beneficiary, provided
that such Class B Holder is vested with the power to direct the
investment of funds deposited into such Individual Retirement Account
and to control the voting of securities held by such Individual
Retirement Account (an "IRA"); (f) a pension, profit sharing, stock
bonus or other type of plan or trust of which such Class B Holder is a
participant or beneficiary and which satisfies the requirements for
qualification under Section 401 of the Internal Revenue Code, provided
that such Class B Holder is vested with the power to direct the
3
<PAGE>
investment of funds deposited into such plan or trust and to control
the voting of securities held by such plan or trust, (a "Plan"); (g) a
corporation all of the outstanding capital stock of which is owned by,
or a partnership all of the partners of which are, such Class B
Holder, his or her Spouse, his or her Descendants, any Permitted
Transferee of the Class B Holder and/or any other Class B Holder or
its Permitted Transferee determined pursuant to this subparagraph (i)
of this Section 5(A), provided that if any share (or any interest in
any share) of capital stock of such a corporation (or of any survivor
of a merger or consolidation of such corporation), or any partnership
interest in such a partnership, is acquired by any person who is not
within such class of persons, all shares of Class B Common Stock then
held by such corporation or partnership, as the case may be, shall be
deemed without further act on anyone's part to be converted into
shares of Class A Common Stock and stock certificates formerly
representing such shares of Class B Common Stock shall thereupon and
thereafter be deemed to represent the like number of shares of Class A
Common Stock in the manner set forth in Section 6(B) hereof; (h)
another Class B Holder or such Class B Holder's Permitted Transferee
determined pursuant to this subparagraph (i) of this Section 5(A); and
(i) in the event of the death of such Class B Holder, such Class B
Holder's estate.
(ii) In the case of a Class B Holder holding the shares of Class
B Common Stock in question as trustee of an IRA, a Plan or a Trust
other than a Trust described in subparagraph (iii) of this Section
5(A), "Permitted Transferee" means: (a) any participant in or
beneficiary of such IRA, such Plan or such Trust, or the person who
transferred such shares of Class B Common Stock to such IRA, such Plan
or such Trust, and (b) a Permitted Transferee of any such person or
persons determined pursuant to subparagraph (i) of this Section 5(A).
(iii) In the case of a Class B Holder holding the shares of
Class B Common Stock in question as trustee pursuant to a Trust which
was irrevocable on the Record Date (as defined below), "Permitted
Transferee" means any person as of the Record Date to whom or for
whose benefit principal may be distributed either during or at the end
of the term of such Trust whether by power of appointment or
otherwise. For purposes of this Certificate of Incorporation, there
shall be one "Record Date," which date shall be the date that is the
record date for determining the persons to whom the Class B Common
Stock is first distributed by the Corporation.
4
<PAGE>
(iv) In the case of a Class B Holder holding record (but not
beneficial) ownership of the shares of Class B Common Stock in
question as nominee for the person who was the beneficial owner
thereof on the Record Date, "Permitted Transferee" means such
beneficial owner and a Permitted Transferee of such beneficial owner
determined pursuant to subparagraph (i), (ii), (iii), (v) or (vi) of
this Section 5(A), as the case may be.
(v) In the case of a Class B Holder that is a partnership
holding record and beneficial ownership of the shares of Class B
Common Stock in question, "Permitted Transferee" means any partner of
such partnership, provided that such partner was a partner in the
partnership at the time it first became a Class B Holder, or any
Permitted Transferee of such partner determined pursuant to
subparagraph (i) of this Section 5(A).
(vi) In the case of a Class B Holder that is a corporation,
other than a Charitable Organization described in clause (d) of
subparagraph (i) of this Section 5(A), holding record and beneficial
ownership of the shares of Class B Common Stock in question (a
"Corporate Holder"), "Permitted Transferee" means (a) any stockholder
of such Corporate Holder, provided that such stockholder was a
stockholder of the Corporate Holder at the time it first became a
Class B Holder, or any Permitted Transferee of any such stockholder
determined pursuant to subparagraph (i) of this Section 5(A); and (b)
the survivor (the "Survivor") of a merger or consolidation of such
Corporate Holder, so long as such Survivor is controlled, directly or
indirectly, by those stockholders of the Corporate Holder who were
stockholders of the Corporate Holder at the time the Corporate Holder
first became a Class B Holder or any Permitted Transferees of such
stockholders determined pursuant to subparagraph (i) of this Section
5(A).
(vii) In the case of a Class B Holder that is the estate of a
deceased Class B Holder, or that is the estate of a bankrupt or
insolvent Class B Holder, and provided such deceased, bankrupt or
insolvent Class B Holder, as the case may be, held record and
beneficial ownership of the shares of Class B Common Stock in
question, "Permitted Transferee" means a Permitted Transferee of such
deceased, bankrupt or insolvent Class B Holder as determined pursuant
to subparagraphs (i), (v) or (vi) of this Section 5(A), as the case
may be.
(viii) In the case of any Class B Holder who desires to make a
bona fide gift, "Permitted Transferee" means any other Class B
5
<PAGE>
Holder or its Permitted Transferee determined pursuant to subparagraph
(i) of this Section 5(A).
(ix) In the case of any Class B Holder, "Permitted Transferee"
means any person or entity that will hold record (but not beneficial)
ownership of the shares of Class B Stock in question as nominee for
the Class B Holder or its Permitted Transferee determined pursuant to
subparagraph (i), (ii), (iii), (v) or (vi) of this Section 5(A), as
the case may be.
(B). Notwithstanding anything to the contrary set forth herein, any Class B
Holder may pledge such Holder's shares of Class B Common Stock to a pledgee
pursuant to a bona fide pledge of such shares as collateral security for
indebtedness due to the pledgee, provided that such shares shall not be
transferred to, registered in the name of or voted by the pledgee and shall
remain subject to this Section 5. In the event of foreclosure or other similar
action by the pledgee, such pledged shares of Class B Common Stock may only be
transferred to a Permitted Transferee of the pledgor or converted into shares of
Class A Common Stock, as the pledgee may elect.
(C). For purposes of this Section 5:
(i) The relationship of any person that is derived by or
through legal adoption shall be considered a natural relationship.
(ii) Each joint owner of shares (if a Permitted Transferee) or
owner of a community property interest in shares (if a Permitted
Transferee) of Class B Common Stock shall be considered a "Class B
Holder" of such shares.
(iii) A minor for whom shares of Class B Common Stock are held
pursuant to a Uniform Transfer to Minors Act or similar law shall be
considered a Class B Holder of such shares.
(iv) Unless otherwise specified, the term "person" means and
includes natural persons, corporations, partnerships, unincorporated
associations, firms, joint ventures, trusts and all other entities.
(D). Except as otherwise provided in Section 6(B), any purported transfer
of shares of Class B Common Stock not permitted hereunder shall be void and of
no effect, and the purported transferee shall have no rights as a stockholder of
the Corporation and no other rights against or with respect to the Corporation.
The Corporation may, as a condition to the transfer or the registration of
transfer of shares of Class B Common Stock to a purported Permitted Transferee,
require the furnishing of such affidavits or other proof as it deems necessary
to establish that such transferee is a Permitted Transferee. Each certificate
representing shares of Class B Common Stock shall be endorsed with a legend that
states that shares of Class B Common Stock are not transferable other than to
6
<PAGE>
certain transferees and are subject to certain restrictions as set forth in the
Certificate of Incorporation filed by the Corporation with the Secretary of
State of the State of Delaware.
SECTION 6. Conversion and Exchange of Class B Common Stock.
------------------------------------------------
(A). Each share of Class B Common Stock, at the option of its holder, may
at any time be converted into one (1) fully paid and nonassessable share of
Class A Common Stock. Such right shall be exercised by the surrender of the
certificate representing such share of Class B Common Stock to be converted to
the Corporation at any time during normal business hours at the principal
executive offices of the Corporation or at the office of the Transfer Agent,
accompanied by a written notice of the election by the holder thereof to convert
and (if so required by the Corporation or the Transfer Agent) by instruments of
transfer, in form satisfactory to the Corporation and to the Transfer Agent,
duly executed by such holder or such holder's duly authorized attorney, and
transfer tax stamps or funds therefor, if required pursuant to Section 6(F).
(B). If the beneficial ownership (as determined under Rule 13d-3
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended) of any share or any interest in any share of
Class B Common Stock changes, voluntarily or involuntarily, such that each new
beneficial owner of such share is not a "Permitted Transferee" (as defined in
Section 5(A) hereof) of the beneficial owner of such share of Class B Common
Stock immediately prior to such change in beneficial ownership, then each such
share shall thereupon be converted automatically into one (1) fully paid and
nonassessable share of Class A Common Stock. A determination by the Secretary
of the Corporation that a change in beneficial ownership requires conversion
under this paragraph shall be conclusive. Upon making such determination, the
Secretary of the Corporation shall promptly request of the holder of record of
each such share that each such holder promptly deliver, and each such holder
shall promptly deliver, the certificate representing each such share to the
Corporation for documentation of such conversion, together with instruments of
transfer, in form satisfactory to the Corporation and Transfer Agent, duly
executed by such holder or such holder's duly authorized attorney, and together
with transfer tax stamps or funds therefor, if required pursuant to Section
6(F).
(C). If, on the record date for any annual meeting of stockholders, the
number of shares of Class B Common Stock then outstanding is less than ten
percent (10%) of the aggregate number of shares of Class B Common Stock and
Class A Common Stock then outstanding, as determined by the Secretary of the
Corporation, each share of Class B Common Stock then issued or outstanding shall
thereupon be converted automatically into one (1) fully paid and nonassessable
share of Class A Common Stock, and each share of Class B Common Stock then
authorized but unissued shall thereupon automatically be deemed an authorized
but unissued share of Class A Common Stock. Upon making such determination, the
Secretary of the Corporation shall promptly request of each holder of record of
shares of Class B Common Stock that each such holder promptly deliver, and each
such holder shall promptly deliver, all certificates that prior to such
determination represented all shares of Class B Common Stock held by such holder
to the Corporation
7
<PAGE>
for documentation of such conversion, together with instruments of transfer in
form satisfactory to the Corporation and Transfer Agent, duly executed by such
holder or such holder's duly authorized attorney, and together with transfer tax
stamps or funds therefor, if required pursuant to Section 6(F).
(D). As promptly as practicable following the surrender for conversion of a
certificate representing shares of Class B Common Stock in the manner provided
in paragraphs A, B or C, as applicable, of this Section 6 and the payment in
cash of any amount required by the provisions of Section 6(F), the Corporation
will deliver or cause to be delivered at the office of the Transfer Agent to or
upon the written order of the holder of such certificate, a certificate or
certificates representing the number of full shares of Class A Common Stock
issuable upon such conversion, issued in such name or names as such holder may
direct. In the case of a conversion under Section 6(A), such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of the surrender of the certificate representing shares of Class B Common
Stock. In the case of a conversion under Section 6(B), such conversion shall be
deemed to have been made on the date that the beneficial ownership of such share
has changed as set forth in Section 6(B). In the case of a conversion under
Section 6(C), such conversion shall be deemed to have occurred on the record
date for such annual meeting on which the condition set forth in Section 6(C) is
determined by the Secretary of the Corporation to have occurred. Upon the date
any conversion under Section 6(A) is made, all rights of the holder of such
shares as such holder shall cease, and the person or persons in whose name or
names the certificate or certificates representing the shares of Class A Common
Stock are to be issued shall be treated for all purposes as having become the
record holder or holders of such shares of Class A Common Stock; provided,
however, that any such surrender and payment on any date when the stock transfer
books of the Corporation shall be closed shall constitute the person or persons
in whose name or names the certificate or certificates representing shares of
Class A Common Stock are to be issued as the record holder or holders thereof
for all purposes immediately prior to the close of business on the next
succeeding day on which stock transfer books are open. Upon the date any
conversion under Section 6(B) is made, all rights of the holder of such share as
such holder shall cease, and the new beneficial owner or owners of such shares
shall be treated for all purposes as having become the record holder or holders
of such shares of Class A Common Stock. Upon the date any conversion under
Section 6(C) is made, all rights of the holders of shares of Class B Common
Stock as holders of Class B Common Stock shall cease, and such holders shall be
treated for all purposes as having become the record holders of such shares of
Class A Common Stock at such time.
(E). The Corporation covenants that it will at all times reserve and keep
available, solely for the purpose of issue upon conversion of the outstanding
shares of Class B Common Stock, such number of shares of Class A Common Stock as
shall be issuable upon the conversion of all such outstanding shares of Class B
Common Stock, provided that nothing contained herein shall be construed to
preclude the Corporation from satisfying its obligations in respect of the
conversion of the outstanding shares of Class B Common Stock by delivery of
purchased shares of Class A Common Stock that are held in the treasury of the
Corporation. The Corporation covenants that if any shares
8
<PAGE>
of Class A Common Stock required to be reserved for purposes of conversion
hereunder require registration with or approval of any governmental authority
under any federal or state law before such shares of Class A Common Stock may be
issued upon conversion, the Corporation will cause such shares to be duly
registered or approved, as the case may be. The Corporation will endeavor to
list the shares of Class A Common Stock required to be delivered upon conversion
prior to such delivery upon each national securities exchange or automated
quotation system upon which the outstanding Class A Common Stock is listed at
the time of such delivery. The Corporation covenants that all shares of Class A
Common Stock that shall be issued upon conversion of the shares of fully paid
and nonassessable Class B Common Stock will, upon issue, be fully paid and
nonassessable.
(F). The issuance of certificates for shares of Class A Common Stock upon
conversion of shares of Class B Common Stock shall be made without charge for
any stamp or other similar tax in respect of such issuance. However, if any
such certificate is to be issued in a name other than that of the holder of the
share or shares of Class B Common Stock converted, then the person or persons
requesting the issuance thereof shall pay to the Corporation the amount of any
tax that may be payable in respect of any transfer involved in such issuance or
shall establish to the satisfaction of the Corporation that such tax has been
paid.
SECTION 7. Preferred Stock. The Board of Directors of the Corporation may
----------------
by resolution authorize the issuance of shares of Preferred Stock from time to
time in one or more series. Shares of Preferred Stock that are redeemed,
purchased or otherwise acquired by the Corporation may be reissued except as
otherwise provided by law. The Board of Directors is hereby authorized to fix
or alter the designations, powers and preferences, and relative, participating,
optional or other rights, if any, and qualifications, limitations or
restrictions thereof, including, without limitation, dividend rights (and
whether dividends are cumulative), conversion rights, if any, voting rights
(including the number of votes, if any, per share, as well as the number of
members, if any, of the Board of Directors or the percentage of members, if any,
of the Board of Directors each class or series of Preferred Stock may be
entitled to elect), rights and terms of redemption (including sinking fund
provisions, if any), redemption price and liquidation preferences of any wholly
unissued series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, and to increase or decrease the number
of shares of any such series subsequent to the issuance of shares of such
series, but not below the number of shares of such series then outstanding.
SECTION 8. Distributions Upon Liquidation. In the event of any
-------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation in
accordance with applicable law, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation,
the holders of each series of Preferred Stock, if any, shall be entitled to
receive, out of the net assets of the Corporation, an amount for each share of
such series of Preferred Stock equal to the amount fixed and determined by the
Board of Directors in the resolution or resolutions creating such series and
providing for the issuance of such shares, plus an amount equal to all dividends
accrued and unpaid
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on shares of such series to the date fixed for distribution,
and no more, before any of the assets of the Corporation shall be distributed or
paid over to the holders of Common Stock. After payment in full of said amounts
to the holders of Preferred Stock of all series, the remaining assets and funds
of the Corporation shall be divided among and paid to the holders of shares of
Common Stock (and any series of Preferred Stock having rights to participate
with the holders of Common Stock in any such distribution) on a pro rata basis
in accordance with their respective interests. If, upon such dissolution,
liquidation or winding up, the assets of the Corporation distributable as
aforesaid among the holders of Preferred Stock of all series shall be
insufficient to permit full payment to them of said preferential amounts, then
such assets shall be distributed ratably among such holders of Preferred Stock
in proportion to the respective total amounts that they shall be entitled to
receive as provided in this Section 8 (unless such series are, by their terms,
entitled to different distribution preferences).
ARTICLE V
MEETINGS OF STOCKHOLDERS
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in Delaware General Corporation Law) outside
the State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the Bylaws of the Corporation.
ARTICLE VI
NUMBER AND ELECTION OF DIRECTORS
The number of directors of the Corporation shall be fixed from time to time
by or in the manner provided in the bylaws of the Corporation or amendment
thereof duly adopted by the Board of Directors or by the stockholders of the
Corporation. Elections of directors need not be by written ballot unless the
bylaws of the Corporation shall so provide.
ARTICLE VII
STOCKHOLDER ACTION BY WRITTEN CONSENT
Any election of directors or other action by the stockholders of the
Corporation may be effected at an annual or special meeting of stockholders or,
if the Board of Directors has approved such action, by written consent in lieu
of such a meeting. The record date with respect to the determination of
stockholders entitled to consent in writing to any action approved by the Board
of Directors shall be the first date on which a signed written consent setting
forth the action to be taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Any
action by written consent shall
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be deemed effective, provided the Board of Directors has earlier approved such
action, as of the day on which written consents signed by stockholders having
the minimum number of votes that would be necessary to authorize such action at
a meeting at which all shares entitled to vote thereon were present and voted
are delivered to the Corporation by delivery to its registered office in
Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the books in which proceedings of meetings of
stockholders are recorded. Any delivery under this Article VII to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
ARTICLE VIII
LIABILITY AND INDEMNIFICATION
To the fullest extent permitted by the Delaware General Corporation Law, as
the same exists or may hereafter be amended (provided that the effect of any
such amendment shall be prospective only) (the "Delaware Law"), a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director. The
Corporation shall indemnify, in the manner and to the fullest extent permitted
by the Delaware Law (but in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise. The Corporation may, to the fullest
extent permitted by the Delaware Law, purchase and maintain insurance on behalf
of any such person against any liability which may be asserted against such
person. The Corporation may create a trust fund, grant a security interest or
use other means (including without limitation a letter of credit) to ensure the
payment of such sums as may become necessary or desirable to effect the
indemnification as provided herein. To the fullest extent permitted by the
Delaware Law, the indemnification provided herein shall include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement and
any such expenses shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the person seeking indemnification to repay such amounts if it
is ultimately determined that he or she is not entitled to be indemnified. The
indemnification provided herein shall not be deemed to limit the right of the
Corporation to indemnify any other person for any such expenses to the fullest
extent permitted by the Delaware Law, nor shall it be deemed exclusive of any
other rights to which any person seeking indemnification from the Corporation
may be entitled under any agreement, the Corporation's Bylaws, vote of
stockholders or disinterested directors, or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office. The Corporation may, but only to the extent that the Board of
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Directors may (but shall not be obligated to) authorize from time to time,
grant rights to indemnification and to the advancement of expenses to any
employee or agent of the Corporation to the fullest extent of the provisions of
this Article VIII as they apply to the indemnification and advancement of
expenses of directors and officers of the Corporation.
ARTICLE IX
AMENDMENT OF CORPORATE DOCUMENTS
SECTION 1. Certificate of Incorporation. The Corporation reserves the
-----------------------------
right to alter, amend, repeal or rescind any provision contained in this
Certificate of Incorporation in any manner now or hereafter prescribed by law,
and all rights conferred on stockholders herein are granted subject to this
reservation.
SECTION 2. Bylaws. In furtherance and not in limitation of the powers
-------
conferred by the Delaware Law, the Board of Directors shall have the power to
make, alter, amend, repeal or rescind the Bylaws of the Corporation, subject to
the power of the stockholders to alter, amend, repeal or rescind any Bylaw made
by the Board of Directors.
ARTICLE X
CREDITOR COMPROMISE OR ARRANGEMENT
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE XI
INCORPORATOR
The name and mailing address of the incorporator of the Corporation is:
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Tami Baldwin
c/o National Corporate Research, Ltd.
9 East Loockerman Street
Dover, Delaware 19901
THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose
of forming a corporation to do business both within and without the State of
Delaware, and in pursuance of the Delaware General Corporation Law, does make
and file this Certificate.
------------------------------------
Tami Baldwin
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EXHIBIT 3.2
FIRST ALLIANCE CORPORATION
A DELAWARE CORPORATION
BYLAWS
ARTICLE I: OFFICES.
SECTION 1.1 Registered Office. The registered office of FIRST
-----------------
ALLIANCE CORPORATION (the "Corporation") shall be at Corporation Service
Company, 1013 Centre Road, City of Wilmington, County of New Castle, State of
Delaware, and the name of the registered agent in charge thereof shall be the
Corporation Service Company.
SECTION 1.2 Principal Office. The principal office for the
----------------
transaction of the business of the Corporation shall be at such place as the
Board of Directors of the Corporation (the "Board") may determine. The Board is
hereby granted full power and authority to change said principal office from one
location to another.
SECTION 1.3 Other Offices. The Corporation may also have an office
-------------
or offices at such other place or places, either within or without the State of
Delaware, as the Board may from time to time determine or as the business of the
Corporation may require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
SECTION 2.1 Place of Meetings. All annual meetings of stockholders
-----------------
and all other meetings of stockholders shall be held either at the principal
office of the Corporation or at any other place within or without the State of
Delaware that may be designated by the Board pursuant to authority hereinafter
granted to the Board.
SECTION 2.2 Annual Meetings. Annual meetings of stockholders of the
---------------
Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at such
time and place and on such date as the Board shall determine by resolution.
SECTION 2.3 Special Meetings. A special meeting of the stockholders
----------------
for the transaction of any proper business may be called at any time by the
Board or the Chairman.
SECTION 2.4 Notice of Meetings. Except as otherwise required by law,
------------------
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 days nor more than 60 days before the date of the meeting
to each stockholder of record entitled to vote at such meeting by delivering a
typewritten or printed notice thereof to such stockholder personally, or by
depositing such notice in the United States mail, in a postage prepaid envelope,
directed to such stockholder at such stockholder's post office address furnished
by such stockholder to the Secretary of the Corporation for such purpose, or, if
such stockholder shall not have furnished an address to the Secretary for such
purpose, then at such stockholder's post office address last known to the
Secretary, or by transmitting a notice thereof to such stockholder at such
address by telegraph, cable, wireless or facsimile. Except as otherwise
expressly required by law, no publication of any notice of a meeting of
stockholders shall be
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required. Every notice of a meeting of stockholders shall state the place, date
and hour of the meeting and, in the case of a special meeting, shall also state
the purpose for which the meeting is called. Notice of any meeting of
stockholders shall not be required to be given to any stockholder to whom notice
may be omitted pursuant to applicable Delaware law or who shall have waived such
notice, and such notice shall be deemed waived by any stockholder who shall
attend such meeting in person or by proxy, except a stockholder who shall attend
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Except as otherwise expressly required by law, notice of any
adjourned meeting of stockholders need not be given if the time and place
thereof are announced at the meeting at which the adjournment is taken.
SECTION 2.5 Quorum. Except as otherwise required by law, the holders
------
of record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of
stockholders of the Corporation or any adjournment thereof. Subject to the
requirement of a larger percentage vote, if any, contained in the Certificate of
Incorporation, these Bylaws or by statute, the stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding any withdrawal of stockholders that may leave
less than a quorum remaining, if any action taken (other than adjournment) is
approved by the vote of at least a majority in voting interest of the shares
required to constitute a quorum. In the absence of a quorum at any meeting or
any adjournment thereof, a majority in voting interest of the stockholders
present in person or by proxy and entitled to vote thereat or, in the absence
therefrom of all the stockholders, any officer entitled to preside at, or to act
as secretary of, such meeting may adjourn such meeting from time to time. At
any such adjourned meeting at which a quorum is present, any business may be
transacted that might have been transacted at the meeting as originally called.
SECTION 2.6 Voting.
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(A) Each stockholder shall, at each meeting of stockholders, be
entitled to vote in person or by proxy each share of the stock of the
Corporation that has voting rights on the matter in question and that shall have
been held by such stockholder and registered in such stockholder's name on the
books of the Corporation:
(i) on the date fixed pursuant to Section 6.5 of these Bylaws as the
record date for the determination of stockholders entitled to notice
of and to vote at such meeting; or
(ii) if no such record date shall have been so fixed, then (a) at the
close of business on the day next preceding the day upon which notice
of the meeting shall be given or (b) if notice of the meeting shall be
waived, at the close of business on the day next preceding the day
upon which the meeting shall be held.
(B) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity
shall be entitled to vote such stock. Persons whose stock is pledged shall be
entitled to vote, unless in the transfer by the pledgor on the books of the
Corporation the pledgor shall have expressly empowered the pledgee to vote
thereon, in
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which case only the pledgee, or the pledgee's proxy, may represent such stock
and vote thereon. Stock having voting power standing of record in the names of
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship, shall
be voted in accordance with the provisions of the Delaware General Corporation
Law.
(C) Subject to the provisions of the Corporation's Certificate of
Incorporation, any such voting rights may be exercised by the stockholder
entitled thereto in person or by such stockholder's proxy appointed by an
instrument in writing, subscribed by such stockholder or by such stockholder's
attorney thereunto authorized and delivered to the secretary of the meeting.
The attendance at any meeting of a stockholder who may theretofore have given a
proxy shall not have the effect of revoking the same unless such stockholder
shall in writing so notify the secretary of the meeting prior to the voting of
the proxy. At any meeting of stockholders at which a quorum is present, all
matters, except as otherwise provided in the Certificate of Incorporation, in
these Bylaws or by law, shall be decided by the vote of a majority in voting
interest of the stockholders present in person or by proxy and entitled to vote
thereat and thereon. The vote at any meeting of stockholders on any question
need not be by ballot, unless so directed by the chairman of the meeting. On a
vote by ballot, each ballot shall be signed by the stockholder voting, or by
such stockholder's proxy, if there by such proxy, and it shall state the number
of shares voted.
SECTION 2.7 Judges. Prior to each meeting of stockholders, the
------
Chairman of such meeting shall appoint a judge or judges to act with respect to
such vote. Each judge so appointed shall first subscribe an oath faithfully to
execute the duties of a judge at such meeting with strict impartiality and
according to the best of such judge's ability. Such judges shall decide upon
the qualification of the voters and shall certify and report the number of
shares represented at the meeting and entitled to vote on such question,
determine the number of votes entitled to be cast by each share, shall conduct
and accept the votes, when the voting is completed, ascertain and report the
number of shares voted respectively for and against the question, and determine,
and retain for a reasonable period a record of the disposition of, any challenge
made to any determination made by such judges. Reports of judges shall be in
writing and subscribed and delivered by them to the Secretary of the
Corporation. The judges need not be stockholders of the Corporation, and any
officer of the Corporation may be a judge on any question other than a vote for
or against a proposal in which such officer shall have a material interest. The
judges may appoint or retain other persons or entities to assist the judges in
the performance of the duties of the judges.
SECTION 2.8 Advance Notice of Stockholder Proposals and Stockholder
-------------------------------------------------------
Nominations.
- -----------
(A) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board or (ii) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Section 2.8(A). For
business to be properly brought before any meeting of the stockholders by a
stockholder, the stockholder must have given notice thereof in writing to the
Secretary of the Corporation not less than 90 days in advance of such meeting
or, if later, the seventh day following the first public announcement of the
date of such meeting. A stockholder's notice to the Secretary shall set forth
as to each matter the stockholder proposes to bring before the meeting (1) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (2) the name and
address, as
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they appear on the Corporation's books, of the stockholder proposing such
business, (3) the class and number of shares of the Corporation that are
beneficially owned by the stockholder, and (4) any material interest of the
stockholder in such business. In addition, the stockholder making such proposal
shall promptly provide any other information reasonably requested by the
Corporation. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any meeting of the stockholders except in
accordance with the procedures set forth in this Section 2.8. The Chairman of
any such meeting shall direct that any business not properly brought before the
meeting shall not be considered.
(B) Nominations for the election of directors may be made by the Board
or by any stockholder entitled to vote in the election of directors; provided,
however, that a stockholder may nominate a person for election as a director at
a meeting only if written notice of such stockholder's intent to make such
nomination has been given to the Secretary of the Corporation not later than 90
days in advance of such meeting or, if later, the seventh day following the
first public announcement of the date of such meeting. Each such notice shall
set forth: (i) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (ii) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting and nominate the person or persons specified in the notice; (iii) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (iv) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the United States Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
Board; and (v) the consent of each nominee to serve as a director of the
Corporation if so elected. In addition, the stockholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 2.8(B). The Chairman of any meeting of stockholders shall direct that
any nomination not made in accordance with these procedures be disregarded.
SECTION 2.9 Action Without Meeting. Any action required to be taken
----------------------
at any annual or special meeting of stockholders of the Corporation, or any
action which may be taken at any annual or special meeting of such stockholders,
may, if such action has been approved by the Board of Directors, be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE III: BOARD OF DIRECTORS
SECTION 3.1 General Powers. Subject to any requirements in the
--------------
Certificate of Incorporation, these Bylaws, and of the Delaware General
Corporation Law as to action which must be authorized or approved by the
stockholders, any and all corporate powers shall be exercised by or under the
authority of, and the business and affairs of the Corporation shall be under the
direction of, the Board
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to the fullest extent permitted by law. Without limiting the generality of the
foregoing, it is hereby expressly declared that the Board shall have the
following powers, to wit:
(A) to select and remove all the officers, agents and employees of the
Corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the Certificate of Incorporation or these Bylaws, fix
their compensation, and require from them security for faithful service;
(B) to conduct, manage and control the affairs and business of the
Corporation, and to make such rules and regulations therefor not inconsistent
with law, the Certificate of Incorporation or these Bylaws, as it may deem best;
(C) to change the location of the registered office of the Corporation
in Section 1.1 hereof; to change the principal office and the principal office
for the transaction of the business of the Corporation from one location to
another as provided in Section 1.2 hereof; to fix and locate from time to time
one or more subsidiary offices of the Corporation within or without the State of
Delaware as provided in Section 1.3 hereof; to designate any place within or
without the State of Delaware for the holding of any meeting or meetings of
stockholders; and to adopt, make and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and of such
certificates from time to time, and in its judgment as it may deem best,
provided such seal and such certificate shall at all times comply with the
provisions of law;
(D) to authorize the issuance of shares of stock of the Corporation
from time to time, upon such terms and for such considerations as may be lawful;
(E) to borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust and
securities therefor; and
(F) by resolution adopted by a majority of the whole Board to
designate an executive and other committees of the Board, each consisting of one
or more directors, to serve at the pleasure of the Board, and to prescribe the
manner in which proceedings of such committee or committees shall be conducted.
SECTION 3.2 Number and Term of Office.
-------------------------
(A) Until this Section 3.2 is amended by a resolution duly adopted by
the Board or by the stockholders of the Corporation, the number of directors
constituting the entire Board shall be not less than three (3) members nor more
than eleven (11) members and shall initially consist of seven (7) members.
Directors need not be stockholders. Each of the directors of the corporation
shall hold office until his successor shall have been duly elected and shall
qualify or until he shall resign or shall have been removed in the manner
hereinafter provided.
(B) The Board shall be divided into three classes: Class I, Class II
and Class III. Such classes shall be as nearly equal in number of directors as
possible with the term of office of one class expiring each year. At the annual
meeting of stockholders in 1996, directors of Class I shall be elected to hold
office for a term ending at the next succeeding annual meeting of stockholders,
directors of Class II shall be elected to hold office for a term ending at the
second succeeding annual
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meeting of stockholders and directors of Class III shall be elected to hold
office for a term ending at the third succeeding annual meeting of stockholders.
Subject to the following, at each annual meeting of stockholders, the successors
to the class of directors whose term shall then expire shall be elected to hold
office for a term expiring at the third succeeding annual meeting of
stockholders.
(C) During any period when the holders of preferred stock or any one
or more series thereof, voting as a class, shall be entitled to elect a
specified number of directors by reason of dividend arrearages or other
contingencies giving them the right to do so, then and during such time as such
right continues (1) the then otherwise authorized number of directors shall be
increased by such specified number of directors, and the holders of the
preferred stock or such series thereof, voting as a class, shall be entitled to
elect the additional directors as provided for pursuant to the provisions of
such preferred stock or series; (2) the additional directors shall be members of
those respective classes of directors in which vacancies are created as a result
of such increase in the authorized number of directors; and (3) each such
additional director shall serve until the annual meeting at which the term of
office of his class shall expire and until his successor shall be elected and
shall qualify, or until his right to hold such office terminates pursuant to the
provisions of such preferred stock or series, whichever occurs earlier.
Whenever the holders of such preferred stock or series thereof are divested of
such rights to elect a specified number of directors, voting as a class,
pursuant to the provisions of such preferred stock or series, the terms of
office of all directors elected by the holders of such preferred stock or
series, voting as a class pursuant to such provisions, or elected to fill any
vacancies resulting from the death, resignation or removal of directors so
elected by the holders of such preferred stock or series, shall forthwith
terminate and the authorized number of directors shall be reduced accordingly.
SECTION 3.3 Election of Directors. The directors shall be elected by
---------------------
the stockholders of the Corporation, and at each election, the persons receiving
the greater number of votes, up to the number of directors then to be elected,
shall be the persons then elected. The election of directors is subject to any
provision contained in the Certificate of Incorporation relating thereto,
including any provision regarding the rights of holders of preferred stock to
elect directors.
SECTION 3.4 Resignations. Any director of the Corporation may resign
------------
at any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time is not specified, it shall take effect immediately upon
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 3.5 Vacancies. Except as otherwise provided in the
---------
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors,
removal, or any other cause, may be filled by vote of the majority of the
remaining directors, although less than a quorum. Increases in the number of
directors shall be filled in accordance with the rule that each class of
directors shall be as nearly equal in number of directors as possible.
Notwithstanding such rule, in the event of any change in the authorized number
of directors each director then continuing to serve as such will nevertheless
continue as a director of the class of which he is a member, until the
expiration of his current term or his earlier death, resignation or removal. If
any newly created directorship or vacancy on the Board of Directors, consistent
with the rule that the three classes shall be as nearly equal in number of
directors as possible, may be allocated to one or two or more classes, the Board
of Directors shall allocate it to that of the available class whose term of
office is due to expire at the earliest date following such allocation. When
the Board of Directors fills a vacancy, the director chosen to fill that vacancy
shall be of the same class as the director he succeeds and shall hold
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office until such director's successor shall have been elected and shall qualify
or until such director shall resign or shall have been removed. No reduction of
the authorized number of directors shall have the effect of removing any
director prior to the expiration of such director's term of office.
SECTION 3.6 Place of Meeting. The Board or any committee thereof may
----------------
hold any of its meetings at such place or places within or without the State of
Delaware as the Board or such committee may from time to time by resolution
designate or as shall be designated by the person or persons calling the meeting
or in the notice or a waiver of notice of any such meeting. Directors may
participate in any regular or special meeting of the Board or any committee
thereof by means of conference telephone or similar communications equipment
pursuant to which all persons participating in the meeting of the Board or such
committee can hear each other, and such participation shall constitute presence
in person at such meeting.
SECTION 3.7 Regular Meetings. Regular meetings of the Board may be
----------------
held at such times as the Board shall from time to time by resolution determine.
If any day fixed for a regular meeting shall be a legal holiday at the place
where the meeting is to be held, then the meeting shall be held at the same hour
and place on the next succeeding business day not a legal holiday. Except as
provided by law, notice of regular meetings need not be given.
SECTION 3.8 Special Meetings. Special meetings of the Board for any
----------------
purpose or purposes shall be called at any time by the Chairman of the Board or,
if the Chairman of the Board is absent or unable or refuses to act, by the
President, and may also be called by any two members of the Board. Except as
otherwise provided by law or by these Bylaws, written notice of the time and
place of special meetings shall be delivered personally or by facsimile to each
director, or sent to each director by mail or by other form of written
communication, charges prepaid, addressed to such director at such director's
address as it is shown upon the records of the Corporation, or, if it is not so
shown on such records and is not readily ascertainable, at the place in which
the meetings of the directors are regularly held. In case such notice is mailed
or telegraphed, it shall be deposited in the United States mail or delivered to
the telegraph company in the County in which the principal office for the
transaction of the business of the Corporation is located at least 48 hours
prior to the time of the holding of the meeting. In case such notice is
delivered personally or by facsimile as above provided, it shall be delivered at
least 24 hours prior to the time of the holding of the meeting. Such mailing,
telegraphing, delivery or facsimile transmission as above provided shall be due,
legal and personal notice to such director. Except where otherwise required by
law or by these Bylaws, notice of the purpose of a special meeting need not be
given. Notice of any meeting of the Board shall not be required to be given to
any director who is present at such meeting, except a director who shall attend
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
SECTION 3.9 Quorum and Manner of Acting. Except as otherwise
---------------------------
provided in these Bylaws, the Certificate of Incorporation or by applicable law,
the presence of a majority of the authorized number of directors shall be
required to constitute a quorum for the transaction of business at any meeting
of the Board, and all matters shall be decided at any such meeting, a quorum
being present, by the affirmative votes of a majority of the directors present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, provided any action taken
is approved by at least a majority of the required quorum for such meeting. In
the absence of a quorum, a majority of directors present at any meeting may
adjourn the same from time to time until
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a quorum shall be present. Notice of any adjourned meeting need not be given.
The directors shall act only as a Board, and the individual directors shall have
no power as such.
SECTION 3.10 Action by Consent. Any action required or permitted to
-----------------
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if consent in writing is given thereto by all members of the
Board or of such committee, as the case may be, and such consent is filed with
the minutes of proceedings of the Board or of such committee.
SECTION 3.11 Compensation. Directors, whether or not employees of
------------
the Corporation or any of its subsidiaries, may receive an annual fee for their
services as directors in an amount fixed by resolution of the Board plus other
compensation, including options to acquire capital stock of the Corporation, in
an amount and of a type fixed by resolution of the Board, and, in addition, a
fixed fee, with or without expenses of attendance, may be allowed by resolution
of the Board for attendance at each meeting, including each meeting of a
committee of the Board. Nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation therefor.
SECTION 3.12 Committees. The Board may, by resolution passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. Any such committee,
to the extent provided in the resolution of the Board and subject to any
restrictions or limitations on the delegation of power and authority imposed by
applicable law, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it. Any such committee shall keep written minutes of its meetings and
report the same to the Board at the next regular meeting of the Board. Unless
the Board or these Bylaws shall otherwise prescribe the manner of proceedings of
any such committee, meetings of such committee may be regularly scheduled in
advance and may be called at any time by the chairman of the committee or by any
two members thereof; otherwise, the provisions of these Bylaws with respect to
notice and conduct of meetings of the Board shall govern.
SECTION 3.13 Affiliated Transactions. Notwithstanding any other
-----------------------
provisions of these Bylaws, each transaction, or, if an individual transaction
constitutes a part of a series of transactions, each series of transactions,
proposed to be entered into between the Corporation, on the one hand, and Brian
Chisick, or any person affiliated with Brian Chisick, on the other hand, must be
approved by a majority of the independent directors.
ARTICLE IV: OFFICERS
SECTION 4.1 Officers. The officers of the Corporation shall be a
--------
Chairman, a President, one or more Vice Presidents (the number thereof and their
respective titles to be determined by the Board), a Secretary, and such other
officers as may be appointed at the discretion of the Board in accordance with
the provisions of Section 4.3 hereof.
SECTION 4.2 Election. The officers of the Corporation, except such
--------
officers as may be appointed or elected in accordance with the provisions of
Sections 4.3 or 4.5 hereof, shall be chosen annually by the Board at the first
meeting thereof after the annual meeting of stockholders, and each officer shall
hold office until such officer shall resign or shall be removed or otherwise
disqualified to serve, or until such officer's successor shall be elected and
qualified.
SECTION 4.3 Other Officers. In addition to the officers chosen
--------------
annually by the Board at its first meeting, the Board also may appoint or elect
such other officers as the business of the Corporation may require, each of whom
shall have such authority and perform such duties as are provided in these
Bylaws or as the Board may from time to time specify, and shall hold office
until such
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officer shall resign or shall be removed or otherwise disqualified to serve, or
until such officer's successor shall be elected and qualified.
SECTION 4.4 Removal and Resignation. Any officer may be removed,
-----------------------
either with or without cause, by resolution of the Board, at any regular or
special meeting of the Board, or except in case of an officer chosen by the
Board, by any officer upon whom such power of removal may be conferred by the
Board. Any officer or assistant may resign at any time by giving written notice
of his resignation to the Board or the Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein, or, if the time is
not specified, upon receipt thereof by the Board or the Secretary, as the case
may be; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 4.5 Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
SECTION 4.6 Chairman of the Board. The Chairman of the Board shall
----------------------
preside at all meetings of stockholders and at all meetings of the Board. The
Chairman shall exercise and perform such powers and duties with respect to the
business and affairs of the Corporation as may be assigned to the Chairman by
the Board or such other powers and duties as may be prescribed by the Board or
these Bylaws.
SECTION 4.7 President. The President shall exercise and perform such
---------
powers and duties with respect to the administration of the business and affairs
of the Corporation as may from time to time be assigned to the President by the
Chairman of the Board or by the Board, or as may be prescribed by these Bylaws.
In the absence or disability of the Chairman of the Board, or in the event and
during the period of a vacancy in that office, the President shall perform all
the duties of the Chairman of the Board, and when so acting shall have all of
the powers of, and be subject to all the restrictions upon, the Chairman of the
Board and chief executive officer of the Corporation.
SECTION 4.8 Vice President. Each Vice President shall have such
--------------
powers and perform such duties with respect to the administration of the
business and affairs of the Corporation as may from time to time be assigned to
such Vice President by the Chairman of the Board or the Board, or the President
or as may be prescribed by these Bylaws. In the absence or disability of the
Chairman of the Board and the President, the Vice Presidents in order of their
rank as fixed by the Board, or if not ranked, the Vice President designated by
the Board, shall perform all of the duties of the Chairman of the Board, and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the Chairman of the Board.
SECTION 4.9 Secretary.
---------
(A) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation or such other place as the Board may order, a book of
minutes of all meetings of directors and stockholders, with the time and place
of holding, whether regular or special, and if special, how authorized and the
notice thereof given, the names of those present at meetings of directors, the
number of shares present or represented at meetings of stockholders, and the
proceedings thereof.
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(B) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation's transfer agent, a share register, or a duplicate
share register, showing the name of each stockholder, the number of shares of
each class held by such stockholder, the number and date of certificates issued
for such shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
ARTICLE V: CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 5.1 Execution of Contracts. The Board, except as otherwise
----------------------
provided in these Bylaws, may authorize any officer or officers, or agent or
agents, to enter into any contract or execute any instrument in the name of and
on behalf of the Corporation, and such authority may be general or confined to
specific instances; and unless so authorized by the Board or by these Bylaws, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or in any amount.
SECTION 5.2 Checks, Drafts, Etc. All checks, drafts or other orders
-------------------
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board. Each such officer, assistant, agent or attorney
shall give such bond, if any, as the Board may require.
SECTION 5.3 Deposits. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select, or
as may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, the Chairman of the
Board, the President, any Vice President (or any other officer or officers,
assistant or assistants, agent or agents, or attorney or attorneys of the
Corporation who shall from time to time be determined by the Board) may endorse,
assign and deliver checks, drafts and other orders for the payment of money
which are payable to the order of the Corporation.
SECTION 5.4 General and Special Bank Accounts. The Board may from
---------------------------------
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI: SHARES AND THEIR TRANSFER
SECTION 6.1 Certificates for Stock. Every owner of stock of the
----------------------
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class or
series of shares of the stock of the Corporation owned by such owner. The
certificates representing shares of such stock shall be numbered in the order in
which they shall be issued and shall be signed in the name of the Corporation by
the Chairman of the Board, the President or any Vice President, and by the
Secretary. Any or all of the signatures on the certificates may be a
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<PAGE>
facsimile. In case any officer, transfer agent or registrar who has signed, or
whose facsimile signature has been placed upon, any such certificate, shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, such certificate may nevertheless be issued by the Corporation with
the same effect as though the person who signed such certificate, or whose
facsimile signature shall have been placed thereupon, were such an officer,
transfer agent or registrar at the date of issue. A record shall be kept of the
respective names of the persons, firms or corporations owning the stock
represented by such certificates, the number and class or series of shares
represented by such certificates, respectively, and the respective dates
thereof, and in case of cancellation, the respective dates of cancellation.
Every certificate surrendered to the Corporation for exchange or transfer shall
be cancelled, and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been so
cancelled, except in cases provided for in Section 6.4 hereof.
SECTION 6.2 Transfers of Stock. Transfers of shares of stock of the
------------------
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by such holder's attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk or
a transfer agent appointed as provided in Section 6.3 hereof, and upon surrender
of the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards the Corporation. Whenever any transfer of shares shall be made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates shall be presented to
the Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
SECTION 6.3 Regulations. The Board may make such rules and
-----------
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
SECTION 6.4 Lost, Stolen, Destroyed, and Mutilated Certificates. In
---------------------------------------------------
any case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction,
or mutilation and upon the giving of a bond of indemnity to the Corporation in
such form and in such sum as the Board may direct; provided, however, that a new
certificate may be issued without requiring any bond when, in the judgment of
the Board, it is proper so to do.
SECTION 6.5 Fixing Date for Determination of Stockholders of Record.
-------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any other
change, conversion or exchange of stock or for the purpose of any other lawful
action other than to consent to corporate action in writing without a meeting,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any such other action. If in any case involving the determination of
stockholders for any purpose other than notice of or voting at a meeting of
stockholders the Board shall not fix such a record date, then the record date
for determining stockholders for such purpose shall be the close of business on
the day on which the Board shall adopt the resolution relating thereto. A
determination of stockholders entitled to
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<PAGE>
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of such meeting; provided, however, that the Board may fix a new record date for
the adjourned meeting.
ARTICLE VII: INDEMNIFICATION
SECTION 7.1 Indemnification of Directors and Officers. The
-----------------------------------------
Corporation shall indemnify, in the manner and to the fullest extent permitted
by the Delaware General Corporation Law, as the same exists or may hereafter be
amended (the "Delaware Law") (but in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than permitted prior thereto), any person (or the estate
of any person) who is or was a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding, whether or not
by or in the right of the Corporation, and whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Corporation, or is or was serving
at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise. The
Corporation may, to the fullest extent permitted by the Delaware Law, purchase
and maintain insurance on behalf of any such person against any liability which
may be asserted against such person. The Corporation may create a trust fund,
grant a security interest or use other means (including without limitation a
letter of credit) to ensure the payment of such sums as may become necessary to
effect the indemnification as provided herein. To the fullest extent permitted
by the Delaware Law, the indemnification provided herein shall include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement and
any such expenses shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the indemnitee to repay such amounts if it is ultimately
determined that he or she is not entitled to be indemnified. The
indemnification provided herein shall not be deemed to limit the right of the
Corporation to indemnify any other person for any such expenses to the fullest
extent permitted by the Delaware Law, nor shall it be deemed exclusive of any
other rights to which any person seeking indemnification from the Corporation
may be entitled under any agreement, the Corporation's Certificate of
Incorporation, vote of stockholders or disinterested directors, or otherwise,
both as to action in such person's official capacity and as to action in another
capacity while holding such office.
SECTION 7.2 Indemnification of Employees and Agents. The Corporation
---------------------------------------
may, but only to the extent that the Board of Directors may (but shall not be
obligated to) authorize from time to time, grant rights to indemnification and
to the advancement of expenses to any employee or agent of the Corporation to
the fullest extent of the provisions of this Article VII as they apply to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 7.3 Enforcement of Indemnification. The rights to
------------------------------
indemnification and the advancement of expenses conferred above shall be
contract rights. If a claim under this ARTICLE VII is not paid in full by the
Corporation within 60 days after written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a
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defense that, and (ii) any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met any applicable standard for indemnification set forth in the
Delaware Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel or stockholders) that the indemnitee has not met such applicable
standard of conduct, shall create a presumption that the indemnitee has not met
the applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article VII or otherwise shall be on the Corporation.
ARTICLE VIII: MISCELLANEOUS
SECTION 8.1 Seal. The Board shall adopt a corporate seal, which
----
shall be in the form of a circle and shall bear the name of the Corporation and
words showing that the Corporation was incorporated in the State of Delaware.
SECTION 8.2 Waiver of Notices. Whenever notice is required to be
-----------------
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
SECTION 8.3 Amendments. Except as otherwise provided herein or in
----------
the Certificate of Incorporation, these Bylaws or any of them may be altered,
amended, repealed or rescinded and new Bylaws may be adopted by the Board or by
the stockholders at any annual or special meeting of stockholders, provided that
notice of such proposed alteration, amendment, repeal, recession or adoption is
given in the notice of such meeting.
SECTION 8.4 Representation of Other Corporations. The Chairman of
------------------------------------
the Board or the President or the Secretary or any Vice President of the
Corporation is authorized to vote, represent and exercise on behalf of the
Corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of the Corporation, other than a
corporation of which the Corporation owns twenty percent (20%) or more of its
capital stock, in which case such officers shall not be so authorized under
these Bylaws without the authorization of the Board of Directors. The authority
herein granted to said officers to vote or represent on behalf of the
Corporation any and all shares held by the Corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
person authorized so to do by proxy or power of attorney duly executed by such
officers.
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Exhibit 4.1
FIRST ALLIANCE CORPORATION
1996 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE OF PLAN
The purpose of this 1996 Stock Incentive Plan ("Plan") of First
Alliance Corporation, a Delaware corporation (the "Company"), is to enable the
Company to attract, retain and motivate its employees, non-employee directors
and independent contractors by providing for or increasing the proprietary
interests of such employees, non-employee directors and independent contractors
in the Company.
SECTION 2. PERSONS ELIGIBLE UNDER PLAN
Any person, including any director of the Company, who is an employee
of the Company or any of its subsidiaries (an "Employee"), and any non-employee
director (a "Non-Employee Director") or independent contractor of the Company
(an "Independent Contractor," or, together with the Employees and the Non-
Employee Directors, the "Eligible Persons") shall be eligible to be considered
for the grant of Awards (as hereinafter defined) hereunder. For purposes of
this Plan, the Chairman of the Board's status as an Eligible Person shall be
determined by the Board of Directors of the Company (the "Board").
SECTION 3. AWARDS
(a) The Committee (as hereinafter defined), on behalf of the Company,
is authorized under this Plan to enter into any type of arrangement with an
Eligible Person that is not inconsistent with the provisions of this Plan and
that, by its terms, involves or might involve the issuance of (i) shares of
Class A Common Stock, no par value per share, of the Company or of any other
class of security of the Company which is convertible into shares of the
Company's Class A Common Stock ("Shares") or (ii) a right or interest with an
exercise or conversion privilege at a price related to the Shares or with a
value derived from the value of the Shares, which right or interest may, but
need not, constitute a "Derivative Security," as such term is defined in Rule
16a-1 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as such Rule may be amended from time to time. The entering
into of any such arrangement is referred to herein as the "grant" of an "Award."
(b) Awards are not restricted to any specified form or structure and
may include, without limitation, sales or bonuses of stock, restricted stock,
stock options, reload stock options, stock purchase warrants, other rights to
acquire stock, securities convertible into or redeemable for stock, stock
appreciation rights, limited stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares, and an Award may consist
of one such security or benefit, or two or more of them in tandem or in the
alternative. The terms upon which an Award is granted shall be evidenced by a
written agreement executed by the Company and the Eligible Person to whom such
Award is granted.
(c) Subject to paragraph (d)(ii) below, Awards may be issued, and
Shares may be issued pursuant to an Award, for any lawful consideration as
determined by the Committee, including, without limitation, services rendered by
the Eligible Person.
<PAGE>
(d) Subject to the provisions of this Plan, the Committee, in its sole
and absolute discretion, shall determine all of the terms and conditions of each
Award granted under this Plan, which terms and conditions may include, among
other things:
(i) provisions permitting the Committee to allow or require the
recipient of such Award, including any Eligible Person who is a director or
officer of the Company, or permitting any such recipient the right, to pay
the purchase price of the Shares or other property issuable pursuant to
such Award, or such recipient's tax withholding obligation with respect to
such issuance, in whole or in part, by any one or more of the following
means:
(A) the delivery of cash;
(B) the delivery of other property deemed acceptable by the
Committee;
(C) the delivery of previously owned shares of capital stock
of the Company (including "pyramiding") or other property;
(D) a reduction in the amount of Shares or other property
otherwise issuable pursuant to such Award; or
(E) the delivery of a promissory note of the Eligible Person
or of a third party, the terms and conditions of which shall be determined
by the Committee;
(ii) provisions specifying the exercise or settlement price for
any option, stock appreciation right or similar Award, or specifying the
method by which such price is determined, provided that the exercise or
settlement price of any option, stock appreciation right or similar Award
that is intended to qualify as "performance based compensation" for
purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code") shall be not less than the fair market value of a Share on the
date such Award is granted;
(iii) provisions relating to the exercisability and/or vesting of
Awards, lapse and non-lapse restrictions upon the Shares obtained or
obtainable under Awards or under the Plan and the termination, expiration
and/or forfeiture of Awards;
(iv) provisions conditioning or accelerating the grant of an
Award or the receipt of benefits pursuant to such Award, either
automatically or in the discretion of the Committee, upon the occurrence of
specified events, including, without limitation, the achievement of
performance goals, the exercise or settlement of a previous Award, the
satisfaction of an event or condition within the control of the recipient
of the Award or within the control of others, a change of control of the
Company, an acquisition of a specified percentage of the voting power of
the Company, the dissolution or liquidation of the Company, a sale of
substantially all of the property and assets of the Company or an event of
the type described in Section 7 hereof; and/or
(v) provisions required in order for such Award to qualify as an
incentive stock option under Section 422 of the Code (an "Incentive Stock
Option").
(e) Unless otherwise provided by the Committee in the written
agreement evidencing an Award, the terms of any stock option granted under the
Plan shall provide:
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(i) that the exercise price thereof shall not be less than 100%
of the market value of a share of Class A Common Stock on the date the
option is granted;
(ii) that the term of such option shall be ten years from the
date of grant;
(iii) that, upon an Employee ceasing to be employed by the
Company for any reason other than death or disability, or a Non-Employee
Director ceasing to be a Non-Employee Director of the Company, an option
shall not become exercisable to an extent greater than it could have been
exercised on the date the Employee's employment by the Company, or the Non-
Employee Director's incumbency, as the case may be, ceased; and
(iv) that the option shall expire ninety (90) days after the
Employee ceases to be employed with the Company or a Non-Employee Director
ceases to be a Non-Employee Director of the Company.
SECTION 4. STOCK SUBJECT TO PLAN
(a) Subject to adjustment as provided in Section 7(a) hereof, at any
time, the aggregate number of Shares issued and issuable pursuant to all Awards
(including all Incentive Stock Options) granted under this Plan shall not exceed
750,000.
(b) The aggregate number of Shares subject to Awards granted during
any calendar year to any one Eligible Person (including the number of shares
involved in Awards having a value derived from the value of Shares) shall not
exceed _______; provided, however, that the limitation set forth in this Section
4(b) shall not apply if such provision is not required in order for Awards to
qualify as "performance based compensation" under Section 162(m) of the Code.
Further, such aggregate number of shares shall be subject to adjustment under
Section 7(a) only to the extent that such will not affect the status of any
Award intended to qualify as "performance based compensation" under Section
162(m) of the Code.
(c) Subject to adjustment as provided in Section 7(b) hereof, the
aggregate number of Shares issued and issuable pursuant to all Incentive Stock
Options granted under this Plan shall not exceed _________. Such maximum number
does not include the number of Shares subject to the unexercised portion of any
Incentive Stock Option granted under this Plan that expires or is terminated.
(d) The aggregate number of Shares issued under this Plan at any time
shall equal only the number of shares actually issued upon exercise or
settlement of an Award and not returned to the Company upon forfeiture of an
Award or in payment or satisfaction of the purchase price, exercise price or tax
withholding obligation of an Award.
SECTION 5. NATURE AND DURATION OF PLAN
(a) This Plan is intended to constitute an unfunded arrangement for a
select group of management or other key employees.
(b) No Awards shall be made under this Plan after ______ ___, 2006.
Although Shares may be issued after _______ ___, 2006 pursuant to Awards made
prior to such date, no Shares shall be issued under this Plan after _______ ___,
2016.
3
<PAGE>
SECTION 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by one or more committees of the
Board (any such committee, the "Committee"). If no persons are designated by
the Board to serve on the Committee, the Plan shall be administered by the Board
and all references herein to the Committee shall refer to the Board. The Board
shall have the discretion to appoint, add, remove or replace members of the
Committee, and shall have the sole authority to fill vacancies on the Committee.
Unless otherwise provided by the Board: (i) with respect to any Award for which
such is necessary and desired for such Award to be exempted by Rule 16b-3 of the
Exchange Act, the Committee shall consist of two or more directors, each of whom
is a "disinterested person" (as such term is defined in Rule 16b-3 promulgated
under the Exchange Act, as such Rule may be amended from time to time), (ii)
with respect to any Award that is intended to qualify as "performance based
compensation" under Section 162(m) of the Code, the Committee shall consist of
two or more directors, each of whom is an "outside director" (as such term is
defined under Section 162(m) of the Code), and (iii) with respect to any other
Award, the Committee shall consist of one or more directors (any of whom also
may be an Eligible Person who has been granted or is eligible to be granted
Awards under the Plan).
(b) Subject to the provisions of this Plan, the Committee shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of this Plan with respect to the Awards over which such
Committee has authority, including, without limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to
this Plan;
(ii) determine which persons are Eligible Persons and to which
of such Eligible Persons, if any, and when Awards shall be granted
hereunder;
(iii) grant Awards to Eligible Persons and determine the terms
and conditions thereof, including the number of Shares subject thereto and
the circumstances under which Awards become exercisable or vested or are
forfeited or expire, which terms may but need not be conditioned upon the
passage of time, continued employment, the satisfaction of performance
criteria, the occurrence of certain events (including events which the
Board or the Committee determine constitute a change of control), or other
factors;
(iv) at any time cancel an Award with the consent of the holder
and grant a new Award to such holder in lieu thereof, which new Award may
be for a greater or lesser number of Shares and may have a higher or lower
exercise or settlement price;
(v) determine whether, and the extent to which adjustments are
required pursuant to Section 7 hereof; and
(vi) interpret and construe this Plan, any rules and regulations
under the Plan and the terms and conditions of any Award granted
hereunder.
All decisions, determinations, and interpretations of the Committee shall be
final and conclusive upon any Eligible Person to whom an Award has been granted
and to any other person holding an Award.
(c) The Committee may, in the terms of an Award or otherwise,
temporarily suspend the issuance of Shares under an Award if the Committee
determines that securities law considerations so warrant.
4
<PAGE>
(d) The Committee from time to time may permit a recipient holding any
stock option granted by the Company to surrender for cancellation any
unexercised portion of such option and receive in exchange an option or other
Award for such number of Shares as may be designated by the Committee. The
Committee may, with the consent of the person entitled to exercise any
outstanding option, amend such option, including reducing the exercise price of
any option and/or extending the term thereof.
SECTION 7. ADJUSTMENTS
(a) If the outstanding securities of the class then subject to this
Plan are increased, decreased or exchanged for or converted into cash, property
or a different number or kind of shares or securities, or if cash, property or
shares or securities are distributed in respect of such outstanding securities,
in either case as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split, spin-off or the like, or if substantially all of the property and
assets of the Company are sold, then, unless the terms of such transaction shall
provide otherwise, the Committee shall make appropriate and proportionate
adjustments in (i) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to Awards theretofore granted under
this Plan other than Incentive Stock Options and the exercise or settlement
price of such Awards, and (ii) the maximum number and type of shares or other
securities that may be issued pursuant to such Awards thereafter granted under
this Plan.
(b) If the outstanding securities of the class then subject to this
Plan are increased, decreased or exchanged for or converted into a different
number or kind of shares or securities as a result of a reorganization, merger,
consolidation, recapitalization, reclassification, stock dividend, stock split,
reverse stock split, spin-off or the like, then, unless the terms of such
transaction shall provide otherwise, the Committee shall make appropriate and
proportionate adjustments in (i) the number and type of shares or other
securities that may be acquired pursuant to Incentive Stock Options and the
exercise price thereof theretofore granted under this Plan, and (ii) the maximum
number and type of shares or other securities that may be issued pursuant to
Incentive Stock Options thereafter granted under this Plan.
SECTION 8. AMENDMENT AND TERMINATION OF PLAN
The Board may amend or terminate this Plan at any time and in any
manner; provided, however, that no such amendment or termination shall deprive
-------- -------
the recipient of any Award theretofore granted under this Plan, without the
consent of such recipient, of any of his or her rights thereunder or with
respect thereto; provided, further, that if an amendment to the Plan would
-------- -------
affect the Plan's compliance with Rule 16b-3 under the Exchange Act or Section
422 or 162(m) or other applicable provisions of the Code, the amendment shall be
approved by the Company's stockholders to the extent required to comply with
Rule 16b-3 under the Exchange Act, Sections 422 and 162(m) of the Code, or other
applicable provisions of or rules under the Code.
SECTION 9. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of the date upon which it was approved
by the Board, subject however to approval of the plan by the affirmative votes
of the holders of a majority of the securities of the Company present, or
represented, and entitled to vote at a meeting duly held in accordance with the
laws of the State of Delaware.
5
<PAGE>
SECTION 10. COMPLIANCE WITH OTHER LAWS AND REGULATIONS
The Plan, the grant and exercise of Awards thereunder, and the
obligation of the Company to sell and deliver shares under such Awards, shall be
subject to all applicable federal and state laws, rules and regulations and to
such approvals by any governmental or regulatory agency as may be required. The
Company shall not be required to issue or deliver any certificates for shares of
Class A Common Stock prior to the completion of any registration or
qualification of such shares under any federal or state law or issuance of any
ruling or regulation of any government body which the Company shall, in its sole
discretion, determine to be necessary or advisable. Any adjustments provided
for in Section 7 shall be subject to any shareholder action required by Delaware
corporate law.
SECTION 11. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted pursuant to
this Plan shall confer on any individual any right to continue in the employ of
the Company or interfere in any way with the right of the Company to terminate
an individual's employment at any time. The agreement evidencing an Award may
contain such provisions as the Committee may approve with reference to the
effect of approved leaves of absence.
SECTION 12. LIABILITY OF COMPANY
The Company and any affiliate which is in existence or hereafter comes
into existence shall not be liable to an Eligible Person or other persons as to:
(a) The Non-Issuance of Shares. The non-issuance or sale of shares as
----------------------
to which the Company has been unable to obtain from any regulatory body having
jurisdiction the authority deemed by the Company's counsel to be necessary to
the lawful issuance and sale of any shares hereunder; and
(b) Tax Consequences. Any tax consequence expected, but not realized,
----------------
by any Eligible Person or other person due to the issuance, exercise,
settlement, cancellation or other transaction involving any Award granted
hereunder.
SECTION 13. GOVERNING LAW
This Plan and any Awards and agreements hereunder shall be interpreted
and construed in accordance with the laws of the State of Delaware and
applicable federal law.
6
<PAGE>
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the
foregoing by directors of the Company, __________________________ has caused
these presents to be duly executed in its name and behalf by its proper officers
thereunto duly authorized as of this ______ day of _______________, 1996.
FIRST ALLIANCE CORPORATION
By:_________________________________
Brian Chisick, Chief Executive Officer
and President
ATTEST:
__________________________
Mark K. Mason
Executive Vice President and
Chief Financial Officer
7
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP]
July 5, 1996
First Alliance Corporation
17305 Von Karman Avenue
Irvine, California 92714-6203
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for First Alliance Corporation, a Delaware
corporation (the "Company"), in connection with a proposed restructuring, as a
result of which First Alliance Mortgage Company, a California corporation, will
become a wholly-owned subsidiary of the Company, and in connection with the
registration of 4,025,000 shares of the Company's Class A Common Stock, $.01 par
value (the "Shares"), on Form S-1 Registration Statement No. 333-3633 (as
amended, the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), on May 13, 1996 and Amendment No. 1 thereto filed with the Commission on
July __, 1996. Of the 4,025,000 Shares, 525,000 are subject to an option granted
to the Underwriters (as defined below) to cover over-allotments. We understand
that the Company proposes to sell the Shares to a group of underwriters (the
"Underwriters") represented by Friedman, Billings, Ramsey & Co., Inc. for
offering to the public.
We are familiar with the corporate actions to be taken by the Company in
connection with the authorization, issuance and sale of the Shares and have made
such other legal and factual inquiries as we deem necessary for the purpose of
rendering this opinion.
Based on the foregoing and in reliance thereon, and subject to the
effectiveness of the Registration Statement under the Act, we are of the
opinion that, upon conclusion of the
<PAGE>
First Alliance Corporation
July 5, 1996
Page 2
proceedings contemplated by us to be taken prior to the issuance of the Shares,
the Shares, when issued and sold in the manner described in the Registration
Statement and in accordance with the terms of the underwriting agreement to be
entered into between the Company and the Underwriters, will be legally issued,
fully paid and nonassessable.
We are admitted to practice in California. We are not admitted to practice
in Delaware. However, we are generally familiar with the Delaware General
Corporation Law and have made such review thereof as we consider necessary for
the purpose of rendering this opinion. Subject to the foregoing, this opinion
is limited to Delaware, California and federal law.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" contained in the prospectus that forms a part of the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Act or the General Rules and Regulations of the Commission. This opinion is
rendered solely for your benefit and may not be otherwise copied, quoted or
relied upon without our prior written consent.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
<PAGE>
EXHIBIT 10.1
INTERIM WAREHOUSE AND SECURITY AGREEMENT
----------------------------------------
INTERIM WAREHOUSE AND SECURITY AGREEMENT, dated as of October 29, 1993
(as amended or otherwise modified from time to time, this "Agreement"), between
----------
(i) PRUDENTIAL SECURITIES GROUP INC., a Delaware corporation (the "Lender"), and
(ii) FIRST ALLIANCE MORTGAGE COMPANY, a California corporation (the "Borrower").
RECITALS
--------
WHEREAS, Prudential Securities Incorporated ("PSI") has agreed to act
from time to time as lead manager of one or more public offerings of residential
loan pass-through certificates (the "Certificates") to be issued by one or more
------------
trusts to be sponsored by the Borrower; and
WHEREAS, the Lender has agreed, subject to the terms and conditions
contained herein, to provide interim funding from time to time to finance the
origination of First Mortgage Loans (as defined herein), Fixed-Rate Mortgage
Loans (as defined herein) and Designated Loans (as defined herein; First
Mortgage Loans, Fixed-Rate Loans and Designated Loans are herein collectively
referred to as "Mortgage Loans"), which Mortgage Loans are related to a specific
--------------
series or class of Certificates and which Mortgage Loans are to be pledged to
secure the advances to be made by the Lender hereunder, with the proceeds of the
related Certificates to be used to repay such advances.
NOW, THEREFORE, the parties to this Agreement hereby agree as follows
(an index of certain capitalized, defined terms appears in Section 23 of this
Agreement):
Section 1. The Advances. Subject to the terms of this Agreement, the
---------- ------------
Lender agrees to lend to the Borrower from time to time in an aggregate
principal amount not to exceed $125,000,000 at any one time outstanding to be
made in one or more advances (each an "Advance" and, collectively, "Advances")
provided, however, that the aggregate principal amount outstanding of Advances
- -------- -------
made hereunder and the aggregate principal amount outstanding of "Advances" made
under (and as defined in) that certain Interim Warehouse and Security Agreement
dated as of April 5, 1993 between the Borrower and the Lender in the aggregate
shall not exceed $125,000,000. Each Advance shall be made on a date that is
prior to the Termination Date (as defined below; each such date on which an
Advance is made, a "Funding Date"); provided that:
------------ --------
(a) the representations and warranties of the Borrower in Section 6
hereof shall be true and correct on and as of such Funding Date as if made on
and as of such date;
(b) no Default or Event of Default shall have occurred and be
continuing or would exist after the making of any Advance on such Funding Date;
<PAGE>
(c) if requested by the Lender, the Lender shall have conducted a due
diligence review of the mortgage files relating to the Mortgage Loans, the
results of which shall have been satisfactory to the Lender;
(d) the Lender shall have received (i) a Certification (as defined
below) from the Custodian (as defined in the Custodial Agreement referred to
below) to the effect that it has reviewed mortgage files relating to the
Mortgage Loans being pledged in connection with the Advance being made on such
Funding Date in the manner required by the Custodial Agreement (as defined
below) and has found no material deficiencies in such mortgage files as so
reviewed, and (ii) in connection with the first Advance, (A) a legal opinion
from counsel to the Borrower, in the form of Exhibit C attached hereto, (B) the
---------
Secured Note (as defined below) and (C) the Second Amendment dated as of October
29, 1993 to the Custodial Agreement, in each case duly executed by the parties
thereto;
(e) the Borrower shall have delivered to the Custodian all documents
to be delivered with respect to the Mortgage Loans being pledged on such Funding
Date;
(f) after the making of such Advance, the outstanding principal amount
of the aggregate of all Advances will not exceed the aggregate of the following:
(i) the lesser of (A) 92.5% of the market value of the First
Mortgage Loans held as Collateral (such amount not to exceed the par
amount thereof), if the Lender has received evidence satisfactory to
it that the Certificates related to such First Mortgage Loans will be
insured by the Municipal Bond Investors Assurance Corporation or
another monoline insurer acceptable to the Lender (an "Insurer") and
-------
(B) such other percentage of the par amount of the First Mortgage
Loans held as Collateral, as the Lender determines in its sole
discretion, if the Certificates related to such First Mortgage Loans
receive their credit enhancement other than from an Insurer,
including, without limitation, from credit enhancement provided by a
senior/subordinated structure,
(ii) the lesser of (A) the aggregate par amount of the Fixed-
Rate Mortgage Loans held as Collateral and (B) 92.5% of the aggregate
market value of the Fixed-Rate Mortgage Loans held as Collateral, and
(iii) the lesser of (A) the aggregate par amount of the
Designated Loans held as Collateral and (B) 92.5% of the aggregate
market value of Designated Loans held as collateral,
in each case as determined by the Lender and notified to the Borrower on the
third business day of each week (or, in the sole discretion of the Lender
following notice to the Borrower, on any business day);
(g) the Lender shall have received, prior to the first Advance in
respect of any First Mortgage Loans, a copy of a Mortgage Loan Subservicing
Agreement, in form and
-2-
<PAGE>
substance satisfactory to the Lender, by and between the Borrower and Lomas
Mortgage USA, Inc. and duly executed by the parties thereto;
(h) each rescission period, under applicable federal, state or local
law, in respect of the Mortgage Loans being pledged in connection with the
Advance being made on such Funding Date shall have expired, and the Lender shall
have received evidence satisfactory to it to that effect; and
(i) any general conditions for the making of Advances, specified in
Section 2 below, have been satisfied and will continue to be satisfied if such
Advance is made.
Section 2. Terms and Conditions for All Advances.
---------- --------------------------------------
(a) Each outstanding Advance shall mature on the related Maturity
Date (as defined below), and the obligation of the Lender to make any Advances
hereunder shall terminate, on January 31, 1994 (the "Termination Date");
----------------
provided that the Termination Date may be extended from time to time, in the
- --------
sole and absolute discretion of the Lender, upon (i) the execution and delivery
by the parties hereto of (A) a Notice of Extension of Agreement substantially in
the form of Exhibit B-1 annexed hereto, and (B) an Endorsement to the Secured
-----------
Note, substantially in the form of Exhibit B-2 annexed hereto and (ii) the
-----------
delivery of an opinion of counsel to the Borrower substantially in the form of
Exhibit B-3 annexed hereto; and provided, further, that such an extension alone
- ----------- -------- -------
shall not be deemed an Event of Default hereunder.
(b) (i) If the Borrower wishes to receive an Advance in respect of
First Mortgage Loans or Fixed-Rate Mortgage Loans, then the Borrower shall give
the Lender written notice by no later than 11:00 a.m. one business day prior to
a Funding Date of the amount and type of such Advance to be advanced on such
Funding Date by delivering a Notice of Borrowing substantially in the form of
Exhibit D attached hereto, and the Custodian shall have delivered a
- ---------
Certification (as defined below), indicating no material deficiencies with
respect to the Mortgage Loan Documents (as defined below) related to such
Advance, by no later than 2:00 p.m. one business day before such Funding Date.
(ii) If the borrower wishes to receive an Advance in respect of
Designated Loans, then the Borrower shall give the Lender written notice by no
later than 11:00 a.m. ten business days prior to a Funding Date of the amount
and type of such Advance to be advanced on such Funding Date by delivering a
Notice of Borrowing substantially in the form of Exhibit D attached hereto, and
---------
the Custodian shall have delivered a Certification (as defined below),
indicating no material deficiencies with respect to the Mortgage Loan Documents
(as defined below) related to such Advance, by no later than 2:00 p.m. one
business day before such Funding Date.
(iii) Each Advance shall bear interest from the related Funding Date
to but excluding the Maturity Date at a rate per annum equal to LIBOR plus 2.50%
and thereafter as provided in Section 2(e). "LIBOR" shall mean the rate
-----
appearing at page 3750 of the Telerate
-3-
<PAGE>
Screen as one-month LIBOR and, if such rate shall not be so quoted, the rate per
annum at which deposits in U.S. dollars for a period of one month are offered by
Morgan Guaranty Trust Company of New York (or such other prime bank in the
London interbank market as the Lender shall designate) to prime banks in the
London interbank market at approximately 11:00 a.m. (London Time) on the date of
each Advance.
(c) Each outstanding Advance shall mature on the related maturity
date specified for such Advance as set forth in the related Notice of Borrowing
(the "Maturity Date"); provided that the Maturity Date shall, for any Advance,
-------------
be no later than the earlier of (i) subject to the second succeeding proviso
hereto, the Termination Date or (ii) the date upon which the Certificates
related to the Mortgage Loans funded by such Advance shall be sold to the
public; provided, further, that the Lender shall have the option, in its sole
-------- -------
discretion, to extend the Maturity Date of an Advance from time to time for a
period of up to thirty (30) days by delivering to the Borrower notice of such
election in the form of Exhibit E attached hereto no later than thirty (30) days
---------
preceding the then scheduled Maturity Date of such Advance; and provided,
--------
further, that if the Lender chooses to extend the Maturity Date of an Advance
- -------
and such Maturity Date is a date later than the Termination Date of this
Agreement, then the Borrower shall deliver to the Lender an endorsement in the
form of Exhibit F attached hereto. If no such notice or endorsement, as
---------
applicable, is delivered by the Lender, such Advance shall automatically become
due and payable without any further action by the Lender on its respective
Maturity Date, and in such event the Lender may exercise all rights and remedies
available to it as the holder of a first perfected security interest under the
Uniform Commercial Code as in effect in the State of New York (the "NY UCC").
-------
The extension of the Maturity Date of any Advance beyond the Termination Date of
this Agreement shall not be deemed to be an extension or renewal, beyond such
Termination Date, of the Lender's obligations to lend to the Borrower under this
Agreement, and the Borrower's obligations in respect of an Advance so extended
shall survive the termination of this Agreement.
(d) The Advances are pre-payable at any time without premium or
penalty, in whole or in part. Any amounts pre-paid shall be applied to repay
the outstanding principal amount of any Advances (together with interest
thereon) until paid in full. Amounts repaid may be borrowed in accordance with
the terms of this Agreement. If the Borrower intends to prepay an Advance in
whole or in substantial part from a source other than the proceeds of
Certificates, the Borrower shall give two business days' prior notice thereof to
the Lender.
(e) If the Advances are not repaid in whole on the date when due, the
Advances shall, commencing on such date, bear interest at a rate per annum equal
to one-month LIBOR plus 3.50% until repaid.
(f) Interest calculated on the basis of LIBOR shall be calculated on
the basis of a 360 day year and paid for the actual number of days elapsed.
With respect to each Advance, LIBOR shall be determined initially as of the date
of such Advance to but excluding the tenth day of the month following the date
of the making of such Advance (such tenth day and each
-4-
<PAGE>
succeeding tenth day, an "Interest Payment Date") and shall thereafter be
---------------------
determined as of each Interest Payment Date to but excluding the following
Interest Payment Date.
(g) Interest on each Advance is payable on each Interest Payment Date
and on the Maturity Date for such Advance. In the event that an Advance is not
repaid in full on the date when due, interest shall be payable thereafter on
demand.
(h) The Advances shall be evidenced collectively by the secured
promissory note of the Borrower in the form attached hereto as Exhibit A (the
---------
"Secured Note"). The Lender is authorized to record the date and amount of each
------------
Advance and the date and amount of each repayment of principal thereof on the
schedule annexed to the Secured Note and any such recordation shall be
conclusive evidence of the accuracy of the amounts so recorded (absent manifest
error); provided that the failure of the Lender to make such recordation (or any
error in such recordation) shall not affect the rights and obligations of the
Borrower hereunder or under the Secured Note.
(i) Each Advance shall be repaid in full on the Maturity Date, and
the Lender shall release its security interest in and to the Mortgage Loans when
all Advances are so repaid.
(j) If an Advance is not repaid in full when due, thereafter all
payments and prepayments of the related Mortgage Loans shall be paid to the
Lender as promptly as practicable following receipt of such payments but in any
event no later than fifteen days following receipt thereof.
(k) If at any time the outstanding principal amount of the aggregate
of all Advances exceeds the aggregate of the following:
(i) the lesser of (A) 92.5% of the market value the First
Mortgage Loans held as Collateral (such amount not to exceed the par
amount thereof), if Lender has received evidence satisfactory to it
that the Certificates related to such First Mortgage Loans will be
insured by an Insurer and (B) such other percentage of the par amount
of the First Mortgage Loans held as Collateral, as the Lender
determines in its sole discretion, if the Certificates related to such
First Mortgage Loans receive their credit enhancement other than from
an Insurer, including, without limitation, from credit enhancement
provided by a senior/subordinated structure,
(ii) the lesser of (A) the aggregate par amount of the Fixed-
Rate Mortgage Loans held as Collateral and (B) 92.5% of the aggregate
market value of the Fixed-Rate Mortgage Loans held as Collateral, and
(iii) the lesser of (A) the aggregate par amount of the
Designated Loans held as Collateral and (B) 92.5% of the aggregate
market value of Designated Loans held as Collateral,
-5-
<PAGE>
in each case as determined by the Lender and notified to the Borrower on the
third business day of each week (or, in the sole discretion of the Lender
following notice to the Borrower, on any business day), the Borrower shall no
later than one business day after receipt of notice of such excess, either
prepay such Advances (together with interest thereon) in part or in whole or
pledge additional Collateral (as hereinafter defined) to the Lender, such that
after giving effect to such prepayment or pledge the unpaid principal amount of
such Advances does not exceed such lesser amount.
(l) Notwithstanding anything to the contrary in this Agreement, the
Lender shall have no obligation to make any Advance hereunder if (i) the Lender
is unable, after good faith effort, to obtain a source of funds for the proposed
Advance on substantially the same economic terms as are available to the Lender
as of the date of this Agreement, or (ii) there shall have occurred any material
adverse change in (A) the financial condition of the Lender, (B) the financial
markets generally or (C) the secondary market for mortgage loans or mortgage-
related securities. The Lender shall promptly notify the Borrower of any such
determination by the Lender.
(m) (i) No Advance shall be made in respect of any First Mortgage
Loan or Fixed-Rate Mortgage Loan unless the Lender shall have received evidence
satisfactory to it that: (A) such First Mortgage Loan was originated in
accordance with the underwriting guidelines established by the Borrower and
agreed to by both an Insurer (for the related Certificates) and PSI, (B) a
third-party, acceptable to PSI, has determined that such First Mortgage Loan
meets the aforementioned underwriting guidelines, and (C) such First Mortgage
Loan meets the eligibility criteria of an Insurer (for the related
Certificates); and
(ii) No Advance shall be made in respect of any Designated Loan unless
the Lender in its sole discretion determines that such loan is satisfactory to
it.
(n) No Advance shall be made in respect of a Fixed-Rate Mortgage Loan
if the aggregate principal amount of all Advances previously made and
outstanding in respect of Fixed-Rate Mortgage Loans (and the amount of the
Advance to be made) exceeds $50,000,000.
Section 3. Purpose and Disbursement of Funds Advanced. Each Advance
---------- ------------------------------------------
shall be used to originate six-month LIBOR-indexed first mortgage loans ("First
-----
Mortgage Loans"), fixed-rate first or second mortgage loans ("Fixed-Rate
- -------------- ----------
Mortgage Loans") and such other loans, including but not limited to loans not
- --------------
originated by the Borrower and non-LIBOR indexed loans, as the Lender in its
sole discretion determines are acceptable to it (the "Designated Loans"), as
identified to the Lender in writing from time to time. All Advances shall be
disbursed by the Custodian in accordance with Section 15 of the Custodial
Agreement.
Section 4. No Commitment to Extend Maturity Date or Termination Date.
---------- ---------------------------------------------------------
The Lender shall have no obligation hereunder to extend the Maturity Date of any
Advance or the Termination Date hereunder, and the Borrower expressly waives,
and agrees not to assert,
-6-
<PAGE>
any claim or cause of action the Borrower may have in respect of any
determination by the Lender not to extend the Maturity Date of any Advance or
the Termination Date hereunder.
Section 5. Mortgage Files and Custodian; Secured Obligations. (a) In
---------- -------------------------------------------------
connection with each Advance, the Borrower shall deliver, or heretofore has
delivered, to Chemical Bank, as custodian (the "Custodian") on behalf of the
---------
Lender, the documents and instruments listed in Section 2 of that certain
Custodial Agreement, dated as of April 5, 1993 (as heretofore amended to date
and as amended by the Second Amendment thereto, dated as of October 29, 1993,
the "Custodial Agreement"), among the Borrower, the Lender, and the Custodian,
-------------------
and the Borrower shall further cause to be delivered to the Custodian the
documents and instruments described in the last sentence of Section 2 of the
Custodial Agreement as and to the extent required to be delivered to the
Custodian pursuant thereto. All such documents and instruments evidencing and
relating to the Mortgage Loans (collectively, the "Mortgage Loan Documents"),
-----------------------
together with all computer records and tapes relating thereto, and any proceeds
thereof, are hereinafter referred to as the "Collateral". Pursuant to the
----------
Custodial Agreement, the Custodian shall hold the Mortgage Loan Documents on
behalf of the Lender pursuant to terms of the Custodial Agreement and shall
deliver to the Lender a Certification (as defined in the Custodial Agreement) to
the effect that it has reviewed such Mortgage Loan Documents in the manner
required by the Custodial Agreement and identifying any deficiencies in such
Mortgage Loan Documents as so reviewed.
(b) The Borrower hereby pledges and grants a security interest in all
of its respective right, title and interest in and to the Collateral to the
Lender to secure the repayment of principal of and interest on all Advances and
all other amounts owing to the Lender hereunder (collectively, the "Secured
-------
Obligations"). The Borrower agrees to mark its computer records and tapes to
- -----------
evidence the security interests granted to the Lender hereunder.
Section 6. Representations and Warranties. (a) The Borrower
---------- ------------------------------
represents and warrants to the Lender that:
(i) It has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of California.
(ii) It is duly licensed as a licensee or is otherwise qualified
in each state in which it transacts business and is not in default of such
state's applicable laws, rules and regulations. It has the requisite power
and authority and legal right to own and grant a lien on all of its right,
title and interest in and to the Collateral, and to execute and deliver,
engage in the transactions contemplated by, and perform and observe the
terms and conditions of, this Agreement, the Secured Note and the Custodial
Agreement.
(iii) At all times after the Custodian has received a Mortgage
Loan from the Borrower and until payment in full of the Advances, the
Borrower will not commit any act in violation of applicable laws, or
regulations promulgated pursuant thereto.
-7-
<PAGE>
(iv) It is solvent and is not in default under any mortgage,
borrowing agreement or other instrument or agreement pertaining to
indebtedness for borrowed money, and the execution, delivery and
performance by it of this Agreement, the Secured Note and the Custodial
Agreement do not conflict with any term or provision of its certificate of
incorporation or by-laws or any law, rule, regulation, order, judgment,
writ, injunction or decree applicable to any of them of any court,
regulatory body, administrative agency or governmental body having
jurisdiction over it and will not result in any violation of any such
mortgage, instrument or agreement.
(v) All financial statements or certificates of the Borrower or
any of its officers furnished to the Lender are true and complete and do
not omit to disclose any material liabilities or other facts relevant to
the Borrower's condition. All such financial statements have been prepared
in accordance with GAAP. No financial statement or other financial
information as of a date later than September 30, 1993, has been furnished
by the Borrower to any lender that has not been furnished to the Lender.
(vi) No consent, approval, authorization or order of,
registration or filing with, or notice to any governmental authority or
court is required under applicable law in connection with the execution,
delivery and performance by it of this Agreement, the Secured Note or the
Custodial Agreement, where the failure to obtain any of the foregoing would
materially adversely affect the business, operations, property or financial
condition of the Borrower taken as a whole, the ability of the Borrower to
perform its obligations under this Agreement, the Secured Note or the
Custodial Agreement or the validity or enforceability of this Agreement,
the Secured Note or the Custodial Agreement, except as have been obtained
and are in full force and effect.
(vii) There is no action, preceding or investigation pending or,
to the best of its knowledge, threatened against it before any court,
administrative agency or other tribunal (A) asserting the invalidity of
this Agreement, the Custodial Agreement or the Secured Note, (B) seeking to
prevent the consummation of any of the transactions contemplated by this
Agreement, the Custodial Agreement or the Secured Note, or (C) which might
materially and adversely affect the validity of the Mortgage Loans or the
performance by it of its obligations under, or the validity or
enforceability of, this Agreement, the Secured Note or the Custodial
Agreement.
(viii) There has been no material adverse change in the business,
operations, financial condition, properties or prospects of the Borrower
since September 30, 1993.
(ix) This Agreement, the Secured Note and the Custodial Agreement
have each been duly authorized, executed and delivered by the Borrower, all
requisite corporate action having been taken, and each is legal, valid and
binding and enforceable against the Borrower in accordance with its terms.
-8-
<PAGE>
(b) With respect to every Mortgage Loan delivered or to be delivered
to the Custodian, the Borrower warrants to the Lender that:
(i) Such Mortgage Loan and all accompanying documents are
complete and authentic and all signatures thereon are genuine.
(ii) Such Mortgage Loan arose from a bona fide loan, complying
with all applicable State and Federal laws and regulations, to persons
having legal capacity to contract and is not subject to any defense, set-
off or counterclaim.
(iii) All amounts represented to be payable on such Mortgage Loan
are, in fact, payable in accordance with the provisions of such Mortgage
Loan.
(iv) No monetary default has occurred in any provisions of such
Mortgage Loan that has or will cause a prepayment of Advances made in
respect of such Mortgage Loan pursuant to Section 13 hereof, and no non-
monetary default has occurred in any provisions of such Mortgage Loan.
(v) To the best of the Borrower's knowledge, any property subject
to any security interest given in connection with such Mortgage Loan is not
subject to any encumbrance other than a stated first or second mortgage.
(vi) The Borrower held good and indefeasible title to, and was
the sole owner of, such Mortgage Loan subject to no liens, charges,
mortgages, participations, encumbrances or rights of others or other liens
released simultaneously with such pledge.
(vii) Each Mortgage Loan conforms to the description thereof as
set forth on the attached Mortgage Loan Schedule (as defined in the
Custodial Agreement).
(viii) All disclosures required by Regulation Z of the Board of
Governors of the Federal Reserve System promulgated pursuant to the statute
commonly known as the Truth-in-Lending Act and the Notice of the Right of
Rescission required by said statute and regulation have been properly made
and given.
(ix) None of the Mortgage Loans repurchased by the Borrower from
lenders were repurchased because such Mortgage Loans were in default to
such other lenders.
(x) Upon receipt by the Custodian of the Collateral with respect
to any Mortgage Loan and for so long as the Custodian maintains actual
physical possession of such Collateral, the Custodian shall have, for the
benefit of the Lender, a fully-perfected first priority security interest
in such Collateral; provided, however, until such time as assignments of
-------- -------
mortgage with respect to the Mortgage Loans are recorded in the appropriate
office in the name of the Custodian (1) the Custodian may
-9-
<PAGE>
not independently be able to enforce a mortgage against the related
mortgage property or the related mortgagor, (2) the related Borrower could
record an assignment of such mortgage in the name of a third party or
record a discharge and satisfaction of such mortgage with the result that,
in the former case such third party could acquire the rights represented by
such mortgage and, in the latter case, the lien of such mortgage could be
discharged, with the result that such mortgage note would no longer be
secured by the related property and (3) any notice which may be given to
the record holder of a mortgage, including, without limitation, notices
regarding the non-payment of real estate taxes, would instead be given to
the applicable Borrower.
(xi) The additional representations and warranties set forth in
schedule 1 attached hereto are true and correct with respect to each
----------
Mortgage Loan.
Section 7. Rights of Lender; Limitations on Lender's Obligations.
---------- -------------------------------------------------------
(a) Anything herein to the contrary notwithstanding, the Borrower shall remain
liable under each of the Mortgage Loan Documents to which it is a party to
observe and perform all the conditions and obligations to be observed and
performed by it thereunder, all in accordance with and pursuant to the terms and
provisions of each such Mortgage Loan Document. The Lender shall not have any
obligation or liability under any Mortgage Loan Document by reason of or arising
out of this Agreement or the receipt by the Lender of any payment relating to
such Mortgage Loan Document pursuant hereto, nor shall the Lender be obligated
in any manner to perform any of the obligations of the Borrower under or
pursuant to any Mortgage Loan Document, to make any payment, to make any inquiry
as to the nature or the sufficiency of any payment received by it or as to the
sufficiency of any performance by any party under any Mortgage Loan Document, to
present or file any claim, to take any action to enforce any performance or to
collect the payment of any amounts which may have been assigned to it or to
which it may be entitled at any time or times.
(b) Upon the request of the Lender at any time after the occurrence
and during the continuance of an Event of Default, the Borrower shall notify
parties to the Mortgage Loan Document to which it is a party that the Mortgage
Loan Documents have been assigned to the Lender and that payments in respect
thereof shall be made directly to the Lender. The Lender may in its own name or
in the name of others communicate with parties to the Mortgage Loan Documents to
verify with them to its satisfaction the existence, amount and terms of any
Mortgage Loan Documents.
Section 8. Covenants. The Borrower covenants and agrees with the
---------- ---------
Lender that, from and after the date of this Agreement until the obligations of
the Borrower hereunder and under the Secured Note is paid in full:
(a) Further Documentation. At any time and from time to time,
---------------------
upon the written request of the Lender, and at the sole expense of the
Borrower, the Borrower will promptly and duly execute and deliver such
further instruments and documents and take such further action as the
Lender may reasonably request for the purpose of obtaining or preserving
the full benefits of this Agreement and of the rights
-10-
<PAGE>
and powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in
effect in any jurisdiction with respect to the security interests created
hereby and the delivery to the Lender of any reports or notices provided to
the Borrower by the Subservicer (as defined below) in connection with the
Mortgage Loans. The Borrower also hereby authorizes the Lender to file any
such financing or continuation statement without the signature of the
Borrower to the extent permitted by applicable law. A carbon, photographic
or other reproduction of this Agreement shall be sufficient as a financing
statement for filing in any jurisdiction.
(b) Limitation on Liens on Collateral. The Borrower will not,
---------------------------------
nor will it permit or allow the Subservicer to, create, incur or permit to
exist, will defend the Collateral against, and the Borrower will take such
other action as is necessary to remove, any lien, security interest or
claim on or to the Collateral, other than the security interests created
hereby, and will defend the right, title and interest of the Lender in and
to any of the Collateral against the claims and demands of all persons
whomsoever.
(c) Limitations on Modifications, Waivers and Extensions of
----------------------------------------------------
Contracts. The Borrower will not, nor will it permit or allow the
---------
Subservicer to, (i) amend, modify, terminate or waive any provision of any
Mortgage Loan Document to which the Borrower is a party in any manner which
could reasonably be expected to materially adversely affect the value of
such Mortgage Loan Document as Collateral, (ii) fail to exercise promptly
and diligently each and every material right which the Borrower may have
under each such Mortgage Loan Document (other than any right of
termination) where the failure to so act could materially adversely affect
the Collateral relating to such Mortgage Loan Document or (iii) fail to
deliver to the Lender a copy of each material demand, notice or document
received by it relating in any way to any such Mortgage Loan Document other
than any such demand, notice or document relating to the delinquency of a
Mortgage Loan Document or the bankruptcy of the obligor thereunder.
(d) Further Identification of Collateral. The Borrower will
------------------------------------
furnish to the Lender from time to time statements and schedules further
identifying and describing the Collateral and such other reports in
connection with the Collateral as the Lender may reasonably request, all in
reasonable detail.
(e) Limitation on Foreclosure. The Borrower will not, nor will
-------------------------
it permit or allow the Subservicer to, take title to real estate mortgaged
in connection with a Mortgage Loan, whether by means of a foreclosure
action (judicial or non-judicial), acceptance of a deed in lieu of
foreclosure, or any voluntary transfer, without the express written consent
of the Lender.
-11-
<PAGE>
(f) Limitation on Collection Account. The Borrower will not
--------------------------------
permit or allow the Subservicer to establish a "collection account" with a
financial institution other than one acceptable to the Lender in the
exercise of its reasonable discretion.
(g) Notices. The Borrower will notify the Lender promptly, in
-------
reasonable detail and in accordance with Section 22 of this Agreement, (i)
of any lien or security interest (other than security interests created
hereby) on, or claim asserted against, any of the Collateral, (ii) of the
occurrence of any other event which could reasonably be expected to have a
material adverse effect on the aggregate value of the Collateral or on the
security interests created hereunder, and (iii) of the existence of
circumstances requiring the Borrower, or permitting the Lender to require
the Borrower, to prepay the Loans pursuant to Section 2(k), Section 9(b) or
Section 13 hereof.
Section 9. Repayment of Advances If Mortgage Loan Found Defective.
---------- ------------------------------------------------------
(a) Upon discovery by the Borrower, the Lender or the Custodian of any breach
of any of the representations and warranties listed in Section 6 hereof, the
party discovering such breach shall promptly give notice of such discovery to
the others.
(b) The Lender has the right to require, in its unreviewable
discretion, the Borrower to prepay the amount of any Advance made in respect of
any Mortgage Loan which breaches one or more of the representations and
warranties, listed in Section 6(b) hereof, no later than one business day after
notice from the Lender to the Borrower of such breach.
Section 10. Release of Mortgage Files following Payment of Secured
----------- ------------------------------------------------------
Obligations. The Lender agrees to cause to be delivered the documents and
- -----------
instruments held by the Custodian on the Lender's behalf pursuant to Section 5
hereof upon request of the Borrower upon payment in full of the Secured
Obligations.
Section 11. Servicing. The Borrower shall, or shall cause the
----------- ---------
Subservicer to, service the Mortgage Loans in accordance with the standards,
covenants and terms set forth in the draft of the Mortgage Loan Subservicing
Agreement (the "Subservicing Agreement") attached hereto as Schedule 2. The
----------
term "Subservicer" as used herein means Lomas Mortgage USA, Inc., as subservicer
-----------
pursuant to that certain Mortgage Loan Subservicing Agreement, in form and
substance satisfactory to the Lender, to be entered into by the Borrower and
Lomas Mortgage USA, Inc. The Borrower will not, nor will it permit or allow the
Subservicer to, amend or modify the Subservicing Agreement without the express
written consent of the Lender, which consent shall not be unreasonably withheld.
Section 12. No Oral Modifications: Successors and Assigns. No
----------- ----------------------------------------------
provisions of this Agreement shall be waived or modified except by a writing
duly signed by the authorized agents of the Lender and the Borrower. This
Agreement shall be binding upon the successors and assigns of the parties
hereto.
-12-
<PAGE>
Section 13. Monthly Report. The Borrower shall provide the Lender,
----------- --------------
no later than ten (10) days following the end of each month, with an accurate
listing of each Mortgage Loan maintained in the warehouse facility as of the
last day of such month. With respect to any Mortgage Loan, in the event that
more than one monthly installment of such Mortgage Loan is delinquent as of the
end of any calendar month, the Borrower shall prepay the amount of the Advances
made in respect of such Mortgage Loan or pledge one or more replacement Mortgage
Loans having an aggregate unpaid principal amount of not less than the principal
amount of such delinquent Mortgage Loan and otherwise meeting the requirements
of this Agreement and the Custodial Agreement.
Section 14. Events of Default. Each of the following shall
----------- -----------------
constitute an event of default (an "Event of Default") hereunder (a "Default"
----------------
being any of the following whether or not any requirement for the giving of
notice, the lapse of time, or both, has been satisfied):
(a) Failure of the Borrower to make any payment of interest or
principal or any other sum which has become due, whether by acceleration or
otherwise, under the terms of the Secured Note, this Agreement or any other
document evidencing or securing indebtedness of the Borrower to the Lender;
(b) Failure of the Borrower to prepay Advances or pledge
additional Collateral when required to do so pursuant to Section 2(k),
Section 9(b) or Section 13 hereof;
(c) Failure of the Borrower to observe or perform any other
agreement contained in this Agreement thirty days after notice from the
Lender of such failure to observe or perform;
(d) Any representation or warranty made by the Borrower herein in
connection with any Advance made hereunder or in any certificate, document
or financial or other statement furnished at any time under or in
connection with this Agreement or the Custodial Agreement (including
without limitation, Schedule 1 to the Custodial Agreement), shall prove to
have been incorrect in any material respect on or as of the date made;
(e) Assignment or attempted assignment by the Borrower of this
Agreement or any rights hereunder, without first obtaining the specific
written consent of Lender, or the granting by the Borrower of any security
interest, lien or other encumbrance on any Collateral to other than the
Lender;
(f) The filing by or against the Borrower or any subsidiary of
the Borrower of a petition for liquidation, reorganization, arrangement or
adjudication as a bankrupt or similar relief under the bankruptcy,
insolvency or similar laws of the United States or any state or territory
thereof or of any foreign jurisdiction; the failure of the Borrower or such
subsidiary to secure dismissal of any such petition filed against
-13-
<PAGE>
it within thirty (30) days of such filing; the making of any general
assignment by the Borrower or any subsidiary for the benefit of creditors;
the appointment of a receiver or trustee for the Borrower or any
subsidiary, or for any part of the Borrower or such subsidiary's assets;
the institution by the Borrower or any subsidiary of any other type of
insolvency proceeding (under the Bankruptcy Code or otherwise) or of any
formal or informal proceeding, for the dissolution or liquidation of,
settlement of claims against, or winding up of the affairs of, the Borrower
or any subsidiary; the institution of any such proceeding against the
Borrower or any subsidiary if the Borrower or such subsidiary shall fail to
secure dismissal thereof within thirty (30) days thereafter; the consent by
the Borrower or any subsidiary to any type of insolvency proceeding against
the Borrower or such subsidiary (under the Bankruptcy Code or otherwise);
the occurrence of any event or existence of any condition which could be
the ground, basis or cause for any proceeding or petition described in this
Section 14(f);
(g) Any materially adverse change in the business, operations,
financial condition, properties or prospects of the Borrower or of any
subsidiary as determined by the Lender in its discretion or the existence
of any other condition which, in the Lender's determination, constitutes an
impairment of the Borrower's or such subsidiary's ability to perform their
obligations under this Agreement or the Borrower's obligations under the
Secured Note; and
(h) Failure by the Borrower or the Subservicer to service the
Mortgage Loans in substantial compliance with the servicing requirements
set forth in the Subservicing Agreement, subject to any applicable grace
period.
Section 15. Remedies Upon Default. (a) Upon the happening of one or
----------- ---------------------
more Events of Default, the Lender may immediately declare the principal of all
Advances under the Secured Note then outstanding to be immediately due and
payable, together with all interest thereon and fees and expenses accruing under
this Agreement; provided that upon the occurrence of the Event of Default
referred to in Section 14(f), such amounts shall immediately and automatically
become due and payable without any further action by any person or entity. Upon
such declaration or such automatic acceleration, the balance then outstanding on
the Secured Note shall become immediately due and payable without presentation,
demand or further notice of any kind to the Borrower.
(b) Upon the happening of one or more Events of Default, the Lender
shall have the right to obtain physical possession of all files of the Borrower
relating to the Collateral and all documents relating to the Collateral which
are then or may thereafter come in to the possession of the Borrower or any
third party acting for the Borrower, and the Borrower shall deliver to the
Lender such assignments of mortgage as the Lender shall request. The Lender
shall be entitled to specific performance of all agreements of the Borrower
contained in this Agreement.
(c) Upon the happening of one or more Events of Default, the Lender
shall have the right to collect and receive all further payments made on the
Collateral, and if any
-14-
<PAGE>
such payments are received by the Borrower, the Borrower shall not commingle the
amounts received with other funds of the Borrower and shall promptly pay them
over to the Lender. In addition, the Lender shall have the right to dispose of
the Collateral as provided herein, or as provided in the other documents
executed in connection herewith, or in any commercially reasonable manner, or as
provided by law. The Lender shall be entitled to place the Mortgage Loans which
it recovers after any default in a pool for issuance of asset-backed securities
at the then-prevailing price for such securities and to sell such securities for
such prevailing price in the open market as a commercially reasonable
disposition of collateral subject to the applicable requirements of the New York
UCC. The Lender shall also be entitled to sell any or all of such Mortgage Loans
individually for the prevailing price as a commercially reasonable disposition
of collateral subject to the applicable requirements of the New York UCC. The
specification in this Section 15 of manners of disposition of collateral as
being commercially reasonable shall not preclude the use of other commercially
reasonable methods (as contemplated by the New York UCC) at the option of the
Lender. Upon disposition of the Collateral and repayment in full to the Lender
of all amounts owing hereunder plus the reasonable expenses incurred (including
fees and expenses of its counsel), the Lender shall promptly remit any remaining
proceeds to the Borrower or as required by law or as a court of competent
jurisdiction shall direct.
Section 16. Indemnification and Expenses. (a) The Borrower agrees to
----------- ----------------------------
hold the Lender harmless from and indemnifies the Lender against all
liabilities, losses, damages, judgments, costs and expenses of any kind which
may be imposed on, incurred by, or asserted against the Lender relating to or
arising out of this Agreement, the Secured Note, the Custodial Agreement, any
transaction contemplated hereby or thereby, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of this Agreement,
the Secured Note, the Custodial Agreement, or any transaction contemplated
hereby or thereby, resulting from anything other than the Lender's gross
negligence or willful misconduct. In any suit, proceeding or action brought by
the Lender in connection with any Mortgage Loan Document for any sum owing
thereunder, or to enforce any provisions of any Mortgage Loan Document, the
Borrower will save, indemnify and keep the Lender harmless from and against all
expense, loss or damage suffered by reason of any defense, set-off,
counterclaim, recoupment or reduction or liability whatsoever of the obligor
thereunder, arising out of a breach by the Borrower of any obligation thereunder
or arising out of any other agreement, indebtedness or liability at any time
owing to or in favor of such obligor or its successors from the Borrower. The
Borrower also agrees to reimburse the Lender for all its costs and expenses
incurred in connection with the enforcement or the preservation of the Lender's
rights under this Agreement, the Secured Note, the Custodial Agreement, or any
transaction contemplated hereby or thereby, including, without limitation, the
reasonable fees and disbursements of counsel. The Borrower hereby acknowledges
that, notwithstanding the fact that the Secured Note is secured by the
Collateral, the obligation of the Borrower under the Secured Note is a recourse
obligation of the Borrower.
(b) The Borrower agrees to pay as and when billed by the Lender all of
the out-of-pocket costs and expenses incurred in connection with the
development, preparation and
-15-
<PAGE>
execution of, and any amendment, supplement or modification to this Agreement,
the Secured Note, the Custodial Agreement, or any other documents prepared in
connection herewith or therewith, and the consummation and administration of the
transactions contemplated hereby and thereby including, without limitation, (i)
all the reasonable fees, disbursements and expenses of Lender's counsel, (ii)
all the reasonable due diligence, inspection, testing and review costs and
expenses incurred by the Lender (or a third-party contract underwriter that is
both acceptable to the Lender and is acting on behalf of the Lender), with
respect to Mortgage Loans pledged as Collateral under this Agreement and (iii)
all the fees and expenses incurred by the Custodian in connection with its
duties under the Custodial Agreement.
(c) The Borrower's agreements in this Section 16 shall survive the
payment in full of the Secured Note and the expiration or termination of this
Agreement.
Section 17. Power of Attorney. The Borrower hereby authorizes the
----------- -----------------
Lender (without requiring the Lender), at the Borrower's expense, to file such
financing statement or statements relating to the Collateral without the
Borrower's signature thereon as the Lender at its option may deem appropriate,
and appoints the Lender as the Borrower's attorney-in-fact to execute any such
financing statement or statements in the Borrower's name and to perform all
other acts which the Lender deems appropriate to perfect and continue the
security interest granted hereby and to protect, preserve and realize upon the
Collateral, including, but not limited to, the right to endorse notes, complete
blanks in documents and sign assignments on behalf of the Borrower as its
attorney-in-fact. This Power of Attorney is coupled with an interest and is
irrevocable without the Lender's consent. Notwithstanding the foregoing, the
power of attorney hereby granted may be exercised only during the occurrence and
continuance of any Event of Default hereunder.
Section 18. No Duty on Lender's Part. The powers conferred on the
----------- ------------------------
Lender hereunder are solely to protect the Lender's interests in the Collateral
and shall not impose any duty upon it to exercise any such powers. The Lender
shall be accountable only for amounts that it actually receives as a result of
the exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its own gross negligence or willful misconduct.
Section 19. Limitation on Duties Regarding Presentation of
----------- ----------------------------------------------
Collateral. The Lender's sole duty with respect to the custody, safekeeping and
- ----------
physical preservation of any Collateral in its possession, under Section 9-207
of the Uniform Commercial Code or otherwise, shall be to deal with it in the
same manner as the Lender deals with similar property for its own account.
Neither the Lender nor any of its directors, officers, employees or agents shall
be liable for failure to demand, collect or realize upon all or any part of the
Collateral or for any delay in doing so or shall be under any obligation to sell
or otherwise dispose of any Collateral upon the request of the Borrower or
otherwise.
Section 20. Powers Coupled with an Interest. All authorizations and
----------- -------------------------------
agencies herein contained with respect to the Collateral are irrevocable and
powers coupled with an interest.
-16-
<PAGE>
Section 21. Severability. Any provision of this Agreement which is
----------- ------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 22. Notices. All written communications hereunder shall be
----------- -------
mailed, telecopied or delivered to the respective addresses as listed in the
Custodial Agreement or to such other address as shall be designated by a party
in a written notice to the other parties. All such notices and communications
shall be effective when delivered to the party to which such notice is to be
given.
Section 23. Certain Definitions. The following capitalized terms are
----------- -------------------
defined in the corresponding sections specified below:
"Advance" - Section 1.
-------
"Agreement" - Introductory Clause.
---------
"Borrower" - Introductory Clause.
--------
"Certificates" - Recitals.
------------
"Certification" - Section 5.
-------------
"Collateral" - Section 5.
----------
"Custodial Agreement" - Section 5.
-------------------
"Custodian" - Section 5.
---------
"Default" - Section 14.
-------
"Designated Loans" - Section 3.
----------------
"Event of Default" - Section 14.
----------------
"First Mortgage Loans" - Section 4.
--------------------
"Fixed-Rate Mortgage Loans" - Section 4.
-------------------------
"Funding Date" - Section 1.
------------
"Insurer" - Section 1.
-------
"Interest Payment Date" - Section 2.
---------------------
-17-
<PAGE>
"Lender" - Introductory Clause
------
"LIBOR" - Section 2.
-----
"Maturity Date" - Section 2.
-------------
"Mortgage Loan Documents" - Section 5.
-----------------------
"Mortgage Loans" - Recitals.
--------------
"NY UCC" - Section 2.
------
"PSI" - Recitals.
---
"Secured Note" - Section 2.
------------
"Secured Obligations" - Section 5.
-------------------
"Subservicer" - Section 11.
----------
"Subservicing Agreement" - Section 11.
----------------------
"Termination Date" - Section 2.
----------------
Section 24. Paragraph Headings. The paragraph headings used in this
----------- ------------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
Section 25. No Waiver; Cumulative Remedies. The Lender shall not by
----------- ------------------------------
any act (except by a written instrument pursuant to Section 12 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Event of Default or in any breach of any
of the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Lender, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Lender of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Lender would otherwise have
on any future occasion. The rights and remedies herein provided are cumulative,
may be exercised singly or concurrently and are not exclusive of any rights or
remedies provided by law.
Section 26. Agreement Constitutes Security Agreement. This Agreement
----------- ----------------------------------------
is intended by the parties hereto to be governed by New York law, and to
constitute a security agreement within the meaning of the New York UCC.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
FIRST ALLIANCE MORTGAGE COMPANY
By:________________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES GROUP INC.
By:________________________________
Name:
Title:
-19-
<PAGE>
Schedule 1
----------
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE BORROWER
IN RESPECT OF THE MORTGAGE LOANS
(a) The information in respect of the Mortgage Loan set forth in the
related Mortgage Loan Schedule is true and correct;
(b) The Mortgage Loan is being and will be serviced by the Borrower or
the Subservicer;
(c) The mortgage note related to the Mortgage Loan bears either a
fixed-rate of interest or, if a First Mortgage Loan, a rate of interest tied to
six-month LIBOR;
(d) The mortgage related to the Mortgage Loan is a valid and
subsisting first or second lien on real property subject, in the case of any
second Mortgage Loan, only to a lien of a first mortgage on such real property
and subject in all cases to the exceptions to title set forth in the title
insurance policy or the other evidence of title in respect of the related
Mortgage Loan, which exceptions are generally acceptable to prudent mortgage
lending companies, and such other exceptions to which similar properties are
commonly subject and which do not individually, or in the aggregate, materially
and adversely affect the benefits of the security intended to be provided by
such mortgage;
(e) To the best of the Borrower's knowledge, (i) there is no
delinquent tax or assessment lien on any real property mortgaged in connection
with the related Mortgage Loan and (ii) such real property is free of material
damage and is in average repair;
(f) The Mortgage Loan is not subject to any right of rescission, set-
off, counterclaim or defense, including the defense of usury, nor will the
operation of any of the terms of the related mortgage note or the related
mortgage, or the exercise of any right thereunder, render either such mortgage
note or such mortgage (i) unenforceable in whole or in part, or (ii) subject to
any right of rescission, set-off, counterclaim or defense, including the defense
of usury, and no such right of rescission, set-off, counterclaim or defense has
been asserted with respect thereto;
(g) To the best of the Borrower's knowledge, there is no mechanics'
lien or claim for work, labor or material affecting any real property mortgaged
in connection with the related Mortgage Loan which is or may be a lien prior to,
or equal with, the lien of mortgage securing the related Mortgage Loan except
those which are insured against by a title insurance policy;
(h) The Mortgage Loan, at the time it was made, complied in all
material respects with applicable state and federal laws and regulations,
including, without limitation, usury, equal credit opportunity and disclosure
laws:
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<PAGE>
(i) With respect to the Mortgage Loan, a written commitment for a
lender's title insurance policy, issued in Standard American Land Title
Association or California Land Title Association form, or other form acceptable
in a particular jurisdiction, by a title insurance company generally acceptable
to prudent mortgage lending companies and authorized to transact business in the
state in which the real property mortgaged in connection with such Mortgage Loan
is situated (together with a condominium endorsement, if applicable, in an
amount at least equal to the original principal amount of such Mortgage Loan),
insuring the mortgagee's interest under the related Mortgage Loan as the holder
of a valid first or second mortgage lien of record on the real property
described in the mortgage, was effective on the date of the origination of such
Mortgage Loan and as of the related Funding Date for an Advance in connection
with such Mortgage Loan; such commitment will be valid and thereafter the policy
issued pursuant to such commitment shall continue in full force and effect;
(j) The improvements upon the real property mortgaged in connection
with the related Mortgage Loan are covered by a valid and existing hazard
insurance policy (that also provides for fire and extended coverage) with a
generally acceptable carrier;
(k) A flood insurance policy is in effect with respect to the real
property, mortgaged in connection with the related Mortgage Loan and located in
a flood zone, with a generally acceptable carrier for a commercially reasonable
amount;
(l) The Mortgage Loan Documents for the Mortgage Loan are the legal,
valid and binding obligation of the maker thereof and are enforceable in
accordance with their terms, except only as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (whether considered in a proceeding or action in equity or
at law), and all parties to the Mortgage Loan had full legal capacity to execute
all Mortgage Loan Documents and convey the estate therein purported to be
conveyed;
(m) The Borrower has performed or directed the subservicer to perform
any and all acts required to be performed to preserve the rights and remedies of
the Lender in any insurance policies applicable to the Mortgage Loans including,
without limitation, any necessary notifications of insurers, assignments of
policies or interests therein, and establishments of co-insured, joint loss
payee and mortgagee rights in favor of the Lender;
(n) The terms of the original mortgage note and the original mortgage
related to the Mortgage Loan have not been impaired, altered or modified in any
material respect, except by a written instrument which has been recorded or is
in the process of being recorded, if necessary, to protect the interest of the
Lender in the Collateral and a certified copy of which has been delivered to the
Lender or the Custodian. The substance of any such alteration or modification
is reflected on the Mortgage Loan Schedule. The original mortgage was recorded
(or will be duly submitted for recordation as of the time of origination of the
related Mortgage Loan and the Lender or the Custodian has been provided with a
certified copy thereof), and all subsequent assignments of such mortgage have
been recorded (or will be
-21-
<PAGE>
duly submitted for recordation and the Lender or the Custodian has been
provided with a certified copy thereof) in the appropriate jurisdictions wherein
such recordation is necessary to perfect the lien thereof as against creditors
of the Borrower;
(o) No instrument of release or waiver has been executed in connection
with the Mortgage Loan, and no borrower in respect of such Mortgage Loan has
been released, in whole or in part;
(p) To the best of the Borrower's knowledge, all taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have been paid,
or an escrow of funds has been established in an amount sufficient to pay for
every such item which remains unpaid and which has been assessed but is not yet
due and payable;
(q) To the best of the Borrower's knowledge, there is no proceeding
pending or threatened for the total or partial condemnation of the real property
mortgaged in connection with the related Mortgage Loan, nor is such a proceeding
currently occurring, and such property is undamaged by waste, fire, earthquake
or earth movement, windstorm, flood, tornado or other casualty, so as to affect
adversely the value of such real property as security for the Mortgage Loan or
the use for which the premises were intended:
(r) To the best of the Borrower's knowledge, all of the improvements
which were included for the purpose of determining the appraised value of the
real property mortgaged in connection with the related Mortgage Loan lie wholly
within the boundaries and building restriction lines of such property, and no
improvements on adjoining properties encroach upon such real property;
(s) To the best of the Borrower's knowledge, no improvement located on
or being part of the real property mortgaged in connection with the related
Mortgage Loan is in violation of any applicable zoning law or regulation. To
the best of the Borrower's knowledge, all inspections, licenses and certificates
required to be made or issued with respect to all occupied portions of such real
property and, with respect to the use and occupancy of the same, including (but
not limited to) certificates of occupancy and fire underwriting certificates,
have been made or obtained from the appropriate authorities and such real
property is lawfully occupied under applicable law;
(t) The mortgage note related to the Mortgage Loan is not and has not
been secured by any collateral, pledged account or other security except the
lien of the corresponding mortgage;
(u) No Mortgage Loan was originated under a buydown plan (whereby the
seller of the mortgaged property or any third party, other than the mortgagor,
has agreed, or is obligated, to supplement or pay a portion of the mortgagor's
mortgage payments in respect of such Mortgage Loan);
-22-
<PAGE>
(v) There is no obligation on the part of the Borrower or any other
party to make payments in addition to those made by the borrower in respect of
the Mortgage Loan;
(w) No Mortgage Loan has a shared appreciation feature, or other
contingent interest feature;
(x) With respect to the Mortgage Loan secured by a second priority
mortgage, either (i) no consent for the Mortgage Loan is required by the holder
of the related first mortgage, or (ii) such consent has been obtained and is
part of the Mortgage Loan Documents;
(y) All parties which have had any interest in the Mortgage Loan,
whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period
in which they held and disposed of such interest, were) (1) in compliance with
any and all applicable licensing requirements of the laws of the state wherein
the real property mortgaged in connection with the Mortgage Loan is located, and
(2)(A) organized under the laws of such state, or (B) qualified to do business
in such state, or (C) federal savings and loan associations or national banks
having principal offices in such state, or (D) not doing business in such state
so as to require qualification or licensing;
(z) The mortgage related to the Mortgage Loan contains a customary
provision for the acceleration of the payment of the unpaid principal balance of
the Mortgage Loan in the event the related security for the Mortgage Loan is
sold without the prior consent of the mortgagee thereunder;
(aa) The Mortgage related to the Mortgage Loan contains customary and
enforceable provisions which render the rights and remedies of the holder
thereof adequate for the realization against the real property mortgaged in
connection with such Mortgage Loan of the benefits of the security, including,
(i) in the case of a mortgage designated as a deed of trust, by trustee's sale,
and (ii) otherwise by judicial or non-judicial foreclosure. There is no
homestead or other exemption available to the mortgagor which would materially
interfere with the right to sell such real property at a trustee's sale or the
right to foreclose such mortgage;
(bb) There is no monetary default, breach, violation or event of
acceleration existing under the mortgage or the mortgage note for the related
Mortgage Loan and no event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute a monetary default,
breach, violation or event of acceleration that has or will cause a prepayment
of Advances made in respect of such mortgage loan pursuant to section 13 of the
agreement; there is no non-monetary default, breach, violation or event of
acceleration existing under the mortgage or the mortgage note for the related
Mortgage Loan and no event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute a non-monetary
default, breach, violation or event of acceleration; and neither the subservicer
nor the borrower has waived any monetary or
-23-
<PAGE>
non-monetary default, breach, violation or event of acceleration in respect of
the mortgage or the mortgage note for the related Mortgage Loan;
(cc) All parties to the Mortgage Loan Documents had legal capacity to
execute them and each such document has been duly and properly executed by such
parties;
(dd) The Mortgage Loans were not selected by the Borrower on any basis
intended to adversely affect the value of the Lender's security interest
therein;
(ee) A full interior inspection appraisal was performed in connection
with the real property mortgaged in connection with the Mortgage Loan;
(ff) To the best of the Borrower's knowledge, no real property
mortgaged in connection with a Mortgage Loan was, at origination, located within
a 1 mile radius of any site with environmental or hazardous waste risks.
-24-
<PAGE>
Schedule 2
----------
STANDARDS, COVENANTS AND TERMS REGARDING THE SERVICING OF
MORTGAGE LOANS
-25-
<PAGE>
CWT DRAFT 1/26/94
FIRST AMENDMENT, dated as of January 27, 1994 (the "First Amendment"),
between (i) PRUDENTIAL SECURITIES GROUP INC., A Delaware corporation (the
"Lender"), and (ii) FIRST ALLIANCE MORTGAGE COMPANY, a California corporation
(the "Borrower") to the Existing Agreement referred to below (as amended hereby,
the "Agreement").
RECITALS
--------
WHEREAS, the Lender and the Borrower are parties to the Interim
Warehouse and Security Agreement dated as of October 29, 1993 (the "Existing
Agreement");
WHEREAS, the Borrower has requested that the Lender amend and waive
certain provisions of the Existing Agreement as set forth below, and the Lender
is willing to so amend the Existing Agreement and grant the requested waivers on
the terms and conditions set forth below; and
WHEREAS, the Borrower, among other things, has requested that the
Termination Date of the Existing Agreement and the Maturity Date of certain
Advances be extended; provided, that under no circumstances shall the Maturity
Date of any Advance made prior to January 31, 1994 be later than the earlier of
(i) February 28, 1994, or (ii) the securitization of the Mortgage Loans in
respect of which such Advance has been made;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. The Advances.
-------------
(a) The first paragraph of Section 1 of the Existing Agreement is
hereby amended by deleting the term "$125,000,000" and by substituting the term
"$135,000,000" therefor.
SECTION 2. Terms and Conditions for all Advances.
--------------------------------------
(a) Paragraph (a) of Section 2 of the Existing Agreement is hereby
amended by deleting the last clause thereof beginning "and provided, further"
-------- -------
and by substituting the following therefor:
"and provided, further, that in extending the Termination Date in
-------- --------
connection with a newly-designated public offering of Certificates to occur
on or prior to such extended Termination Date, the Lender may limit the
Borrower to using the proceeds of any Advances made after a date specified
by the Lender to the acquisition or origination of Mortgage Loans to be
refinanced by such newly-designated public offering."
(b) Subparagraph (b)(iii) of Section 2 of the Existing Agreement is
hereby amended by deleting the term "2.50%" and substituting the term "1.625%"
therefor.
(c) Paragraph (m) of Section 2 of the Existing Agreement is hereby
amended by (A) deleting subparagraph (i) thereof; (B) deleting the term "(ii)"
from subparagraph (ii) thereof and substituting the term "(i)" therefor and
deleting the "." from the end thereof; and (C) adding the following at the end
thereof:
<PAGE>
"; and (ii) No Advance shall be made in respect of any First Mortgage
Loan or Fixed-Rated Mortgage Loan unless, if requested by the Lender, the
Lender shall have reviewed a sample of the First Mortgage Loans or Fixed-
Rated Mortgage Loans to be funded by such Advance and been satisfied in its
sole discretion with the results of such review."
SECTION 3. CERTAIN DEFINITIONS. Section 23 of the Existing Agreement
-------------------
is hereby amended by substituting the existing cross-references for the
following terms with the following cross-references therefor in the proper
alphabetical order:
Designated Loans - Section 3
First Mortgage Loans - Section 3
Fixed-Rate Mortgage Loans - Section 3
SECTION 4. The Existing Agreement is hereby amended by adding the
following sections in the proper numerical order:
Section 27. Assignment.
----------- ----------
No Borrower may assign its rights or delegate its
obligations under this Agreement without the express written consent
of the Lender. The Lender may assign its rights and obligations
hereunder to any affiliate of the Lender upon written notice thereof
to the Borrower.
Section 28. Hypothecation or Pledge of Collateral.
---------- -------------------------------------
Nothing in this Agreement shall preclude the Lender from
engaging in repurchase transactions with any of the Collateral or
otherwise pledging, repledging, hypothecating, or rehypothecating any
of the Collateral, but no such transaction shall relieve the Lender of
its obligations to the Borrower under this Agreement or the Custody
Agreement with respect to the Collateral.
SECTION 5. EXHIBIT B-1. Exhibit B-1 of the Existing Agreement is
-----------
hereby deleted and exhibit b-1 in the form of APPENDIX 1 hereto is substituted
therefor.
SECTION 6. CONDITIONS PRECEDENT. This First Amendment shall become
--------------------
effective as of the date first above written provided that each of the following
conditions precedent shall have been fulfilled to the satisfaction of the
Lender:
(a) The Lender shall have received an executed counterpart hereof
signed by a duly authorized officer of the Borrower.
(b) The representations and warranties of the Borrower contained in
Section 6 of the Existing Agreement shall be true and correct as of the
date hereof; provided, however, that the references in Section 6 of the
-------- -------
Existing Agreement to "September 30, 1993," shall be deemed references to
"December 31, 1993".
-2-
<PAGE>
(c) No Default or Event of Default shall have occurred and be
continuing as of the date hereof.
(d) The Borrower shall have executed and delivered a Note Endorsement
in the form of APPENDIX 2 hereto.
(e) The Lender shall have received an opinion of counsel for the
Borrower in the form of APPENDIX 3 hereto.
SECTION 7. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
------------------------------
confirms and reaffirms the representations and warranties contained in Section 6
of the Existing Agreement; provided, however, that (i) references therein to the
-------- -------
"Agreement" shall be deemed to refer collectively to this first amendment, the
existing agreement and the agreement, each as defined herein, and (ii) such
representations and warranties shall be subject to the proviso in paragraph (b)
of Section 6 of this First Amendment.
SECTION 8. DEFINITIONS IN THE EXISTING AGREEMENT. Unless otherwise
-------------------------------------
defined in this First Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 9. LIMITED EFFECT. Except as expressly modified hereby, the
--------------
Existing Agreement continues to be, and shall remain, in full force and effect
in accordance with its terms.
SECTION 10. COUNTERPARTS. This First Amendment may be executed in
------------
any number of separate counterparts, each of which shall be an original and all
of which taken together shall constitute one and the same instrument.
SECTION 11. GOVERNING LAW. This First Amendment and the rights and
-------------
obligations of the parties hereunder shall be governed by, and construed in
accordance with, the laws of the state of New York.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this First Amendment to be
duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
FIRST ALLIANCE MORTGAGE COMPANY
By:________________________________
Name:
Title:
PRUDENTIAL SECURITIES GROUP INC.
By:________________________________
Name:
Title:
-4-
<PAGE>
APPENDIX 1
Exhibit B-1
-----------
NOTICE OF EXTENSION OF AGREEMENT NO. __
Prudential Securities Group, Inc.
130 John Street, 24th Floor
Treasury Department
New York, New York
Attention: Mr. William Horan
Telecopy: 212-214-7310
Confirmation: 212-214-7535
1. Pursuant to the Interim Warehouse and Security Agreement, dated as
of October 29, 1993 (as amended from time to time, the "Agreement"), between you
and First Alliance Mortgage Company (the "Borrower"), the undersigned Borrower
hereby requests that the Termination Date under the Agreement be extended to
________, 199__ [; provided, however, that any Advance made after [date] shall
-------- -------
be used solely for the acquisition or origination of Mortgage Loans to be
refinanced by the public offering of Certificates to occur on or prior to the
Termination Date as so extended].
The undersigned Borrower agrees that, upon acceptance by the Lender of this
Notice of Extension of Agreement No. __ by signing and dating the same below,
the Borrower will be bound by the terms of the Agreement as amended by this
Notice of Extension of Agreement in the manner set forth in this paragraph 1 and
by the terms of the Secured Note as amended by Secured Note Endorsement No. __
delivered herewith.
2. The undersigned Borrower hereby certifies that the following
statements are true and correct on the date hereof and shall be true and correct
on the date of the extension of the Termination Date requested herein, before
and after giving effect thereto:
A. Each of the representations and warranties contained in the Agreement
and the Custodial Agreement are true and correct in all material
respects; and
B. No Default or Event of Default has occurred and is continuing.
3. Unless otherwise defined in this Notice of Extension of Agreement
No. __, terms defined in the Agreement shall have their defined meanings when
used herein.
4. Except as expressly modified by this Notice of Extension of
Agreement No. __, the Agreement shall be in full force and effect.
5. This Notice of Extension of Agreement No. __ and the rights and
obligations of the parties hereunder and under the Agreement as amended hereby
shall be
<PAGE>
governed by, and construed and interpreted in accordance with, the laws
of the State of New York.
6. The undersigned Borrower are delivering herewith to the Lender (a)
Secured Note Endorsement No. __ to the Secured Note, in a form reasonably
acceptable to the Lender, and (b) an opinion of counsel to the Borrower, in a
form reasonably acceptable to the Lender.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Notice of
Extension of Agreement No. __ to be executed and delivered by its proper and
duly authorized officers as of the day and year first above written.
FIRST ALLIANCE MORTGAGE COMPANY
By: ______________________________
Name:
Title:
AGREED TO AND ACCEPTED:
PRUDENTIAL SECURITIES GROUP INC.
By: ____________________________
Name:
Title:
Date: __________________________
-2-
<PAGE>
APPENDIX 2
SECURED NOTE
ENDORSEMENT NO. 1
January 27, 1994
The undersigned Borrower hereby agrees with PRUDENTIAL SECURITIES
GROUP INC. (the "Lender") that the Secured Note of the Borrower, dated October
29, 1993 (the "Secured Note"), as it may have been previously amended by
endorsement, in the amount of $125,000,000 (the "Secured Note"), to which this
Secured Note Endorsement No. 1 is attached, is hereby amended by (i) changing
the Termination Date referred to therein to April 30, 1994; (ii) deleting the
term "2.50%" from paragraph (a) thereof and by substituting the term "1.625%"
therefor; and (iii) all references to the term "$125,000,000" shall be deemed a
reference to "$135,000,000".
This Secured Note Endorsement No. 1 is given as a renewal,
rearrangement and extension of the obligations of the Borrower to the Lender
under the Secured Note and is not given in substitution therefor or
extinguishment thereof. The Borrower hereby authorizes the Lender to attach
this Secured Note Endorsement No. 1 to the Secured Note.
Borrower: FIRST ALLIANCE MORTGAGE COMPANY
By: ______________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES GROUP INC.
By: ______________________________
Name:
Title:
<PAGE>
APPENDIX 3
[Letterhead of Counsel to First Alliance Mortgage Company]
January 27, 1994
Prudential Securities Group Inc.
199 Water Street
New York, New York 10292-0001
Gentlemen:
I am the counsel to First Alliance Mortgage Company, a California
Corporation (the "Borrower") and have acted as such in connection with the
execution and delivery of the following documents:
(i) the Interim Warehouse and Security Agreement, dated as of October 29,
1993, as heretofore amended to date, (the "Interim Warehouse
Agreement"), between Prudential Securities Group Inc. (the "Lender")
and the Borrower;
(ii) the Secured Note (the "Note") dated October 29, 1993, as heretofore
amended by endorsement, made by the Borrower in favor of the Lender;
(iii) the Custodial Agreement, dated April 5, 1993, as heretofore
amended to date, (the "Custodial Agreement"), among the Borrower, the
Lender and Chemical Bank (the "Custodian");
(iv) the First Amendment, dated January __, 1994 (the "First Amendment")
to the Interim Warehouse Agreement, between the Borrower and the
Lender;
(v) Secured Note Endorsement No. 1, dated January __, 1994, to the Note
(the "Endorsement");
(vi) the Notice of Extension of Agreement No. 1, dated January __, 1994
(the "Notice of Extension"), between the Borrower and the Lender; and
(vii) the Notice of Extension (the "Notice"), dated January __, 1994,
relating to the Maturity Dates of certain Advances made on or prior to
January 31, 1994;
(viii) The documents described in the foregoing clauses (iv) (v), (vi)
and (vii) are hereinafter referred to as the "Delivered Documents."
<PAGE>
Capitalized terms used herein and not defined herein shall have the
meanings assigned to them in the Interim Warehouse Agreement.
I have examined executed copies of the Interim Warehouse Agreement,
the Note, the Custodial Agreement, and the Delivered Documents. I have also
examined originals or photostatic or certified copies of all such corporate
records of the Borrower, and such certificates of public officials, certificates
of corporate officers, and other documents, as I have deemed appropriate and
necessary as a basis for the opinions hereinafter expressed. In making my
examination and rendering the opinions hereinafter expressed I have assumed that
each party to each of the Interim Warehouse Agreement, the Custodial Agreement,
and the Delivered Documents (other than the Borrower) has the corporate power to
enter into and perform all of its obligations thereunder, (ii) the due
authorization, execution and delivery of each of the Interim Warehouse
Agreement, the Custodial Agreement, and the Delivered Documents by the parties
thereto (other than the Borrower) and (iii) the validity and binding effect on
the parties thereto (other than the Borrower) of each of the Interim Warehouse
Agreement, the Custodial Agreement and the Delivered Documents.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization, moratorium,
receivership, or other similar laws of general applicability relating to or
affecting creditors' rights generally in the event of bankruptcy,
insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including, but not
limited to, the right of specific performance (regardless of whether
enforceability is considered in a proceeding in equity or at law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, and the Borrower is
licensed or qualified to do business in each state wherein it owns property or
is required to be so qualified or licensed.
2. The Borrower has the corporate power and legal right to execute
and deliver each of the Delivered Documents, to borrow under the Interim
Warehouse Agreement and the Note, as amended by the Delivered Documents, and to
grant liens under the Interim Warehouse Agreement, as amended by the First
Amendment, and has taken all necessary corporate action to authorize such
borrowing and such granting of liens upon the terms and conditions of the
Interim Warehouse Agreement, as amended by the First Amendment, and to authorize
the execution and delivery of the Delivered Documents. No consent of any other
Person (including, without limitation, stockholders of the Borrower), and no
consent, license, permit, approval or authorization of, or registration or
declaration with, any governmental
-2-
<PAGE>
authority, bureau of agency is required connection with the execution and
delivery of the Delivered Documents or the enforceability of each of the Interim
Warehouse Agreement and the Note, as amended by the Delivered Documents.
3. Assuming for purposes of the opinion expressed in this paragraph 3
that each of the documents referred to herein is governed by the laws of the
State of California, each of the Interim Warehouse Agreement and the Note, as
amended by the Delivered Documents, and the Custodial Agreement constitutes the
legal, valid, and binding obligation of the Borrower enforceable against the
Borrower in accordance with their respective terms.
4. The execution and delivery of the Delivered Documents and the
performance of each of the Interim Warehouse Agreement and the Note, as amended
by the Delivered Documents, and the Custodial Agreement will not violate any
provision of any existing law or regulation or of the charter or by-laws of the
Borrower or of any mortgage, indenture, contract or other undertaking to which,
to the best of my knowledge (after due inquiry), the Borrower is a party or
which is binding upon it or its assets, and, to the best of my knowledge (after
due inquiry), will not result in the creation or imposition of any lien, charge
or encumbrance on any of its assets pursuant to the provisions of any of the
foregoing.
5. No material litigation or administrative proceeding of or before
any government body is presently pending, or, to the best of my knowledge (after
due inquiry), threatened against the Borrower or its assets.
6. No consent, approval, authorization or order of, registration or
filing with, or notice to, any governmental authority or court is required under
federal laws or the laws of the State of California for the execution and
delivery of the Delivered Documents and the performance of the Interim Warehouse
Agreement or the Note, as amended by the Delivered Documents, or the Custodial
Agreement by the Borrower.
7. The execution and delivery of the Delivered Documents and the
performance by the Borrower of the Interim Warehouse Agreement and the Note, as
amended by the Delivered Documents, and the Custodial Agreement do not conflict
with or result in a breach of or constitute a default under any law, rule or
regulation of the federal government or of the State of California.
8. The Interim Warehouse Agreement, as amended by the First
Amendment, together with possession by the Custodian of the promissory notes
(the "Notes") evidencing the Mortgage Loans, create a perfected first priority
security interest in the Notes securing the obligations of the Borrower to the
Lender under the Interim Warehouse Agreement.
9. Under the laws of the State of California, the stipulation of New
York law in each of the documents referred to in paragraph 3 herein is
enforceable.
-3-
<PAGE>
I am admitted to practice law in the State of California, and the
foregoing opinions are limited to the federal law of the United States and the
laws of the State of California.
Sincerely yours,
-4-
<PAGE>
SECOND AMENDMENT TO INTERIM
WAREHOUSE AND SECURITY AGREEMENT
SECOND AMENDMENT, dated as of November 10, 1994 (this "Second
------
Amendment"), between PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a
- ---------
Delaware corporation (the "Lender") and FIRST ALLIANCE MORTGAGE COMPANY, a
------
California corporation (the "Borrower") to the Existing Agreement referred to
--------
below.
RECITALS
The Lender and the Borrower are parties to a certain Interim Warehouse
and Security Agreement, dated as of October 29, 1993 (as heretofore amended by
that First Amendment, dated as of January 27, 1994, the "Existing Agreement"; as
------------------
amended by this Second Amendment, the "Agreement").
---------
The Lender and the Borrower desire to amend the Existing Agreement to
lower the rate of interest borne by Advances made by the Lender to the Borrower
thereunder.
Accordingly, in consideration of the premises, the parties hereto
agree as follows:
SECTION 1. Terms and Conditions for All Advances. Section 2(b)(iii)
-------------------------------------
of the Existing Agreement is hereby amended by deleting the term "1.625%"
therein and replacing in lieu thereof the term "1.375%".
SECTION 2. Conditions Precedent. This Second Amendment shall become
--------------------
effective on the date (the "Second Amendment Effective Date") on which the
-------------------------------
following conditions precedent shall have been satisfied:
2.1 Delivered Documents. On the Second Amendment Effective Date, the
-------------------
Lender shall have received the following documents, each of which shall be
satisfactory to the Lender in form and substance:
(a) this Second Amendment, executed and delivered by a duly authorized
officer of the Borrower;
(b) an Endorsement to the Secured Note substantially in the form of Annex A
hereto, executed and delivered by a duly authorized officer of the
Borrower;
(c) such other documents as the Lender may reasonably request.
<PAGE>
2.2 No Default. On the Second Amendment Effective Date, (i) the
----------
Borrower shall be in compliance with all the terms and provisions set forth in
each Existing Agreement on its part to be observed or performed; (ii) the
representations and warranties made and restated by the Borrower pursuant to
Section 3 of this Second Amendment shall be true and complete on and as of such
no Default or Event of Default shall have occurred and be continuing on such
date. On the Second Amendment Effective Date the Borrower shall be deemed to
have certified to the Lender as set forth in this Section 2.
SECTION 3. Representations and Warranties. The Borrower hereby
------------------------------
confirms and reaffirms the representations and warranties contained in Section 6
of the Existing Agreement; provided, however, that (i) references therein to the
-------- -------
"Agreement" shall be deemed to refer collectively to this Second Amendment, the
Existing Agreement, and the Agreement, each as defined herein, and (ii)
references therein to "September 30, 1993" shall be deemed to be references to
"September 30, 1994".
SECTION 4. Limited Effect. Except as expressly amended and modified
--------------
by this Second Amendment, the Existing Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
SECTION 5. Definitions In Existing Agreement. Unless otherwise
---------------------------------
defined in this Second Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 6. Counterparts. This Second Amendment may be executed by
------------
one or more of the parties hereto on any number of separate counterparts, each
of which shall be an original and all of which taken together shall constitute
one and the same instrument.
SECTION 7. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED
-------------
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE>
IN WITNESS WHEREOF, the Lender and the Borrower have caused this
Second Amendment to be duly executed by their respective duly authorized
officers, all as of the day and year first above written.
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By______________________________
Name:
Title:
FIRST ALLIANCE MORTGAGE COMPANY,
By______________________________
Name:
Title:
-3-
<PAGE>
ANNEX A
to Second Amendment
-------------------
SECURED NOTE ENDORSEMENT
November 10, 1994
The undersigned Borrower hereby agrees with Prudential Realty Funding
Corporation (the "Lender") that the Secured Note of the Borrower, dated October
29, 1993, as it may have been previously amended by endorsement, in the amount
of $85,000,000, to which this Secured Note Endorsement is attached, is hereby
amended by deleting the term "1.625%" from paragraph (a) thereof, and by
replacing in lieu thereof the term "1.375%".
This Secured Note Endorsement is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Secured
Note and is not given in substitution therefor or extinguishment thereof. The
Borrower hereby authorizes the Lender to attach this Secured Note Endorsement to
the Secured Note.
Borrower:
- ---------
FIRST ALLIANCE MORTGAGE COMPANY
By_____________________________
Name:
Title:
Lender:
- -------
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By_____________________________
Name:
Title:
<PAGE>
THIRD AMENDMENT TO INTERIM
WAREHOUSE AND SECURITY AGREEMENT
THIRD AMENDMENT, dated as of March 3, 1995 (this "Third Amendment"),
---------------
between PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a Delaware corporation
(the "Lender") and FIRST ALLIANCE MORTGAGE COMPANY, a California corporation
------
(the "Borrower") to the Existing Agreement referred to below.
--------
RECITALS
The Lender and the Borrower are parties to a certain Interim Warehouse
and Security Agreement, dated as of October 29, 1993 (as heretofore amended by
that First Amendment, dated as of January 27, 1994, and that Second Amendment,
dated as of November 10, 1994 (collectively, the "Existing Agreement")) as
------------------
amended by this Third Amendment, the "Agreement").
---------
The Lender and the Borrower desire to amend the Existing Agreement to
increase the advance rate stated therein from 92.5% to 95.0%, as more
particularly set forth below, in respect of Advances made by the Lender to the
Borrower thereunder.
Accordingly, in consideration of the premises, the parties hereto
agree as follows:
SECTION 1. The Advances.
------------
(a) Section 1(f)(i)(A) of the Existing Agreement is hereby amended by
deleting the term "92.5%" therein and replacing in lieu thereof the term
"95.0%".
(b) Section 1(f)(iii)(B) of the Existing Agreement is hereby amended
by deleting the term "92.5%" therein and replacing in lieu thereof the term
"95.0%".
SECTION 2. Terms and Conditions for All Advances.
-------------------------------------
(a) Section 2(k)(i)(A) of the Existing Agreement is hereby amended by
deleting the term "92.5%" therein and replacing in lieu thereof the term
"95.0%".
(b) Section 2(k)(iii)(B) of the Existing Agreement is hereby amended
by deleting the term "92.5%" therein and replacing in lieu thereof the term
"95.0%".
SECTION 3. Conditions Precedent. This Third Amendment shall become
--------------------
effective on the date (the "Third Amendment Effective Date") on which the
------------------------------
following conditions precedent shall have been satisfied:
3.1 Delivered Documents. On the Third Amendment Effective Date, the
-------------------
Lender shall have received the following documents, each of which shall be
satisfactory to the Lender in form and substance:
<PAGE>
(a) this Third Amendment, executed and delivered by a duly authorized
officer of the Borrower;
(b) an Endorsement to the Secured Note substantially in the form of
Annex A hereto, executed and delivered by a duly authorized officer of the
Borrower; and
(c) such other documents as the Lender may reasonably request.
3.2 No Default. On the Third Amendment Effective Date, (i) the
----------
Borrower shall be in compliance with all the terms and provisions set forth in
the Existing Agreement on its part to be observed or performed; (ii) the
representations and warranties made and restated by the Borrower pursuant to
Section 4 of this Third Amendment shall be true and complete on and as of such
date with the same force and effect as if made on and as of such date; and (iii)
no Default or Event of Default shall have occurred and be continuing on such
date. On the Third Amendment Effective Date the Borrower shall be deemed to
have certified to the Lender as set forth in this Section 3.
SECTION 4. Representations and Warranties. The Borrower hereby
------------------------------
confirms and reaffirms the representations and warranties contained in Section 6
of the Existing Agreement; provided, however, that (i) references therein to the
-------- -------
"Agreement" shall be deemed to refer collectively to this Third Amendment, the
Existing Agreement, and the Agreement, each as defined herein, and (ii)
references therein to "September 30, 1993" shall be deemed to be references to
December 31, 1994.
SECTION 5. Limited Effect. Except as expressly amended and modified
--------------
by this Third Amendment, the Existing Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
SECTION 6. Definitions In Existing Agreement. Unless otherwise
---------------------------------
defined in this Third Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 7. Counterparts. This Third Amendment may be executed by one
------------
or more of the parties hereto on any number of separate counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
SECTION 8. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE GOVERNED BY,
-------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE>
IN WITNESS WHEREOF, the Lender and the Borrower have caused this Third
Amendment to be duly executed by their respective duly authorized officers, all
as of the day and year first above written.
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By______________________________
Name:
Title:
FIRST ALLIANCE MORTGAGE COMPANY
By______________________________
Name:
Title:
-3-
<PAGE>
ANNEX A
to Third Amendment
------------------
SECURED NOTE ENDORSEMENT NO. 10
[DATE]
The undersigned Borrower hereby agrees with Prudential Realty Funding
Corporation (the "Lender") that the Secured Note of the Borrower, dated October
29, 1993, as it may have been previously amended by endorsement, in the amount
of $85,000,000, to which this Secured Note Endorsement is attached, is hereby
amended by deleting the term "92.5%" from each place where it is deemed to
appear therein, and replacing in lieu thereof the term "95.0%".
This Secured Note Endorsement is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Secured
Note and is not given in substitution therefor or extinguishment thereof. The
Borrower hereby authorizes the Lender to attach this Secured Note Endorsement to
the Secured Note.
Borrower:
- ---------
FIRST ALLIANCE MORTGAGE COMPANY
By_____________________________
Name:
Title:
Lender:
- -------
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By_____________________________
Name:
Title:
<PAGE>
FOURTH AMENDMENT TO INTERIM
WAREHOUSE AND SECURITY AGREEMENT
FOURTH AMENDMENT, dated as of June 29, 1995 (this "Fourth Amendment"),
----------------
between PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a Delaware corporation
(the "Lender") and FIRST ALLIANCE MORTGAGE COMPANY, a California corporation
------
(the "Borrower") to the Existing Agreement referred to below.
--------
RECITALS
The Lender and the Borrower are parties to a certain Interim Warehouse
and Security Agreement, dated as of October 29, 1993 (as heretofore amended by
that First Amendment, dated as of January 27, 1994, that Second Amendment, dated
as of November 10, 1994 and that Third Amendment, dated as of March 3, 1995, the
"Existing Agreement"; as amended by this Fourth Amendment, the "Agreement").
---------
Under the Existing Agreement, the Lender provides interim funding from
time to time to finance the origination of certain Mortgage Loans, which
Mortgage Loans are related to a specific series or class of Certificates and
which Mortgage Loans are pledged to secure the advances made by the Lender
thereunder, with the proceeds of the related Certificates being used to repay
such advances.
The Lender and the Borrower desire to amend the Existing Agreement to
permit the Borrower to additionally utilize the proceeds of Advances to finance
the origination of Mortgage Loans to be sold to one or more third-parties as
whole loans.
Accordingly, in consideration of the premises, the parties hereto
agree as follows:
SECTION 1. Recitals. The Recitals of the Existing Agreement are
---------
hereby amended by deleting the deleting the second recital therein and replacing
in lieu thereof the following:
"WHEREAS, the Lender has agreed, subject to the terms and
conditions contained herein, to provide interim funding from time to
time to finance the origination of First Mortgage Loans (as defined
herein), Fixed-Rate Mortgage Loans (as defined herein) and Designated
Loans (as defined herein) (First Mortgage Loans, Fixed-Rate Mortgage
Loans and Designated Loans are herein collectively referred to as
"Mortgage Loans"), which Mortgage Loans are either (i) related to a
--------------
specific series or class of Certificates ("Securitization Mortgage
-----------------------
Loans"), or (ii) are to be sold to one or more third-parties ("Whole
----- -----
Loan Sale Mortgage Loans"), and which Mortgage Loans are to be pledged
------------------------
to
<PAGE>
secure the advances to be made by the Lender hereunder, with the
proceeds of the sale of the related Certificates, or Whole Loan Sale
Mortgage Loans, as applicable, to be used to repay such advances."
SECTION 2. The Advances.
------------
(a) Section 1 of the Existing Agreement is hereby amended by the
first paragraph thereof and replacing in lieu thereof the following:
"The Advances. Subject to the terms of this Agreement, the
------------
Lender agrees to lend to the Borrower from time to time an aggregate
principal amount not to exceed at any one time outstanding an amount
(the "Maximum Funding Amount") equal to (i) for the period from the
----------------------
date hereof to and including the initial Termination Date (as defined
below), $85,000,000, and (ii) if the Termination Date is extended in
accordance with Section 2(a) hereof, for each subsequent Funding
Period the amount specified in the Notice of Extension of Agreement
delivered in accordance therewith in respect of such Funding Period,
to be made in one or more advances (each an "Advance" and,
-------
collectively, "Advances"). Each Advance shall be made on a date other
--------
than a Saturday, Sunday or other day on which banks in New York City
are authorized or required by law to be closed or on which the New
York Stock Exchange is closed (and such date, a "Business Day") that
------------
is prior to the Termination Date (each such date on which an Advance
is made, a "Funding Date"); provided that:";
------------
(b) Section 1(f)(i) of the Existing Agreement is hereby amended by
deleting it in its entirety and replacing in lieu thereof the following Section
1(f)(i):
"(i) the sum of (A) the lesser of (1) 95% of the market value of
First Mortgage Loans which are Securitization Mortgage Loans held as
Collateral (such amount not to exceed the par amount thereof), if the
Lender has received evidence satisfactory to it that the Certificates
related to such Securitization Mortgage Loans will be insured by the
Municipal Bond Investors Assurance Corporation or another monoline
insurer acceptable to the Lender (an "Insurer") and (2) such other
-------
percentage of the par amount of First Mortgage Loans which are
Securitization Mortgage Loans held as Collateral, as the Lender
determines in its sole discretion, if the Certificates related to such
Securitization Mortgage Loans receive their credit enhancement other
than from an Insurer, including, without limitation, from credit
enhancement provided by a senior/subordinated structure, and (B) a
percentage of the par amount of Whole Loan Sale Mortgage Loans held as
Collateral as the Lender determines in its sole discretion,";
(c) Section 1(g) of the Existing Agreement is hereby amended by adding
the following clause at the end of such Section 1(g) :
-2-
<PAGE>
", and, in connection with any Advance, the Lender shall have
received a copy of the Mortgage Loan Subservicing Agreement, if any,
in respect of the Mortgage Loans relating to such Advance, which
Mortgage Loan Subservicing Agreement shall be in form and substance
acceptable to the Lender".
SECTION 3. Terms and Conditions for all Advances.
-------------------------------------
(a) Section 2(b)(iii) of the Existing Agreement is hereby amended by
deleting the term "1.375%" from the first sentence thereof and adding in lieu
thereof the term "1.10%".
(b) Section 2(c) of the Existing Agreement is hereby amended by
deleting the first proviso in the first sentence thereof and adding the
following proviso in lieu thereof:
"; provided, that the Maturity Date shall, for any Advance, be no
--------
later than the earlier of (i) subject to the second succeeding proviso
hereto, the Termination Date, (ii) the date upon which the
Certificates, if any, related to the Mortgage Loans funded by such
Advance shall be sold to the public, or (iii) the date upon which the
Mortgage Loans funded by such Advance are sold to a third-party".
(c) Section 2(k)(i) of the Existing Agreement is hereby amended by
deleting it in its entirety and adding in lieu thereof the following Section
2(k)(i):
"(i) the sum of (A) the lesser of (1) 95% of the market value of
First Mortgage Loans which are Securitization Mortgage Loans held as
Collateral (such amount not to exceed the par amount thereof), if the
Lender has received evidence satisfactory to it that the Certificates
related to such Securitization Mortgage Loans will be insured by the
Municipal Bond Investors Assurance Corporation or another monoline
insurer acceptable to the Lender (an "Insurer") and (2) such other
-------
percentage of the par amount of First Mortgage Loans which are
Securitization Mortgage Loans held as Collateral, as the Lender
determines in its sole discretion, if the Certificates related to such
Securitization Mortgage Loans receive their credit enhancement other
than from an Insurer, including, without limitation, from credit
enhancement provided by a senior/subordinated structure, and (B) a
percentage of the par amount of Whole Loan Sale Mortgage Loans held as
Collateral as the Lender determines in its sole discretion,";
SECTION 4. Notice of Borrowing. The Existing Agreement is hereby
-------------------
amended by deleting Exhibit D (form of Notice of Borrowing) thereof, and adding
---------
in lieu thereof the Exhibit D attached hereto as Annex B.
--------- -------
-3-
<PAGE>
SECTION 5. Conditions Precedent. This Fourth Amendment shall become
--------------------
effective on the date (the "Fourth Amendment Effective Date") on which the
-------------------------------
following conditions precedent shall have been satisfied:
5.1 Delivered Documents. On the Fourth Amendment Effective Date, the
-------------------
Lender shall have received the following documents, each of which shall be
satisfactory to the Lender in form and substance:
(a) this Fourth Amendment, executed and delivered by a duly authorized
officer of the Borrower;
(b) an Endorsement to the Secured Note substantially in the form of
Annex A hereto, executed and delivered by a duly authorized officer of the
-------
Borrower; and
(c) such other documents as the Lender may reasonably request.
5.2 No Default. On the Fourth Amendment Effective Date, (i) the
----------
Borrower shall be in compliance with all the terms and provisions set forth in
the Existing Agreement on its part to be observed or performed; (ii) the
representations and warranties made and restated by the Borrower pursuant to
Section 6 of this Fourth Amendment shall be true and complete on and as of such
date with the same force and effect as if made on and as of such date; and (iii)
no Default or Event of Default shall have occurred and be continuing on such
date. On the Fourth Amendment Effective Date the Borrower shall be deemed to
have certified to the Lender as set forth in this Section 5.
SECTION 6. Representations and Warranties. The Borrower hereby
------------------------------
confirms and reaffirms the representations and warranties contained in Section 6
of the Existing Agreement; provided, however, that (i) references therin to the
-------- -------
"Agreement" shall be deemed to refer collectively to this Fourth Amendment, the
Existing Agreement, and the Agreement, each as defined herein, and (ii)
references therein to "December 31, 1994" shall be deemed to be references to
"March 31, 1995".
SECTION 7. Limited Effect. Except as expressly amended and modified
--------------
by this Fourth Amendment, the Existing Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
SECTION 8. Definitions In Existing Agreement. Unless otherwise
---------------------------------
defined in this Fourth Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 9. Counterparts. This Fourth Amendment may be executed by
------------
one or more of the parties hereto on any number of separate counterparts, each
of which shall be an original and all of which taken together shall constitute
one and the same instrument.
-4-
<PAGE>
SECTION 10. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE GOVERNED
-------------
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the Lender and the Borrower have caused this
Fourth Amendment to be duly executed by their respective duly authorized
officers, all as of the day and year first above written.
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By______________________________
Name:
Title:
FIRST ALLIANCE MORTGAGE COMPANY
By______________________________
Name:
Title:
-5-
<PAGE>
ANNEX A
to Fourth Amendment
-------------------
SECURED NOTE ENDORSEMENT NO. 11
June __, 1995
The undersigned Borrower hereby agrees with Prudential Realty Funding
Corporation (the "Lender") that the Secured Note of the Borrower, dated October
29, 1993, as it may have been previously amended by endorsement, in the amount
of $85,000,000, to which this Secured Note Endorsement is attached, is hereby
amended by:
(a) deleting the term "1.375%" from paragraph (a) thereof, and by
adding in lieu thereof the term "1.10%"; and
(b) deleting paragraph (j)(i) in its entirety, and replacing in lieu
thereof the following paragraph (j)(i):
"(i) the sum of (A) the lesser of (1) 95% of the market value of
First Mortgage Loans which are Securitization Mortgage Loans held as
Collateral (such amount not to exceed the par amount thereof), if the
Lender has received evidence satisfactory to it that the Certificates
related to such Securitization Mortgage Loans will be insured by the
Municipal Bond Investors Assurance Corporation or another monoline insurer
acceptable to the Lender (an "Insurer") and (2) such other percentage of
-------
the par amount of First Mortgage Loans which are Securitization Mortgage
Loans held as Collateral, as the Lender determines in its sole discretion,
if the Certificates related to such Securitization Mortgage Loans receive
their credit enhancement other than from an Insurer, including, without
limitation, from credit enhancement provided by a senior/subordinated
structure, and (B) a percentage of the par amount of Whole Loan Sale
Mortgage Loans held as Collateral as the Lender determines in its sole
discretion,".
This Secured Note Endorsement is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Secured
Note and is not given in substitution therefor or extinguishment thereof. The
Borrower hereby authorizes the Lender to attach this Secured Note Endorsement to
the Secured Note.
Borrower: FIRST ALLIANCE MORTGAGE COMPANY
- --------
By_____________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES REALTY
- ------ FUNDING CORPORATION
By_____________________________
Name:
Title:
<PAGE>
ANNEX B
to Fourth Amendment
-------------------
Exhibit D
---------
NOTICE OF BORROWING NO. ____
Prudential Securities Realty
Funding Corporation
130 John Street, 24th Floor
Treasury Department
New York, New York
Attention: Mr. William Horan
Telecopy: 212-214-7310
Confirmation: 212-214-7535
Pursuant to the Interim Warehouse and Security Agreement, dated as of
October 29, 1993 (as amended from time to time, the "Agreement"), between you
---------
and First Alliance Mortgage Company (the "Borrower"), the undersigned Borrower
--------
hereby gives notice of its election to request an Advance and, in connection
therewith, sets forth below the following information (all capitalized terms
used herein shall have the meaning specified there for in the Agreement):
1. The Advance is being made in respect of [First Mortgage Loans] [Fixed-
Rate Mortgage Loans] [Designated Loans].
2. The principal amount of the requested Advance is $____________.
3. The Business Day on which this advance is to be made is
__________,199__ (the "Funding Date"), no earlier than one (1)
Business Day following the date hereof].
4. The date on which this Advance shall mature is ___________,199__ [no
later than the earlier of (i) the Termination Date, (ii) the date upon
which the Certificates related to the Securitization Mortgage Loans
funded by such Advance shall be sold to the public, or (iii) the date
upon which any Whole Loan Sale Mortgage Loans funded by such Advance
are sold to a third-party].
5. Attached hereto is a copy of the Mortgage Loan Schedule (as defined in
the Custodial Agreement) being submitted to the Custodian in
connection with the Advance requested hereby, specifying, among other
things, whether each Mortgage Loan listed thereon is a Securitization
Mortgage Loan or a Whole Loan Sale Mortgage Loan.
<PAGE>
The undersigned hereby certifies that the following statements are
true and correct on the date hereof and shall be true and correct on the date of
the Advance requested herein, before and after giving effect thereto:
A. Each of the representations and warranties contained in the Agreement
and the Custodial Agreement are true and correct in all material
respects; and
B. No Default or Event of Default has occurred and is continuing.
FIRST ALLIANCE MORTGAGE COMPANY
By:________________________________
Name:___________________________
Title:__________________________
Date:_______________, 199__
-2-
<PAGE>
FIFTH AMENDMENT TO INTERIM
WAREHOUSE AND SECURITY AGREEMENT
FIFTH AMENDMENT, dated as of July 11, 1995 (this "Fifth Amendment"),
---------------
between (i) PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a Delaware
corporation (the "Lender"), and (ii) FIRST ALLIANCE MORTGAGE COMPANY, a
------
California corporation (the "Borrower"), to the Existing Agreement referred to
--------
below.
RECITALS
The Lender and the Borrower are parties to a certain Interim Warehouse
and Security Agreement, dated as of October 29, 1993 (as heretofore amended, the
"Existing Agreement"; as amended by this Fifth Amendment, the "Agreement").
------------------ ---------
Under the Existing Agreement, the Lender provides interim funding from
time to time to finance the origination of certain Mortgage Loans, which
Mortgage Loans are related to a specific series or class of Certificates and
which Mortgage Loans are pledged to secure the advances made by the Lender
thereunder, with the proceeds of the related Certificates being used to repay
such advances.
The Borrower has requested that the Existing Agreement be amended as
provided herein, and the Lender is willing to so amend the Existing Agreement.
Accordingly, in consideration of the premises, the Borrower and the Lender
hereby agree that the Existing Agreement is hereby amended as follows:
SECTION 1. Terms and Conditions for all Advances. Section 2(b)(iii)
-------------------------------------
of the Existing Agreement is hereby amended by deleting the term "1.10%%" from
the first sentence thereof and adding in lieu thereof the term ".875%".
SECTION 2. Conditions Precedent. This Fifth Amendment shall become
--------------------
effective on the date (the "Fifth Amendment Effective Date") on which the
------------------------------
following conditions precedent shall have been satisfied:
2.1 Delivered Documents. On the Fifth Amendment Effective Date, the
-------------------
Lender shall have received the following documents, each of which shall be
satisfactory to the Lender in form and substance:
(a) this Fifth Amendment, executed and delivered by a duly authorized
officer of the Borrower;
(b) an Endorsement to the Secured Note substantially in the form of Annex A
-------
hereto, executed and delivered by a duly authorized officer of the
Borrower; and
<PAGE>
(c) such other documents as the Lender may reasonably request.
2.2 No Default. On the Fifth Amendment Effective Date, (i) the
----------
Borrower shall be in compliance with all the terms and provisions set forth in
the Existing Agreement on its part to be observed or performed; (ii) the
representations and warranties made and restated by the Borrower pursuant to
Section 3 of this Fifth Amendment shall be true and complete on and as of such
date with the same force and effect as if made on and as of such date; and (iii)
no Default or Event of Default shall have occurred and be continuing on such
date. On the Fifth Amendment Effective Date the Borrower shall be deemed to
have certified to the Lender as set forth in this Section 2.
SECTION 3. Representations and Warranties. The Borrower hereby
------------------------------
confirms and reaffirms the representations and warranties contained in Section 6
of the Existing Agreement; provided, however, that references therein to the
-------- -------
"Agreement" shall be deemed to refer collectively to this Fifth Amendment, the
Existing Agreement, and the Agreement, each as defined herein
SECTION 4. Limited Effect. Except as expressly amended and modified
--------------
by this Fifth Amendment, the Existing Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
SECTION 5. Definitions In Existing Agreement. Unless otherwise
---------------------------------
defined in this Fifth Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 6. Counterparts. This Fifth Amendment may be executed by one
------------
or more of the parties hereto on any number of separate counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
SECTION 7. GOVERNING LAW. THIS FIFTH AMENDMENT SHALL BE GOVERNED BY,
-------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
_______________________________
-2-
<PAGE>
IN WITNESS WHEREOF, the Lender and the Borrower have caused this Fifth
Amendment to be duly executed by their respective duly authorized officers, all
as of the day and year first above written.
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By______________________________
Name:
Title:
FIRST ALLIANCE MORTGAGE COMPANY
By______________________________
Name:
Title:
-3-
<PAGE>
ANNEX A
to Fifth Amendment
------------------
SECURED NOTE ENDORSEMENT NO. 12
July 11, 1995
The undersigned Borrower hereby agrees with Prudential Realty Funding
Corporation (the "Lender") that the Secured Note of the Borrower, dated October
29, 1993, as it may have been previously amended by endorsement, in the amount
of $85,000,000, to which this Secured Note Endorsement is attached, is hereby
amended by deleting the term "1.10%" from paragraph (a) thereof, and by adding
in lieu thereof the term ".875%"; and
This Secured Note Endorsement is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Secured
Note and is not given in substitution therefor or extinguishment thereof. The
Borrower hereby authorizes the Lender to attach this Secured Note Endorsement to
the Secured Note.
Borrower: FIRST ALLIANCE MORTGAGE COMPANY
- --------
By_____________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES REALTY
- ------ FUNDING CORPORATION
By_____________________________
Name:
Title:
<PAGE>
SIXTH AMENDMENT TO INTERIM
WAREHOUSE AND SECURITY AGREEMENT
SIXTH AMENDMENT, dated as of September 28, 1995 (this "Sixth
-----
Amendment"), between (i) PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a
- ---------
Delaware corporation (the "Lender"), and (ii) FIRST ALLIANCE MORTGAGE COMPANY, a
------
California corporation (the "Borrower") to the Existing Agreement referred to
--------
below.
RECITALS
The Borrower and the Lender are parties to that certain Interim
Warehouse and Security Agreement dated as of October 29, 1993 (as heretofore
amended, the "Existing Agreement"; as amended by this Sixth Amendment, the
------------------
"Agreement").
- ----------
Under the Existing Agreement, the Lender provides interim funding from
time to time to finance the origination of certain Mortgage Loans, which
Mortgage Loans are related to a specific series or class of Certificates and
which Mortgage Loans are pledged to secure the advances made by the Lender
thereunder, with the proceeds of the related Certificates being used to repay
such advances.
The Borrower has requested that the Existing Agreement be amended as
provided herein and the Lender is willing to so amend the Existing Agreement.
Accordingly, in consideration of the premises, the Borrower and the
Lender hereby agree that the Existing Agreement is hereby amended as follows:
SECTION 1. The Advances. Section 1 of the Existing Agreement is
------------
hereby amended by deleting the number "$85,000,000" from the fifth line thereof
and inserting in lieu thereof the number "$160,000,000".
SECTION 2. Terms and Conditions for All Advances.
-------------------------------------
(a) Section 2(a) of the Existing Agreement is hereby amended by
extending the Termination Date set forth therein to December 29, 1995.
SECTION 3. Form of Secured Note. Exhibit A to the Existing Agreement
--------------------
is hereby amended by deleting the phrase "that certain Interim Warehouse and
Security Agreement dated as of April 5, 1993" in the second paragraph thereof
and inserting in lieu thereof the phrase "that certain Interim Warehouse and
Security Agreement dated as of October 29, 1993 (the `Agreement')".
<PAGE>
SECTION 4. Conditions Precedent. This Sixth Amendment shall become
--------------------
effective on the date on which the Lender shall have received the following
documents, each of which shall be satisfactory to the Lender in form and
substance:
(a) this Sixth Amendment, executed and delivered by a duly authorized
officer of the Borrower;
(b) a Secured Note Endorsement, No. 12 substantially in the form
attached hereto as Annex A;
-------
(c) an opinion of counsel to the Borrower, substantially in the form
attached hereto as Annex B; and
-------
(d) such other documents, certificates or opinions as the Lender may
reasonably request.
SECTION 5. Limited Effect. Except as expressly amended and modified
--------------
by this Sixth Amendment, the Existing Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
SECTION 6. Definitions In Existing Agreement. Unless otherwise
---------------------------------
defined in this Sixth Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 7. Counterparts. This Sixth Amendment may be executed by one
------------
or more of the parties hereto on any number of separate counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
SECTION 8. GOVERNING LAW. THIS SIXTH AMENDMENT SHALL BE GOVERNED BY,
-------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
(Signatures Commence on the Following Page)
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Sixth
Amendment to be duly executed and delivered in New York, New York by their
proper and duly authorized officers as of the day and year first above written.
Borrower: FIRST ALLIANCE MORTGAGE COMPANY
By:_______________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By:______________________________
Name:
Title:
<PAGE>
Annex A
-------
SECURED NOTE ENDORSEMENT, NO. 12
September 28, 1995
The undersigned Borrower hereby agrees with PRUDENTIAL SECURITIES
REALTY FUNDING CORPORATION (the "Lender") that the Secured Note of the Borrower,
------
dated October 29, 1993, as it may have been previously amended by endorsement,
in the amount of $85,000,000, to which this Secured Note Endorsement is
attached, is hereby amended by (i) deleting the number "$85,000,000" in the
first paragraph thereof and inserting in lieu thereof the number "$160,000,000",
(ii) deleting the phrase "January 31, 1994 (the `Termination Date')" in the
first paragraph therein and inserting in lieu thereof the phrase "the
Termination Date (as defined in the Agreement referred to below)" and (iii)
deleting the phrase "that certain Interim Warehouse and Security Agreement dated
as of April 5, 1993" in the second paragraph thereof and inserting in lieu
thereof the phrase "that certain Interim Warehouse and Security Agreement dated
as of October 29, 1993 (the `Agreement')".
This Amended and Restated Secured Note Endorsement is given as a
renewal, rearrangement and extension of the obligations of the Borrower to the
Lender under the Amended and Restated Secured Note and is not given in
substitution therefore or extinguishment thereof. The Borrower hereby
authorizes the Lender to attach this Amended and Restated Secured Note
Endorsement to the Amended and Restated Secured Note.
BORROWER: FIRST ALLIANCE MORTGAGE COMPANY
By:_______________________________
Name:
Title:
LENDER: PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By:______________________________
Name:
Title:
<PAGE>
Annex B
-------
[Letterhead of Counsel to Borrower]
[____________, 199_]
Prudential Securities Realty Funding Corporation
199 Water Street
New York, New York 10292-0001
Ladies and Gentlemen:
I am the counsel to First Alliance Mortgage Company, a California
corporation (the "Borrower") and have acted as such in connection with the
--------
execution and delivery of the following documents:
(i) the Sixth Amendment to Interim Warehouse and Security
Agreement, dated as of September 21, 1995 (the "Sixth Amendment"), between
---------------
the Borrower and the Lender; and
(ii) the Secured Note Endorsement, No. 12, dated September 28, 1995
(the "Endorsement"), to the Secured Note.
-----------
The documents described in the foregoing clauses are hereinafter
referred to as the "Delivered Documents".
-------------------
This opinion is being delivered to you pursuant to Subsection 3(c) of
the Sixth Amendment. Capitalized terms used herein and not defined herein shall
have the meanings assigned to them in that certain Interim Warehouse and
Security Agreement dated as of October 29, 1993 (as heretofore amended, the
"Agreement"), by and between the Borrower and the Lender.
I have examined executed copies of the Agreement, the Secured Note,
the Custodial Agreement and the Delivered Documents. I have also examined
originals or photostatic or certified copies of all such corporate records of
the Borrower, and such certificates of public officials, certificates of
corporate officers, and other documents, as I have deemed appropriate and
necessary as a basis for the opinions hereinafter expressed. In making my
examination and rendering the opinions hereinafter expressed I have assumed (i)
that the Lender, as a party to each of the Agreement, the Custodial Agreement,
the Secured Note and the Delivered Documents has the corporate power to enter
into and perform all of its obligations thereunder, (ii) the due authorization,
execution and delivery of each of the Agreement, the Custodial Agreement, the
Secured Note and the Delivered Documents by the
<PAGE>
Lender, and (iii) the validity and binding effect on the Lender of each of the
Agreement and the Delivered Documents.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization, moratorium,
receivership, or other similar laws of general applicability relating to or
affecting creditors' rights generally in the event of bankruptcy,
insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including, but
not limited to, the right of specific performance (regardless of whether
enforceability is considered in a proceeding in equity or at law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and the Borrower is
licensed or qualified to do business in each state wherein it owns property or
is required to be so qualified or licensed.
2. The Borrower has the corporate power and legal right to execute
and deliver each of the Delivered Documents, to borrow under the Agreement and
the Secured Note, as amended by the Delivered Documents, and to grant liens
under the Agreement, as amended by the Sixth Amendment, and has taken all
necessary corporate action to authorize such borrowing and such granting of
liens upon the terms and conditions of the Agreement, as amended by the Sixth
Amendment, and to authorize the execution and delivery of the Delivered
Documents. No consent of any other person or entity (including, without
limitation, stockholders of the Borrower), and no consent, license, permit,
approval or authorization of, or registration or declaration with, any
governmental authority, bureau or agency is required in connection with the
execution and delivery of the Delivered Documents or the enforceability of each
of the Agreement and the Secured Note, as amended by the Delivered Documents.
3. Assuming for purposes of the opinion expressed in this paragraph 3
that each of the documents referred to herein is governed by the laws of the
State of California, each of the Agreement and the Secured Note, as amended by
the Delivered Documents, and the Custodial Agreement constitutes the legal,
valid, and binding obligation of the Borrower enforceable against the Borrower
in accordance with their respective terms.
4. The execution and delivery of the Delivered Documents and the
performance of each of the Agreement and the Secured Note, as amended by the
Delivered Documents, and the Custodial Agreement (i) will not violate any
provision of any existing law or regulation or of the charter or by-laws of the
Borrower or of any mortgage, indenture, contract or other undertaking to which,
to the best of my knowledge (after due inquiry), the
Annex B - Page 2
<PAGE>
Borrower is a party or which is binding upon it or its assets, and (ii) to the
best of my knowledge (after due inquiry), will not result in the creation or
imposition of any lien, charge or encumbrance on any of its assets pursuant to
the provisions of any of the foregoing.
5. No material litigation or administrative proceeding of or before
any government body is presently pending, or, to the best of my knowledge (after
due inquiry), threatened against the Borrower or its assets.
6. No consent, approval, authorization or order of, registration or
filing with, or notice to, any governmental authority or court is required under
federal laws or the laws of the State of California for the execution and
delivery of the Delivered Documents and the performance of the Agreement or the
Secured Note, as amended by the Delivered Documents, or the Custodial Agreement
by the Borrower.
7. The execution and delivery of the Delivered Documents and the
performance by the Borrower of the Agreement and the Secured Note, as amended by
the Delivered Documents, and the Custodial Agreement do not conflict with,
results in a breach of, or constitute a default under, any law, rule or
regulation of the federal government or of the State of California.
8. The Agreement, as amended by the Sixth Amendment, together with
the possession by the Custodian of the promissory notes evidencing the Mortgage
Loans create a valid first priority security interest in favor of the Lender in
the Collateral.
9. Under the laws of the State of California, the stipulation of New
York law in each of the documents referred to in paragraph 3 herein is
enforceable.
I am admitted to practice law in the State of California and the
foregoing opinions are limited to the federal law of the United States and the
laws of the State of California.
Sincerely yours,
Annex B - Page 3
<PAGE>
SEVENTH AMENDMENT TO INTERIM
WAREHOUSE AND SECURITY AGREEMENT
SEVENTH AMENDMENT, dated as of December 29, 1995 (this "Seventh
-------
Amendment"), between (i) PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a
- ---------
Delaware corporation (the "Lender"), and (ii) FIRST ALLIANCE MORTGAGE COMPANY, a
------
California corporation (the "Borrower") to the Existing Agreement referred to
--------
below.
RECITALS
The Borrower and the Lender are parties to that certain Interim
Warehouse and Security Agreement dated as of October 29, 1993 (as heretofore
amended, the "Existing Agreement"; as amended by this Seventh Amendment, the
------------------
"Agreement").
---------
Under the Existing Agreement, the Lender provides interim funding from
time to time to finance the origination of certain Mortgage Loans, which
Mortgage Loans are related to a specific series or class of Certificates and
which Mortgage Loans are pledged to secure the advances made by the Lender
thereunder, with the proceeds of the related Certificates being used to repay
such advances.
The Borrower has requested that the Existing Agreement be amended as
provided herein and the Lender is willing to so amend the Existing Agreement on
the terms and subject to the conditions set forth herein.
Accordingly, in consideration of the premises, the Borrower and the
Lender hereby agree that the Existing Agreement is hereby amended as follows:
SECTION 1. The Advances. Section 1 of the Existing Agreement is
------------
hereby amended by deleting the number "$160,000,000" from the fifth line thereof
and inserting in lieu thereof the number "$125,000,000".
SECTION 2. Terms and Conditions for All Advances. Section 2(a) of the
-------------------------------------
Existing Agreement is hereby amended by deleting the date "December 29, 1995"
set forth therein, and adding in lieu thereof the date "January 5, 1996".
SECTION 3. Conditions Precedent. This Seventh Amendment shall become
--------------------
effective on the date on which the Lender shall have received the following
documents, each of which shall be satisfactory to the Lender in form and
substance:
(a) this Seventh Amendment, executed and delivered by a duly
authorized officer of the Borrower;
<PAGE>
(b) a Secured Note Endorsement, No. 13 substantially in the form
attached hereto as Annex A;
--------
(c) an opinion of counsel to the Borrower, substantially in the form
attached hereto as Annex B; and
-------
(d) such other documents, certificates or opinions as the Lender may
reasonably request.
SECTION 4. Limited Effect. Except as expressly amended and modified
--------------
by this Seventh Amendment, the Existing Agreement shall continue to be, and
shall remain, in full force and effect in accordance with its terms.
SECTION 5. Definitions In Existing Agreement. Unless otherwise
---------------------------------
defined in this Seventh Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 6. Counterparts. This Seventh Amendment may be executed by
------------
one or more of the parties hereto on any number of separate counterparts, each
of which shall be an original and all of which taken together shall constitute
one and the same instrument.
SECTION 7. GOVERNING LAW. THIS SEVENTH AMENDMENT SHALL BE GOVERNED
-------------
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Seventh
Amendment to be duly executed and delivered in New York, New York by their
proper and duly authorized officers as of the day and year first above written.
Borrower: FIRST ALLIANCE MORTGAGE COMPANY
By:_______________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By:______________________________
Name:
Title:
<PAGE>
Annex A
-------
SECURED NOTE ENDORSEMENT NO. 13
December 29, 1995
The undersigned Borrower hereby agrees with PRUDENTIAL SECURITIES
REALTY FUNDING CORPORATION (the "Lender") that the Secured Note of the Borrower,
------
dated October 29, 1993, as it may have been previously amended by endorsement,
in the amount of $160,000,000, to which this Secured Note Endorsement is
attached, is hereby amended by deleting the number "160,000,000" in the first
paragraph thereof and inserting in lieu thereof the number "$125,000,000".
This Secured Note Endorsement is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Secured
Note and is not given in substitution therefore or extinguishment thereof. The
Borrower hereby authorizes the Lender to attach this Secured Note Endorsement to
the Secured Note.
BORROWER: FIRST ALLIANCE MORTGAGE COMPANY
- ---------
By:_____________________________
Name:
Title:
LENDER: PRUDENTIAL SECURITIES REALTY
- ------- FUNDING CORPORATION
By:_____________________________
Name:
Title:
<PAGE>
Annex B
-------
[Letterhead of Counsel to Borrower]
[____________, 199_]
Prudential Securities Realty Funding Corporation
199 Water Street
New York, New York 10292-0001
Ladies and Gentlemen:
I am the counsel to First Alliance Mortgage Company, a California
corporation (the "Borrower") and have acted as such in connection with the
--------
execution and delivery of the following documents:
(i) the Seventh Amendment to Interim Warehouse and Security Agreement,
dated as of December 29, 1995 (the "Seventh Amendment"), between the
-----------------
Borrower and the Lender; and
(ii) the Secured Note Endorsement No. 13 dated December 29, 1995 (the
"Endorsement"), to the Secured Note.
-----------
The documents described in the foregoing clauses are hereinafter
referred to as the "Delivered Documents".
-------------------
This opinion is being delivered to you pursuant to Subsection 2(c) of
the Seventh Amendment. Capitalized terms used herein and not defined herein
shall have the meanings assigned to them in that certain Interim Warehouse and
Security Agreement dated as of October 29, 1993 (as heretofore amended, the
"Agreement"), by and between the Borrower and the Lender.
---------
I have examined executed copies of the Agreement, the Secured Note,
the Custodial Agreement and the Delivered Documents. I have also examined
originals or photostatic or certified copies of all such corporate records of
the Borrower, and such certificates of public officials, certificates of
corporate officers, and other documents, as I have deemed appropriate and
necessary as a basis for the opinions hereinafter expressed. In making my
examination and rendering the opinions hereinafter expressed I have assumed (i)
that the Lender, as a party to each of the Agreement, the Custodial Agreement,
the Secured Note and the Delivered Documents has the corporate power to enter
into and perform all of its obligations thereunder, (ii) the due authorization,
execution and delivery of each of the Agreement, the Custodial Agreement, the
Secured Note and the Delivered Documents by the
<PAGE>
Lender, and (iii) the validity and binding effect on the Lender of each of the
Agreement and the Delivered Documents.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization, moratorium,
receivership, or other similar laws of general applicability relating to or
affecting creditors' rights generally in the event of bankruptcy,
insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including, but
not limited to, the right of specific performance (regardless of whether
enforceability is considered in a proceeding in equity or at law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and the Borrower is
licensed or qualified to do business in each state wherein it owns property or
is required to be so qualified or licensed.
2. The Borrower has the corporate power and legal right to execute
and deliver each of the Delivered Documents, to borrow under the Agreement and
the Secured Note, as amended by the Delivered Documents, and to grant liens
under the Agreement, as amended by the Seventh Amendment, and has taken all
necessary corporate action to authorize such borrowing and such granting of
liens upon the terms and conditions of the Agreement, as amended by the Seventh
Amendment, and to authorize the execution and delivery of the Delivered
Documents. No consent of any other person or entity (including, without
limitation, stockholders of the Borrower), and no consent, license, permit,
approval or authorization of, or registration or declaration with, any
governmental authority, bureau or agency is required in connection with the
execution and delivery of the Delivered Documents or the enforceability of each
of the Agreement and the Secured Note, as amended by the Delivered Documents.
3. Assuming for purposes of the opinion expressed in this paragraph 3
that each of the documents referred to herein is governed by the laws of the
State of California, each of the Agreement and the Secured Note, as amended by
the Delivered Documents, and the Custodial Agreement constitutes the legal,
valid, and binding obligation of the Borrower enforceable against the Borrower
in accordance with their respective terms.
4. The execution and delivery of the Delivered Documents and the
performance of each of the Agreement and the Secured Note, as amended by the
Delivered Documents, and the Custodial Agreement (i) will not violate any
provision of any existing law or regulation or of the charter or by-laws of the
Borrower or of any mortgage, indenture, contract or other undertaking to which,
to the best of my knowledge (after due inquiry), the
Annex B - Page 2
<PAGE>
Borrower is a party or which is binding upon it or its assets, and (ii) to the
best of my knowledge (after due inquiry), will not result in the creation or
imposition of any lien, charge or encumbrance on any of its assets pursuant to
the provisions of any of the foregoing.
5. No material litigation or administrative proceeding of or before
any government body is presently pending, or, to the best of my knowledge (after
due inquiry), threatened against the Borrower or its assets.
6. No consent, approval, authorization or order of, registration or
filing with, or notice to, any governmental authority or court is required under
federal laws or the laws of the State of California for the execution and
delivery of the Delivered Documents and the performance of the Agreement or the
Secured Note, as amended by the Delivered Documents, or the Custodial Agreement
by the Borrower.
7. The execution and delivery of the Delivered Documents and the
performance by the Borrower of the Agreement and the Secured Note, as amended by
the Delivered Documents, and the Custodial Agreement do not conflict with,
results in a breach of, or constitute a default under, any law, rule or
regulation of the federal government or of the State of California.
8. The Agreement, as amended by the Seventh Amendment, together with
the possession by the Custodian of the promissory notes evidencing the Mortgage
Loans create a valid first priority security interest in favor of the Lender in
the Collateral.
9. Under the laws of the State of California, the stipulation of New
York law in each of the documents referred to in paragraph 3 herein is
enforceable.
I am admitted to practice law in the State of California and the
foregoing opinions are limited to the federal law of the United States and the
laws of the State of California.
Sincerely yours,
Annex B - Page 3
<PAGE>
EIGHTH AMENDMENT TO INTERIM
WAREHOUSE AND SECURITY AGREEMENT
EIGHTH AMENDMENT, dated as of January 5, 1996 (this "Eighth
------
Amendment"), between (i) PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a
- ---------
Delaware corporation (the "Lender"), and (ii) FIRST ALLIANCE MORTGAGE COMPANY, a
------
California corporation (the "Borrower") to the Existing Agreement referred to
--------
below.
RECITALS
The Borrower and the Lender are parties to that certain Interim
Warehouse and Security Agreement dated as of October 29, 1993 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Existing
--------
Agreement"; as amended by this Eighth Amendment, the "Agreement").
- --------- ---------
Under the Existing Agreement, the Lender provides interim funding from
time to time to finance the origination of certain Mortgage Loans, which
Mortgage Loans are either identified as being related to a specific series or
class of Certificates to be sold to one or more third-parties, or identified as
Mortgage Loans to be sold to one or more third-parties as whole loans, and which
Mortgage Loans are, in either case, pledged to secure the advances made by the
Lender thereunder, with the proceeds of the sale of the related Certificates, or
of the whole loans, being used to repay such advances.
The Borrower has requested that the Existing Agreement be amended as
provided herein and the Lender is willing to so amend the Existing Agreement on
the terms and subject to the conditions set forth herein.
Accordingly, in consideration of the premises, the Borrower and the
Lender hereby agree that the Existing Agreement is hereby amended as follows:
SECTION 1. Terms and Conditions for All Advances.
-------------------------------------
(a) Section 2(a) of the Existing Agreement is hereby amended by
deleting the date "January 5, 1996" set forth therein, and adding in lieu
thereof the date "June 28, 1996".
(b) Section 2 of the Existing Agreement is hereby amended by deleting
the first proviso in the first sentence of subsection (c) thereof and adding the
following proviso in lieu thereof:
"; provided, that the Maturity Date shall, (i) for any Advance in
--------
respect of a Securitization Mortgage Loan, be no later than the
earlier of (A) the Termination Date, or (B) the date upon which the
Certificates from a
<PAGE>
securitization to which such Securitization Mortgage Loan has been
identified are sold to the public (whether or not such Securitization
Mortgage Loan is actually included in such securitization), and (ii)
for any Advance in respect of a Whole Loan Sale Mortgage Loan, be no
later than the earlier of (X) the Termination Date, (Y) the date upon
which such Whole Loan Sale Mortgage Loan is sold to a third-party, or
(Z) the date which is ninety (90) days after the Funding Date with
respect to such Advance".
(c) Section 2 of the Existing Agreement is hereby amended by deleting
subsection (d) thereof in its entirety and by adding the following new
subsection (d) in lieu thereof:
"(d) (i) The Advances are prepayable at any time, in whole or
in part. Amounts prepaid may be reborrowed in accordance with the
terms of this Agreement. Any amounts prepaid shall be applied to
repay the then outstanding principal amount of any Advances (together
with interest thereon) until paid in full, with any remaining amount
applied to pay any accrued but unpaid Breakage Fees and Whole Loan
Fees (together with interest thereon).
(ii) Any Mortgage Loan constituting Collateral hereunder which is
released by the Lender in connection with the prepayment by the
Borrower of any Advance shall not be eligible to be repledged to the
Lender as Collateral in connection with the making of any new Advance
until thirty (30) days have passed from the date of the prepayment of
such original Advance.
(iii) In the event that the Borrower repays an Advance in whole
or in part (whether at stated maturity, upon acceleration, upon
mandatory or optional prepayment or otherwise, other than upon a
mandatory prepayment made pursuant to Section 2(k) in connection with
which no Collateral is released, Section 9 or Section 13) other than
with the proceeds of a sale of Certificates for which Lender or an
affiliate thereof acts as underwriter or placement agent,
(A) the Borrower shall give two (2) business days' prior
notice thereof to the Lender,
(B) if, on the Breakage Fee Payment Date, any Securitization
Mortgage Loan released by the Lender in connection with any such
repayment has not been repledged to the Lender as Collateral
hereunder, the Borrower shall pay to the Lender on the Breakage
Fee Payment Date a breakage fee (a "Breakage Fee") equal to 0.25%
------------
of the outstanding principal amount of each such Securitization
Mortgage Loan on the date such Advance was repaid, and
(C) if any Whole Loan Sale Mortgage Loan is released by the
Lender in connection with any such repayment, the Borrower shall
pay to the Lender on the Whole Loan Fee Payment Date a fee (a
"Whole
-----
-2-
<PAGE>
Loan Fee") equal to 0.25% of the outstanding principal
--------
amount of each such Whole Loan Sale Mortgage Loan on the date
such Advance was repaid (it being understood that a Whole Loan
Fee shall be payable in respect of each such Whole Loan Sale
Mortgage Loan so released).
For purposes hereof, the "Breakage Fee Payment Date" shall be the next
-------------------------
succeeding Maturity Date for Advances made in respect of
Securitization Mortgage Loans, and the "Whole Loan Fee Payment Date"
---------------------------
shall be the earliest of (1) the Termination Date, (2) the date on
which such Whole Loan Sale Mortgage Loan is sold to a third-party, or
(3) the Interest Payment Date following the date which is sixty (60)
days after such Whole Loan Sale Mortgage Loan is released by the
Lender."
(d) Section 2 of the Existing Agreement is hereby amended by deleting
subsection (e) thereof in its entirety and by adding the following new
subsection (e) in lieu thereof:
"(e) Any Advance or any other amount payable by the Borrower
hereunder or under the Note, including, without limitation, Breakage
Fees and Whole Loan Fees, which is not paid in full when due (whether
at stated maturity, by acceleration, by mandatory prepayment or
otherwise) shall bear interest at a rate per annum equal to one-month
LIBOR plus 3.50% for the period from and including the due date
thereof to but excluding the date the same is paid in full. All such
interest shall be payable on demand."
SECTION 2. Purpose and Disbursement of Funds Advanced. Section 3 of
------------------------------------------
the Existing Agreement is hereby amended by deleting the reference to "Section
15" in the last sentence and adding "Section 13" in lieu thereof.
SECTION 3. Mortgage Files and Custodian; Secured Obligations.
-------------------------------------------------
(a) Section 5(a) of the Existing Agreement is hereby amended by
deleting the reference to "Chemical Bank" in the first sentence and adding the
words "Bankers Trust Company of California, N.A." in lieu thereof.
(b) Section 5(a) of the Existing Agreement is hereby amended by
deleting the words "April 5, 1993 (as heretofore amended to date and as amended
by the Second Amendment thereto, dated as of October 29, 1993" and adding the
words "August 5, 1994 (as may be amended, supplemented or otherwise modified
from time to time" in lieu thereof.
SECTION 4. Representations and Warranties. Section 6(a)(vii) is
------------------------------
hereby amended by deleting the word "preceding" in the first sentence and adding
the word "proceeding" in lieu thereof.
SECTION 5. Definitions. Section 23 of the Existing Agreement is
-----------
hereby amended by adding the following terms in the proper alphabetical order:
-3-
<PAGE>
"Breakage Fee" - Section 2(d)(iii).
------------
"Breakage Fee Payment Date" - Section 2(d)(iii).
-------------------------
"Business Day" - Section 1.
------------
"Maximum Funding Amount" - Section 1.
----------------------
"Securitization Mortgage Loans" - Recitals.
-----------------------------
"Whole Loan Fee" - Section 2(d)(iii).
--------------
"Whole Loan Fee Payment Date" - Section 2(d)(iii).
---------------------------
"Whole Loan Sale Mortgage Loans" - Recitals.
------------------------------
SECTION 6. Conditions Precedent. This Eighth Amendment shall become
--------------------
effective on the date on which the Lender shall have received the following
documents, each of which shall be satisfactory to the Lender in form and
substance:
(a) this Eighth Amendment, executed and delivered by a duly authorized
officer of the Borrower;
(b) an opinion of counsel to the Borrower, substantially in the form
attached hereto as Annex A; and
-------
(c) such other documents, certificates or opinions as the Lender may
reasonably request.
SECTION 7. Limited Effect. Except as expressly amended and modified
--------------
by this Eighth Amendment, the Existing Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
SECTION 8. Definitions In Existing Agreement. Unless otherwise
---------------------------------
defined in this Eighth Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 9. Counterparts. This Eighth Amendment may be executed by
------------
one or more of the parties hereto on any number of separate counterparts, each
of which shall be an original and all of which taken together shall constitute
one and the same instrument.
SECTION 10. GOVERNING LAW. THIS EIGHTH AMENDMENT SHALL BE GOVERNED
-------------
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Eighth
Amendment to be duly executed and delivered in New York, New York by their
proper and duly authorized officers as of the day and year first above written.
Borrower: FIRST ALLIANCE MORTGAGE COMPANY
By:_______________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By:______________________________
Name:
Title:
<PAGE>
Annex A
-------
[Letterhead of Counsel to Borrower]
[____________, 199_]
Prudential Securities Realty Funding Corporation
199 Water Street
New York, New York 10292-0001
Ladies and Gentlemen:
I am the counsel to First Alliance Mortgage Company, a California
corporation (the "Borrower") and have acted as such in connection with the
--------
execution and delivery of the Eighth Amendment to the Interim Warehouse and
Security Agreement, dated as of January 5, 1996 (the "Eighth Amendment"),
----------------
between the Borrower and the Lender.
This opinion is being delivered to you pursuant to Subsection 6(b) of
the Eighth Amendment. Capitalized terms used herein and not defined herein
shall have the meanings assigned to them in that certain Interim Warehouse and
Security Agreement dated as of October 29, 1993 (as amended prior to the date
hereof, the "Existing Agreement") by and between the Borrower and the Lender.
------------------
I have examined executed copies of the Existing Agreement, the Secured
Note, the Custodial Agreement and the Eighth Amendment. I have also examined
originals or photostatic or certified copies of all such corporate records of
the Borrower, and such certificates of public officials, certificates of
corporate officers, and other documents, as I have deemed appropriate and
necessary as a basis for the opinions hereinafter expressed. In making my
examination and rendering the opinions hereinafter expressed I have assumed (i)
that the Lender, as a party to each of the Existing Agreement, the Custodial
Agreement, the Secured Note and the Eighth Amendment has the corporate power to
enter into and perform all of its obligations thereunder, (ii) the due
authorization, execution and delivery of each of the Existing Agreement, the
Custodial Agreement, the Secured Note and the Eighth Amendment by the Lender,
and (iii) the validity and binding effect on the Lender of each of the Existing
Agreement and the Eighth Amendment.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization, moratorium,
receivership, or other similar laws of general applicability relating to or
affecting
<PAGE>
creditors' rights generally in the event of bankruptcy,
insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including, but
not limited to, the right of specific performance (regardless of whether
enforceability is considered in a proceeding in equity or at law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and the Borrower is
licensed or qualified to do business in each state wherein it owns property or
is required to be so qualified or licensed.
2. The Borrower has the corporate power and legal right to execute
and deliver the Eighth Amendment, to borrow under the Existing Agreement, as
amended by the Eighth Amendment, and the Secured Note and to grant liens under
the Existing Agreement, as amended by the Eighth Amendment, and has taken all
necessary corporate action to authorize such borrowing and such granting of
liens upon the terms and conditions of the Existing Agreement, as amended by the
Eighth Amendment, and to authorize the execution and delivery of the Eighth
Amendment. No consent of any other person or entity (including, without
limitation, stockholders of the Borrower), and no consent, license, permit,
approval or authorization of, or registration or declaration with, any
governmental authority, bureau or agency is required in connection with the
execution and delivery of the Eighth Amendment or the enforceability of each of
the Existing Agreement, as amended by the Eighth Amendment, and the Secured
Note.
3. Assuming for purposes of the opinion expressed in this paragraph 3
that each of the documents referred to herein is governed by the laws of the
State of California, each of the Existing Agreement, as amended by the Eighth
Amendment, the Secured Note and the Custodial Agreement constitutes the legal,
valid, and binding obligation of the Borrower enforceable against the Borrower
in accordance with their respective terms.
4. The execution and delivery of the Eighth Amendment and the
performance of each of the Existing Agreement, as amended by the Eighth
Amendment, the Secured Note and the Custodial Agreement (i) will not violate any
provision of any existing law or regulation or of the charter or by-laws of the
Borrower or of any mortgage, indenture, contract or other undertaking to which,
to the best of my knowledge (after due inquiry), the Borrower is a party or
which is binding upon it or its assets, and (ii) to the best of my knowledge
(after due inquiry), will not result in the creation or imposition of any lien,
charge or encumbrance on any of its assets pursuant to the provisions of any of
the foregoing.
5. No material litigation or administrative proceeding of or before
any government body is presently pending, or, to the best of my knowledge (after
due inquiry), threatened against the Borrower or its assets.
Annex A - Page 2
<PAGE>
6. No consent, approval, authorization or order of, registration or
filing with, or notice to, any governmental authority or court is required under
federal laws or the laws of the State of California for the execution and
delivery of the Eighth Amendment and the performance of the Existing Agreement,
as amended by the Eighth Amendment, the Secured Note or the Custodial Agreement
by the Borrower.
7. The execution and delivery of the Eighth Amendment and the
performance by the Borrower of the Existing Agreement, as amended by the Eighth
Amendment, the Secured Note and the Custodial Agreement do not conflict with,
result in a breach of, or constitute a default under, any law, rule or
regulation of the federal government or of the State of California.
8. The Existing Agreement, as amended by the Eighth Amendment,
together with the possession by the Custodian of the promissory notes evidencing
the Mortgage Loans create a valid first priority security interest in favor of
the Lender in the Collateral.
9. Under the laws of the State of California, the stipulation of New
York law in each of the documents referred to in paragraph 3 herein is
enforceable.
I am admitted to practice law in the State of California and the
foregoing opinions are limited to the federal law of the United States and the
laws of the State of California.
Sincerely yours,
Annex A - Page 3
<PAGE>
NINTH AMENDMENT TO INTERIM
WAREHOUSE AND SECURITY AGREEMENT
NINTH AMENDMENT, dated as of February 14, 1996 (this "Ninth
-----
Amendment"), between (i) PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a
- ---------
Delaware corporation (the "Lender"), and (ii) FIRST ALLIANCE MORTGAGE COMPANY, a
------
California corporation (the "Borrower") to the Existing Agreement referred to
--------
below.
RECITALS
The Borrower and the Lender are parties to that certain Interim
Warehouse and Security Agreement dated as of October 29, 1993 (as amended,
supplemented or otherwise modified prior to the date hereof, the "Existing
--------
Agreement"; as amended by this Ninth Amendment, the "Agreement").
- --------- ---------
Under the Existing Agreement, the Lender provides interim funding from
time to time to finance the origination of certain Mortgage Loans, which
Mortgage Loans are either identified as being related to a specific series or
class of Certificates to be sold to one or more third-parties, or identified as
Mortgage Loans to be sold to one or more third-parties as whole loans, and which
Mortgage Loans are, in either case, pledged to secure the advances made by the
Lender thereunder, with the proceeds of the sale of the related Certificates, or
of the whole loans, being used to repay such advances.
The Borrower has requested that the Existing Agreement be amended as
provided herein and the Lender is willing to so amend the Existing Agreement on
the terms and subject to the conditions set forth herein.
Accordingly, in consideration of the premises, the Borrower and the
Lender hereby agree that the Existing Agreement is hereby amended as follows:
SECTION 1. Terms and Conditions for all Advances. Section 2(b)(iii)
-------------------------------------
of the Existing Agreement is hereby amended by deleting the term ".875%" from
the first sentence thereof and adding in lieu thereof the term "0.75%".
SECTION 2. Conditions Precedent. This Ninth Amendment shall become
--------------------
effective on the date (the "Ninth Amendment Effective Date") on which the
------------------------------
following conditions precedent shall have been satisfied:
2.1 Delivered Documents. On the Ninth Amendment Effective Date, the
-------------------
Lender shall have received the following documents, each of which shall be
satisfactory to the Lender in form and substance:
<PAGE>
(a) this Ninth Amendment, executed and delivered by a duly authorized
officer of the Borrower;
(b) an Endorsement to the Secured Note substantially in the form of
Annex A hereto, executed and delivered by a duly authorized officer of the
-------
Borrower;
(c) an opinion of counsel to the Borrower, substantially in the form
attached hereto as Annex B; and
-------
(d) such other documents, certificates or opinions as the Lender may
reasonably request.
2.2 No Default. On the Ninth Amendment Effective Date, (i) the
----------
Borrower shall be in compliance with all the terms and provisions set forth in
the Existing Agreement on its part to be observed or performed; (ii) the
representations and warranties made and restated by the Borrower pursuant to
Section 3 of this Ninth Amendment shall be true and complete on and as of such
date with the same force and effect as if made on and as of such date; and (iii)
no Default or Event of Default shall have occurred and be continuing on such
date. On the Ninth Amendment Effective Date the Borrower shall be deemed to
have certified to the Lender as set forth in this Section 2.
SECTION 3. Representations and Warranties. The Borrower hereby
------------------------------
confirms and reaffirms the representations and warranties contained in Section 6
of the Existing Agreement; provided, however, that references therein to the
"Agreement" shall be deemed to refer collectively to this Ninth Amendment, the
Existing Agreement, and the Agreement, each as defined herein.
SECTION 4. Limited Effect. Except as expressly amended and modified
--------------
by this Ninth Amendment, the Existing Agreement shall continue to be, and shall
remain, in full force and effect in accordance with its terms.
SECTION 5. Definitions In Existing Agreement. Unless otherwise
---------------------------------
defined in this Ninth Amendment, terms defined in the Existing Agreement shall
have their defined meanings when used herein.
SECTION 6. Counterparts. This Ninth Amendment may be executed by one
------------
or more of the parties hereto on any number of separate counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
SECTION 7. GOVERNING LAW. THIS NINTH AMENDMENT SHALL BE GOVERNED BY,
-------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Ninth
Amendment to be duly executed and delivered in New York, New York by their
proper and duly authorized officers as of the day and year first above written.
Borrower: FIRST ALLIANCE MORTGAGE COMPANY
By:_______________________________
Name:
Title:
Lender: PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By:______________________________
Name:
Title:
<PAGE>
ANNEX A
to Ninth Amendment
------------------
SECURED NOTE ENDORSEMENT NO. 14
February 14, 1996
The undersigned Borrower hereby agrees with PRUDENTIAL SECURITIES
REALTY FUNDING CORPORATION (the "LENDER") that the Secured Note of the Borrower,
dated October 29, 1993, as it may have been previously amended by endorsement,
in the amount of $125,000,000, to which this secured Note Endorsement is
attached, is hereby amended by deleting the term ".875%" from paragraph (a)
thereof, and by inserting in lieu thereof the term "0.75%".
This Secured Note Endorsement is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Secured
Note and is not given in substitution therefore or extinguishment thereof. The
Borrower hereby authorizes the Lender to attach this secured Note Endorsement to
the Secured Note.
BORROWER: FIRST ALLIANCE MORTGAGE COMPANY
- --------
By_____________________________
Name:
Title:
LENDER: PRUDENTIAL SECURITIES REALTY
- ------ FUNDING CORPORATION
By_____________________________
Name:
Title:
<PAGE>
ANNEX B
to Ninth Amendment
------------------
[Letterhead of Counsel to Borrower]
February 23, 1996
Prudential Securities Realty Funding Corporation
199 Water Street
New York, New York 10292-0001
Ladies and Gentlemen:
I am the counsel to First Alliance Mortgage Company, a California
corporation (the "Borrower") and have acted as such in connection with the
--------
execution and delivery of the following documents:
(i) the Ninth Amendment to Interim Warehouse and Security Agreement,
dated as of December 29, 1995 (the "Ninth Amendment"), between the Borrower
---------------
and the Lender; and
(ii) the Secured Note Endorsement No. 14 dated February 14, 1996 (the
"Endorsement"), to the Secured Note.
-----------
The documents described in the foregoing clauses are hereinafter
referred to as the "Delivered Documents".
-------------------
This opinion is being delivered to you pursuant to Subsection 2.1(c)
of the Ninth Amendment. Capitalized terms used herein and not defined herein
shall have the meanings assigned to them in that certain Interim Warehouse and
Security Agreement dated as of October 29, 1993 (as heretofore amended, the
"Agreement"), by and between the Borrower and the Lender.
---------
I have examined executed copies of the Agreement, the Secured Note,
the Custodial Agreement and the Delivered Documents. I have also examined
originals or photostatic or certified copies of all such corporate records of
the Borrower, and such certificates of public officials, certificates of
corporate officers, and other documents, as I have deemed appropriate and
necessary as a basis for the opinions hereinafter expressed. In making my
examination and rendering the opinions hereinafter expressed I have assumed (i)
that the Lender, as a party to each of the Agreement, the Custodial Agreement,
the Secured Note and the Delivered Documents has the corporate power to enter
into and perform all of its obligations thereunder, (ii) the due authorization,
execution and delivery of each of the Agreement, the Custodial Agreement, the
Secured Note and the Delivered Documents by the
<PAGE>
Lender, and (iii) the validity and binding effect on the Lender of each of the
Agreement and the Delivered Documents.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of bankruptcy, insolvency, reorganization, moratorium,
receivership, or other similar laws of general applicability relating to or
affecting creditors' rights generally in the event of bankruptcy,
insolvency, reorganization, moratorium or receivership.
(b) The application of general principles of equity, including, but
not limited to, the right of specific performance (regardless of whether
enforceability is considered in a proceeding in equity or at law).
Based upon the foregoing, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and the Borrower is
licensed or qualified to do business in each state wherein it owns property or
is required to be so qualified or licensed.
2. The Borrower has the corporate power and legal right to execute
and deliver each of the Delivered Documents, to borrow under the Agreement and
the Secured Note, as amended by the Delivered Documents, and to grant liens
under the Agreement, as amended by the Ninth Amendment, and has taken all
necessary corporate action to authorize such borrowing and such granting of
liens upon the terms and conditions of the Agreement, as amended by the Ninth
Amendment, and to authorize the execution and delivery of the Delivered
Documents. No consent of any other person or entity (including, without
limitation, stockholders of the Borrower), and no consent, license, permit,
approval or authorization of, or registration or declaration with, any
governmental authority, bureau or agency is required in connection with the
execution and delivery of the Delivered Documents or the enforceability of each
of the Agreement and the Secured Note, as amended by the Delivered Documents.
3. Assuming for purposes of the opinion expressed in this paragraph 3
that each of the documents referred to herein is governed by the laws of the
State of California, each of the Agreement and the Secured Note, as amended by
the Delivered Documents, and the Custodial Agreement constitutes the legal,
valid, and binding obligation of the Borrower enforceable against the Borrower
in accordance with their respective terms.
4. The execution and delivery of the Delivered Documents and the
performance of each of the Agreement and the Secured Note, as amended by the
Delivered Documents, and the Custodial Agreement (i) will not violate any
provision of any existing law or regulation or of the charter or by-laws of the
Borrower or of any mortgage, indenture, contract or other undertaking to which,
to the best of my knowledge (after due inquiry), the Borrower is a party or
which is binding upon it or its assets, and (ii) to the best of my
2
<PAGE>
knowledge (after due inquiry), will not result in the creation or imposition of
any lien, charge or encumbrance on any of its assets pursuant to the provisions
of any of the foregoing.
5. No material litigation or administrative proceeding of or before
any government body is presently pending, or, to the best of my knowledge (after
due inquiry), threatened against the Borrower or its assets.
6. No consent, approval, authorization or order of, registration or
filing with, or notice to, any governmental authority or court is required under
federal laws or the laws of the State of California for the execution and
delivery of the Delivered Documents and the performance of the Agreement or the
Secured Note, as amended by the Delivered Documents, or the Custodial Agreement
by the Borrower.
7. The execution and delivery of the Delivered Documents and the
performance by the Borrower of the Agreement and the Secured Note, as amended by
the Delivered Documents, and the Custodial Agreement do not conflict with,
results in a breach of, or constitute a default under, any law, rule or
regulation of the federal government or of the State of California.
8. The Agreement, as amended by the Ninth Amendment, together with
the possession by the Custodian of the promissory notes evidencing the Mortgage
Loans create a valid first priority security interest in favor of the Lender in
the Collateral.
9. Under the laws of the State of California, the stipulation of New
York law in each of the documents referred to in paragraph 3 herein is
enforceable.
I am admitted to practice law in the State of California and the
foregoing opinions are limited to the federal law of the United States and the
laws of the State of California.
Sincerely yours,
3
<PAGE>
Copy of Execution Copy
----------------------
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of March 25, 1994 (the
"Assignment"), between PRUDENTIAL SECURITIES GROUP, INC., a Delaware corporation
(the "Assignor") and PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION (the
"Assignee").
RECITALS
Reference is made to (i) the Interim Warehouse and Security Agreement,
dated as of October 29, 1993 (as heretofore amended, and as may be further
amended, supplemented or otherwise modified from time to time, the "Interim
Warehouse Agreement"), between the Assignor and First Alliance Mortgage Company
("the Borrower"), (ii) the Secured Note, dated October 29, 1993 (as heretofore
amended, and as may be further amended, supplemented or otherwise modified from
time to time, the "Note"), made by the Borrower in favor of the Assignor, and
(iii) the Custodial Agreement, dated as of April 5, 1993 (as heretofore amended,
and as may be further amended, supplemented or otherwise modified from time to
time, the "Custodial Agreement"), among the Borrower, the Assignor and Chemical
Bank, as custodian (the "Custodian") (the Interim Warehouse Agreement, the Note
and the Custodial Agreement, collectively, the "Assigned Documents").
Capitalized terms used in this Assignment and not otherwise defined herein shall
have the meanings ascribed thereto in the Interim Warehouse Agreement.
On the terms and conditions set forth below, as of the Effective Date
(as defined below), the Assignor desires to sell and assign to the Assignee
(which is an affiliate of the Assignor), and the Assignee desires to purchase
and assume from the Assignor, all of the Assignor's rights and obligations under
the Assigned Documents.
NOW, THEREFORE, the Assignor and the Assignee hereby agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor, effective as of the
Effective Date, all of the Assignor's rights and obligations under the Assigned
Documents.
2. The Assignee hereby (a) appoints and authorizes the Custodian to
take such action as custodian for the Lender on its behalf and to exercise such
powers under the Custodial Agreement as are delegated to the Custodian by the
terms thereof; (b) agrees that it will perform in accordance with their terms
all of the obligations which by the terms of the Interim Warehouse Agreement and
the Custodial Agreement are required to be performed by it as Lender; and (c)
specifies as its address for notices the office set forth beneath its name on
the signature page hereof.
<PAGE>
3. This Assignment shall become effective, following execution hereof
by the parties hereto, on the date (the "Effective Date") on which the written
consent of the Borrower and the Custodian hereto have been obtained. As of the
Effective Date, (a) the Assignee shall be a party to the Assigned Documents and
have the rights and obligations of the Lender thereunder, (b) the Assignor shall
relinquish its rights and be released from its obligations under the Assigned
Documents, (c) all references in the Assigned Documents to the "Lender" shall be
deemed to refer to the Assignee and (d) all references in the Custodial
Agreement to the "Interim Warehouse Agreement" shall be references to the
Interim Warehouse Agreement. From and after the Effective Date, the Borrower
shall make all payments under the Interim Warehouse Agreement and the Note
(including, without limitation, all payments of principal, interest and fees
with respect thereto) to the Assignee.
4. This Assignment shall bind, and the benefits hereof shall inure
to, the Assignor and the Assignee and their repective successors and assigns.
5. THIS ASSIGNMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO
CHOICE OF LAW DOCTRINE.
____________________________________
-2-
<PAGE>
IN WITNESS WHEREOF, the Assignor and the Assignee have executed this
Assignment as of the date first above written.
PRUDENTIAL SECURITIES GROUP, INC.,
AS ASSIGNOR
By________________________
Name:
Title:
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION, AS ASSIGNEE
By_________________________
Name:
Title:
Address for Notices:
--------------------
130 John Street, 24th Floor
New York, New York 10292
Attention: Mr. William Horan
Telephone: 212-214-7310
Telecopy: 212-214-7535
CONSENTED TO AND ACKNOWLEDGED:
- ------------------------------
FIRST ALLIANCE MORTGAGE COMPANY,
AS BORROWER
By_______________________
Name:
Title:
CHEMICAL BANK, AS CUSTODIAN
By_______________________
Name:
Title:
<PAGE>
EXHIBIT 10.2
POOLING AND SERVICING AGREEMENT
Relating to
FIRST ALLIANCE MORTGAGE LOAN TRUST
1996-1
Among
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION,
as Depositor
FIRST ALLIANCE MORTGAGE COMPANY,
as Company
FIRST ALLIANCE MORTGAGE COMPANY,
as Servicer
and
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.
as Trustee
Dated as of March 1, 1996
<PAGE>
TABLE OF CONTENTS
(Not a Part of this Agreement)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS; RULES OF CONSTRUCTION 1
1.1. Definitions 1
1.2. Use of Words and Phrases 24
1.3. Captions; Table of Contents 24
1.4. Opinions 24
ARTICLE II ESTABLISHMENT AND ORGANIZATION OF THE TRUST 25
2.1. Establishment of the Trust 25
2.2. Office 25
2.3. Purposes and Powers 25
2.4. Appointment of the Trustee; Declaration of Trust 25
2.5. Expenses of Trustee 25
2.6. Ownership of the Trust 25
2.7. Situs of the Trust 25
2.8. Miscellaneous REMIC Provisions 26
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
DEPOSITOR, THE COMPANY AND THE COVENANT OF COMPANY TO CONVEY
MORTGAGE LOANS 26
3.1A. Representations and Warranties of the Depositor 26
3.1B. Representations and Warranties of the Company 28
3.2. Representations and Warranties of the Servicer 31
3.3. Representations and Warranties of the Company
with Respect to the Mortgage Loans 33
3.4. Covenants of the Company to Take Certain Actions
with Respect to the Mortgage Loans In Certain
Situations 34
3.5. Conveyance of the Mortgage Loans 35
3.6. Acceptance by Trustee; Certain Substitutions of
Mortgage Loans; Certification by Trustee 39
3.7. Cooperation Procedures 40
ARTICLE IV ISSUANCE AND SALE OF CERTIFICATES 40
4.1. Issuance of Certificates 40
4.2. Sale of Certificates 40
ARTICLE V CERTIFICATES AND TRANSFER OF INTERESTS 41
5.1. Terms 41
5.2. Forms 41
5.3. Execution, Authentication and Delivery 41
5.4. Registration and Transfer of Certificates 42
5.5. Mutilated, Destroyed, Lost or Stolen Certificates 43
5.6. Persons Deemed Owners 44
5.7. Cancellation 44
5.8. Limitation on Transfer of Ownership Rights 44
5.9. Assignment of Rights 45
</TABLE>
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ARTICLE VI COVENANTS 45
6.1. Distributions 45
6.2. Money for Distributions to be Held in Trust; Withholding 45
6.3. Protection of Trust Estate 46
6.4. Performance of Obligations 46
6.5. Negative Covenants 47
6.6. No Other Powers 47
6.7. Limitation of Suits 47
6.8. Unconditional Rights of Owners to Receive Distributions 48
6.9. Rights and Remedies Cumulative 48
6.10. Delay or Omission Not Waiver 48
6.11. Control by Owners 48
6.12. Access to Owners of Certificates' Names and Addresses 49
ARTICLE VII ACCOUNTS, DISBURSEMENTS AND RELEASES 49
7.1. Collection of Money 49
7.2. Establishment of Accounts 49
7.3. The Certificate Insurance Policies 49
7.4 51
7.5. Flow of Funds 51
7.6. Investment of Accounts 53
7.7. Eligible Investments 54
7.8. Reports by Trustee 55
7.9. Additional Reports by Trustee 57
ARTICLE VIII SERVICING AND ADMINISTRATION OF MORTGAGE LOANS 57
8.1. Servicer and Sub-Servicers 57
8.2. Collection of Certain Mortgage Loan Payments 58
8.3. Sub-Servicing Agreements Between Servicer and
Sub-Servicers 59
8.4. Successor Sub-Servicers 59
8.5. Liability of Servicer 59
8.6. No Contractual Relationship Between Sub-Servicer
and Trustee or the Owners 59
8.7. Assumption or Termination of Sub-Servicing Agreement
by Trustee 59
8.8. Principal and Interest Account 60
8.9. Delinquency Advances, Compensating Interest and
Servicing Advances 61
8.10. Purchase of Mortgage Loans 62
8.11. Maintenance of Insurance 62
8.12. Due-on-Sale Clauses; Assumption and Substitution
Agreements 63
8.13. Realization Upon Defaulted Mortgage Loans 63
8.14. Trustee to Cooperate; Release of Files 64
8.15. Servicing Compensation 65
8.16. Annual Statement as to Compliance 66
8.17. Annual Independent Certified Public Accountants'
Reports 66
8.18. Access to Certain Documentation and Information
Regarding the Mortgage Loans 66
8.19. Assignment of Agreement 66
8.20. Events of Servicing Termination 66
8.21. Resignation of Servicer and Appointment of Successor 69
8.22. Waiver of Past Events of Servicing Termination 71
8.23. Inspections by Certificate Insurer; Errors and
Omissions Insurance 72
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8.24. Merger, Conversion, Consolidation or Succession to
Business of Servicer 72
8.25. Notices of Material Events 72
8.26. Monthly Servicing Report and Servicing Certificate 73
8.27. Indemnification by the Company. 75
8.28. Indemnification by the Servicer 75
ARTICLE IX TERMINATION OF TRUST 75
9.1. Termination of Trust 75
9.2. Termination Upon Option of Servicer 76
9.3. Termination Upon Loss of REMIC Status 76
9.4. Disposition of Proceeds 78
9.5. Netting of Amounts 78
ARTICLE X THE TRUSTEE 78
10.1. Certain Duties and Responsibilities 78
10.2. Removal of Trustee for Cause 80
10.3. Certain Rights of the Trustee 81
10.4. Not Responsible for Recitals or Issuance of Certificates 82
10.5. May Hold Certificates 82
10.6. Money Held in Trust 82
10.7. No Lien for Fees 83
10.8. Corporate Trustee Required; Eligibility 83
10.9. Resignation and Removal; Appointment of Successor 83
10.10. Acceptance of Appointment by Successor Trustee 84
10.11. Merger, Conversion, Consolidation or Succession to
Business of the Trustee 85
10.12. Reporting; Withholding 85
10.13. Liability of the Trustee 85
10.14. Appointment of Co-Trustee or Separate Trustee 85
ARTICLE XI MISCELLANEOUS 87
11.1. Compliance Certificates and Opinions 87
11.2. Form of Documents Delivered to the Trustee 87
11.3. Acts of Owners 88
11.4. Notices, etc. to Trustee 88
11.5. Notices and Reports to Owners; Waiver of Notices 88
11.6. Rules by Trustee and the Company 89
11.7. Successors and Assigns 89
11.8. Severability 89
11.9. Benefits of Agreement 89
11.10. Legal Holidays 89
11.11. Governing Law 89
11.12. Counterparts 89
11.13. Usury 90
11.14. Amendment 90
11.15. REMIC Status; Taxes 90
11.16. Additional Limitation on Action and Imposition of Tax 92
11.17. Appointment of Tax Matters Person 92
11.18. The Certificate Insurer 92
11.19. Maintenance of Records 93
11.20. Notices 93
</TABLE>
3
<PAGE>
EXHIBIT A-1 -- Form of Class A-1 Certificate
EXHIBIT A-2 -- Form of Class A-2 Certificate
EXHIBIT B -- Mortgage Loan Schedule
EXHIBIT C -- Form of Class R Certificate
EXHIBIT D -- Form of Certificate Re: Mortgage Loans Prepaid in full
After the Cut-Off Date
EXHIBIT E -- Form of Initial Certification
EXHIBIT F -- Form of Final Certification
EXHIBIT G -- Form of Delivery Order
EXHIBIT H -- Form of Class R Tax Matters Transfer Certificate
EXHIBIT I -- Form of Notice for Certificate Insurance Policy
EXHIBIT J -- Form of Monthly Report
EXHIBIT K -- Form of Request for Release
4
<PAGE>
POOLING AND SERVICING AGREEMENT, relating to FIRST ALLIANCE MORTGAGE LOAN
TRUST 1996-1, dated as of March 1, 1996, by and among PRUDENTIAL SECURITIES
SECURED FINANCING CORPORATION, a Delaware corporation (the "Depositor"), FIRST
ALLIANCE MORTGAGE COMPANY, a California corporation (the "Company"), the Company
in its fiduciary capacity as servicer of the Trust (the "Servicer"), and BANKERS
TRUST COMPANY OF CALIFORNIA, N.A., a national banking association, in its
capacity as trustee (the "Trustee").
WHEREAS, the Depositor wishes to establish a trust and two subtrusts, which
provide for the allocation and sale of the beneficial interests therein and the
maintenance and distribution of the trust estate;
WHEREAS, the Servicer has agreed to service the Mortgage Loans, which
constitute the principal assets of the trust estate;
WHEREAS, all things necessary to make the Certificates, when executed and
authenticated by the Trustee, valid instruments, and to make this Agreement a
valid agreement, in accordance with their and its terms, have been done;
WHEREAS, Bankers Trust Company of California, N.A. is willing to serve in
the capacity of Trustee hereunder; and
WHEREAS, MBIA Insurance Corporation (the "Certificate Insurer") is intended
to be a third party beneficiary of this Agreement and is hereby recognized by
the parties hereto to be a third-party beneficiary of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Company, the Servicer and the Trustee hereby agree as
follows:
ARTICLE I DEFINITIONS; RULES OF CONSTRUCTION
Section 1.1. Definitions. For all purposes of this Agreement, the
-----------
following terms shall have the meanings set forth below, unless the context
clearly indicates otherwise:
"Account": Any account established in accordance with Section 7.2 or 8.8
-------
hereof.
"Agreement": This Pooling and Servicing Agreement, as it may be amended
---------
from time to time, and including the Exhibits hereto.
"Appraised Value": The appraised value of any Property based upon the
---------------
appraisal or other valuation made at the time of the origination of the related
Mortgage Loan, or, in the case of a Mortgage Loan which is a purchase money
mortgage, the sales price of the Property at such time of origination, if such
sales price is less than such appraised value.
"Authorized Officer": With respect to any Person, any person who is
------------------
authorized to act for such Person in matters relating to this Agreement, and
whose action is binding upon such Person and, with respect to the Depositor, the
Company and the Servicer, initially including those individuals whose names
appear on the lists of Authorized Officers delivered on the Startup Day, and
with respect to the Trustee, any Vice President, Assistant Vice President or
Assistant Secretary of the Trustee.
"Available Funds": With respect to Group I, the Group I Available Funds
---------------
and with respect to Group II, the Group II Available Funds.
1
<PAGE>
"Available Funds Cap Carry-Forward Amortization Amount": As of any Payment
-----------------------------------------------------
Date, any amount distributed from the Available Funds Cap Carry-Forward Amount
Account on such Payment Date pursuant to Section 7.5(e) hereof.
"Available Funds Cap Carry-Forward Amount": As of any Payment Date, the
----------------------------------------
excess, if any, of (x) the sum of (i) the excess, if any, equal to (a) the
aggregate amount of interest due on the Class A-2 Certificates on all prior
Payment Dates, calculated at the Class A-2 Formula Pass-Through Rate applicable
to each such Payment Date over (b) the aggregate amount of interest due on the
Class A-2 Certificates on all prior Payment Dates, calculated at the Class A-2
Pass-Through Rate applicable to each such Payment Date, (ii) the amount, if any,
described in clause (iii) hereof as of the immediately preceding Payment Date
and (iii) the product of (a) one-twelfth of the Class A-2 Formula Pass-Through
Rate on such Payment Date and (b) the sum of the amounts described in clauses
(i) and (ii) preceding over (y) all Available Funds Cap Carry-Forward
Amortization Amounts actually funded on all prior Payment Dates.
"Available Funds Cap Carry-Forward Amount Account": The Available Funds Cap
------------------------------------------------
Carry-Forward Amount Account established in accordance with Section 7.2 hereof
and maintained by the Trustee.
"Available Funds Shortfall": Any of the Group I Available Funds Shortfall
-------------------------
or the Group II Available Funds Shortfall.
"Balloon Loan": Any Mortgage Loan which has an amortization schedule which
------------
extends beyond its maturity date, resulting in an unamortized principal balance
due in a single payment at maturity.
"Business Day": Any day that is not a Saturday, Sunday or other day on
------------
which commercial banking institutions in the States of New York and California
or in the city in which the Corporate Trust Office is located are authorized or
obligated by law or executive order to be closed.
"Certificate": Any one of the Class A Certificates or the Class R
-----------
Certificates, each representing the interests and the rights described in this
Agreement.
"Certificate Account": The Certificate Account established in accordance
-------------------
with Section 7.2 hereof and maintained by the Trustee; provided that the funds
in such account shall not be commingled with any other funds held by the
Trustee.
"Certificate Insurance Policies": The Class A-1 Certificate Insurance
------------------------------
Policy and the Class A-2 Certificate Insurance Policy.
"Certificate Insurer": MBIA Insurance Corporation or any successor
-------------------
thereto, as issuer of the Certificate Insurance Policies.
"Certificate Principal Balance": As to the Class A-1 Certificates, the
-----------------------------
Class A-1 Certificate Principal Balance and as to the Class A-2 Certificates,
the Class A-2 Certificate Principal Balance. The Class R Certificates do not
have a "Certificate Principal Balance".
"Class": All of the Class A-1 Certificates, all of the Class A-2
-----
Certificates or all of the Class R Certificates.
"Class A Certificate": Any one of the Class A-1 Certificates or the Class
-------------------
A-2 Certificates.
"Class A Distribution Amount": Any of the Class A-1 Distribution Amount or
---------------------------
the Class A-2 Distribution Amount.
2
<PAGE>
"Class A-1 Carry-Forward Amount": With respect to any Payment Date, the
------------------------------
sum of (i) the amount, if any, by which (x) the Class A-1 Distribution Amount as
of the immediately preceding Payment Date exceeded (y) the amount of the actual
distribution made to the Owners of the Class A-1 Certificates on such
immediately preceding Payment Date and (ii) 30 days' interest on the interest
portion of such amount at the Class A-1 Pass-Through Rate.
"Class A-1 Certificate": Any Certificate designated as a "Class A-1
---------------------
Certificate" on the face thereof, in the form of Exhibit A-1 hereto,
representing the right to distributions as set forth herein. The Class A-1
Certificates shall be issued with an initial aggregate Certificate Principal
Balance equal to the Original Certificate Principal Balance therefor.
"Class A-1 Certificate Insurance Policy": The certificate guaranty
--------------------------------------
insurance policy (number 20807) dated March 29, 1996 issued by the Certificate
Insurer to the Trustee for the benefit of the Owners of the Class A-1
Certificates.
"Class A-1 Certificate Principal Balance": As of any time of
---------------------------------------
determination, the Original Certificate Principal Balance of the Class A-1
Certificates less any amounts actually distributed on account of the Class A-1
Distribution Amount pursuant to Section 7.5(d)(iv)(B) hereof with respect to
principal thereon on all prior Payment Dates.
"Class A-1 Certificate Termination Date": The Payment Date on which the
--------------------------------------
Class A-1 Certificate Principal Balance is reduced to zero.
"Class A-1 Current Interest": With respect to interest accruing on or
--------------------------
after the Cut-Off Date and as of any Payment Date, the aggregate amount of
interest accrued on the Class A-1 Certificate Principal Balance immediately
prior to such Payment Date during the related Interest Accrual Period at the
Class A-1 Pass-Through Rate.
"Class A-1 Distribution Amount": The sum of (x) the Group I Principal
-----------------------------
Distribution Amount payable to the Owners of the Class A-1 Certificates pursuant
to Section 7.5(d)(iv)(B) and (y) the Class A-1 Current Interest.
"Class A-1 Pass-Through Rate": 7.34% per annum.
---------------------------
"Class A-2 Carry-Forward Amount": With respect to any Payment Date, the
------------------------------
sum of (i) the amount, if any, by which (x) the Class A-2 Distribution Amount as
of the immediately preceding Payment Date exceeded (y) the amount of the actual
distribution made to the Owners of the Class A-2 Certificates on such
immediately preceding Payment Date and (ii) 30 days' interest on the interest
portion of such amount at the Class A-2 Pass-Through Rate.
"Class A-2 Certificate": Any Certificate designated as a "Class A-2
---------------------
Certificate" on the face thereof, in the form of Exhibit A-2 hereto representing
the right to distributions as set forth herein. The Class A-2 Certificates
shall be issued with an initial aggregate Certificate Principal Balance equal to
the Original Certificate Principal Balance therefor.
"Class A-2 Certificate Insurance Policy": The certificate guaranty
--------------------------------------
insurance policy (number 20806) dated March 29, 1996 issued by the Certificate
Insurer to the Trustee for the benefit of the Owners of the Class A-2
Certificates.
"Class A-2 Certificate Principal Balance": As of any time of
---------------------------------------
determination, the Original Certificate Principal Balance of the Class A-2
Certificates less amounts actually distributed on account of the Class A-2
Distribution Amount pursuant to Section 7.5(d)(iv)(D) hereof made with
3
<PAGE>
respect to principal thereon on all prior Payment Dates.
"Class A-2 Certificate Termination Date": The Payment Date on which the
--------------------------------------
Class A-2 Certificate Principal Balance is reduced to zero.
"Class A-2 Current Interest": With respect to interest accruing on or
--------------------------
after the Cut-Off Date and as of any Payment Date, the aggregate amount of
interest accrued on the Class A-2 Certificate Principal Balance immediately
prior to such Payment Date during the related Interest Accrual Period at the
Class A-2 Pass-Through Rate for such Payment Date.
"Class A-2 Distribution Amount": The sum of (x) the Group II Principal
-----------------------------
Distribution Amount payable to the Owners of the Class A-2 Certificates pursuant
to Section 7.5(d)(iv)(D) hereof and (y) the Class A-2 Current Interest.
"Class A-2 Formula Pass-Through Rate": As of any Payment Date, the rate
-----------------------------------
determined by clause (x) of the definition of Class A-2 Pass-Through Rate.
"Class A-2 Pass-Through Rate": As of any Payment Date, the lesser of (x)
---------------------------
LIBOR plus, in the case of any Payment Date prior to the date on which the
outstanding aggregate Loan Balance of the Mortgage Loans in the Trust has
declined to 10% or less of the Original Aggregate Loan Balance, 0.38% per annum,
or in the case of any Payment Date thereafter, 0.76% per annum and (y) the Group
II Available Funds Cap for such Payment Date.
"Class R Certificate": Any of those Certificates representing certain
-------------------
residual rights to distributions from the REMIC, designated as a "Class R
Certificate" on the face thereof, in the form of Exhibit C hereto and evidencing
an interest designated as the "residual interest" in the Trust for purposes of
the REMIC Provisions.
"Code": The Internal Revenue Code of 1986, as amended and any successor
----
statute.
"Combined Loan-to-Value Ratio": With respect to any First Mortgage Loan,
----------------------------
the percentage equal to the Original Principal Amount of the related Note
divided by the Appraised Value of the related Property and with respect to any
Second Mortgage Loan the percentage equal to (a) the sum of (i) the remaining
principal balance, as of origination of the Second Mortgage Loan of the Senior
Lien note(s) relating to such Second Mortgage Loan and (ii) the Original
Principal Amount of the Note relating to such Second Mortgage Loan divided by
(b) the Appraised Value.
"Compensating Interest": As defined in Section 8.9(b) hereof.
---------------------
"Corporate Trust Office": The principal office of the Trustee at 3 Park
----------------------
Plaza, 16th Floor, Irvine, California 92714, attention: First Alliance Mortgage
Loan Trust 1996-1 or any other office of the Trustee designated as such
hereunder.
"Coupon Rate": The rate of interest borne by each Note.
-----------
"Current Interest": As of any Payment Date, the sum of the Class A-1
----------------
Current Interest and the Class A-2 Current Interest due on the related Payment
Date.
"Curtailment": With respect to a Mortgage Loan, any payment of principal
-----------
received during a Remittance Period as part of a payment that is in excess of
the amount of the monthly payment due for such Remittance Period and which is
not a Paid-in-Full Mortgage Loan, nor is intended to cure a delinquency.
"Cut-Off Date": March 1, 1996.
------------
4
<PAGE>
"Delinquency Advance": As defined in Section 8.9(a) hereof.
-------------------
"Delinquent": A Mortgage Loan is "Delinquent" if any payment due thereon
----------
is not made by the close of business on the day such payment is scheduled to be
due. A Mortgage Loan is "31 days Delinquent" if such payment has not been
received by the close of business on the second day of the month immediately
succeeding the month in which such payment was due. Similarly for "61 days
Delinquent," "91 days Delinquent" and so on.
"Delivery Order": The delivery order in the form set forth as Exhibit G
--------------
hereto and delivered by the Company to the Trustee on the Startup Day pursuant
to Section 4.1 hereof.
"Depositor": Prudential Securities Secured Financing Corporation, a
---------
Delaware corporation, and any successor thereto.
"Depository": The Depository Trust Company, 7 Hanover Square, New York,
----------
New York 10004 and any successor Depository hereafter named.
"Designated Depository Institution": With respect to the Principal and
---------------------------------
Interest Account or the Certificate Account, an institution whose deposits are
insured by the Bank Insurance Fund or the Savings Association Insurance Fund of
the FDIC, the long-term deposits of which shall be rated (x) A or better by
Standard & Poor's and (y) A2 or better by Moody's and in one of the highest
short-term rating categories, unless otherwise approved in writing by the
Certificate Insurer and each of Moody's and Standard & Poor's, and which is any
of the following: (i) a federal savings and loan association duly organized,
validly existing and in good standing under the federal banking laws, (ii) an
institution duly organized, validly existing and in good standing under the
applicable banking laws of any state, (iii) a national banking association duly
organized, validly existing and in good standing under the federal banking laws,
(iv) a principal subsidiary of a bank holding company, or (v) approved in
writing by the Certificate Insurer, Moody's and Standard & Poor's and, in each
case acting or designated by the Servicer as the depository institution for the
Principal and Interest Account; provided, however, that any such institution or
-------- -------
association shall have combined capital, surplus and undivided profits of at
least $100,000,000. Notwithstanding the foregoing, the Principal and Interest
Account or the Certificate Account may be held by (a) the Trustee or (b) an
institution otherwise meeting the preceding requirements except that the only
applicable rating requirement shall be that the unsecured and uncollateralized
debt obligations thereof shall be rated Baa3 or better by Moody's if such
institution has trust powers and the Principal and Interest Account is held by
such institution in its trust capacity and not in its commercial capacity.
"Determination Date": As to each Remittance Date, the 12th day of each
------------------
month, or if such day is not a Business Day, the next succeeding Business Day.
"Direct Participant" or "DTC Participant": Any broker-dealer, bank or other
------------------ ----------------
financial institution for which the Depository holds Offered Certificates from
time to time as a securities depository.
"Disqualified Organization": "Disqualified Organization" shall have the
-------------------------
meaning set forth from time to time in the definition thereof at Section
860E(e)(5) of the Code (or any successor statute thereto) and applicable to the
Trust.
"Due Date": The first day of the month of the related Payment Date.
--------
"Due Period": With respect to any Payment Date, the period commencing on
----------
the second day of the month preceding the month of such Payment Date (or, with
respect to the first Due Period, the day following the Cut-Off Date) and ending
on the related Due Date.
5
<PAGE>
"Eligible Investments": Those investments so designated pursuant to
--------------------
Section 7.7 hereof.
"Event of Default": Any event described in clauses (a) or (b) of Section
----------------
8.20 hereof.
"Event of Servicing Termination": Any event as described in Section 8.20
------------------------------
hereof.
"Excess Subordinated Amount": With respect to any Mortgage Loan Group and
--------------------------
Payment Date, the difference, if any, between (x) the Subordinated Amount that
would apply to the related Mortgage Loan Group on such Payment Date after taking
into account the payment of the related Class A Distribution Amounts on such
Payment Date (except for any distributions of related Subordination Reduction
Amounts on such Payment Date) and (y) the related Specified Subordinated Amount
for such Payment Date.
"FDIC": The Federal Deposit Insurance Corporation, or any successor
----
thereto.
"FHLMC": The Federal Home Loan Mortgage Corporation, a corporate
-----
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970, as amended, or any successor thereof.
"File": The documents delivered to the Trustee pursuant to Section 3.5
----
hereof pertaining to a particular Mortgage Loan and any additional documents
required to be added to the mortgage file pursuant to this Agreement.
"Final Certification": The final certification in the form set forth as
-------------------
Exhibit F hereto and delivered by the Trustee to the Company within 90 days
after the Startup Day pursuant to Section 3.6 hereof.
"Final Determination": As defined in Section 9.3(a) hereof.
-------------------
"First Mortgage Loan": A Mortgage Loan which constitutes a first priority
-------------------
mortgage lien with respect to any Property.
"FNMA": The Federal National Mortgage Association, a federally-chartered
----
and privately-owned corporation existing under the Federal National Mortgage
Association Charter Act, as amended, or any successor thereof.
"Group I": The pool of Mortgage Loans identified in the related Schedule
-------
of Mortgage Loans as having been assigned to Group I, including any Qualified
Replacement Mortgages delivered in replacement thereof.
"Group I Amortized Subordinated Amount Requirement": As of any date of
-------------------------------------------------
determination, the product of (x) 2.25% and (y) the Group I Original Aggregate
Loan Balance.
"Group I Available Funds": As defined in Section 7.3(a)(i) hereof.
-----------------------
"Group I Available Funds Shortfall": As defined in Section 7.5(d)(ii)(A).
---------------------------------
"Group I Initial Specified Subordinated Amount": $105,000.00.
---------------------------------------------
"Group I Insured Payment": As defined in the Class A-1 Certificate
-----------------------
Insurance Policy.
6
<PAGE>
"Group I Interest Remittance Amount": As of any Remittance Date, the sum,
----------------------------------
without duplication, of (i) all scheduled interest collected by the Servicer
during the related Due Period, with respect to the Mortgage Loans in Group I,
(ii) all Delinquency Advances relating to interest made by the Servicer on such
Remittance Date with respect to Group I and (iii) all Compensating Interest paid
by the Servicer on such Remittance Date with respect to Group I.
"Group I Monthly Remittance Amount": As of any Remittance Date, the sum of
---------------------------------
(i) the Group I Interest Remittance Amount for such Remittance Date and (ii) the
Group I Principal Remittance Amount for such Remittance Date.
"Group I Original Aggregate Loan Balance": The aggregate Loan Balances of
---------------------------------------
all Mortgage Loans in Group I as of the Cut-Off Date, i.e., $20,541,764.16.
----
"Group I Preference Amount": As defined in the Class A-1 Certificate
-------------------------
Insurance Policy.
"Group I Premium Amount": As to any Payment Date beginning with the third
----------------------
Payment Date, the product of (x) .0125% and (y) the Class A-1 Certificate
Principal Balance on such Payment Date (before taking into account any
distributions of principal to be made to the Owners of the Class A-1
Certificates on such Payment Date).
"Group I Principal Distribution Amount": With respect to the Class A-1
-------------------------------------
Certificates for any Payment Date, the lesser of:
(x) the Group I Total Available Funds plus any Group I Insured Payment
minus the Class A-1 Current Interest for such Payment Date; and
(y) the excess, if any, of (i) the sum, without duplication of:
(a) the Class A-1 Carry-Forward Amount,
(b) the principal portion of all scheduled monthly payments on the
Mortgage Loans in Group I due on or prior to the related Due Date during the
related Due Period, to the extent actually received by the Trustee on or prior
to the related Remittance Date or to the extent advanced by the Servicer on or
prior to the related Remittance Date and any Prepayments made by the respective
Mortgagors during the related Remittance Period,
(c) the Loan Balance of each Mortgage Loan in Group I that either was
repurchased by the Company or an Originator or purchased by the Servicer on the
related Remittance Date, to the extent such Loan Balance is actually received by
the Trustee on or prior to the related Remittance Date,
(d) any Substitution Amounts delivered by the Company or an Originator
on the related Remittance Date in connection with a substitution of a Mortgage
Loan in Group I (to the extent such Substitution Amounts relate to principal),
to the extent such Substitution Amounts are actually received by the Trustee on
or prior to the related Remittance Date,
(e) all Net Liquidation Proceeds actually collected by the Servicer
with respect to the Mortgage Loans in Group I during the related Remittance
Period (to the extent such Net Liquidation Proceeds relate to principal) to the
extent actually received by the Trustee on or prior to the related Remittance
Date,
7
<PAGE>
(f) the amount of any Group I Subordination Deficit for such
Payment Date,
(g) the proceeds received by the Trustee of any termination as set
forth in Article IX hereof of Group I (to the extent such proceeds related to
principal), and
(h) the amount of any Subordination Increase Amount with respect to
Group I for such Payment Date, to the extent of any Net Monthly Excess Cashflow
available for such purpose;
over
(ii) the amount of any Subordination Reduction Amount with respect to
Group I for such Payment Date.
"Group I Principal Remittance Amount": As of any Remittance Date, the
-----------------------------------
sum, without duplication, of (i) the scheduled principal actually collected by
the Servicer with respect to Mortgage Loans in Group I during the related Due
Period, (ii) Prepayments collected in the related Remittance Period, (iii) the
Loan Balance of each such Mortgage Loan in Group I that either was repurchased
by an Originator or by the Company or purchased by the Servicer on such
Remittance Date, to the extent such Loan Balance was actually deposited in the
Principal and Interest Account, (iv) any Substitution Amounts delivered by the
Company in connection with a substitution of a Mortgage Loan in Group I, to the
extent such Substitution Amounts were actually deposited in the Principal and
Interest Account on such Remittance Date, (v) all Net Liquidation Proceeds
actually collected by the Servicer with respect to such Mortgage Loans in Group
I during the related Due Period (to the extent such Liquidation Proceeds related
to principal) and (vi) all Delinquency Advances relating to principal made by
the Servicer on such Remittance Date with respect to Group I.
"Group I Projected Net Monthly Excess Cashflow": As of any date of
---------------------------------------------
calculation, Net Monthly Excess Cashflow relating to Group I, as calculated
pursuant to Section 7.5(d)(iii) hereof on the Payment Date immediately preceding
such date of calculation.
"Group I Reimbursement Amount": As of any Payment Date, the sum of
----------------------------
(x)(i) all Group I Insured Payments previously received by the Trustee and all
Group I Preference Amounts previously paid to the Trustee by the Certificate
Insurer and in each case not previously repaid to the Certificate Insurer
pursuant to Section 7.5(d)(ii)(C) or Section 7.5(d)(ii)(D) hereof plus (ii)
interest accrued on each such Group I Insured Payment not previously repaid
calculated at the Late Payment Rate from the date the Trustee received the
related Group I Insured Payment to, but not including, such Payment Date and
(y)(i) any amounts then due and owing to the Certificate Insurer relating to
Group I under the Insurance Agreement plus (ii) interest on such amounts at the
Late Payment Rate. The Certificate Insurer shall notify the Trustee and the
Company of the amount of any Group I Reimbursement Amount.
"Group I Servicing Fee": With respect to Group I, as to any Payment
---------------------
Date beginning with the second Payment Date, the product of (x) one-twelfth of
1.00% and (y) the aggregate Loan Balances of the Mortgage Loans in Group I as of
the opening of business on the first day of the related Remittance Period less
any Curtailments collected during such Remittance Period. Such Servicing Fee is
retained by the Servicer pursuant to Sections 8.8(c)(i) and 8.15 hereof.
8
<PAGE>
"Group I Specified Subordinated Amount": Means the sum of:
-------------------------------------
(a) for any Payment Date occurring during the period commencing on the
Startup Day and ending on the later of (i) the date upon which principal equal
to one-half of the Group I Original Aggregate Loan Balance has been received and
(ii) the 30th Payment Date following the Startup Day, the greater of (A) the
Group I Amortized Subordinated Amount Requirement and (B) two (2) times the
excess of (x) one-half of the aggregate Loan Balances of all Mortgage Loans in
Group I which are 91 or more days Delinquent (including REO Properties) over (y)
five times the Group I Projected Net Monthly Excess Cashflow as of such Payment
Date; and
(b) for any Payment Date occurring after the end of the period in clause
(a) above, the greatest of (i) the lesser of (A) the Group I Amortized
Subordinated Amount Requirement and (B) two (2) times the Group I Amortized
Subordinated Amount Requirement stated as a percentage of the aggregate Original
Certificate Principal Balance of the Class A-1 Certificates times the current
Class A-1 Certificate Principal Balance, (ii) two (2) times the excess of (A)
one-half of the aggregate Loan Balances of all Mortgage Loans in Group I which
are 91 or more days Delinquent (including REO Properties) over (B) three times
the Group I Projected Net Monthly Excess Cashflow as of such Payment Date and
(iii) an amount equal to 0.50% of the Group I Original Aggregate Loan Balance;
provided, however, notwithstanding the above, in the event that any Group I
- -------- -------
Insured Payment or Group II Insured Payment is made by the Certificate Insurer,
the amount described in this clause (b) shall remain equal to the Group I
Amortized Subordinated Amount Requirement.
"Group I Subordinated Amount": As of any Payment Date, the
---------------------------
difference, if any, between (x) the aggregate Loan Balances (minus the aggregate
principal components of unreimbursed Delinquency Advances) of the Mortgage Loans
in Group I as of the close of business on the last day of the related Remittance
Period and (y) the Class A-1 Certificate Principal Balance as of such Payment
Date (after taking into account the payment of the Class A-1 Distribution Amount
(except for any portion thereof related to an Insured Payment) on such Payment
Date).
"Group I Subordination Deficit": With respect to Group I and any
-----------------------------
Payment Date, the amount, if any, by which (x) the aggregate Class A-1
Certificate Principal Balance, after taking into account the payment of the
Group I Principal Remittance Amount on such Payment Date (except any payment to
be made as to principal from the proceeds of the Class A-1 Certificate Insurance
Policy), exceeds (y) the aggregate Loan Balances of the Mortgage Loans in Group
I as of the close of business on the last day of the related Due Period;
provided that for the purpose of calculating Loan Balances to determine if a
Subordination Deficit exists, the aggregate amount of the principal component of
all unreimbursed Delinquency Advances shall be deducted from the related actual
Loan Balances.
"Group I Total Available Funds": As defined in Section 7.3(a) hereof.
-----------------------------
"Group I Total Available Funds Shortfall": As defined in Section
---------------------------------------
7.3(b) hereof.
"Group I Total Monthly Excess Spread": With respect to Group I and
-----------------------------------
any Payment Date, the difference between (i) the interest which is collected on
the Mortgage Loans in Group I during the related Remittance Period, less the
Group I Servicing Fee plus any Delinquency Advances and Compensating Interest
paid by the Servicer with respect to Group I for such Remittance Period and (ii)
the sum of (x) the interest due on the Class A-1 Certificates on such Payment
Date and (y) the Group I Premium Amount and the Group I Trustee Fee, if any, for
such Payment Date.
"Group I Trustee Fee": The amount payable monthly to the Trustee on
-------------------
each Payment Date, in an amount equal to the product of (x) one-twelfth of
0.025% and (y) the aggregate Loan Balance of the Mortgage Loans in Group I as of
the opening of business on the first day of the preceding Remittance Period.
9
<PAGE>
"Group II": The pool of Mortgage Loans identified in the related
--------
Schedules of Mortgage Loans as having been assigned to Group II, including any
Qualified Replacement Mortgages delivered in replacement thereof.
"Group II Amortized Subordinated Amount Requirement": As of any date
--------------------------------------------------
of determination, the product of (x) 2.2% and (y) the Group II Original
Aggregate Loan Balance.
"Group II Available Funds": As defined in Section 7.3(a)(ii) hereof.
------------------------
"Group II Available Funds Cap": As of any Payment Date, the weighted
----------------------------
average of the Coupon Rates on the Mortgage Loans in Group II less the sum of
(a) the rates of which (i) the Group II Servicing Fee, (ii) the Group II Trustee
Fee, (iii) beginning on the seventh Payment Date, the Group II Premium Amount
are determined and (b) beginning on the seventh Payment Date, 0.50% per annum
expressed as a percentage of the Mortgage Loans in Group II.
"Group II Available Funds Shortfall": As defined in Section
----------------------------------
7.5(d)(ii)(A).
"Group II Initial Specified Subordinated Amount": $0.00.
----------------------------------------------
"Group II Insured Payment": The Group II Insured Payment shall have
------------------------
the meaning set forth in the Class A-2 Certificate Insurance Policy.
"Group II Interest Remittance Amount": As of any Remittance Date, the
-----------------------------------
sum, without duplication, of (i) all scheduled interest collected by the
Servicer during the related Due Period with respect to the Mortgage Loans in
Group II, (ii) all Delinquency Advances relating to interest made by the
Servicer on such Remittance Date with respect to Group II, and (iii) all
Compensating Interest paid by the Servicer on such Remittance Date with respect
to Group II.
"Group II Monthly Remittance Amount": As of any Remittance Date, the
----------------------------------
sum of (i) the Group II Interest Remittance Amount for such Remittance Date and
(ii) the Group II Principal Remittance Amount for such Remittance Date.
"Group II Original Aggregate Loan Balance": The aggregate Loan
----------------------------------------
Balances of all Mortgage Loans in Group II as of the Cut-Off Date, i.e.,
----
$31,878,145.23.
"Group II Preference Amount": As defined in the Class A-2 Certificate
--------------------------
Insurance Policy.
"Group II Premium Amount": As to any Payment Date on or after the
-----------------------
seventh Payment Date, the product of (x) .0125% and (y) the Class A-2
Certificate Principal Balance on such Payment Date (before taking into account
any distributions of principal to be made to the Owners of Class A-2
Certificates on such Payment Date).
"Group II Principal Distribution Amount": With respect to the Class
--------------------------------------
A-2 Certificates for any Payment Date, the lesser of:
(x) the Group II Total Available Funds plus any Group II Insured Payment
minus the Class A-2 Current Interest for such Payment Date; and
(y) the excess, if any, of (i) the sum, without any duplication of:
I the Class A-2 Carry-Forward Amount,
10
<PAGE>
(b) the principal portion of all scheduled monthly payments on the
Mortgage Loans in Group II due on or prior to the related Due Date during the
related Due Period, to the extent actually received by the Trustee on or prior
to the related Remittance Date or to the extent advanced by the Servicer on or
prior to the related Remittance Date and any Prepayments made by the respective
Mortgagors during the related Remittance Period,
(c) the Loan Balance of each Mortgage Loan in Group II that either was
repurchased by the Company or an Originator or purchased by the Servicer on the
related Remittance Date, to the extent such Loan Balance is actually received by
the Trustee, on or prior to the related Remittance date,
(d) any Substitution Amounts delivered by the Company or an Originator
on the related Remittance Date in connection with a substitution of a Mortgage
Loan in Group II (to the extent such Substitution Amounts relate to principal),
to the extent such Substitution Amounts are actually received by the Trustee, on
or prior to the related Remittance date,
(e) all Net Liquidation Proceeds actually collected by the Servicer
with respect to the Mortgage Loans in Group II during the related Remittance
Period (to the extent such Net Liquidation Proceeds relate to principal) to the
extent actually received by the Trustee, on or prior to the related Remittance
date,
(f) the amount of any Group II Subordination Deficit for such
Payment Date,
(g) the proceeds received by the Trustee of any termination as set
forth in Article IX hereto of Group II (to the extent such proceeds related to
principal), and
(h) the amount of any Subordination Increase Amount with respect to
Group II for such Payment Date, to the extent of any Net Monthly Excess Cashflow
available for such purpose;
over
(ii) the amount of any Subordination Reduction Amount with respect to
Group II for such Payment Date.
"Group II Principal Remittance Amount": As of any Remittance Date,
------------------------------------
the sum, without duplication, of (i) the scheduled principal actually collected
by the Servicer with respect to Mortgage Loans in Group II during the related
Due Period, (ii) the Prepayments collected in the related Remittance Period,
(iii) the Loan Balance of each such Mortgage Loan in Group II that either was
repurchased by an Originator or by the Company or purchased by the Servicer on
such Date, to the extent such Loan Balance was actually deposited in the
Principal and Interest Account, (iv) any Substitution Amounts delivered by the
Company in connection with a substitution of a Mortgage Loan in Group II, to the
extent such Substitution Amounts were actually deposited in the Principal and
Interest Account on such Remittance Date, (v) all Net Liquidation Proceeds
actually collected by the Servicer with respect to such Mortgage Loans in Group
II during the related Due Period (to the extent such Liquidation Proceeds
related to principal) and (vi) all Delinquency Advances relating to principal
made by the Servicer on such Remittance Date with respect to Group II.
11
<PAGE>
"Group II Projected Net Monthly Excess Cashflow": As of any date of
----------------------------------------------
calculation, Net Monthly Excess Cashflow relating to Group II, as calculated
pursuant to Section 7.5(d)(iii) hereof on the Payment Date immediately
preceding such date of calculation.
"Group II Reimbursement Amount": As of any Payment Date, the sum of
-----------------------------
(x)(i) all Group II Insured Payments previously received by the Trustee and all
Group II Preference Amounts previously paid to the Trustee by the Certificate
Insurer and in each case not previously repaid to the Certificate Insurer
pursuant to Sections 7.5(d)(ii)(C) and 7.5(d)(ii)(D) hereof plus (ii) interest
accrued on each such Group II Insured Payment not previously repaid calculated
at the Late Payment Rate from the date the Trustee received the related Group II
Insured Payment to, but not including, such Payment Date and (y)(i) any amounts
then due and owing to the Certificate Insurer relating to Group II under the
Insurance Agreement plus (ii) interest on such amounts at the Late Payment Rate.
The Certificate Insurer shall notify the Trustee and the Company of the amount
of any Group II Reimbursement Amount.
"Group II Servicing Fee": With respect to Group II, as to any Payment
----------------------
Date, the product of (x) one-twelfth of 0.50% and (y) the aggregate Loan
Balances of the Mortgage Loans in Group II as of the opening of business on the
first day of the related Remittance Period less any Curtailments collected
during such Remittance Period; provided, however, that in the event that, as of
-------- -------
any of the first twelve Payment Dates, (i) the sum of (x) Class A-2 Pass-Through
Rate applicable to such Payment Date and (y) the annualized rate at which the
Group II Servicing Fee would otherwise be calculated exceeds (ii) the weighted
average Coupon Rate of the Mortgage Loans in Group II for the related Remittance
Period, then the Group II Servicing Fee for such Payment Date shall be reduced
by an amount equal to the product of (a) one-twelfth of such excess (not to
exceed 10 basis points on a per annum basis) and (b) the aggregate Loan Balance
of the Mortgage Loans in Group II as of the opening of business of the first day
of such Remittance Period. Such Servicing Fee is retained by the Servicer
pursuant to Sections 8.8(c)(i) and 8.15 hereof.
"Group II Specified Subordinated Amount": means:
--------------------------------------
(a) for any Payment Date occurring during the period commencing on the
Startup Day and ending on the later of (i) the date upon which principal equal
to one-half of the Group II Original Aggregate Loan Balance has been received
and (ii) the 30th Payment Date following the Startup Day, the greater of (A) the
Group II Amortized Subordinated Amount Requirement and (B) two times the excess
of (x) one-half of the aggregate Loan Balances of all Mortgage Loans in Group II
which are 91 or more days Delinquent (including REO Properties) over (y) five
times the Group II Projected Net Monthly Excess Cashflow as of such Payment
Date; and
(b) for any Payment Date occurring after the end of the period in clause
(a) above, the greatest of (i) the lesser of (A) the Group II Amortized
Subordinated Amount Requirement and (B) two (2) times the Group II Amortized
Subordinated Amount Requirement stated as a percentage of the Original
Certificate Principal Balance of the Class A-2 Certificates times the current
Class A-2 Certificate Principal Balance, (ii) two (2) time the excess of (A)
one-half of the aggregate Loan Balances of all Mortgage Loans in Group II which
are 91 or more days Delinquent (including REO Properties) over (B) three times
the Group II Projected Net Monthly Excess Cashflow as of such Payment Date and
(iii) an amount equal to 0.50% of the Group II Original Aggregate Loan Balance;
provided, however, notwithstanding the above, in the event that any Group I
- -------- -------
Insured Payment or Group II Insured Payment is made by the Certificate Insurer,
the Group II Specified Subordinated Amount shall remain equal to the Group II
Amortized Subordinated Amount Requirement.
"Group II Subordinated Amount": As of any Payment Date, the
----------------------------
difference, if any, between (x) the aggregate Loan Balances (minus the aggregate
principal components of unreimbursed Delinquency Advances) of the Mortgage Loans
in Group II as of the close of business on the last day of the related
Remittance Period and (y) the Class A-2 Certificate Principal Balance as of such
Payment
12
<PAGE>
Date (after taking into account the payment of the Class A-2
Distribution Amount (except for any portion thereof related to an Insured
Payment) on such Payment Date).
"Group II Subordination Deficit": With respect to Group II and any
------------------------------
Payment Date, the amount, if any, by which (x) the aggregate Class A-2
Certificate Principal Balance, after taking into account the payment of the
Group II Principal Remittance Amount on such Payment Date (except any payment to
be made as to principal from the proceeds of the Class A-2 Certificate Insurance
Policy), exceeds (y) the aggregate Loan Balances of the Mortgage Loans in Group
II as of the close of business on the last day of the related Due Period;
provided that for the purpose of calculating Loan Balances to determine if a
Subordination Deficit exists, the aggregate amount of the principal component of
all unreimbursed Delinquency Advances shall be deducted from the related actual
Loan Balances .
"Group II Total Available Funds": As defined in Section 7.3(a)(ii)
------------------------------
hereof.
"Group II Total Available Funds Shortfall": As defined in Section
----------------------------------------
7.3(b) hereof.
"Group II Total Monthly Excess Spread": With respect to Group II and
------------------------------------
any Payment Date, the difference between (i) the interest which is collected on
the Mortgage Loans in Group II during the related Remittance Period, less the
Group II Servicing Fee for such Remittance Period plus any Delinquency Advances
and Compensating Interest paid by the Servicer with respect to Group II for such
Remittance Period and (ii) the sum of (x) the interest due on the Class A-2
Certificates on such Payment Date, (y) the Group II Premium Amount, and the
Group II Trustee Fee, if any, for such Payment Date and (z) the difference
between (A) one month's interest on the Class A-2 Certificates, calculated at
the Group II Available Funds Cap and (B) the amount of any Available Funds Cap
Carry-Forward Amount for such Payment Date.
"Group II Trustee Fee": The amount payable monthly to the Trustee on
--------------------
each Payment Date, in an amount equal to the product of (x) one-twelfth of
0.025% and (y) the aggregate Loan Balance of the Mortgage Loan in Group II as of
the opening of business on the first day of the related Remittance Period.
"Highest Lawful Rate": As defined in Section 11.13.
-------------------
"Indemnification Agreement": The Indemnification Agreement dated as
-------------------------
of March 1, 1996, among the Certificate Insurer, the Depositor and the
Underwriter.
"Indirect Participant": Any financial institution for whom any Direct
--------------------
Participant holds an interest in a Class A Certificate.
"Initial Certification": The initial certification in the form set
---------------------
forth as Exhibit E hereto and delivered by the Trustee to the Company on the
Startup Day pursuant to Section 3.6 hereof.
"Initial Premiums": The initial premium (covering three months) for
----------------
Group I and the initial premium (covering seven months) for Group II payable by
the Company on behalf of the Trust to the Certificate Insurer in consideration
of the delivery to the Trustee of each of the Certificate Insurance Policies.
"Insurance Agreement": The Insurance Agreement dated as of March 1,
-------------------
1996, among the Company, the Servicer, the Depositor, the Trustee and the
Certificate Insurer, as it may be amended from time to time.
"Insurance Policy": Any hazard, flood, title or primary mortgage
----------------
insurance policy relating to a Mortgage Loan.
13
<PAGE>
"Insured Payment": With respect to either Group I or Group II and as
---------------
to any Payment Date, the sum of (i) the excess, if any, of (a) the sum of the
related Current Interest and the then existing Subordination Deficit, if any,
over (b) the related Total Available Funds (after applying the cross
collateralization provisions of Section 7.5(d)(ii)(A) and (B) hereof, after
deduction for the related Premium Amount and the related Trustee Fee and after
taking into account the portion of the related Principal Distribution Amount to
be actually distributed on such Payment Date without regard to any related
Insured Payment to be made with respect to such Payment Date), plus (ii) the
related Preference Amount.
"Interest Accrual Period": With respect to the Class A-1 Certificates
-----------------------
and any Payment Date, the calendar month immediately preceding such Payment
Date. A "Calendar Month" shall be deemed to be 30 days. With respect to the
Class A-2 Certificates and any Payment Date, the period commencing on the
immediately preceding Payment Date (or in the case of the first Payment Date,
the Startup Day) and ending on the day immediately preceding the current Payment
Date. All calculations of interest on the Class A-1 Certificates will be made
on the basis of a 360-day year assumed to consist of twelve 30-day months and
all calculations of interest on the Class A-2 Certificates will be made on the
basis of the actual number of days elapsed in the related Interest Accrual
Period and in a year of 360 days.
"Interest Determination Date": With respect to any Interest Accrual
---------------------------
Period for the Class A-2 Certificates, the second London Business Day preceding
such Interest Accrual Period.
"Late Payment Rate": For any Payment Date, the rate of interest, as
-----------------
it is publicly announced by State Street Bank and Trust Company, N.A. at its
principal office in New York, New York as its prime rate (any change in such
prime rate of interest to be effective on the date such change is announced by
State Street Bank and Trust Company, N.A.) plus 3%. The Late Payment Rate shall
be computed on the basis of a year of 365 days calculating the actual number of
days elapsed. In no event shall the Late Payment Rate exceed the maximum rate
permissible under any applicable law limiting interest rates.
"Latest Termination Date": The later to occur of (i) the Class A-1
-----------------------
Certificate Termination Date and (ii) the Class A-2 Certificate Termination
Date.
"LIBOR": With respect to any Interest Accrual Period for the Class A-
-----
2 Certificates, the rate determined by the Trustee on the related Interest
Determination Date on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar deposits, as such rates appear on the Reuters Screen LIBO
Page, as of 11:00 a.m. (London time) on such Interest Determination Date. On
each Interest Determination Date, LIBOR for the related Interest Accrual Period
will be established by the Trustee as follows:
(i) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the related Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 1/16%).
(ii) If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, LIBOR for the related Interest Accrual Period
shall be the higher of (i) LIBOR as determined on the previous Interest
Determination Date and (ii) the Reserve Interest Rate.
"Liquidated Loan": As defined in Section 8.13(b) hereof. A Mortgage
---------------
Loan which is purchased from the Trust pursuant to Section 3.4, 3.6 or 8.10
hereof is not a "Liquidated Loan".
"Liquidation Expenses": Expenses which are incurred by the Servicer
--------------------
in connection with the liquidation of any defaulted Mortgage Loan, such
expenses, including, without limitation,
14
<PAGE>
legal fees and expenses, and any unreimbursed Servicing Advances expended by the
Servicer pursuant to Sections 8.9(c) and 8.13 with respect to the related
Mortgage Loan.
"Liquidation Proceeds": With respect to any Liquidated Loan, any
--------------------
amounts (including the proceeds of any Insurance Policy) recovered by the
Servicer in connection with such Liquidated Loan, whether through trustee's
sale, foreclosure sale or otherwise.
"Loan Balance": With respect to each Mortgage Loan, the outstanding
------------
principal balance thereof on the Cut-Off Date less any related Principal
Remittance Amounts relating to such Mortgage Loan included in previous related
Monthly Remittance Amounts that were transferred by the Servicer or any Sub-
Servicer to the Trustee for deposit in the related Certificate Account;
provided, however, that the Loan Balance for any Mortgage Loan which has become
- -------- -------
a Liquidated Loan shall be zero as of the first day of the Remittance Period
following the Remittance Period in which such Mortgage Loan becomes a Liquidated
Loan, and at all times thereafter; and further provided that for purposes of
calculating the Specified Subordinated Amount, Loan Balance shall not include
any principal relating to a Delinquency Advance.
"Loan Purchase Price": With respect to any Mortgage Loan purchased
-------------------
from the Trust on a Remittance Date pursuant to Section 3.4, 3.6 or 8.10 hereof,
an amount equal to the Loan Balance of such Mortgage Loan as of the date of
purchase, plus one month's interest on the outstanding Loan Balance thereof as
of the beginning of the preceding Remittance Period computed at the Coupon Rate
less the Servicing Fee (expressed as an annual percentage rate), if any,
together with, without duplication, the aggregate amount of (i) all delinquent
interest, all Delinquency Advances and Servicing Advances theretofore made with
respect to such Mortgage Loan and not subsequently recovered from the related
Mortgage Loan and (ii) all Delinquency Advances which the Servicer or any Sub-
Servicer has theretofore failed to remit with respect to such Mortgage Loan.
"London Business Day": A day on which banks are open for dealing in
-------------------
foreign currency and exchange in London and New York City.
"Master Transfer Agreement": Any one of the Mortgage Loan Master
-------------------------
Transfer Agreements and related Conveyance Agreements among the Company and one
or more Originators.
"Monthly Exception Report": The monthly report delivered by the
------------------------
Servicer to the Trustee on each Determination Date, commencing with the
Determination Date in April, 1996, pursuant to Section 8.8(d)(ii), which shall
be on computer tape and printout. Each Monthly Exception Report shall cover the
immediately preceding Remittance Period and shall consist of (i) a computer
generated activity report of the Mortgage Loans setting forth the Scheduled
Balance of Mortgage Loans as of the first day of the related Remittance Period.
Scheduled Payments due, Prepayments, Liquidated Loan balances, and the resulting
Scheduled Balance of the Mortgage Loans as of the last day of the related
Remittance period and (ii) separate computer generated reports in computer
format of (a) payoffs and curtailments, such reports to provide the payment
details for each Mortgage Loan covering the immediately preceding Remittance
Period and any Prepayments not previously reported from a prior Remittance
Period, and (b) prepayments and delinquencies, such reports to reflect the
current status of each Mortgage Loan with payment details as of the last day of
the related Remittance Period.
"Monthly Remittance Amount": With respect to Group I, the Group I
-------------------------
Monthly Remittance Amount and with respect to Group II, the Group II Monthly
Remittance Amount. The sum of the Group I Monthly Remittance Amount and the
Group II Monthly Remittance Amount shall equal the "Total Available
Funds".
"Monthly Servicing Report": As defined in Section 8.26.
------------------------
"Moody's": Moody's Investors Service, Inc.
-------
15
<PAGE>
"Mortgage": The mortgage, deed of trust or other instrument creating
--------
a first or second lien on an estate in fee simple interest in real property
securing a Note.
"Mortgage Loans": Such of the mortgage loans transferred and assigned
--------------
to the Trust pursuant to Section 3.5(a) and Section 3.8 hereof, together with
any Qualified Replacement Mortgages substituted therefor in accordance with this
Agreement, as from time to time are held as a part of the Trust Estate, the
Mortgage Loans originally so held being identified in the Schedules of Mortgage
Loans. The term "Mortgage Loan" includes the terms "First Mortgage Loan" and
"Second Mortgage Loan." The term "Mortgage Loan" includes any Mortgage Loan
which is Delinquent, which relates to a foreclosure or which relates to a
Property which is REO Property prior to such Property's disposition by the
Trust. Any mortgage loan which, although intended by the parties hereto to have
been, and which purportedly was, transferred and assigned to the Trust by the
Company, in fact was not transferred and assigned to the Trust for any reason
whatsoever shall nevertheless be considered a "Mortgage Loan" for all purposes
of this Agreement.
"Mortgage Loan Group": Either Group I or Group II. References herein
-------------------
to the related Class of Class A Certificates, when used with respect to a
Mortgage Loan Group, shall mean (A) in the case of Group I, the Class A-1
Certificates and (B) in the case of Group II, the Class A-2 Certificates.
"Mortgagor": The obligor on a Note.
---------
"Net Liquidation Proceeds": As to any Liquidated Loan, Liquidation
------------------------
Proceeds net of, without duplication, Liquidation Expenses and unreimbursed
Servicing Advances, unreimbursed Delinquency Advances and accrued and unpaid
Servicing Fees through the date of liquidation relating to such Liquidated Loan.
In no event shall Net Liquidation Proceeds with respect to any Liquidated Loan
be less than zero.
"Net Monthly Excess Cashflow": As defined in Section 7.5(d)(iii)
---------------------------
hereof.
"Note": The note or other evidence of indebtedness evidencing the
----
indebtedness of a Mortgagor under a Mortgage Loan.
"Officer's Certificate": A certificate signed by any Authorized
---------------------
Officer of any Person delivering such certificate and delivered to the Trustee.
"Operative Documents": Collectively, this Agreement, the Master
-------------------
Transfer Agreements, the Certificate Insurance Policies, the Purchase Agreement,
the Certificates, the Insurance Agreement, the Underwriting Agreement and the
Indemnification Agreement.
"Original Aggregate Loan Balance": The aggregate Loan Balances of the
-------------------------------
Mortgage Loans as of the Cut-Off Date, i.e., $52,419,909.39.
----
"Original Certificate Principal Balance": As of the Startup Day and
--------------------------------------
as to each Class of Class A Certificates, the original Certificate Principal
Balances thereof, as follows:
Class A-1 Certificates $20,541,000.
Class A-2 Certificates $31,878,000.
The Class R Certificates do not have an Original Certificate Principal
Balance.
"Original Principal Amount": With respect to each Note, the principal
-------------------------
amount of such Note or the mortgage note relating to a Senior Lien, as the case
may be, on the date of origination
16
<PAGE>
thereof.
"Originator": The Company and any entity from which the Company
----------
acquires Mortgage Loans.
"Outstanding": With respect to all Certificates of a Class, as of any
-----------
date of determination, all such Certificates theretofore executed and delivered
hereunder except:
(i) Certificates theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Certificates or portions thereof for which full and final payment
money in the necessary amount has been theretofore deposited with the Trustee in
trust for the Owners of such Certificates;
(iii) Certificates in exchange for or in lieu of which other Certificates
have been executed and delivered pursuant to this Agreement, unless proof
satisfactory to the Trustee is presented that any such Certificates are held by
a bona fide purchaser; and
(iv) Certificates alleged to have been destroyed, lost or stolen for which
replacement Certificates have been issued as provided for in Section 5.5 hereof.
(v) Certificates as to which the Trustee has made the final distribution
thereon, whether or not such Certificates have been returned to the Trustee.
"Owner": The Person in whose name a Certificate is registered in
-----
the Register, to the extent described in Section 5.6.
"Paid-in-Full Mortgage Loan": With respect to any Payment Date, a
--------------------------
Mortgage Loan which has been paid in full during the related Remittance Period.
"Pass-Through Rate": As to the Class A-1 Certificates, the Class A-1
-----------------
Pass-Through Rate and as to the Class A-2 Certificates, the Class A-2 Pass-
Through Rate.
"Payment Date": Any date on which the Trustee is required to make
------------
distributions to the Owners, which shall be the 20th day of each month, or if
such day is not a Business Day, the next succeeding Business Day, commencing in
the month following the Startup Day.
"Percentage Interest": As to any Class A Certificate, that
-------------------
percentage, expressed as a fraction, the numerator of which is the Certificate
Principal Balance set forth on such Certificate as of the Cut-Off Date and the
denominator of which is the Original Certificate Principal Balance of all Class
A Certificates of the same Class as of the Cut-Off Date; and as to any Class R
Certificate, that Percentage Interest set forth on such Class R Certificate.
"Person": Any individual, corporation, partnership, joint venture,
------
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Pool Cumulative Expected Losses": With respect to any period, the
-------------------------------
sum of (i) all Realized Losses with respect to the Mortgage Loans experienced
during such period and (ii) the product of (A) 0.43 and (B) with respect to any
date of determination, the sum of (x) 25% of the Loan Balances of all Mortgage
Loans which are greater than 31 days Delinquent and less than 61 days
Delinquent, (y) 50% of the Loan Balances of all Mortgage Loans which are greater
than 61 days Delinquent and less than 91 days Delinquent, and (z) 100% of the
Loan Balances of all Mortgage Loans which are greater than 91 days Delinquent
(including REO Properties).
17
<PAGE>
"Pool Cumulative Realized Losses": With respect to any period, the
-------------------------------
sum of all Realized Losses with respect to the Mortgage Loans experienced during
such period.
"Pool Delinquency Rate": With respect to any Remittance Period, the
---------------------
fraction, expressed as a percentage, equal to (x) the aggregate principal
balances of all Mortgage Loans 91 or more days Delinquent (including
foreclosures and REO Properties) as of the close of business on the last day of
such Remittance Period over (y) the Pool Principal Balance as of the close of
business on the last day of such Remittance Period.
"Pool Principal Balance": The aggregate principal balances of the
----------------------
Group I Mortgage Loans and the Group II Mortgage Loans.
"Pool Rolling Three Month Delinquency Rate": As of any Payment Date,
-----------------------------------------
the fraction, expressed as a percentage, equal to the average of the Pool
Delinquency Rates for each of the three (or one and two, in the case of the
first and second Payment Dates) immediately preceding Remittance Periods.
"Preference Amount": Any of the Group I Preference Amount or the
-----------------
Group II Preference Amount.
"Premium Amount": As to any Payment Date beginning on the third
--------------
Payment Date, the Group I Premium Amount and the Group II Premium Amount.
"Premium Percentage": As defined in the Insurance Agreement.
------------------
"Prepaid Installment": With respect to any Mortgage Loan, any
-------------------
installment of principal thereof and interest thereon received by the Servicer
prior to the scheduled due date for such installment, intended by the Mortgagor
as an early payment thereof and not as a Prepayment with respect to such
Mortgage Loan.
"Prepayment": A Curtailment or a Paid-in-Full Mortgage Loan.
----------
"Preservation Expenses": Expenditures made by the Servicer in
---------------------
connection with a foreclosed Mortgage Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation.
"Principal and Interest Account": Collectively, each principal and
------------------------------
interest account created by the Servicer pursuant to Section 8.8(a) hereof, or
pursuant to any Sub-Servicing Agreement.
"Principal Remittance Amount": As applicable, the Group I Principal
---------------------------
Remittance Amount or the Group II Principal Remittance Amount.
"Prohibited Transaction": The meaning set forth from time to time in
----------------------
the definition thereof at Section 860F(a)(2) of the Code (or any successor
statute thereto) and applicable to the Trust.
"Property": The underlying property securing a Mortgage Loan.
--------
"Prospectus": The Prudential Securities Secured Financing
----------
Corporation Prospectus dated August 4, 1995.
"Prospectus Supplement": The First Alliance Mortgage Loan Trust 1996-
---------------------
1 Prospectus Supplement dated March 28, 1996 to the Prospectus.
18
<PAGE>
"Purchase Agreement": The Unaffiliated Seller's Agreement, dated as
------------------
of the date hereof, between the Company and the Depositor relating to the sale
of the Mortgage Loans from the Company to the Depositor.
"Qualified Liquidation": The meaning set forth from time to time in
---------------------
the definition thereof at Section 860F(a)(4) of the Code (or any successor
statute thereto) and applicable to the Trust and the Trust Estate.
"Qualified Mortgage": The meaning set forth from time to time in the
------------------
definition thereof at Section 860G(a)(4) of the Code (or any successor statute
thereto) and applicable to the Trust and the Mortgage Loan Groups.
"Qualified Replacement Mortgage": A Mortgage Loan substituted for
------------------------------
another pursuant to Section 3.4 or 3.6 hereof, which (i) bears a fixed rate of
interest if the Mortgage Loan to be substituted for is in Group I or bears a
variable rate of interest if the Mortgage Loan to be substituted for is in Group
II, (ii) has a Coupon Rate at least equal to the Coupon Rate of the Mortgage
Loan being replaced (which, in the case of a Mortgage Loan in Group II, shall
mean a Mortgage Loan having the same interest rate index, a margin over such
index and a maximum interest rate at least equal to those applicable to the
Mortgage Loan being replaced), (iii) is of the same or better property type and
the same or better occupancy status as the replaced Mortgage Loan, (iv) shall be
of the same or better credit quality classification (determined in accordance
with the Originators' credit underwriting guidelines) as the Mortgage Loan being
replaced, (v) shall mature no later than June 1, 2026 for Group I and June 1,
2026 for Group II, (vi) has a Combined Loan-to-Value Ratio as of the Cut-Off
Date, no higher than the Combined Loan-to-Value Ratio of the replaced Mortgage
Loan at such time, (vii) has a Loan Balance as of the related Replacement Cut-
Off Date equal to or less than the Loan Balance of the replaced Mortgage Loan as
of such Replacement Cut-Off Date, (viii) satisfies the criteria set forth from
time to time in the definition thereof at Section 860G(a)(4) of the Code (or any
successor statute thereto) and applicable to the Trust, all as evidenced by an
Officer's Certificate of the Company delivered to the Trustee and the
Certificate Insurer prior to any such substitution, (ix) is of the same lien
status or better lien status and (x) a valid fixed rate Mortgage Loan, if the
Mortgage Loan to be substituted for is in Group I, and is a valid variable rate
Loan, if the Mortgage Loan to be substituted for is in Group II. In the event
that one or more mortgage loans are proposed to be substituted for one or more
mortgage loans, the Certificate Insurer may allow the foregoing tests to be met
on a weighted average basis or other aggregate basis acceptable to the
Certificate Insurer, as evidenced by a written approval delivered to the Trustee
by the Certificate Insurer, except that the requirement of clauses (vi) and
(viii) hereof must be satisfied as to each Qualified Replacement Mortgage.
"Rating Agencies": Moody's and Standard & Poor's or any
---------------
successors thereto.
"Realized Loss": As to any Liquidated Loan, the amount, if any, by
-------------
which the Loan Balance thereof as of the date of liquidation is in excess of Net
Liquidation Proceeds realized thereon.
"Record Date": With respect to each Payment Date, the last Business
-----------
Day of the calendar month immediately preceding the calendar month in which such
Payment Date occurs.
"Reference Banks": Bankers Trust Company, Barclay's Bank PLC, The
---------------
Bank of Tokyo and National Westminster Bank PLC; provided that if any of the
--------
foregoing banks are not suitable to serve as a Reference Bank, then any leading
banks selected by the Trustee which are engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (i) with an established place
of business in London, (ii) not controlling, under the control of or under
common control with the Company or any affiliate thereof, (iii) whose quotations
appear on the Reuters Screen LIBO Page on the relevant Interest Determination
Date and (iv) which have been designated as such by the Trustee.
19
<PAGE>
"Register": The register maintained by the Trustee in accordance with
--------
Section 5.4 hereof, in which the names of the Owners are set forth.
"Registrar": The Trustee, acting in its capacity as Trustee appointed
---------
pursuant to Section 5.4 hereof, or any duly appointed and eligible successor
thereto.
"Registration Statement": The Registration Statement filed by the
----------------------
Depositor with the Securities and Exchange Commission, including all amendments
thereto and including the Prospectus constituting a part thereof.
"Reimbursement Amount": A Group I Reimbursement Amount or a Group
--------------------
II Reimbursement Amount.
"REMIC": A "real estate mortgage investment conduit" within the
-----
meaning of Section 860D of the Code.
"REMIC Provisions": Provisions of the federal income tax law relating
----------------
to real estate mortgage investment conduits, which appear at Sections 860A
through 860G of the Code, and related provisions, and regulations and rulings
promulgated thereunder, as the foregoing may be in effect from time to time.
"Remittance Date": Any date on which the Servicer is required to
---------------
remit moneys on deposit in the Principal and Interest Account to the Trustee,
which shall be the day prior to the related Payment Date , or if such day is not
a Business Day, the next preceding Business Day, commencing one day prior to the
first Payment Date.
"Remittance Period": The period (inclusive) beginning on the first
-----------------
day of the calendar month immediately preceding the month in which a Remittance
Date occurs and ending on the last day of such immediately preceding calendar
month.
"REO Property": A Property acquired by the Servicer or any Sub-
------------
Servicer on behalf of the Trust through foreclosure or deed-in-lieu of
foreclosure in connection with a defaulted Mortgage Loan.
"Replacement Cut-Off Date": With respect to any Qualified Replacement
------------------------
Mortgage, the first day of the calendar month in which such Qualified
Replacement Mortgage is conveyed to the Trust.
"Representation Letter": Letters to, or agreements with, the
---------------------
Depository to effectuate a book entry system with respect to the Class A
Certificates registered in the Register under the nominee name of the
Depository.
"Request for Release": The request for release in the form set
-------------------
forth as Exhibit K hereto.
"Reserve Interest Rate": With respect to any Interest Determination
---------------------
Date, the rate per annum that the Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole multiple of
1/16%) of the one-month U.S. dollar lending rates which New York City banks
selected by the Trustee are quoting on the relevant Interest Determination Date
to the principal London offices of leading banks in the London interbank market
or (ii) in the event that the Trustee can determine no such arithmetic mean, the
lowest one-month U.S. dollar lending rate which New York City banks selected by
the Trustee are quoting on such Interest Determination Date to leading European
banks.
20
<PAGE>
"Residual Net Monthly Excess Cashflow": With respect to any Payment
------------------------------------
Date, the aggregate Net Monthly Excess Cashflow, if any, remaining with respect
to each of the Mortgage Loan Groups after the making of all applications
described in Section 7.5(d)(iii) hereof.
"Responsible Officer": When used with respect to the Trustee, any
-------------------
officer assigned to the corporate trust group (or any successor thereto),
including any vice president, assistant vice president, trust officer, any
assistant secretary, any trust officer or any other officer of the Trustee
customarily performing functions similar to those performed by any of the above
designated officers and having direct responsibility for the administration of
this Agreement.
"Schedules of Mortgage Loans": The Schedules of Mortgage Loans,
---------------------------
separated by Mortgage Loan Group, with respect to the Mortgage Loans listing
each Mortgage Loan in the related Group to be conveyed on the Startup Day. Such
Schedules of Mortgage Loans shall identify each Mortgage Loan by the Servicer's
loan number and address (including the state) of the Property and shall set
forth as to each Mortgage Loan the lien status, the Combined Loan-to-Value
Ratio, the Loan Balance as of the Cut-Off Date, the Coupon Rate thereof (or,
with respect to Mortgage Loans in Group II, the index, the margin) the current
scheduled monthly payment of principal and interest and the maturity of the
related Note, the property type, occupancy status, Appraised Value and the
Originator of the Mortgage Loan, all as delivered to the Trustee in physical and
computer readable form and delivered to the Certificate Insurer in physical
form.
"Second Mortgage Loan": A Mortgage Loan which constitutes a second
--------------------
priority mortgage lien with respect to the related Property.
"Securities Act": The Securities Act of 1933, as amended.
--------------
"Senior Lien": With respect to any Second Mortgage Loan, the mortgage
-----------
loan relating to the corresponding Property having a first priority lien.
"Servicer": First Alliance Mortgage Company, a California
--------
corporation, and its permitted successors and assigns.
"Servicer Affiliate": A Person (i) controlling, controlled by or
------------------
under common control with the Servicer and (ii) which is qualified to service
residential mortgage loans.
"Servicing Advance": As defined in Section 8.9(c) and Section
-----------------
8.13 hereof.
"Servicing Certificate": A certificate completed by and executed by
---------------------
an Authorized Officer of the Trustee as attached hereto in the form of Exhibit
J.
"Six Month LIBOR Loans": Mortgage Loans whose interest rates adjust
---------------------
semi-annually based on the London interbank offered rate for six-month United
States Dollar deposits in the London Market and as published in The Wall Street
---------------
Journal.
- -------
"Specified Subordinated Amount": As applicable, the Group I Specified
-----------------------------
Subordinated Amount or the Group II Specified Subordinated Amount.
"Standard & Poor's": Standard & Poor's, a Division of The McGraw-
-----------------
Hill Companies.
"Startup Day": March 29, 1996.
-----------
"Subordinated Amount": As applicable, the Group I Subordinated
-------------------
Amount or the Group II Subordinated Amount.
21
<PAGE>
"Subordination Deficiency Amount": With respect to any Mortgage Loan
-------------------------------
Group and Payment Date, the difference, if any, between (i) the Specified
Subordinated Amount applicable to such Mortgage Loan Group and Payment Date and
(ii) the Subordinated Amount applicable to such Mortgage Loan Group and Payment
Date prior to taking into account the payment of any related Subordination
Increase Amounts on such Payment Date.
"Subordination Deficit": As applicable, the Group I Subordination
---------------------
Deficit or the Group II Subordination Deficit.
"Subordination Increase Amount": With respect to any Mortgage Loan
-----------------------------
Group and Payment Date, the lesser of (i) the Subordination Deficiency Amount as
of such Payment Date (after taking into account the payment of the related Class
A Distribution Amount on such Payment Date (except for any Subordination
Increase Amount)) and (ii) the aggregate amount of Net Monthly Excess Cashflow
to be allocated to such Mortgage Loan Group pursuant to Sections 7.5(d)(iii)(A)
and 7.5(d)(iii)(B) on such Payment Date.
"Subordination Reduction Amount": With respect to any Mortgage Loan
------------------------------
Group and Payment Date, an amount equal to the lesser of (x) the Excess
Subordinated Amount for such Mortgage Loan Group and Payment Date and (y) the
Principal Remittance Amount with respect to such Mortgage Loan Group for the
related Remittance Period.
"Sub-Servicer": Any Person with whom the Servicer has entered into a
------------
Sub-Servicing Agreement and who satisfies any requirements set forth in Section
8.3 hereof in respect of the qualification of a Sub-Servicer.
"Sub-Servicing Agreement": The written contract between the Servicer
-----------------------
and any Sub-Servicer relating to servicing and/or administration of certain
Mortgage Loans as permitted by Section 8.3.
"Substitution Amount": In connection with the delivery of any
-------------------
Qualified Replacement Mortgage, if the outstanding principal amount of such
Qualified Replacement Mortgage as of the applicable Replacement Cut-Off Date is
less than the Loan Balance of the Mortgage Loan being replaced as of such
Replacement Cut-Off Date, an amount equal to such difference together with
accrued and unpaid interest on such amount calculated at the Coupon Rate net of
the Servicing Fee of the Mortgage Loan being replaced.
"Tax Matters Person": The Tax Matters Person appointed pursuant
------------------
to Section 11.17 hereof.
"Termination Notice": As defined in Section 9.3(b) hereof.
------------------
"Termination Price": As defined in Section 9.2(a) hereof.
-----------------
"Total Available Funds": The sum of the Group I Monthly
---------------------
Remittance Amount and the Group II Monthly Remittance Amount.
"Total Monthly Excess Cashflow": As defined in Section 7.5(d)(ii)
-----------------------------
hereof.
"Total Monthly Excess Spread": As applicable, the Group I Total
---------------------------
Monthly Excess Spread or the Group II Total Monthly Excess Spread.
"Transaction Documents": Collectively this Agreement, the Insurance
---------------------
Agreement, the Underwriting Agreement, the Master Transfer Agreements, any Sub-
Servicing Agreement, the Indemnification Agreement, the Purchase Agreement, the
Registration Statement and the Certificates.
22
<PAGE>
"Trust": First Alliance Mortgage Loan Trust 1996-1, the trust
-----
created under this Agreement.
"Trust Estate": Collectively, all money, instruments and other
------------
property, to the extent such money, instruments and other property are subject
or intended to be held in trust, and in the subtrusts, for the benefit of the
Owners, including all proceeds thereof, including, without limitation, (i) the
Mortgage Loans, (ii) such amounts, including Eligible Investments, as from time
to time may be held in all Accounts (except as otherwise provided herein), (iii)
any Property, the ownership of which has been effected on behalf of the Trust as
a result of foreclosure or acceptance by the Servicer of a deed in lieu of
foreclosure and that has not been withdrawn from the Trust, (iv) any Insurance
Policies relating to the Mortgage Loans and any rights of the Company under such
Insurance Policies, (v) Net Liquidation Proceeds with respect to any Liquidated
Loan, (vi) the Certificate Insurance Policies, (vii) the rights of the Depositor
against the Company under the Purchase Agreement and (viii) the rights of the
Company against any Originator pursuant to the related Master Transfer Agreement
and the proceeds of any of the above.
"Trustee": Bankers Trust Company of California, N.A. located on the
-------
date of execution of this Agreement at 3 Park Plaza, 16th Floor, Irvine,
California 92714, not in its individual capacity but solely as Trustee under
this Agreement, and any successor hereunder.
"Trustee Fee": The fee payable monthly to the Trustee equal to the
-----------
sum of the Group I Trustee Fee and the Group II Trustee Fee.
"Underwriter": Prudential Securities Incorporated.
-----------
"Underwriting Agreement": The Underwriting Agreement dated as of
----------------------
March 28, 1996 between the Underwriter and the Depositor.
Section 1.2. Use of Words and Phrases. "Herein", "hereby",
------------------------
"hereunder", "hereof", "hereinbefore", "hereinafter" and other equivalent words
refer to this Agreement as a whole and not solely to the particular section of
this Agreement in which any such word is used. The definitions set forth in
Section 1.1 hereof include both the singular and the plural. Whenever used in
this Agreement, any pronoun shall be deemed to include both singular and plural
and to cover all genders.
Section 1.3. Captions; Table of Contents. The captions or headings
---------------------------
in this Agreement and the Table of Contents are for convenience only and in no
way define, limit or describe the scope and intent of any provisions of this
Agreement.
Section 1.4. Opinions. Each opinion with respect to the validity,
--------
binding nature and enforceability of documents or Certificates may be qualified
to the extent that the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity (whether
considered in a proceeding or action in equity or at law) and may state that no
opinion is expressed on the availability of the remedy of specific enforcement,
injunctive relief or any other equitable remedy. Any opinion required to be
furnished by any Person hereunder must be delivered by counsel upon whose
opinion the addressee of such opinion may reasonably rely, and such opinion may
state that it is given in reasonable reliance upon an opinion of another, a copy
of which must be attached, concerning the laws of a foreign jurisdiction.
23
<PAGE>
ARTICLE II
ESTABLISHMENT AND ORGANIZATION OF THE TRUST
Section 2.1. Establishment of the Trust. The parties hereto do
--------------------------
hereby create and establish, pursuant to the laws of the State of New York and
this Agreement, the Trust, which, for convenience, shall be known as "First
Alliance Mortgage Loan Trust 1996-1".
Section 2.2. Office. The office of the Trust shall be in care of the
------
Trustee, at 3 Park Plaza, 16th Floor, Irvine, California 92714 or at such other
address as the Trustee may designate by notice to the Company, the Depositor,
the Servicer, the Owners and the Certificate Insurer.
Section 2.3. Purposes and Powers. The purpose of the Trust is to
-------------------
engage in the following activities and only such activities: (i) the issuance
of the Certificates and the acquiring, owning and holding of Mortgage Loans and
the Trust Estate in connection therewith; (ii) activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith, including the investment of moneys in accordance with this
Agreement; and (iii) such other activities as may be required in connection with
conservation of the Trust Estate and distributions to the Owners; provided,
--------
however, that nothing contained herein shall permit the Trustee to take any
- -------
action which would result in the loss of REMIC status for the Trust.
Section 2.4. Appointment of the Trustee; Declaration of Trust. The
------------------------------------------------
Company hereby appoints the Trustee as trustee of the Trust effective as of the
Startup Day, to have all the rights, powers and duties set forth herein. The
Trustee hereby acknowledges and accepts such appointment, represents and
warrants its eligibility as of the Startup Day to serve as Trustee pursuant to
Section 10.8 hereof and declares that it will hold the Trust Estate in trust
upon and subject to the conditions set forth herein for the benefit of the
Owners.
Section 2.5. Expenses of Trustee. The expenses of the Trust,
-------------------
including (i) any portion of the Trustee Fee not paid pursuant to Section
7.5(d)(i) hereof, (ii) any reasonable expenses of the Trustee, and (iii) any
other expenses of the Trust that have been reviewed by the Servicer, which
review shall not be required in connection with the enforcement of a remedy by
the Trustee resulting from a default under this Agreement, shall be paid
directly by the Servicer. The Servicer shall pay directly the reasonable fees
and expenses of counsel to the Trustee. The reasonable fees and expenses of the
Trustee's counsel in connection with the review and delivery of this Agreement
and related documentation shall be paid by the Servicer on the Startup Day.
Section 2.6. Ownership of the Trust. On the Startup Day the
----------------------
ownership interests in the Trust and the subtrusts shall be transferred as set
forth in Section 4.2 hereof, such transfer to be evidenced by sale of the
Certificates as described therein. Thereafter, transfer of any ownership
interest shall be governed by Sections 5.4 and 5.8 hereof.
Section 2.7. Situs of the Trust. It is the intention of the parties
------------------
hereto that the Trust constitute a trust under the laws of the State of New
York. The Trust will be created and administered in, the State of New York.
The Trust's only office will be at the office of the Trustee as set forth in
Section 2.2 hereof.
Section 2.8. Miscellaneous REMIC Provisions. (a) The Trust shall
------------------------------
elect to be treated as a REMIC under Section 860D of the Code, as described in
Section 11.15. Any inconsistencies or ambiguities in this Agreement or in the
administration of the Trust shall be resolved in a manner that preserves the
validity of the election of the Trust to be treated as a REMIC.
(b) The Class A Certificates are hereby designated as "regular
interests" in the
24
<PAGE>
REMIC and the Class R Certificates are hereby designated as
the "residual interest" in the REMIC, as defined in Section 860G(a) of the Code.
(c) The Startup Day is hereby designated as the "startup day" of the
REMIC within the meaning of Section 860G(a)(9) of the Code.
(d) The final scheduled Payment Date for any Class of Certificates is
hereby set to be the Payment Date succeeding by one year the latest maturity
date of any Mortgage Loan in the related Mortgage Loan Group, as follows:
Class Final Scheduled Payment Date
----- ----------------------------
Class A-1 Certificates June 20, 2027
Class A-2 Certificates June 20, 2027
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF THE DEPOSITOR, THE COMPANY AND THE SERVICER;
COVENANT OF COMPANY TO CONVEY MORTGAGE LOANS
Section 3.1A. Representations and Warranties of the Depositor. The
-----------------------------------------------
Depositor hereby represents, warrants and covenants to the Company, the Trustee,
the Certificate Insurer and to the Owners as of the Startup Day that:
(a) The Depositor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and is in good
standing as a foreign corporation in each jurisdiction in which the nature
of its business, or the properties owned or leased by it, make such
qualification necessary. The Depositor has all requisite corporate power
and authority to own and operate its properties, to carry out its business
as presently conducted and as proposed to be conducted and to enter into
and discharge its obligations under this Agreement and the other Operative
Documents to which it is a party.
(b) The execution and delivery of this Agreement and the other
Operative Documents to which the Depositor is a party by the Depositor and
its performance and compliance with the terms of this Agreement and of the
other Operative Documents to which it is a party have been duly authorized
by all necessary corporate action on the part of the Depositor and will not
violate the Depositor's Articles of Incorporation or Bylaws or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or result in the breach of, any material
contract, agreement or other instrument to which the Depositor is a party
or by which the Depositor is bound, or violate any statute or any order,
rule or regulation of any court, governmental agency or body or other
tribunal having jurisdiction over the Depositor or any of its properties.
(c) This Agreement and the other Operative Documents to which the
Depositor is a party, assuming due authorization, execution and delivery by
the other parties hereto and thereto, each constitutes a valid, legal and
binding obligation of the Depositor, enforceable against it in accordance
with the terms hereof and thereof, except as the enforcement hereof and
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally and by general principles of equity (whether considered in
a proceeding or action in equity or at law).
(d) The Depositor is not in default with respect to any order or
decree of any court or any order, regulation or demand of any federal,
state, municipal or governmental agency,
25
<PAGE>
which might have consequences that would materially and adversely affect
the condition (financial or other) or operations of the Depositor or its
properties or might have consequences that would materially and adversely
affect its performance hereunder or under the other Operative Documents to
which it is a party.
(e) No action, suit, proceeding or investigation is pending or, to the
best of the Depositor's knowledge, threatened against the Depositor which,
individually or in the aggregate, might have consequences that would
prohibit the Depositor from entering into this Agreement or any other
Operative Document to which it is a party or that would materially and
adversely affect the condition (financial or otherwise) or operations of
the Depositor or its properties or might have consequences that would
materially and adversely affect the validity or enforceability of Mortgage
Loans or the Depositor's performance hereunder or under the other Operative
Documents to which it is a party.
It is understood and agreed that the representations and warranties
set forth in this Section 3.1A shall survive delivery of the Mortgage Loans to
the Trustee.
Section 3.1B. Representations and Warranties of the Company. The
---------------------------------------------
Company hereby represents, warrants and covenants to the Trustee, the Depositor
the Certificate Insurer and to the Owners as of the Startup Day that:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and is in good
standing as a foreign corporation in each jurisdiction in which the nature
of its business, or the properties owned or leased by it, make such
qualification necessary. The Company has all requisite corporate power and
authority to own and operate its properties, to carry out its business as
presently conducted and as proposed to be conducted and to enter into and
discharge its obligations under this Agreement and the other Operative
Documents to which it is a party.
(b) The execution and delivery of this Agreement and the other
Operative Documents to which the Company is a party by the Company and its
performance and compliance with the terms of this Agreement and of the
other Operative Documents to which it is a party have been duly authorized
by all necessary corporate action on the part of the Company and will not
violate the Company's Articles of Incorporation or Bylaws or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or result in the breach of, any material
contract, agreement or other instrument to which the Company is a party or
by which the Company is bound, or violate any statute or any order, rule or
regulation of any court, governmental agency or body or other tribunal
having jurisdiction over the Company or any of its properties.
(c) This Agreement and the other Operative Documents to which the
Company is a party, assuming due authorization, execution and delivery by
the other parties hereto and thereto, each constitutes a valid, legal and
binding obligation of the Company, enforceable against it in accordance
with the terms hereof and thereof, except as the enforcement hereof and
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally and by general principles of equity (whether considered in
a proceeding or action in equity or at law).
(d) The Company is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state,
municipal or governmental agency (other than any such order, regulation or
demand relating to filings required to be made pursuant to the Securities
Act and the Securities Exchange Act of 1934, as amended), which might have
consequences that would materially and adversely affect the condition
(financial or other) or operations of the Company or its properties or
might have consequences that would materially and adversely affect its
performance hereunder or under the other Operative Documents to which it is
a party.
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<PAGE>
(e) No action, suit, proceeding or investigation is pending or, to the best
of the Company's knowledge, threatened against the Company which, individually
or in the aggregate, might have consequences that would prohibit the Company
from entering into this Agreement or any other Operative Document to which it is
a party or that would materially and adversely affect the condition (financial
or otherwise) or operations of the Company or its properties or might have
consequences that would materially and adversely affect the validity or
enforceability of Mortgage Loans or the Company's performance hereunder or under
the other Operative Documents to which it is a party.
(f) No certificate of an officer, statement furnished in writing or report
delivered pursuant to the terms hereof by the Company contains any untrue
statement of a material fact or omits to state any material fact necessary to
make the certificate, statement or report not misleading.
(g) The statements contained in the Registration Statement which describe
the Company or matters or activities for which the Company is responsible in
accordance with the Operative Documents or which are attributed to the Company
therein are true and correct in all material respects, and the Registration
Statement does not contain any untrue statement of a material fact with respect
to the Company or omit to state a material fact required to be stated therein or
necessary in order to make the statements contained therein with respect to the
Company not misleading. With respect to matters other than those referred to in
the immediately preceding sentence, to the best of the Company's knowledge and
belief, the Registration Statement does not contain any untrue statement of a
material fact required to be stated therein or omit to state any material fact
required to be stated therein or necessary to make the statements contained
therein not misleading.
(h) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required to be
taken, given or obtained, as the case may be, by or from any federal, state or
other governmental authority or agency (other than any such actions, approvals,
etc. under any state securities laws, real estate syndication or "Blue Sky"
statutes, as to which the Company makes no such representation or warranty),
that are necessary or advisable in connection with the purchase and sale of the
Certificates and the execution and delivery by the Company of the Operative
Documents to which it is a party, have been duly taken, given or obtained, as
the case may be, are in full force and effect on the date hereof, are not
subject to any pending proceedings or appeals (administrative, judicial or
otherwise) and either the time within which any appeal therefrom may be taken or
review thereof may be obtained has expired or no review thereof may be obtained
or appeal therefrom taken, and are adequate to authorize the consummation of the
transactions contemplated by this Agreement and the other Operative Documents on
the part of the Company and the performance by the Company of its obligations
under this Agreement and such of the other Operative Documents to which it is a
party.
(i) The transactions contemplated by this Agreement are in the ordinary
course of business of the Company.
(j) The Company received fair consideration and reasonably equivalent
value in exchange for the sale of the interests in the Mortgage Loans evidenced
by the Certificates.
(k) The Company did not sell any interest in any Mortgage Loan evidenced
by the Certificates with any intent to hinder, delay or defraud any of its
respective creditors.
(l) The Company is solvent and the Company will not be rendered insolvent
as a result of the sale of the Mortgage Loans to the Trust or the sale of the
Certificates.
(m) On the Startup Day, the Trustee will have good title on behalf of the
Trust to each
27
<PAGE>
Mortgage Loan and such other items comprising the corpus of the Trust
Estate free and clear of any lien.
(n) There has been no material adverse change in any information
submitted by the Company in writing to the Certificate Insurer.
(o) To the best knowledge of the Company, no event has occurred which
would allow any purchaser of the Class A Certificates not to be required to
purchase the Class A Certificates on the Startup Day.
(p) To the best knowledge of the Company, no document submitted by or
on behalf of the Company to the Certificate Insurer contains any untrue or
misleading statement of a material fact or fails to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading.
(q) To the best knowledge of the Company, no material adverse change
affecting any security for the Class A Certificates has occurred prior to
delivery of and payment for the Class A Certificates.
(r) The Company is not in default under any agreement involving
financial obligations or on any outstanding obligation which would
materially adversely impact the financial condition or operations of the
Company or legal documents associated with the transaction contemplated in
this Agreement.
It is understood and agreed that the representations and warranties
set forth in this Section 3.1B shall survive delivery of the Mortgage Loans to
the Trustee.
Section 3.2. Representations and Warranties of the Servicer. The
----------------------------------------------
Servicer hereby represents, warrants and covenants to the Trustee, the
Depositor, the Certificate Insurer and to the Owners as of the Startup Day that:
(a) The Servicer is a corporation duly organized, validly existing and
in good standing under the laws of the State of California. The Servicer is
in compliance with the laws of each state in which any Property is located
to the extent necessary to enable it to perform its obligations hereunder
and is in good standing as a foreign corporation in each jurisdiction in
which the nature of its business, or the properties owned or leased by it,
make such qualification necessary. The Servicer has all requisite corporate
power and authority to own and operate its properties, to carry out its
business as presently conducted and as proposed to be conducted and to
enter into and discharge its obligations under this Agreement and the other
Operative Documents to which it is a party. The Servicer has equity of at
least $20,000,000, as determined in accordance with generally accepted
accounting principles.
(b) The execution and delivery of this Agreement by the Servicer and
its performance and compliance with the terms of this Agreement and the
other Operative Documents to which it is a party have been duly authorized
by all necessary corporate action on the part of the Servicer and will not
violate the Servicer's Articles of Incorporation or Bylaws or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or result in the breach of, any material
contract, agreement or other instrument to which the Servicer is a party or
by which the Servicer is bound or violate any statute or any order, rule or
regulation of any court, governmental agency or body or other tribunal
having jurisdiction over the Servicer or any of its properties.
(c) This Agreement and the other Operative Documents to which the
Servicer is a party, assuming due authorization, execution and delivery by
the other parties hereto and thereto, each constitutes a valid, legal and
binding obligation of the Servicer, enforceable against it in accordance
with the terms hereof, except as the enforcement hereof may be limited
28
<PAGE>
by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally and by general principles of
equity (whether considered in a proceeding or action in equity or at law).
(d) The Servicer is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state, municipal
or governmental agency (other than any such order, regulation or demand relating
to filings required to be made pursuant to the Securities Act and the Securities
Exchange Act of 1934, as amended), which might have consequences that would
materially and adversely affect the condition (financial or other) or operations
of the Servicer or its properties or might have consequences that would
materially and adversely affect its performance hereunder or under the other
Operative Documents to which the Servicer is a party.
(e) No action, suit, proceeding or investigation is pending or, to the
best of the Servicer's knowledge, threatened against the Servicer which,
individually or in the aggregate, might have consequences that would prohibit
its entering into this Agreement or any other Operative Document to which it is
a party or that would materially and adversely affect the condition (financial
or otherwise) or operations of the Servicer or its properties or might have
consequences that would materially and adversely affect the validity or the
enforceability of the Mortgage Loans or the Servicer's performance hereunder or
under the other Operative Documents to which the Servicer is a party.
(f) No certificate of an officer, statement furnished in writing or
report delivered pursuant to the terms hereof by the Servicer contains any
untrue statement of a material fact or omits to state any material fact
necessary to make the certificate, statement or report not misleading.
(g) The statements contained in the Prospectus Supplement which
describe the Servicer or matters or activities for which the Servicer is
responsible in accordance with the Operative Documents or which are attributed
to the Servicer therein are true and correct in all material respects, and the
Prospectus Supplement does not contain any untrue statement of a material fact
with respect to the Servicer or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein with
respect to the Servicer not misleading. With respect to matters other than
those referred to in the immediately preceding sentence, to the best of the
Servicer's knowledge and belief, the Prospectus Supplement does not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements contained therein not
misleading.
(h) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required to be
taken, given or obtained, as the case may be, by or from any federal, state or
other governmental authority or agency (other than any such actions, approvals,
etc. under any state securities laws, real estate syndication or "Blue Sky"
statutes, as to which the Servicer makes no such representation or warranty),
that are necessary or advisable in connection with the execution and delivery by
the Servicer of the Operative Documents to which it is a party, have been duly
taken, given or obtained, as the case may be, are in full force and effect on
the date hereof, are not subject to any pending proceedings or appeals
(administrative, judicial or otherwise) and either the time within which any
appeal therefrom may be taken or review thereof may be obtained has expired or
no review thereof may be obtained or appeal therefrom taken, and are adequate to
authorize the consummation of the transactions contemplated by this Agreement
and the other Operative Documents on the part of the Servicer and the
performance by the Servicer of its obligations under this Agreement and such of
the other Operative Documents to which it is a party.
(i) The collection practices used by the Servicer with respect to the
Mortgage Loans directly serviced by it have been, and are in all material
respects, legal, proper, prudent
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<PAGE>
and customary in the mortgage loan servicing business.
(j) The transactions contemplated by this Agreement are in the
ordinary course of business of the Servicer.
(k) There are no Sub-Servicers as of the date hereof.
(l) The Servicer covenants that it will terminate any Sub-Servicer
within ninety (90) days after being directed by the Certificate Insurer to
do so.
(m) There has been no material adverse change in any information
submitted by the Servicer in writing to the Certificate Insurer.
(n) To the best knowledge of the Servicer, no event has occurred which
would allow any purchaser of the Class A Certificates not to be required to
purchase the Class A Certificates on the Startup Day.
(o) To the best knowledge of the Servicer, no document submitted by or
on behalf of the Servicer to the Certificate Insurer contains any untrue or
misleading statement of a material fact or fails to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading.
(p) To the best knowledge of the Servicer, no material adverse change
affecting any security for the Class A Certificates has occurred prior to
delivery of and payment for the Class A Certificates.
(q) The Servicer is not in default under any agreement involving
financial obligations or on any outstanding obligation which would
materially and adversely impact the financial condition or operations of
the Servicer or legal documents associated with the transaction
contemplated in this Agreement.
It is understood and agreed that the representations and warranties
set forth in this Section 3.2 shall survive delivery of the Mortgage Loans to
the Trustee.
Upon discovery by any of the Originators, the Servicer, the Company,
the Depositor, any Sub-Servicer, the Certificate Insurer or the Trustee of a
breach of any of the representations and warranties set forth in this Section
3.2 or in Section 3.1 hereof which materially and adversely affects the
interests of the Owners or of the Certificate Insurer, without regard to any
limitation set forth in such representation or warranty concerning the knowledge
of the party making such representation or warranty as to the facts stated
therein, the party discovering such breach shall give prompt written notice to
the other parties. Within 30 days of its discovery or its receipt of notice of
breach, the breaching party shall cure such breach in all material respects and,
if such breaching party is the Servicer and upon the Servicer's continued
failure to cure such breach, the Servicer thereafter be removed by the Trustee
or the Certificate Insurer pursuant to Section 8.20 hereof; provided, however,
-------- -------
that if the Servicer can demonstrate to the reasonable satisfaction of the
Certificate Insurer that it is diligently pursuing remedial action, then the
cure period may be extended with the written approval of the Certificate
Insurer.
30
<PAGE>
Section 3.3. Representations and Warranties with Respect to the
--------------------------------------------------
Mortgage Loans.
- --------------
(a) Pursuant to the Purchase Agreement, the Company has made various
representations and warranties to the Depositor as to the Mortgage Loans on
which the Certificate Insurer relies in issuing the Certificate Insurance
Policies. The Depositor does hereby irrevocably transfer, assign, set over and
otherwise convey to the Trustee its right to exercise the remedies created by
Sections 2.05 and 3.05 of the Purchase Agreement for breaches of the
representations, warranties, covenants and agreements of the Company contained
in Sections 2.04, 2.05, 3.01 and 3.02 of the Purchase Agreement. Further, the
Depositor represents and warrants that it has taken no action to impair the
title of the Mortgage Loans.
(b) The Company hereby assigns to the Depositor and the Depositor
immediately assigns to the Trustee for the benefit of the Owners of the
Certificates and the Certificate Insurer all of its right, title and interest in
respect of each Master Transfer Agreement applicable to the related Mortgage
Loan. Insofar as such Master Transfer Agreement provides for representations
and warranties made by the related Originator or by the Company in respect of a
Mortgage Loan and any remedies provided thereunder for any breach of such
representations and warranties, such right, title and interest may be enforced
by the Servicer or by the Trustee on behalf of the Owners or by the Certificate
Insurer. Upon the discovery by the Company, the Servicer, the Certificate
Insurer or the Trustee of a breach of any of the representations and warranties
made in a Master Transfer Agreement in respect of any Mortgage Loan, without
regard to any limitation set forth in such representation or warranty concerning
the knowledge of the Company or any related Originator as to the facts stated
therein, which materially and adversely affects the interests of the Owners or
of the Certificate Insurer in such Mortgage Loan the party discovering such
breach shall give prompt written notice to the other parties. The Servicer
shall promptly notify the related Originator of such breach and request that
such Originator cure such breach or take the actions described in Section 3.4(b)
hereof within the time periods required thereby, and if such Originator does not
cure such breach in all material respects, the Company shall cure such breach or
take such actions. Except as set forth in Section 3.4, the obligations of the
Company or Servicer, as the case may be, shall be limited to the remedies for
cure set forth in Section 3.4 with respect to any Mortgage Loan as to which such
a breach has occurred and is continuing; the remedies set forth in Section 3.4
shall constitute the sole remedy with respect to such breach available to the
Owners, the Trustee and the Certificate Insurer.
The Company acknowledges that a breach of any representation or
warranty (x) relating to marketability of title sufficient to transfer
unencumbered title to a Mortgage Loan and (y) relating to enforceability of the
Mortgage Loan against the related Mortgagor or Property is a priori the breach
- ------
of a representation or warranty which "materially and adversely affects the
interests of the Owners or of the Certificate Insurer" in such Mortgage Loan.
Section 3.4. Covenants of the Company to Take Certain Actions with
-----------------------------------------------------
Respect to the Mortgage Loans In Certain Situations. (a) With the provisos and
- ---------------------------------------------------
limitations as to remedies set forth in this Section 3.4, upon the discovery by
any Originator, the Depositor, the Company, the Servicer, the Certificate
Insurer, any Sub-Servicer or the Trustee that the representations and warranties
set forth in the Purchase Agreement and assigned by the Depositor to the Trust
in Section 3.3(a) of this Agreement or in the Master Transfer Agreement and
assigned to the Trust in Section 3.3(b) of this Agreement were untrue in any
material respect as of the Startup Day and that such breach of the
representations and warranties materially and adversely affects the interests of
the Owners or of the Certificate Insurer, the party discovering such breach
shall give prompt written notice to the other parties.
(b) Upon the earliest to occur of the Company's discovery, its receipt
of notice of breach from any one of the other parties hereto or from the
Certificate Insurer or such time as a breach of any representation and warranty
materially and adversely affects the interests of the Owners or of the
Certificate Insurer as set forth above, the Company hereby covenants and
warrants that it shall promptly cure such breach in all material respects or it
shall (or shall cause an affiliate of the Company
31
<PAGE>
to or an Originator to), subject to the further requirements of this paragraph,
on the second Remittance Date next succeeding such discovery, receipt of notice
or such other time (i) substitute in lieu of each Mortgage Loan in the related
Mortgage Loan Group which has given rise to the requirement for action by the
Company a Qualified Replacement Mortgage and deliver the Substitution Amount
applicable thereto, together with the aggregate amount of all Delinquency
Advances and Servicing Advances theretofore made with respect to such Mortgage
Loan, to the Servicer for deposit in the Principal and Interest Account or (ii)
purchase such Mortgage Loan from the Trust at a purchase price equal to the Loan
Purchase Price thereof, which purchase price shall be delivered to the Servicer
for deposit in the Principal and Interest Account. In connection with any such
proposed purchase or substitution, the Company, at its expense, shall cause to
be delivered to the Trustee and to the Certificate Insurer an opinion of counsel
experienced in federal income tax matters stating whether or not such a proposed
purchase or substitution would constitute a Prohibited Transaction for the Trust
or would jeopardize the status of the Trust as a REMIC, and the Company shall
only be required to take either such action to the extent such action would not
constitute a Prohibited Transaction for the Trust or would not jeopardize the
status of the Trust as a REMIC. Any required purchase or substitution, if
delayed by the absence of such opinion shall nonetheless occur upon the earlier
of (i) the occurrence of a default or imminent default with respect to the
Mortgage Loan or (ii) the delivery of such opinion. It is understood and agreed
that the obligation of the Company to cure the defect, or substitute for or
purchase any Mortgage Loan as to which a representation or warranty is untrue in
any material respect and has not been remedied shall constitute the sole remedy
available to the Owners, the Trustee and the Certificate Insurer.
(c) In the event that any Qualified Replacement Mortgage is delivered
by an Originator or by the Company to the Trust pursuant to this Section 3.4 or
Section 3.6 hereof, the related Originator and the Company shall be obligated to
take the actions described in Section 3.4(b) with respect to such Qualified
Replacement Mortgage upon the discovery by any of the Owners, the Company, the
Servicer, the Certificate Insurer, any Sub-Servicer or the Trustee that any of
the representations and warranties set forth in the related Master Transfer
Agreement or in Section 3.3 above are untrue in any material respect on the date
such Qualified Replacement Mortgage is conveyed to the Trust such that the
interests of the Owners or the Certificate Insurer in the related Qualified
Replacement Mortgage are materially and adversely affected; provided, however,
-------- -------
that for the purposes of this subsection (c) the representations and warranties
in the related Master Transfer Agreement or as set forth in Section 3.3 above
referring to items "as of the Cut-Off Date" or "as of the Startup Day" shall be
deemed to refer to such items as of the date such Qualified Replacement Mortgage
is conveyed to the Trust.
(d) It is understood and agreed that the covenants set forth in this
Section 3.4 shall survive delivery of the respective Mortgage Loans (including
Qualified Replacement Mortgage Loans) to the Trustee.
(e) The Trustee shall have no duty to conduct any affirmative
investigation other than as specifically set forth in this Agreement as to the
occurrence of any condition requiring the repurchase or substitution of any
Mortgage Loan pursuant to this section or the eligibility of any Mortgage Loan
for purposes of this Agreement.
Section 3.5. Conveyance of the Mortgage Loans. (a) The Company,
--------------------------------
concurrently with the execution and delivery hereof, hereby transfers, assigns,
sets over and otherwise conveys without recourse, to the Depositor, and the
Depositor, concurrently with such transfer, hereby transfers, assigns, sets over
and otherwise conveys without recourse, to the Trustee for the benefit of the
Owners of the Certificates, all right, title and interest of the Company and the
Depositor, as the case may be, in and to each Mortgage Loan listed on the
Schedules of Mortgage Loans delivered by the Company and the Depositor, as the
case may be, on the Startup Day, all right, title and interest in and to
principal and interest due on each such Initial Mortgage Loan after the Cut-Off
Date (other than payments of principal and interest due on or before the Cut-Off
Date) and all its right, title and interest in and to all Insurance Policies;
provided, however, that the Company reserves and retains all its right,
- -------- -------
32
<PAGE>
title and interest in and to principal (including Prepayments) collected and
principal and interest due on each Mortgage Loan on or prior to the Cut-Off
Date. The transfer by the Company of the Mortgage Loans set forth on the
Schedules of Mortgage Loans to the Depositor and by the Depositor to the Trustee
is absolute and is intended by the Owners and all parties hereto to be treated
as a sale by the Company and the Depositor, as the case may be.
It is intended that the sale, transfer, assignment and conveyance
herein contemplated constitute a sale of the Mortgage Loans conveying good title
thereto free and clear of any liens and encumbrances from the Company to the
Depositor and by the Depositor to the Trust and that the Mortgage Loans not be
part of either the Company's or the Depositor's estate in the event of an
insolvency. In the event that any such conveyance is deemed to be a loan, the
parties intend that the Company shall be deemed to have granted to the Depositor
and the Depositor shall be deemed to have granted to the Trustee a security
interest of first priority in all of the Company's and the Depositor's right,
title and interest in the Mortgage, Note and the File, and that this Agreement
shall constitute a security agreement under applicable law.
In connection with the sale, transfer, assignment, and conveyance from
the Company to the Depositor, the Company has filed, in the appropriate office
or offices in the States of California and New York, a UCC-1 financing statement
executed by the Company as debtor, naming the Depositor as secured party and
listing the Mortgage Loans and the other property described above as collateral.
The characterization of the Company as a debtor and the Depositor as the secured
party in such financing statements is solely for protective purposes and shall
in no way be construed as being contrary to the intent of the parties that this
transaction be treated as a sale of the Depositor's entire right, title and
interest in the Mortgage Loans and the File to the Trust. In connection with
such filing, the Depositor agrees that it shall cause to be filed all necessary
continuation statements thereof and to take or cause to be taken such actions
and execute such documents as are necessary to perfect and protect the Trustee's
and the Owner's interests in the Mortgage Loans and the File.
In connection with the sale, transfer, assignment, and conveyance, from the
Depositor to the Trustee, the Depositor has filed, in the appropriate office or
offices in the States of Delaware and New York, a UCC-1 financing statement
executed by the Depositor as debtor, naming the Trustee as secured party and
listing the Mortgage Loans and the other property described above as collateral.
The characterization of the Depositor as a debtor and the Trustee as the secured
party in such financing statements is solely for protective purposes and shall
in no way be construed as being contrary to the intent of the parties that this
transaction be treated as a sale of the Depositor's entire right, title and
interest in the Mortgage Loans and the File to the Trust. In connection with
such filing, the Depositor agrees that it shall cause to be filed all necessary
continuation statements thereof and to take or cause to be taken such actions
and execute such documents as are necessary to perfect and protect the Trustee's
and the Owner's interests in the Mortgage Loans and the File.
(b) In connection with the transfer and assignment of the Mortgage
Loans, the Company agrees to:
(a) cause to be delivered, on or prior to the Startup Day (except
as otherwise stated below) without recourse to the Trustee on the Startup
Day with respect to each Mortgage Loan listed on the Schedule of Mortgage
Loans:
(a) the original Notes or certified copies thereof, endorsed
without recourse by the related Originator, "Pay to the order of
______________________________, without recourse" or "Pay to the order of
holder, without recourse." In the event that the Mortgage Loan was acquired
by the related Originator in a merger, the endorsement must be by the
"(related Originator), successor by merger to (name of predecessor)"; and
in the event that the Mortgage Loan was acquired or originated by the
related Originator while doing business under another name, the endorsement
must be by the "(related Originator), formerly known as (previous name)";
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<PAGE>
(b) originals of all intervening assignments, showing a
complete chain of assignment from origination to the related Originator, if
any, including warehousing assignments, with evidence of recording thereon
(or, if an original intervening assignment has not been returned from the
recording office, a certified copy thereof, the original to be delivered to
the Trustee forthwith after return);
(c) originals of all assumption and modification agreements, if
any (or, if an original assumption and/or modification agreement has not
been returned from the recording office, a certified copy thereof, the
original to be delivered to the Trustee forthwith after return);
(d) either (A) the original Mortgage with evidence of recording
thereon or a certified copy of the Mortgage as recorded, or (B) if the
original Mortgage has not yet been returned from the recording office, a
certified copy of the Mortgage, together with a receipt from the recording
office or from a title insurance company or a certificate of an Authorized
Person of the related Originator indicating that such Mortgage has been
delivered for recording;
(e) the original assignment of Mortgage for each Mortgage Loan
conveying the Mortgage to the Trust which assignment shall be in form and
substance acceptable for recording in the state or other jurisdiction where
the mortgaged property is located and, within 75 Business Days following
the Startup Day with respect to the Mortgage Loans, a recorded assignment
of each such Mortgage; provided that in the event that the Mortgage Loan
--------
was acquired by the related Originator in a merger, the assignment of
Mortgage must be by the "(related Originator), successor by merger to (name
of predecessor)"; and in the event that the Mortgage Loan was acquired or
originated by the related Originator while doing business under another
name, the assignment of Mortgage must be by the "(related Originator),
formerly known as (previous name)" (subject to the foregoing, and where
permitted under the applicable laws of the jurisdiction where the mortgaged
property is located, the assignments of Mortgage may be made by blanket
assignments for Mortgage Loans covering mortgaged properties situated
within the same county or other permitted governmental subdivision); and
(f) evidence of title insurance with respect to the
mortgaged property in the form of a binder or commitment.
(ii) except with respect to Mortgage Loans covered by opinions of
counsel delivered in the manner set forth below ("Assignment Opinions"), cause,
as soon as possible but no more than 75 Business Days following the Startup Day
with respect to the Mortgage Loans, the Originators to deliver to the Trustee
copies of all Mortgage assignments submitted for recording, together with a list
of (x) all Mortgages for which no Mortgage assignment has yet been submitted for
recording by the related Originator (y) reasons why the related Originator has
not yet submitted such Mortgage assignments for recording; provided, however,
-------- -------
that with respect to Mortgage Loans subject to jurisdiction in the states of
California, Colorado, Illinois, Oregon, Washington, Georgia and Arizona an
Originator shall not be required to record an assignment of a Mortgage if the
Company furnishes to the Trustee and the Certificate Insurer, on or before the
Startup Day with respect to the Mortgage Loans, at the Company's expense, the
Assignment Opinions which opine that recording is not necessary to perfect the
rights of the Trustee in the related Mortgage (in form satisfactory to the
Certificate Insurer, Moody's and Standard & Poor's). With respect to any
Mortgage assignment set forth on the aforementioned list which has not been
submitted for recording for a reason other than a lack of original recording
information or with respect to Mortgages not covered by the
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Assignment Opinions, the Trustee shall make an immediate demand on the
Company to cause such Mortgage assignments to be prepared and shall inform
the Certificate Insurer of the Company's failure to cause such Mortgage
assignments to be prepared. Thereafter, the Trustee shall cooperate in
executing any documents prepared by the Certificate Insurer and submitted
to the Trustee in connection with this provision. Following the expiration
of the 75-Business Day period following the Startup Day and except with
respect to Mortgages covered by the Assignment Opinions, the Company shall
cause to be prepared a Mortgage assignment for any Mortgage for which
original recording information is subsequently received by the related
Originator and shall promptly deliver a copy of such Mortgage assignment to
the Trustee.
All recording required pursuant to this Section 3.5 shall be
accomplished at the expense of the Originators or of the Company.
Notwithstanding anything to the contrary contained in this Section 3.5, in those
instances where the public recording office retains the original Mortgage, the
assignment of a Mortgage or the intervening assignments of the Mortgage after it
has been recorded, the Company shall be deemed to have satisfied its obligations
hereunder upon delivery to the Trustee of a copy of such Mortgage, such
assignment or assignments of Mortgage certified by the public recording office
to be a true copy of the recorded original thereof.
Copies of all Mortgage assignments received by the Trustee shall be
kept in the related File.
(c) In the case of Mortgage Loans which have been prepaid in full on
or after the Cut-Off Date and prior to the Startup Day, the Company, in lieu of
the foregoing, will deliver within 15 Business Days after the Startup Day to the
Trustee a certification of an Authorized Officer in the form set forth in
Exhibit D.
(d) The Company shall transfer, assign, set over and otherwise convey
without recourse, to the Trustee all right, title and interest of the Company in
and to any Qualified Replacement Mortgage delivered to the Trustee on behalf of
the Trust by the Company pursuant to Section 3.4 or Section 3.6 hereof and all
its right, title and interest to principal collected and interest accruing on
such Qualified Replacement Mortgage on and after the applicable Replacement Cut-
Off Date; provided, however, that the Company shall reserve and retain all
-------- -------
right, title and interest in and to payments of principal and interest due on
such Qualified Replacement Mortgage prior to the applicable Replacement Cut-Off
Date.
(e) As to each Mortgage Loan released from the Trust in connection
with the conveyance of a Qualified Replacement Mortgage therefor, the Trustee
will transfer, assign, set over and otherwise convey without recourse, on the
Company's order, all of its right, title and interest in and to such released
Mortgage Loan and all the Trust's right, title and interest to principal and
interest due on such released Mortgage Loan after the applicable Replacement
Cut-Off Date; provided, however, that the Trust shall reserve and retain all
-------- -------
right, title and interest in and to payments of principal and interest due on
such released Mortgage Loan prior to the applicable Replacement Cut-Off Date.
(f) In connection with any transfer and assignment of a Qualified
Replacement Mortgage to the Trustee on behalf of the Trust, the Company agrees
to cause to be delivered to the Trustee the items described in Section 3.5(b) on
the date of such transfer and assignment or if a later delivery time is
permitted by Section 3.5(b) then no later than such later delivery time.
(g) As to each Mortgage Loan released from the Trust in connection
with the conveyance of a Qualified Replacement Mortgage the Trustee shall
deliver on the date of conveyance of such Qualified Replacement Mortgage, and on
the order of the Company (i) the original Note, or the certified copy, relating
thereto, endorsed without recourse, to the Company and (ii) such other documents
as constituted the File with respect thereto.
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(h) If a Mortgage assignment is lost during the process of recording,
or is returned from the recorder's office unrecorded due to a defect therein,
the Company shall prepare a substitute assignment or cure such defect, as the
case may be, and thereafter cause each such assignment to be duly recorded.
(i) The Company shall reflect on its records that the Mortgage Loans
have been sold to the Depositor and the Depositor shall reflect on its records
that the Mortgage Loans have been sold to the Trust.
Section 3.6. Acceptance by Trustee; Certain Substitutions of Mortgage
--------------------------------------------------------
Loans; Certification by Trustee.
- -------------------------------
(a) The Trustee agrees to execute and deliver to the Depositor, the
Company, the Servicer and the Certificate Insurer on the Startup Day an Initial
Certification in the form annexed hereto as Exhibit E to the effect that, as to
each Mortgage Loan listed in the Schedules of Mortgage Loans (other than any
Mortgage Loan paid in full or any Mortgage Loan specifically identified in such
certification as not covered by such certification), (i) all documents required
to be delivered to it pursuant to this Agreement with respect to such Mortgage
Loan are in its possession, (ii) such documents have been reviewed by it and
appear regular on their face and relate to such Mortgage Loan and (iii) based on
its examination and only as to the foregoing documents, the information set
forth on the Schedules of Mortgage Loans as to loan number and address
accurately reflects information set forth in the File. The Trustee shall not be
under any duty or obligation to inspect, review or examine said documents,
instruments, certificates or other papers to determine that the same are
genuine, enforceable or appropriate for the represented purpose or that they
have actually been recorded or that they are other than what they purport to be
on their face. Within 90 days of the Startup Date (or, with respect to any
document delivered after the Startup Day, within 45 days of receipt and with
respect to any or Qualified Replacement Mortgage, within 45 days after the
assignment thereof) the Trustee shall deliver to the Depositor, the Company,
Certificate Insurer and the Servicer a Final Certification in the form annexed
hereto as Exhibit F evidencing the completeness of the Files, with any
applicable exceptions noted thereon.
(b) If in the process of reviewing the Files and preparing the
certifications referred to above the Trustee finds any document or documents
constituting a part of a File which is not properly executed, has not been
received within the specified period or is unrelated to the Mortgage Loans
identified in the Schedules of Mortgage Loans, or that any Mortgage Loan does
not conform as to loan number and address as set forth in the Schedules of
Mortgage Loans, the Trustee shall promptly notify the Company and the
Certificate Insurer. The Company shall use reasonable efforts to cure any such
defect within 60 days from the date on which the Company was notified of such
defect, and if the Company does not cure such defect in all material respects
during such period, the Company will (or will cause the related Originator or an
affiliate of the Company to) on the next succeeding Remittance Date (i)
substitute in lieu of such Mortgage Loan a Qualified Replacement Mortgage and
deliver the Substitution Amount applicable thereto to the Servicer for deposit
in the Principal and Interest Account or (ii) purchase such Mortgage Loan at a
purchase price equal to the Loan Purchase Price thereof, which purchase price
shall be delivered to the Servicer for deposit in the Principal and Interest
Account. In connection with any such proposed purchase or substitution the
Company shall cause at the Company's expense to be delivered to the Trustee and
to the Certificate Insurer an opinion of counsel experienced in federal income
tax matters stating whether or not such a proposed purchase or substitution
would constitute a Prohibited Transaction for the Trust or would jeopardize the
status of the Trust as a REMIC, and the Company shall only be required to take
either such action to the extent such action would not constitute a Prohibited
Transaction for the Trust or would not jeopardize the status of the Trust as a
REMIC. Any required purchase or substitution, if delayed by the absence of such
opinion shall nonetheless occur upon the earlier of (i) the occurrence of a
default or imminent default with respect to the Mortgage Loan or (ii) the
delivery of such opinion.
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Section 3.7. Cooperation Procedures. (a) The Company shall, in
----------------------
connection with the delivery of each Qualified Replacement Mortgage to the
Trustee, provide the Trustee with the information set forth in the Schedules of
Mortgage Loans with respect to such Qualified Replacement Mortgage.
(b) The Company, the Servicer, the Depositor and the Trustee covenant
to provide each other with all data and information required to be provided by
them hereunder at the times required hereunder, and additionally covenant
reasonably to cooperate with each other in providing any additional information
required to be obtained by any of them in connection with their respective
duties hereunder.
(c) The Servicer shall maintain such accurate and complete accounts,
records and computer systems pertaining to each File as shall enable it and the
Trustee to comply with this Agreement. In performing its recordkeeping duties
the Servicer shall act in accordance with the servicing standards set forth in
this Agreement. The Servicer shall conduct, or cause to be conducted, periodic
audits of its accounts, records and computer systems as set forth in Sections
8.16 and 8.17 hereof. The Servicer shall promptly report to the Trustee any
failure on its part to maintain its accounts, records and computer systems as
herein provided and promptly take appropriate action to remedy any such failure.
(d) The Company further confirms to the Trustee that it has caused the
portions of the electronic ledger relating to the Mortgage Loans to be clearly
and unambiguously marked to indicate that such Mortgage Loans have been sold,
transferred, assigned and conveyed to the Trustee and constitute part of the
Trust Estate in accordance with the terms of the trust created hereunder and
that the Company will treat the transaction contemplated by such sale, transfer,
assignment and conveyance as a sale for accounting purposes.
ARTICLE IV
ISSUANCE AND SALE OF CERTIFICATES
Section 4.1. Issuance of Certificates. On the Startup Day, upon the
------------------------
Trustee's receipt from the Company of an executed Delivery Order in the form set
forth as Exhibit G hereto, the Trustee shall execute, authenticate and deliver
the Certificates on behalf of the Trust in accordance with the directions set
forth in such Delivery Order.
Section 4.2. Sale of Certificates. At 10 a.m. New York City time on
--------------------
the Startup Date, at the offices of Dewey Ballantine, 1301 Avenue of the
Americas, New York, New York, the Company will sell and convey the Mortgage
Loans and the money, instruments and other property related thereto to the
Depositor, the Depositor will sell and convey the Mortgage Loans and the money,
instruments and other property related thereto to the Trustee, and the Trustee
will (i) deliver to the Underwriter the Class A Certificates with an aggregate
Percentage Interest in each Class equal to 100%, registered in the name of Cede
& Co. or in such other names as the Underwriter shall direct, against payment of
the purchase price thereof by wire transfer of immediately available funds to
the Trustee and (ii) deliver to the Company the Class R Certificates, with an
aggregate Percentage Interest in each Class equal to 100%, registered as the
Company shall request. Upon the Trustee's receipt of the entire net proceeds of
the sale of the Class A Certificates the Company shall instruct the Trustee to:
(a) pay any fees and expenses identified by the Company and (b) pay to the
Company the balance after deducting such amounts. The Company shall pay
directly to the Certificate Insurer the Initial Premiums.
ARTICLE V
CERTIFICATES AND TRANSFER OF INTERESTS
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Section 5.1. Terms. (a) The Certificates are pass-through
-----
securities having the rights described therein and herein. Notwithstanding
references herein or therein with respect to the Certificates as to "principal"
and "interest" no debt of any Person is represented thereby, nor are the
Certificates or the underlying Notes guaranteed by any Person (except that the
Notes may be recourse to the Mortgagors thereof to the extent permitted by law
and except for the rights of the Trustee with respect to the Certificate
Insurance Policies). Distributions on the Certificates are payable solely from
payments received on or with respect to the Mortgage Loans (other than the
Servicing Fees), moneys in the Principal and Interest Account, except as
otherwise provided herein, from earnings on moneys and the proceeds of property
held as a part of the Trust Estate and, upon the occurrence of certain events,
from Insured Payments. Each Certificate entitles the Owner thereof to receive
monthly on each Payment Date, in order of priority of distributions with respect
to such Class of Certificates a specified portion of such payments with respect
to the Mortgage Loans in the related Mortgage Loan Group and certain related
Insured Payments, pro rata in accordance with such Owner's Percentage Interest.
--- ----
(b) Each Owner is required, and hereby agrees, to return to the
Trustee at the Corporate Trust Office any Certificate prior to the final
distribution due thereon. Any such Certificate as to which the Trustee has made
the final distribution thereon shall be deemed canceled and shall no longer be
Outstanding for any purpose of this Agreement.
Section 5.2. Forms. The Class A-1 Certificates, the Class A-2
-----
Certificates and the Class R Certificates shall be in substantially the forms
set forth in Exhibits A-1, A-2 and C hereof, respectively, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Agreement or as may in the Company's judgment be necessary,
appropriate or convenient to comply, or facilitate compliance, with applicable
laws, and may have such letters, numbers or other marks of identification and
such legends or endorsements placed thereon as may be required to comply with
the rules of any applicable securities laws or as may, consistently herewith, be
determined by the Authorized Officer of the Trustee executing such Certificates,
as evidenced by his execution thereof.
Section 5.3. Execution, Authentication and Delivery. Each
--------------------------------------
Certificate shall be executed on behalf of the Trust, by the manual or facsimile
signature of one of the Trustee's Authorized Officers and shall be authenticated
by the manual or facsimile signature of one of the Trustee's Authorized
Officers.
Certificates bearing the manual signature of individuals who were at
any time the proper officers of the Trustee shall, upon proper authentication by
the Trustee, bind the Trust, notwithstanding that such individuals or any of
them have ceased to hold such offices prior to the execution and delivery of
such Certificates or did not hold such offices at the date of authentication of
such Certificates.
The initial Certificates shall be dated as of the Startup Day and
delivered at the Closing to the parties specified in Section 4.2 hereof.
No Certificate shall be valid until executed and authenticated as set
forth above.
Section 5.4. Registration and Transfer of Certificates. (a) The
-----------------------------------------
Trustee, as registrar, shall cause to be kept a register (the "Register") in
which, subject to such reasonable regulations as it may prescribe, the Trustee
shall provide for the registration of Certificates and the registration of
transfer of Certificates. The Trustee is hereby appointed registrar for the
purpose of registering Certificates and transfers of Certificates as herein
provided. The Owners shall have the right to inspect the Register during
business hours upon reasonable notice (but no less than 2 Business Days) and to
obtain copies thereof.
(b) Subject to the provisions of Section 5.8 hereof, upon surrender
for registration of transfer of any Certificate at the office designated as the
location of the Register, the Trustee shall
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execute, authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Certificates of a like Class and in the aggregate
principal amount of the Certificate so surrendered.
(c) At the option of any Owner, Certificates of any Class owned by
such Owner may be exchanged for other Certificates authorized of like Class,
tenor, aggregate original principal amount and bearing numbers not
contemporaneously outstanding, upon surrender of the Certificates to be
exchanged at the office designated as the location of the Register. Whenever
any Certificate is so surrendered for exchange, the Trustee shall execute,
authenticate and deliver the Certificate or Certificates which the Owner making
the exchange is entitled to receive.
(d) All Certificates issued upon any registration of transfer or
exchange of Certificates shall be valid evidence of the same ownership interests
in the Trust and entitled to the same benefits under this Agreement as the
Certificates surrendered upon such registration of transfer or exchange.
(e) Every Certificate presented or surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer in form satisfactory to the Trustee duly executed by the
Owner thereof or his attorney duly authorized in writing.
(f) No service charge shall be made to an Owner for any registration
of transfer or exchange of Certificates, but the Trustee may require payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection with any registration of transfer or exchange of
Certificates; any other expenses in connection with such transfer or exchange
shall be an expense of the Trust.
(g) It is intended that the Class A Certificates be registered so as
to participate in a global book-entry system with the Depository, as set forth
herein. Each Class of Class A Certificates shall, except as otherwise provided
in the next paragraph, be initially issued in the form of a single fully
registered Class A Certificate with a denomination equal to the Original
Aggregate Principal Balance. Upon initial issuance, the ownership of each such
Class A Certificate shall be registered in the Register in the name of Cede &
Co., or any successor thereto, as nominee for the Depository.
On the Startup Day, no Class A Certificates shall be issued in
denominations of less than $1,000 except for one Certificate of each Class which
may be in a denomination of less than $1,000; accordingly the Trust shall not
issue tail certificates on the Startup Day.
The Company and the Trustee are hereby authorized to execute and
deliver the Representation Letter with the Depository.
With respect to Class A Certificates registered in the Register in the
name of Cede & Co., as nominee of the Depository, the Depositor, the Company,
the Servicer and the Trustee shall have no responsibility or obligation to
Direct or Indirect Participants or beneficial owners for which the Depository
holds Class A Certificates from time to time as a Depository. Without limiting
the immediately preceding sentence, the Company, the Servicer and the Trustee
shall have no responsibility or obligation with respect to (i) the accuracy of
the records of the Depository, Cede & Co., or any Direct or Indirect Participant
with respect to the ownership interest in the Class A Certificates, (ii) the
delivery to any Direct or Indirect Participant or any other Person, other than a
registered Owner of a Class A Certificate as shown in the Register, of any
notice with respect to the Class A Certificates or (iii) the payment to any
Direct or Indirect Participant or any other Person, other than a registered
Owner of a Class A Certificate as shown in the Register, of any amount with
respect to any distribution of principal or interest on the Class A
Certificates. No Person other than a registered Owner of a Class A Certificate
as shown in the Register shall receive a certificate evidencing such Class A
Certificate.
Upon delivery by the Depository to the Trustee of written notice to
the effect that the Depository has determined to substitute a new nominee in
place of Cede & Co., and subject to the provisions hereof with respect to the
payment of interest by the mailing of checks or drafts to the
39
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registered Owners of Class A Certificates appearing as registered Owners in the
registration books maintained by the Trustee at the close of business on a
Record Date, the name "Cede & Co." in this Agreement shall refer to such new
nominee of the Depository.
(h) In the event that (i) the Depository or the Company advises the
Trustee in writing that the Depository is no longer willing or able to discharge
properly its responsibilities as nominee and depository with respect to the
Class A Certificates and the Company or the Trustee is unable to locate a
qualified successor or (ii) the Company at its sole option elects to terminate
the book-entry system through the Depository, the Class A Certificates shall no
longer be restricted to being registered in the Register in the name of Cede &
Co. (or a successor nominee) as nominee of the Depository. At that time, the
Company may determine that the Class A Certificates shall be registered in the
name of and deposited with a successor depository operating a global book-entry
system, as may be acceptable to the Company and at the Company's expense, or
such depository's agent or designee but, if the Company does not select such
alternative global book-entry system, then the Class A Certificates may be
registered in whatever name or names registered Owners of Class A Certificates
transferring Class A Certificates shall designate, in accordance with the
provisions hereof.
(i) Notwithstanding any other provision of this Agreement to the
contrary, so long as any Class A Certificate is registered in the name of Cede &
Co., as nominee of the Depository, all distributions of principal or interest on
such Class A Certificates and all notices with respect to such Class A
Certificates shall be made and given, respectively, in the manner provided in
the Representation Letter.
Section 5.5. Mutilated, Destroyed, Lost or Stolen Certificates. If
-------------------------------------------------
(i) any mutilated Certificate is surrendered to the Trustee, or the Trustee
receives evidence to its satisfaction of the destruction, loss or theft of any
Certificate, and (ii) in the case of any mutilated Certificate, such mutilated
Certificate shall first be surrendered to the Trustee, and in the case of any
destroyed, lost or stolen Certificate, there shall be first delivered to the
Trustee such security or indemnity as may be reasonably required by it to hold
the Trustee harmless, then, in the absence of notice to the Trustee that such
Certificate has been acquired by a bona fide purchaser, the Trustee shall
execute, authenticate and deliver, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Certificate, a new Certificate of like
Class, tenor and aggregate principal amount, bearing a number not
contemporaneously outstanding.
Upon the issuance of any new Certificate under this Section, the
Trustee may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto; any other expenses
in connection with such issuance shall be an expense of the Trust.
Every new Certificate issued pursuant to this Section in exchange for
or in lieu of any mutilated, destroyed, lost or stolen Certificate shall
constitute evidence of a substitute interest in the Trust and shall be entitled
to all the benefits of this Agreement equally and proportionately with any and
all other Certificates of the same Class duly issued hereunder and such
mutilated, destroyed, lost or stolen Certificate shall not be valid for any
purpose.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Certificates.
Section 5.6. Persons Deemed Owners. The Trustee and any agent of the
---------------------
Trustee may treat the Person in whose name any Certificate is registered as the
Owner of such Certificate for the purpose of receiving distributions with
respect to such Certificate and for all other purposes whatsoever, and neither
the Trustee nor any agent of the Trustee shall be affected by notice to the
contrary.
Section 5.7. Cancellation. All Certificates surrendered for
------------
registration of transfer
39
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or exchange shall, if surrendered to any Person other than the Trustee, be
delivered to the Trustee and shall be promptly canceled by it. No Certificate
shall be authenticated in lieu of or in exchange for any Certificate canceled as
provided in this Section, except as expressly permitted by this Agreement. All
canceled Certificates may be held by the Trustee in accordance with its standard
retention policy.
Section 5.8. Limitation on Transfer of Ownership Rights. (a) No
------------------------------------------
sale or other transfer of any Class A Certificate shall be made to the Company,
any Originator or any of their respective affiliates.
(b) No sale or other transfer of record or beneficial ownership of a
Class R Certificate (whether pursuant to a purchase, a transfer resulting from a
default under a secured lending agreement or otherwise) shall be made to a
Disqualified Organization or agent of a Disqualified Organization. The
transfer, sale or other disposition of a Class R Certificate (whether pursuant
to a purchase, a transfer resulting from a default under a secured lending
agreement or otherwise) to a Disqualified Organization shall be deemed to be of
no legal force or effect whatsoever and such transferee shall not be deemed to
be an Owner for any purpose hereunder, including, but not limited to, the
receipt of distributions on such Class R Certificate. Furthermore, in no event
shall the Trustee accept surrender for transfer, registration of transfer, or
register the transfer, of any Class R Certificate nor authenticate and make
available any new Class R Certificate unless the Trustee has received an
affidavit from the proposed transferee in the form attached hereto as Exhibit H.
Each holder of a Class R Certificate, by his acceptance thereof, shall be deemed
for all purposes to have consented to the provisions of this Section 5.8(b).
(c) No other sale or other transfer of record or beneficial ownership
of a Class R Certificate shall be made unless such transfer is exempt from the
registration requirements of the Securities Act, as amended, and any applicable
state securities laws or is made in accordance with said Act and laws. In the
event such a transfer is to be made within three years from the Startup Day, (i)
the Trustee and the Company shall require a written opinion of counsel
acceptable to and in form and substance satisfactory to the Company and the
Certificate Insurer in the event that such transfer may be made pursuant to an
exemption, describing the applicable exemption and the basis therefor, from said
Act and laws or is being made pursuant to said Act and laws, which opinion of
counsel shall not be an expense of the Trustee, the Trust Estate or the
Certificate Insurer, and (ii) the Trustee shall require the Transferee to
execute an investment letter acceptable to and in form and substance
satisfactory to the Company and the Certificate Insurer certifying to the
Trustee, the Certificate Insurer and the Company the facts surrounding such
transfer, which investment letter shall not be an expense of the Trustee, the
Trust Estate, the Certificate Insurer or the Company. The Owner of a Class R
Certificate desiring to effect such transfer shall, and does hereby agree to,
indemnify the Trustee, the Certificate Insurer and the Company against any
liability that may result if the transfer is not so exempt or is not made in
accordance with such federal and state laws.
Section 5.9. Assignment of Rights. An Owner may pledge, encumber,
--------------------
hypothecate or assign all or any part of its right to receive distributions
hereunder, but such pledge, encumbrance, hypothecation or assignment shall not
constitute a transfer of an ownership interest sufficient to render the
transferee an Owner of the Trust without compliance with the provisions of
Section 5.4 and Section 5.8 hereof.
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ARTICLE VI
COVENANTS
Section 6.1. Distributions. On each Payment Date, the Trustee will
-------------
withdraw amounts from the Certificate Account and make the distributions with
respect to the Certificates in accordance with the terms of the Certificates and
this Agreement. Such distributions shall be made (i) by check mailed on each
Payment Date or (ii) if requested by any Owner, to such Owner by wire transfer
to an account within the United States designated no later than five Business
Days prior to the related Record Date, made on each Payment Date, in each case
to each Owner of record on the immediately preceding Record Date; provided,
--------
however, that an Owner of a Class A Certificate shall only be entitled to
- -------
payment by wire transfer if such Owner owns Class A Certificates in the
aggregate denomination of at least $5,000,000.
Section 6.2. Money for Distributions to be Held in Trust;
--------------------------------------------
Withholding. (a) All payments of amounts due and payable with respect to any
Certificate that are to be made from amounts withdrawn from the Certificate
Account pursuant to Section 7.5 hereof or from Insured Payments shall be made by
and on behalf of the Trustee, and no amounts so withdrawn from the Certificate
Account for payments of the Certificates and no Insured Payment shall be paid
over to the Trustee except as provided in this Section.
(b) The Trustee on behalf of the Trust shall comply with all
requirements of the Code and applicable state and local law with respect to the
withholding from any distributions made by it to any Owner of any applicable
withholding taxes imposed thereon and with respect to any applicable reporting
requirements in connection therewith.
(c) Any money held by the Trustee in trust for the payment of any
amount due with respect to any Class A Certificate and remaining unclaimed by
the Owner of such Class A Certificate for the period then specified in the
escheat laws of the State of New York after such amount has become due and
payable shall be discharged from such trust and be paid first to the Certificate
Insurer on account of any Reimbursement Amounts and second to the Owners of the
Class R Certificates; and the Owner of such Class A Certificate shall
thereafter, as an unsecured general creditor, look only to the Certificate
Insurer or the Owners of the Class R Certificates for payment thereof (but only
to the extent of the amounts so paid to the Certificate Insurer or the Owners of
the Class R Certificates), and all liability of the Trustee with respect to such
trust money shall thereupon cease; provided, however, that the Trustee, before
-------- -------
being required to make any such payment, shall at the expense of the Trust cause
to be published once, in the eastern edition of The Wall Street Journal, notice
-----------------------
that such money remains unclaimed and that, after a date specified therein,
which shall be not fewer than 30 days from the date of such publication, any
unclaimed balance of such money then remaining will be paid to the Certificate
Insurer or the Owners of the Class R Certificates. The Trustee shall, at the
direction of the Company, also adopt and employ, at the expense of the Trust,
any other reasonable means of notification of such payment (including but not
limited to mailing notice of such payment to Owners whose right to or interest
in moneys due and payable but not claimed is determinable from the Register at
the last address of record for each such Owner).
Section 6.3. Protection of Trust Estate. (a) The Trustee will hold
--------------------------
the Trust Estate in trust for the benefit of the Owners and, upon request of the
Certificate Insurer, or, with the consent of the Certificate Insurer, at the
request and expense of the Company, will from time to time execute and deliver
all such supplements and amendments hereto pursuant to Section 11.14 hereof and
all instruments of further assurance and other instruments, and will take such
other action upon such request from the Company or the Certificate Insurer, to:
(i) more effectively hold in trust all or any portion of the Trust
Estate;
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(ii) perfect, publish notice of or protect the validity of any grant
made or to be made by this Agreement;
(iii) enforce any of the Mortgage Loans; or
(iv) preserve and defend title to the Trust Estate and the rights of
the Trustee, and the ownership interests of the Owners represented thereby,
in such Trust Estate against the claims of all Persons and parties.
The Trustee shall send copies of any request received from the
Certificate Insurer or the Company to take any action pursuant to this Section
6.3 to the other party.
(b) The Trustee shall have the power to enforce, shall enforce the
obligations of the other parties to this Agreement and of the Certificate
Insurer, by action, suit or proceeding at law or equity and shall also have the
power to enjoin, by action or suit in equity, any acts or occurrences which may
be unlawful or in violation of the rights of the Owners; provided, however, that
-------- -------
nothing in this Section shall require any action by the Trustee unless the
Trustee shall first (i) have been furnished indemnity satisfactory to it and
(ii) when required by this Agreement, have been requested to take such action by
a majority of the Percentage Interests represented by the affected Class or
Classes of Class A Certificates then Outstanding or, if there are no longer any
affected Class A Certificates then outstanding, by such majority of the
Percentage Interests represented by the Class R Certificates.
(c) The Trustee shall execute any instrument required pursuant to
this Section so long as such instrument does not conflict with this Agreement or
with the Trustee's fiduciary duties.
Section 6.4. Performance of Obligations. The Trustee will not take
--------------------------
any action that would release the Depositor, the Company or the Certificate
Insurer from any of their respective covenants or obligations under any
instrument or document relating to the Trust Estate or the Certificates or which
would result in the amendment, hypothecation, subordination, termination or
discharge of, or impair the validity or effectiveness of, any such instrument or
document, except as expressly provided in this Agreement or such other
instrument or document.
The Trustee may contract with other Persons to assist it in performing
its duties hereunder.
Section 6.5. Negative Covenants. The Trustee will not, to the extent
------------------
within the control of the Trustee, take any of the following actions:
(i) sell, transfer, exchange or otherwise dispose of any of the Trust
Estate except as expressly permitted by this Agreement;
(ii) claim any credit on or make any deduction from the distributions
payable in respect of, the Certificates (other than amounts properly
withheld from such payments under the Code) or assert any claim against any
present or former Owner by reason of the payment of any taxes levied or
assessed upon any of the Trust Estate;
(iii) incur, assume or guaranty on behalf of the Trust any
indebtedness of any Person except pursuant to this Agreement;
(iv) dissolve or liquidate the Trust Estate in whole or in part,
except pursuant to Article IX hereof; or
(v) (A) impair the validity or effectiveness of this Agreement, or
release any Person from any covenants or obligations with respect to the
Trust or to the Certificates under this Agreement, except as may be
expressly permitted hereby or (B) create or extend any lien,
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charge, adverse claim, security interest, mortgage or other encumbrance to
or upon the Trust Estate or any part thereof or any interest therein or the
proceeds thereof.
Section 6.6. No Other Powers. The Trustee will not, to the extent
---------------
within the control of the Trustee, permit the Trust to engage in any business
activity or transaction other than those activities permitted by Section 2.3
hereof.
Section 6.7. Limitation of Suits. No Owner shall have any right to
-------------------
institute any proceeding, judicial or otherwise, with respect to this Agreement
or the Certificate Insurance Policies or for the appointment of a receiver or
trustee, or for any other remedy hereunder, unless:
(1) such Owner has previously given written notice to the Company and the
Trustee of such Owner's intention to institute such proceeding;
(2) the Owners of not less than 25% of the Percentage Interests
represented by the affected Class or Classes of Certificates then
Outstanding or, if there are no affected Classes of Class A
Certificates then Outstanding, by such percentage of the Percentage
Interests represented by the Class R Certificates shall have made
written request to the Trustee to institute such proceeding in respect
of such Event of Default;
(3) such Owner or Owners have offered to the Trustee indemnity against the
costs, expenses and liabilities to be incurred in compliance with such
request;
(4) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute such proceeding;
(5) as long as any Class A Certificates are Outstanding, the Certificate
Insurer consented in writing thereto; and
(6) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Certificate Insurer or by
the Owners of a majority of the Percentage Interests represented by
the Class A Certificates or, if there are no Class A Certificates then
Outstanding, by such majority of the Percentage Interests represented
by the Class R Certificates;
it being understood and intended that no one or more Owners shall have any right
in any manner whatever by virtue of, or by availing themselves of, any provision
of this Agreement to affect, disturb or prejudice the rights of any other Owner
of the same Class or to obtain or to seek to obtain priority or preference over
any other Owner of the same Class or to enforce any right under this Agreement,
except in the manner herein provided and for the equal and ratable benefit of
all the Owners of the same Class.
In the event the Trustee shall receive conflicting or inconsistent
requests and indemnity from two or more groups of Owners, each representing less
than a majority of the applicable Class of Certificates, the Trustee in its sole
discretion may determine what action, if any, shall be taken, notwithstanding
any other provision of this Agreement.
Section 6.8. Unconditional Rights of Owners to Receive Distributions.
-------------------------------------------------------
Notwithstanding any other provision in this Agreement, the Owner of any
Certificate shall have the right, which is absolute and unconditional, to
receive distributions to the extent provided herein and therein with respect to
such Certificate or to institute suit for the enforcement of any such
distribution, and such right shall not be impaired without the consent of such
Owner.
Section 6.9. Rights and Remedies Cumulative. Except as otherwise
------------------------------
provided herein, no right or remedy herein conferred upon or reserved to the
Trustee, the Certificate Insurer or
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to the Owners is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. Except as otherwise provided herein,
the assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 6.10. Delay or Omission Not Waiver. No delay of the Trustee,
----------------------------
the Certificate Insurer or any Owner of any Certificate to exercise any right or
remedy under this Agreement to any Event of Default shall impair any such right
or remedy or constitute a waiver of any such Event of Default or an acquiescence
therein. Every right and remedy given by this Article VI or by law to the
Trustee, the Certificate Insurer or the Owners may be exercised from time to
time, and as often as may be deemed expedient, by the Trustee, the Certificate
Insurer or the Owners, as the case may be.
Section 6.11. Control by Owners. The Certificate Insurer or the
-----------------
Owners of a majority of the Percentage Interests represented by the Class A
Certificates then Outstanding, with the consent of the Certificate Insurer
(which may not be unreasonably withheld), or, if there are no longer any Class A
Certificates then Outstanding, by such majority of the Percentage Interests
represented by the Class R Certificates then Outstanding, with the consent of
the Certificate Insurer (which may not be unreasonably withheld), may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee with respect to the Certificates or exercising any trust or power
conferred on the Trustee with respect to the Certificates or the Trust Estate,
including, but not limited to, those powers set forth in Section 6.3, Section
8.20 and Section 10.1 hereof, provided that:
-------- ----
(1) such direction shall not be in conflict with any rule of law or with
this Agreement;
(2) the Trustee shall have been provided with indemnity satisfactory to
it; and
(3) the Trustee may take any other action deemed proper by the Trustee,
which is not inconsistent with such direction; provided, however, that
-------- -------
the Trustee need not take any action which it determines might involve
it in liability or may be unjustly prejudicial to the Owners not so
directing.
Section 6.12. Access to Owners of Certificates' Names and Addresses.
-----------------------------------------------------
(a) If any owner (for purposes of this Section 6.12, an "Applicant") applies in
writing to the Trustee, and such application states that the Applicant desires
to communicate with other Owners with respect to their rights under this
Agreement or under the Certificates and is accompanied by a copy of the
communication which such Applicant proposes to transmit, then the Trustee shall,
at the expense of such Applicant, within ten (10) Business Days after the
receipt of such application, furnish or cause to be furnished to such Applicant
a list of the names and addresses of the Owners of record as of the most recent
Payment Date.
(b) Every Owner, by receiving and holding such list, agrees with the
Trustee that the Trustee shall not be held accountable in any way by reason of
the disclosure of any information as to the names and addresses of the owners
hereunder, regardless of the source from which such information was derived.
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ARTICLE VII
ACCOUNTS, DISBURSEMENTS AND RELEASES
Section 7.1. Collection of Money. Except as otherwise expressly
-------------------
provided herein, the Trustee may demand payment or delivery of all money and
other property payable to or receivable by the Trustee pursuant to this
Agreement, including (a) all payments due on the Mortgage Loans in accordance
with the respective terms and conditions of such Mortgage Loans and required to
be paid over to the Trustee by the Servicer or by any Sub-Servicer and (b)
Insured Payments. The Trustee shall hold all such money and property received
by it, other than pursuant to or as contemplated by Section 6.2(b) hereof, as
part of the Trust Estate and shall apply it as provided in this Agreement.
Section 7.2. Establishment of Accounts. The Company shall cause to
-------------------------
be established, and the Trustee shall maintain, at the Corporate Trust Office, a
Certificate Account and an Available Funds Cap Carry-Forward Amount Account,
each to be held by the Trustee so long as the Trustee qualifies as a Designated
Depository Institution and if the Trustee does not so qualify, then by any
Designated Depository Institution in the name of the Trust for the benefit of
the Owners of the Certificates and the Certificate Insurer, as their interests
may appear.
Section 7.3. The Certificate Insurance Policies. (a) (i) Three
----------------------------------
Business Days prior to each Payment Date the Trustee shall determine (based
solely upon the information contained in the Monthly Servicing Report) with
respect to the immediately following Payment Date, the amount required to be on
deposit in the Certificate Account on such Payment Date with respect to Group I
(disregarding the sum of (x) the amount of any Insured Payments and (y) the
amount of any expected investment earnings) and equal to the sum of (A) such
amount excluding the amount of any Total Monthly Excess Cashflow from Group I
included in such amount plus (B) any amount of Total Monthly Excess Cashflow
from either Group to be applied on account of Group I on such Payment Date to
the Class A-1 Certificates. The amount described in clause (A) of the preceding
sentence with respect to each Payment Date is the "Group I Available Funds"; the
sum of the amounts described in clauses (A) and (B) of the preceding sentence
with respect to each Payment Date is the "Group I Total Available Funds."
(ii) Three Business Days prior to each Payment Date, the Trustee
shall determine (based solely upon the information contained in the Monthly
Servicing Report) with respect to the immediately following Payment Date, the
amount required to be on deposit in the Certificate Account on such Payment Date
with respect to Group II (disregarding the sum of (x) the amount of any Insured
Payments and (y) the amount of any expected investment earnings), and equal to
the sum of (A) such amount excluding the amount of any Total Monthly Excess
Cashflow from Group II included in such amount plus (B) any amounts of Total
Monthly Excess Cashflow from either Group to be applied on account of Group II
on such Payment Date to the Class A-2 Certificates. The amount described in
clause (A) of the preceding sentence with respect to each Payment Date is the
"Group II Available Funds"; the sum of the amounts described in clauses (A) and
(B) of the preceding sentence with respect to each Payment Date is the "Group II
Total Available Funds".
(b) If the sum of the Class A-1 Current Interest and Group I
Subordination Deficit for any Payment Date exceeds the Group I Total Available
Funds for such Payment Date after deducting amounts payable therefrom, if any,
for the Group I Premium Amount and the Group I Trustee Fee due on such Payment
Date and after taking into account the portion of the Group I Principal
Distribution Amount to be actually distributed on such Payment Date without
regard to any Group I Insured Payment to be made with respect to such Payment
Date, (such event being a "Group I Total Available Funds Shortfall"), the
Trustee shall complete a Notice in the form of Exhibit A to the Class A-1
Certificate Insurance Policy and submit such notice to the Certificate Insurer
no later than 12:00 noon New York City time on the third Business Day preceding
such Payment Date as a claim for an Insured Payment in an amount equal to such
Group I Total Available Funds Shortfall. Similarly, if on any Payment Date the
sum of the Class A-2 Current Interest and Group II
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Subordination Deficit exceeds the Group II Total Available Funds for such
Payment Date after deducting amounts payable therefrom, if any, for the Group II
Premium Amount and the Group II Trustee Fee due on such Payment Date and after
taking into account the portion of the Class A-2 Principal Distribution Amount
to be actually distributed on such Payment Date without regard to any Group II
Insured Payment to be made with respect to such Payment Date, (such event being
a "Group II Total Available Funds Shortfall"), the Trustee shall complete a
Notice in the form of Exhibit A to the Class A-2 Certificate Insurance Policy
and submit such notice to the Certificate Insurer no later than 12:00 noon New
York City time on the second Business Day preceding such Payment Date as a claim
for an Insured Payment in an amount equal to such Group II Total Available Funds
Shortfall.
(c) The Certificate Insurer shall forward to the Trustee Insured
Payments no later than 12:00 noon New York City time on the Business Day
preceding the Payment Date or on such later date specified in the related
Certificate Insurance Policy. Upon receipt of Insured Payments from the
Certificate Insurer on behalf of Owners, the Trustee shall deposit such Insured
Payments in the Certificate Account and shall distribute such Insured Payments,
or the proceeds thereof, in accordance with Section 7.5(d)(iv) to the Owners of
the Class A Certificates of the related Class.
(d) The Trustee shall (i) receive Insured Payments as attorney-in-fact
of each Owner of the Class A Certificates of the related Class receiving any
Insured Payment from the Certificate Insurer and (ii) disburse such Insured
Payment to the Owners of Offered Certificates as set forth in Section
7.5(d)(iv). Insured Payments disbursed by the Trustee from proceeds of a
Certificate Insurance Policy shall not be considered payment by the Trust nor
shall such payments discharge the obligation of the Trust with respect to the
related Class A Certificates, and the Certificate Insurer shall be entitled to
receive the related Reimbursement Amount pursuant to Sections 7.5(d)(ii)(C) and
7.5(d)(ii)(D) hereof. Each Owner of Class A Certificates by its acceptance
thereof recognizes that to the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee), to
the Owners of such Class A Certificates the Certificate Insurer will be entitled
to receive the related Reimbursement Amount pursuant to Sections 7.5(d)(ii)(C)
and 7.5(d)(ii)(D) hereof.
Section 7.4 [Reserved]
Section 7.5. Flow of Funds. (a) The Trustee shall deposit to the
-------------
Certificate Account with respect to Group I, without duplication, upon receipt,
any Insured Payments relating to Group I, the proceeds of any liquidation of the
assets of the Trust, insofar as such assets relate to Group I, the Group I
Monthly Remittance Amount remitted by the Servicer or any Sub-Servicer, together
with any Substitution Amounts and any Loan Purchase Price amounts received by
the Trustee (each with respect to Group I).
(b) The Trustee shall deposit to the Certificate Account with respect
to Group II, without duplication, (i) upon receipt, any Insured Payments
relating to Group II, the proceeds of any liquidation of the assets of the
Trust, insofar as such assets relate to Group II, the Group II Monthly
Remittance Amount remitted by the Servicer or any Sub-Servicer, together with
any Substitution Amounts and any Loan Purchase Price amounts received by the
Trustee (each with respect to Group II).
(c) [Reserved].
(d) With respect to the Certificate Account, on each Payment Date,
the Trustee shall make the following allocations, disbursements and transfers
for each Mortgage Loan Group from amounts deposited therein pursuant to
subsections (a) and (b), respectively in the following order of priority, and
each such allocation, transfer and disbursement shall be treated as having
occurred only after all preceding allocations, transfers and disbursements have
occurred:
(i) first, on each Payment Date from amounts then on deposit in the Certificate
-----
Account (A) to the
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Trustee, the Trustee Fee and (B) commencing on the third Payment Date
following the Startup Day and each Payment Date thereafter, to the
Certificate Insurer, from amounts then on deposit in the Certificate
Account, (x) from amounts then on deposit therein with respect to Group I,
the Group I Premium Amount for such Payment Date and (y) commencing on the
seventh Payment Date from amounts then on deposit therein with respect to
Group II, the Group II Premium Amount for such Payment Date;
(ii) second, on each Payment Date, the Trustee shall allocate an amount equal to
------
the sum of (x) the Total Monthly Excess Spread with respect to such
Mortgage Loan Group and Payment Date (net of the related Premium Amount and
Trustee Fee paid as described above) plus (y) any Subordination Reduction
Amount with respect to such Mortgage Loan Group and Payment Date (such sum
being the "Total Monthly Excess Cashflow" with respect to such Mortgage
Loan Group and Payment Date) with respect to each Mortgage Loan Group in
the following order of priority:
(A) first, such Total Monthly Excess Cashflow with respect to each
-----
Group shall be allocated to the payment of the related Class A Distribution
Amount pursuant to clause (iv) below on such Payment Date with respect to the
related Mortgage Loan Group in an amount equal to the difference, if any,
between (x) the related Class A Distribution Amount (calculated only with
respect to clause (y) of the definition of the related Group I or Group II
Principal Distribution Amount and without any Subordination Increase Amount) for
such Payment Date and (y) the Available Funds with respect to such Mortgage Loan
Group for such Payment Date (the amount of such difference being the "Group I or
the Group II Available Funds Shortfall" with respect to the related Mortgage
Loan Group);
(B) second, any portion of the Total Monthly Excess Cashflow with
------
respect to such Mortgage Loan Group remaining after the application described in
clause (A) above shall be allocated against any Available Funds Shortfall with
respect to the other Mortgage Loan Group and to the payment of the Class A
Distribution Amount with respect to the other Mortgage Loan Group pursuant to
clause (iv) below;
(C) third, any portion of the Total Monthly Excess Cashflow with
-----
respect to such Mortgage Loan Group remaining after the allocations described in
clauses (A) and (B) above shall be disbursed to the Certificate Insurer in
respect of amounts owed on account of any Reimbursement Amount with respect to
the related Mortgage Loan Group; and
(D) fourth, any portion of the Total Monthly Excess Cashflow with
------
respect to such Mortgage Loan Group remaining after the allocations described in
clauses (A), (B) and (C) above shall be paid to the Certificate Insurer in
respect of any Reimbursement Amount with respect to the other Mortgage Loan
Group.
(iii) third, the amount, if any, of the Total Monthly Excess Cashflow with
-----
respect to a Mortgage Loan Group on a Payment Date remaining after the
allocations described in clause (ii) above is the "Net Monthly Excess Cashflow"
with respect to such Mortgage Loan Group for such Payment Date; such Net Monthly
Excess Cashflow is required to be allocated in the following order of priority:
(A) first, such Net Monthly Excess Cashflow shall be used to reduce to
-----
zero, through the allocation of a Subordination Increase Amount to the payment
of the related Class A Distribution Amount pursuant to clause (iv) below, any
Subordination Deficiency Amount with respect to the related Mortgage Loan
47
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Group as of such Payment Date;
(B) second, the Net Monthly Excess Cashflow remaining after the
------
application described in clause (A) above shall be used to reduce to zero,
through the allocation of a Subordination Increase Amount to the payment of the
related Class A Distribution Amount pursuant to clause (iv) below, any
Subordination Deficiency Amounts with respect to the other Mortgage Loan Group;
and
(C) third, an amount equal to the lesser of (i) any portion of the Net
-----
Monthly Excess Cashflow remaining after the applications described in clauses
(A) and (B) above and (ii) the excess of (a) the Available Funds Cap Carry-
Forward Amount for such Payment Date over (b) the amount then on deposit in the
Available Funds Cap Carry-Forward Amount Account shall be allocated to the
Available Funds Cap Carry-Forward Amount Account.
(D) third, any Net Monthly Excess Cashflow remaining after the
-----
applications described in clauses (A), (B) and (C) above shall be paid to the
Servicer to the extent of any unreimbursed Delinquency Advances, unreimbursed
Servicing Advances and accrued and unpaid Servicing Fees, in each case as
certified to the Trustee by the Servicer to be owing to it as of such Payment
Date.
(iv) fourth, following the making by the Trustee of all allocations, transfers
------
and disbursements described above under Section 7.3 hereof and the prior
clauses of this Section 7.5, from amounts (including any related Insured
Payment which shall be paid only to the Owners of the Class A Certificates)
then on deposit in the Certificate Account with respect to the related
Mortgage Loan Group, the Trustee shall distribute in the following order of
priority:
(A) from the amounts then on deposit in the Certificate Account with
respect to Group I, to the Owners of the Class A-1 Certificates, the Class A-1
Current Interest thereon until the Class A-1 Certificate Termination Date;
(B) from the amounts then on deposit in the Certificate Account with
respect to Group I, to the Owners of the Class A-1 Certificates, the Group I
Principal Distribution Amount until the Class A-1 Certificate Termination Date;
(C) from the amounts then on deposit in the Certificate Account with
respect to Group II, to the Owners of the Class A-2 Certificates, the Class A-2
Current Interest until the Class A-2 Certificate Termination Date; and
(D) from the amounts then on deposit in the Certificate Account with
respect to Group II, to the Owners of the Class A-2 Certificates, the Group II
Principal Distribution Amount until the Class A-2 Certificate Termination Date;
(E) to the Owners of the Class R Certificates, the Residual Net
Monthly Excess Cashflow, if any, for such Payment Date.
(e) On each Payment Date the Trustee shall distribute to the Owners of the
Class A-2 Certificates the amount, if any, then on deposit in the Available
Funds Cap Carry-Forward Amount Account.
(f) Notwithstanding clause (d)(iv) above, the aggregate amounts distributed
on all Payment Dates to the Owners of the related Class A Certificates on
account of principal shall not exceed the Original Certificate Principal Balance
for the related Class A Certificates.
Section 7.6. Investment of Accounts. (a) So long as no event
----------------------
described in Sections
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8.20(a) or (b) hereof shall have occurred and be continuing, and consistent with
any requirements of the Code, all or a portion of the Accounts held by the
Trustee shall be invested and reinvested by the Trustee in the name of the
Trustee for the benefit of the Owners, as directed in writing by the Servicer on
the Closing Date and from time to time thereafter, in one or more Eligible
Investments bearing interest or sold at a discount. During the continuance of an
event described in Sections 8.20(a) or (b) hereof and following any removal of
the Servicer, the Certificate Insurer shall direct such investments. No
investment in any Account shall mature later than the second Business Day
preceding the next Payment Date.
(b) If any amounts are needed for disbursement from any Account held
by the Trustee and sufficient uninvested funds are not available to make such
disbursement, the Trustee shall cause to be sold or otherwise converted to cash
a sufficient amount of the investments in such Account. No investments will be
liquidated prior to maturity unless the proceeds thereof are needed for
disbursement.
(c) Subject to Section 10.1 hereof, the Trustee shall not in any way
be held liable by reason of any insufficiency in any Account held by the Trustee
resulting from any loss on any Eligible Investment included therein.
(d) The Trustee shall hold funds in the Accounts held by the Trustee
uninvested upon the occurrence of either of the following events:
(i) the Servicer or the Certificate Insurer, as the case may be, shall
have failed to give investment directions to the Trustee within ten days after
receipt of a written request for such directions from the Trustee; or
(ii) the Servicer or the Certificate Insurer, as the case may be,
shall have failed to give investment directions to the Trustee with respect to
any investment by the Trustee that shall mature during the ten-day period
described in clause (i).
(e) For purposes of investment, the Trustee shall aggregate all
amounts on deposit in each Account. All income or other gain from investments
in any Account shall be deposited in such Account immediately on receipt, and
any loss resulting from such investments shall be charged to the Company, and
upon request by the Trustee, the Company shall reimburse the Trust Estate for
such losses.
Section 7.7. Eligible Investments. The following are Eligible
--------------------
Investments:
(a) Direct general obligations of the United States or the
obligations of any agency or instrumentality of the United States fully and
unconditionally guaranteed, the timely payment or the guarantee of which
constitutes a full faith and credit obligation of the United States.
(b) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365 days)
of any domestic bank, the short-term debt obligations of which have been rated
A-1 or better by Standard & Poor's and P-1 by Moody's.
(c) Investment agreements approved by the Certificate Insurer
provided:
1. The agreement is with a bank or insurance company which has an
unsecured, uninsured and unguaranteed obligation (or claims-paying ability)
rated Aa2 or better by Moody's and AA or better by Standard & Poor's or is the
lead bank of a parent bank holding company with an uninsured, unsecured and
unguaranteed obligation meeting such rating requirements,
2. Moneys invested thereunder may be withdrawn without any penalty,
premium or
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<PAGE>
charge upon not more than one day's notice (provided such notice may
be amended or canceled at any time prior to the withdrawal date),
3. The agreement is not subordinated to any other obligations of such
insurance company or bank,
4. The same guaranteed interest rate will be paid on any future deposits
made pursuant to such agreement, and
5. The Trustee and the Certificate Insurer receive an opinion of counsel
that such agreement is an enforceable obligation of such insurance company or
bank.
(d) Commercial paper (having original maturities of not more than 365
days) rated A-1 or better by Standard & Poor's and P-1 or better by Moody's.
(e) Investments in no load money market funds rated AAAm or AAAm-G by
Standard & Poor's and P-1 by Moody's.
(f) Investments approved in writing by the Certificate Insurer and
acceptable to Moody's and Standard & Poor's.
provided that no instrument described above is permitted to evidence either the
- --------
right to receive (a) only interest with respect to obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations; and provided, further,
-------- -------
that no instrument described above may be purchased at a price greater than par
if such instrument may be prepaid or called at a price less than its purchase
price prior to stated maturity.
Section 7.8. Reports by Trustee. (a) On each Payment Date the
------------------
Trustee shall provide to each Owner, the Servicer, the Depositor, the
Certificate Insurer, the Underwriter, the Company, Standard & Poor's and Moody's
a written report (based solely upon the information contained in the Monthly
Servicing Report) in substantially the form set forth as Exhibit J hereto with
respect to each Mortgage Loan Group, as such form may be revised by the Trustee,
the Servicer, Moody's and Standard & Poor's from time to time, but in every case
setting forth the information requested on Exhibit J hereto and the following
information:
(i) the amount of the distribution with respect to the related Class of the
Class A Certificates and the Class R Certificates;
(ii) the amount of such distributions allocable to principal, separately
identifying the aggregate amount of any Prepayments or Prepaid Installments of
principal included therein (based on a Certificate in the original principal
amount of $1,000) and separately identifying any Subordination Increase Amounts
with respect to the related Mortgage Loan Group;
(iii) the amount of such distributions allocable to interest;
(iv) the Certificate Principal Balance for each Class of Class A
Certificates as of such Payment Date together with the principal amount of such
Class of Class A Certificates (based on a Certificate in an original principal
amount of $1,000) then outstanding, in each case after giving effect to any
payment of principal on such Payment Date;
(v) the amount of any Insured Payment included in the amounts distributed
with respect to the Class A Certificates on such Payment Date;
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(vi) information to the extent and in the form furnished by the Company
pursuant to Section 6049(d)(7)(C) of the Code and the regulations promulgated
thereunder to assist the Owners in computing their market discount;
(vii) the total of any Substitution Amounts and any Loan Purchase Price
amounts included in such distribution;
(viii) the amount of any Subordination Reduction Amount with respect to
each Mortgage Loan Group;
(ix) the amounts, if any, of any Realized Losses in each Mortgage Loan
Group for the related Remittance Period;
(x) the amount of any Available Funds Cap Carry-Forward Amount; and
(xi) a number with respect to each Class (the "Pool Factor" for such Class)
computed by dividing the Certificate Principal Balance for such Class (after
giving effect to any distribution of principal to be made on such Payment Date)
by the Original Certificate Principal Balance for such Class on the Startup Day.
Items (i) through (iii) above shall, with respect to each Class of
Class A Certificates, be presented on the basis of a Certificate having a $1,000
denomination. In addition, by January 31 of each calendar year following any
year during which the Certificates are outstanding, the Trustee shall furnish a
report to each Owner of record at any time during each calendar year as to the
aggregate of amounts reported pursuant to (i), (ii) and (iii) with respect to
the Certificates for such calendar year.
(b) In addition, on each Payment Date the Trustee will distribute to
each Owner, the Certificate Insurer, the Underwriter, the Depositor, the
Servicer, the Company, Standard & Poor's and Moody's, together with the
information described in Subsection (a) preceding, the following information
with respect to each Mortgage Loan Group as of the last day of the related
Remittance Period, which is hereby required to be prepared by the Servicer and
furnished to the Trustee for such purpose on or prior to the related Remittance
Date:
(i) the total number of Mortgage Loans in each Mortgage Loan Group and the
aggregate Loan Balances thereof, together with the number, aggregate principal
balances of such Mortgage Loans in such Mortgage Loan Group and the percentage
(based on the aggregate Loan Balances of the Mortgage Loans in such Mortgage
Loan Group) (a) 31-60 days Delinquent, (b) 61-90 days Delinquent and (c) 91 or
more days Delinquent;
(ii) the number and aggregate Loan Balances of all Mortgage Loans in each
Mortgage Loan Group and percentage (based on the aggregate Loan Balances of the
Mortgage Loans in such Mortgage Loan Group) in foreclosure proceedings (and
whether any such Mortgage Loans are also included in any of the statistics
described in the foregoing clause (i));
(iii) the number, aggregate Loan Balances of all Mortgage Loans in each
Mortgage Loan Group and percentage (based on the aggregate Loan Balances of the
Mortgage Loans in such Mortgage Loan Group) relating to Mortgagors in bankruptcy
proceedings (and whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i));
(iv) the number, aggregate Loan Balances of all Mortgage Loans in each
Mortgage Loan Group and percentage (based on the aggregate Loan Balances of the
Mortgage Loans in such Mortgage Loan Group) relating to REO Properties (and
whether any such Mortgage Loans are also included in any of the statistics
described in the foregoing clause (i));
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(v) the aggregate Loan Balance of all Mortgage Loans, the aggregate
Loan Balance of the Mortgage Loans in each Group in each case after giving
effect to any payment of principal on such Payment Date; and
(vi) the book value of any REO Property in each Mortgage Loan Group.
(c) The foregoing reports shall be sent to an Owner only insofar as
such Owner owns a Certificate with respect to the related Mortgage Loan Group.
Section 7.9. Additional Reports by Trustee. (a) The Trustee
-----------------------------
shall report to the Company, the Depositor, the Servicer, Standard & Poor's,
Moody's and the Certificate Insurer with respect to the amount then held in each
Account (including investment earnings accrued or scheduled to accrue) held by
the Trustee and the identity of the investments included therein, as the
Company, the Servicer or the Certificate Insurer may from time to time request.
(b) Not later than 20 days after each Payment Date, the Trustee shall
forward to the Company, the Depositor, the Servicer and the Certificate Insurer
a statement, setting forth the status of the Certificate Account as of the close
of business on the last Business Day of the related Remittance Period showing,
for the period covered by such statement, the aggregate of deposits into and
withdrawals from the Certificate Account.
ARTICLE VIII
SERVICING AND ADMINISTRATION OF MORTGAGE LOANS
Section 8.1. Servicer and Sub-Servicers. (a) Acting directly
--------------------------
or through one or more Sub-Servicers as provided in Section 8.3, the Servicer,
as servicer, shall service and administer the Mortgage Loans in accordance with
this Agreement and with reasonable care, and using that degree of skill and
attention that the Servicer exercises with respect to comparable mortgage loans
that it services for itself or others, and shall have full power and authority,
acting alone, to do or cause to be done any and all things in connection with
such servicing and administration which it may deem necessary or desirable.
(b) The duties of the Servicer shall include collecting and posting of
all payments, responding to inquiries of Mortgagors or by federal, state or
local government authorities with respect to the Mortgage Loans, investigating
delinquencies, reporting tax information to Mortgagors in accordance with its
customary practices and accounting for collections, furnishing monthly and
annual statements to the Trustee with respect to distributions, paying
Compensating Interest and making Delinquency Advances and Servicing Advances
pursuant hereto. The Servicer shall follow its customary standards, policies
and procedures in performing its duties as Servicer. The Servicer shall
cooperate with the Trustee and furnish to the Trustee with reasonable promptness
information in its possession as may be necessary or appropriate to enable the
Trustee to perform its tax reporting duties hereunder. The Trustee shall
furnish the Servicer with any powers of attorney and other documents necessary
or appropriate to enable the Servicer to carry out its servicing and
administrative duties hereunder.
(c) Without limiting the generality of the foregoing, the Servicer (i)
shall continue, and is hereby authorized and empowered by the Trustee, to
execute and deliver, on behalf of itself, the Owners and the Trustee or any of
them, any and all instruments of satisfaction or cancellation, or of partial or
full release or discharge and all other comparable instruments, with respect to
the Mortgage Loans and with respect to the related Properties; (ii) may consent
to any modification of the terms of any Note not expressly prohibited hereby if
the effect of any such modification (x) will not be to affect materially and
adversely the security afforded by the related Property, the timing of receipt
of any payments required hereby or the interests of the Certificate Insurer and
(y) will not cause the Trust to fail to qualify as a REMIC.
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(d) The parties intend that the Trust shall constitute and that the
affairs of Trust shall be conducted so as to qualify it as a REMIC. In
furtherance of such intention, the Servicer covenants and agrees that it shall
act as agent (and the Servicer is hereby appointed to act as agent) on behalf of
the Trust and that in such capacity it shall: (i) use its best efforts to
conduct the affairs of the Trust at all times that any Class of Certificates are
outstanding so as to maintain the status of the Trust as a REMIC under the REMIC
Provisions; (ii) not knowingly or intentionally take any action or omit to take
any action that would cause the termination of the REMIC status of the Trust or
that would subject the Trust to tax and (iii) exercise reasonable care not to
allow the Trust to receive income from the performance of services or from
assets not permitted under the REMIC Provisions to be held by a REMIC.
(e) The Servicer may, and is hereby authorized to, perform any of its
servicing responsibilities with respect to all or certain of the Mortgage Loans
through a Sub-Servicer as it may from time to time designate but no such
designation of a Sub-Servicer shall serve to release the Servicer from any of
its obligations under this Agreement. Such Sub-Servicer shall have all the
rights and powers of the Servicer with respect to such Mortgage Loans under this
Agreement.
(f) Without limiting the generality of the foregoing, but subject to
Sections 8.13 and 8.14, the Servicer in its own name or in the name of a Sub-
Servicer may be authorized and empowered pursuant to a power of attorney
executed and delivered by the Trustee to execute and deliver, on behalf of
itself, the Owners and the Trustee or any of them, (i) any and all instruments
of satisfaction or cancellation or of partial or full release or discharge and
all other comparable instruments with respect to the Mortgage Loans and with
respect to the Properties, (ii) to institute foreclosure proceedings or obtain a
deed in lieu of foreclosure so as to effect ownership of any Property on behalf
of the Trustee and (iii) to hold title to any Property upon such foreclosure or
deed in lieu of foreclosure on behalf of the Trustee; provided, however, that
-------- -------
Section 8.14(a) shall constitute a power of attorney from the Trustee to the
Servicer to execute an instrument of satisfaction (or assignment of mortgage
without recourse) with respect to any Mortgage Loan paid in full (or with
respect to which payment in full has been escrowed). Subject to Sections 8.13
and 8.14, the Trustee shall execute a power of attorney to the Servicer and any
Sub-Servicer and furnish them with any other documents as the Servicer or such
Sub-Servicer shall reasonably request to enable the Servicer and such Sub-
Servicer to carry out their respective servicing and administrative duties
hereunder.
(g) The Servicer shall give prompt notice to the Trustee and the
Certificate Insurer of any action, of which the Servicer has actual knowledge,
to (i) assert a claim against the Trust or (ii) assert jurisdiction over the
Trust.
(h) Servicing Advances incurred by the Servicer or any Sub-Servicer in
connection with the servicing of the Mortgage Loans (including any penalties in
connection with the payment of any taxes and assessments or other charges) on
any Property shall be recoverable by the Servicer or such Sub-Servicer to the
extent described in Section 8.9(c) and in Section 7.5(d)(iii)(C) hereof.
Section 8.2. Collection of Certain Mortgage Loan Payments. (a)
--------------------------------------------
The Servicer shall, to the extent such procedures shall be consistent with this
Agreement and the terms and provisions of any applicable Insurance Policies
follow such collection procedures as it follows from time to time with respect
to mortgage loans in its servicing portfolio that are comparable to the Mortgage
Loans; provided that the Servicer shall always at least follow collection
--------
procedures that are consistent with or better than standard industry practices.
Consistent with the foregoing, the Servicer may in its discretion (i) waive any
assumption fees, late payment charges, charges for checks returned for
insufficient funds, prepayment fees, if any, or other fees which may be
collected in the ordinary course of servicing the Mortgage Loans, (ii) if a
Mortgagor is in default or about to be in default because of a Mortgagor's
financial condition, arrange with the Mortgagor a schedule for the payment of
delinquent payments due on the related Mortgage Loan; provided, however, the
-------- -------
Servicer shall not reschedule the payment of delinquent payments more than one
time in any twelve (12) consecutive
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months with respect to any Mortgagor or (iii) modify payments of monthly
principal and interest on any Mortgage Loan becoming subject to the terms of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended, in accordance with
the Servicer's general policies of the comparable mortgage loans subject to such
Act.
(b) The Servicer shall hold in escrow on behalf of the related
Mortgagor all Prepaid Installments received by it, and shall apply such Prepaid
Installments as directed by such Mortgagor and as set forth in the related Note.
Section 8.3. Sub-Servicing Agreements Between Servicer and Sub-
-------------------------------- ----------------
Servicers. The Servicer may enter into Sub-Servicing Agreements for any
- ---------
servicing and administration of Mortgage Loans with any institution which is
acceptable to the Certificate Insurer and which is in compliance with the laws
of each state necessary to enable it to perform its obligations under such Sub-
Servicing Agreement and (x) has (i) been designated an approved seller-servicer
by FHLMC or FNMA for Mortgage Loans and (ii) has equity of at least $5,000,000,
as determined in accordance with generally accepted accounting principles or (y)
is a Servicer Affiliate. The Servicer shall give notice to the Certificate
Insurer and the Trustee of the appointment of any Sub-Servicer and shall furnish
to the Certificate Insurer and the Trustee a copy of such Sub-Servicing
Agreement. For purposes of this Agreement, the Servicer shall be deemed to have
received payments on Mortgage Loans when any Sub-Servicer has received such
payments. Any such Sub-Servicing Agreement shall be consistent with and not
violate the provisions of this Agreement.
Section 8.4. Successor Sub-Servicers. The Servicer may
-----------------------
terminate any Sub-Servicing Agreement in accordance with the terms and
conditions of such Sub-Servicing Agreement and either itself directly service
the related Mortgage Loans or enter into a Sub-Servicing Agreement with a
successor Sub-Servicer that qualifies under Section 8.3.
Section 8.5. Liability of Servicer. The Servicer shall not be
---------------------
relieved of its obligations under this Agreement notwithstanding any Sub-
Servicing Agreement or any of the provisions of this Agreement relating to
agreements or arrangements between the Servicer and a Sub-Servicer or otherwise,
and the Servicer shall be obligated to the same extent and under the same terms
and conditions as if it alone were servicing and administering the Mortgage
Loans. The Servicer shall be entitled to enter into any agreement with a Sub-
Servicer for indemnification of the Servicer by such Sub-Servicer and nothing
contained in such Sub-Servicing Agreement shall be deemed to limit or modify
this Agreement. The Trust shall not indemnify the Servicer for any losses due
to the Servicer's negligence.
Section 8.6. No Contractual Relationship Between Sub-Servicer
------------------------------------------------
and Trustee or the Owners. Any Sub-Servicing Agreement and any other
- -------------------------
transactions or services relating to the Mortgage Loans involving a Sub-Servicer
shall be deemed to be between the Sub-Servicer and the Servicer alone and the
Certificate Insurer, the Trustee and the Owners shall not be deemed parties
thereto and shall have no claims, rights, obligations, duties or liabilities
with respect to any Sub-Servicer except as set forth in Section 8.7.
Section 8.7. Assumption or Termination of Sub-Servicing
------------------------------------------
Agreement by Trustee. In connection with the assumption of the
- --------------------
responsibilities, duties and liabilities and of the authority, power and rights
of the Servicer hereunder by the Trustee pursuant to Section 8.20, it is
understood and agreed that the Servicer's rights and obligations under any Sub-
Servicing Agreement then in force between the Servicer and a Sub-Servicer may be
assumed or terminated by the Trustee at its option without the payment of a fee
notwithstanding any contrary provision in any Sub-Servicing Agreement.
The Servicer shall, upon reasonable request of the Trustee, but at the
expense of the Servicer, deliver to the assuming party documents and records
relating to each Sub-Servicing Agreement and an accounting of amounts collected
and held by it and otherwise use its best reasonable efforts to effect the
orderly and efficient transfer of the Sub-Servicing Agreements to the assuming
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party.
Section 8.8. Principal and Interest Account.
------------------------------
(a) The Servicer shall establish in the name of the Trust for the
benefit of the Owners of the Certificates and maintain at one or more Designated
Depository Institutions one or more Principal and Interest Accounts.
Subject to Subsection (c) below, the Servicer and any Sub-Servicer
shall deposit all receipts related to the Mortgage Loans into the Principal and
Interest Account on a daily basis (but no later than the first Business Day
after receipt).
Subject to Subsection (c) below, within one Business Day following the
Startup Day, the Company and/or the Servicer shall deposit into the Principal
and Interest Account all receipts related to the related Mortgage Loans received
after the Cut-Off Date.
(b) Any investment of funds in the Principal and Interest Account
shall mature or be withdrawable at par on or prior to the immediately succeeding
Remittance Date. All funds in the Principal and Interest Account may only be
held (i) uninvested, up to the limits insured by the FDIC or (ii) invested in
Eligible Investments. The Principal and Interest Account shall be held in trust
in the name of the Trust and for the benefit of the Owners of the Certificates.
Any investment earnings on funds held in the Principal and Interest Account
shall be for the account of the Servicer and may only be withdrawn from the
Principal and Interest Account by the Servicer on the second Business Day of the
month for the investment earnings for the previous calendar month. The Servicer
shall withdraw from the Principal and Interest Account held by the Trustee, on
the second Business Day of the month, investment earnings for the previous
calendar month. The Servicer shall deposit into the Principal and Interest
Account the amount of all losses on investment of funds in the Principal and
Interest Account upon request from the Trustee. Any references herein to
amounts on deposit in the Principal and Interest Account shall refer to amounts
net of investment earnings.
(c) The Servicer shall deposit to the Principal and Interest Account
all principal and interest collections on the Mortgage Loans received after the
Cut-Off Date, including any Prepayments and Net Liquidation Proceeds, all Loan
Purchase Prices and Substitution Amounts received or paid by the Servicer with
respect to the Mortgage Loans, other recoveries or amounts related to the
Mortgage Loans received by the Servicer, Compensating Interest and Delinquency
Advances together with any amounts which are reimbursable from the Principal and
Interest Account but net of (i) the Servicing Fee with respect to each Mortgage
Loan and other servicing compensation to the Servicer as permitted by Section
8.15 hereof, (ii) principal (including Prepayments) collected on the related
Mortgage Loans on or prior to the Cut-Off Date, (iii) interest accruing on the
related Mortgage Loans on or prior to the Cut-Off Date and (iv) Net Liquidation
Proceeds to the extent such Net Liquidation Proceeds exceed the Loan Balance of
the related Mortgage Loan.
(d) (i) The Servicer may make withdrawals from the Principal
and Interest Account only for the following purposes:
(A) to effect the timely remittance to the Trustee of the Monthly
Remittance Amounts due on the Remittance Date;
(B) to reimburse itself pursuant to Section 8.9(a) hereof for
unrecovered Delinquency Advances and Servicing Advances;
(C) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(D) to withdraw amounts that have been deposited to the Principal
and Interest Account in error; and
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(E) to clear and terminate the Principal and Interest Account
following the termination of the Trust Estate pursuant to Article IX hereof.
(ii) On the Determination Date of each month, commencing in April
1996 the Servicer shall send to the Trustee the Monthly Exception Report, in the
form of a computer tape, detailing the payments on the Mortgage Loans during the
prior Remittance Period and certifying the amounts and purpose of withdrawals
permitted pursuant to (d) above from the Principal and Interest Account. Such
tape shall contain the specified data, as described in Section 8.26 hereof, and
shall be in the form and have the specifications as may be agreed to between the
Servicer, the Certificate Insurer and the Trustee from time to time.
(iii) On each Remittance Date, commencing in April 1996 the Servicer
shall remit to the Trustee by wire transfer, or otherwise make funds available
in immediately available funds for deposit to the Certificate Account, (x) for
Group I, the Group I Interest Remittance Amount and the Group I Principal
Remittance Amount and (y) for Group II, the Group II Interest Remittance Amount
and the Group II Principal Remittance Amount.
Section 8.9. Delinquency Advances, Compensating Interest and Servicing
---------------------------------------------------------
Advances. (a) The Servicer is required, not later than each Remittance Date,
- --------
to deposit into the Principal and Interest Account an amount equal to the sum of
(i) the interest due (net of the Servicing Fees due but not collected) and (ii)
scheduled principal due, but not collected, with respect to Delinquent Mortgage
Loans during the related Due Period but only if, in its good faith business
judgment, the Servicer reasonably believes that such amount will ultimately be
recovered from the related Mortgage Loan. Such amounts are "Delinquency
Advances".
The Servicer shall be permitted to fund its payment of Delinquency
Advances on any Remittance Date and to reimburse itself for any Delinquency
Advances paid from the Servicer's own funds, from collections on any Mortgage
Loan deposited to the Principal and Interest Account subsequent to the related
Due Period and shall deposit into the Principal and Interest Account with
respect thereto (i) collections from the Mortgagor whose Delinquency gave rise
to the shortfall which resulted in such Delinquency Advance and (ii) Net
Liquidation Proceeds recovered on account of the related Mortgage Loan to the
extent of the amount of aggregate Delinquency Advances related thereto. If not
thereto recovered from the related Mortgagor or the related Net Liquidation
Proceeds, Delinquency Advances shall be recoverable pursuant to Section
7.5(d)(iii)(C).
(b) On or prior to each Remittance Date, the Servicer shall deposit
in the Principal and Interest Account with respect to any Paid-in-Full Mortgage
Loan during the related Remittance Period out of its own funds without any right
of reimbursement therefor an amount equal to the difference between (x) 30 days'
interest at such Mortgage Loan's Coupon Rate (less the Servicing Fee) on the
Loan Balance of such Mortgage Loan as of the first day of the related Remittance
Period and (y) to the extent not previously advanced, the interest (less the
Servicing Fee) paid by the Mortgagor with respect to the Mortgage Loan during
such Remittance Period (any such amount paid by the Servicer, "Compensating
Interest"). The Servicer shall in no event be required to pay Compensating
Interest with respect to any Remittance Period in an amount in excess of the
aggregate Servicing Fee received by the Servicer with respect to all Mortgage
Loans for such Remittance Period. Further, the Servicer is not obligated to
cover shortfalls in collections in interest due to Curtailments.
(c) The Servicer will pay all "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) Preservation Expenses, (ii) any enforcement or
judicial proceedings, including foreclosures, and (iii) the management and
liquidation of REO Property, but is only required to pay such costs and expenses
to the extent the Servicer reasonably believes such costs and expenses will
increase Net Liquidation Proceeds on the related Mortgage Loan. Each such
amount so paid will constitute a "Servicing Advance". The Servicer may recover
Servicing Advances (x) from the Mortgagors to the extent permitted by the
Mortgage Loans, from Liquidation Proceeds realized upon the liquidation of the
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related Mortgage Loan, and (y) as provided in Section 7.5(d)(iii)(C) hereof. In
no case may the Servicer recover Servicing Advances from principal and interest
payments on any Mortgage Loan or from any amounts relating to any other Mortgage
Loan except as provided pursuant to Section 7.5(d)(iii)(C) hereof.
Section 8.10. Purchase of Mortgage Loans. The Servicer may, but is
--------------------------
not obligated to, purchase for its own account any Mortgage Loan which becomes
Delinquent, in whole or in part, as to four consecutive monthly installments or
any Mortgage Loan as to which enforcement proceedings have been brought by the
Servicer or by any Sub-Servicer pursuant to Section 8.13. Any such Loan so
purchased shall be purchased by the Servicer not later than the related
Remittance Date at a purchase price equal to the Loan Purchase Price thereof,
which purchase price shall be deposited in the Principal and Interest Account.
Section 8.11. Maintenance of Insurance. (a) The Servicer shall
------------------------
cause to be maintained with respect to each Mortgage Loan a hazard insurance
policy with a generally acceptable carrier that provides for fire and extended
coverage, and which provides for a recovery by the Servicer on behalf of the
Trust of insurance proceeds relating to such Mortgage Loan in an amount not less
than the least of (i) the outstanding principal balance of the Mortgage Loan,
(ii) the minimum amount required to compensate for damage or loss on a
replacement cost basis and (iii) the full insurable value of the premises.
(b) If the Mortgage Loan at the time of origination relates to a
Property in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards, the Servicer will cause to be
maintained with respect thereto a flood insurance policy in a form meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable carrier in an amount representing coverage, and
which provides for a recovery by the Servicer on behalf of the Trust of
insurance proceeds relating to such Mortgage Loan of not less than the least of
(i) the outstanding principal balance of the Mortgage Loan, (ii) the minimum
amount required to compensate for damage or loss on a replacement cost basis and
(iii) the maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973. The Servicer shall indemnify the Trust and the
Certificate Insurer out of the Servicer's own funds for any loss to the Trust
and the Certificate Insurer resulting from the Servicer's failure to maintain
the insurance required by this Section.
(c) In the event that the Servicer shall obtain and maintain a blanket
policy insuring against fire, flood and hazards of extended coverage on all of
the Mortgage Loans, then, to the extent such policy names the Servicer as loss
payee and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without co-insurance and otherwise complies with
the requirements of this Section 8.11, the Servicer shall be deemed conclusively
to have satisfied its obligations with respect to fire and hazard insurance
coverage under this Section 8.11, it being understood and agreed that such
blanket policy may contain a deductible clause, in which case the Servicer
shall, in the event that there shall not have been maintained on the related
Property a policy complying with the preceding paragraphs of this Section 8.11,
and there shall have been a loss which would have been covered by such policy,
deposit in the Principal and Interest Account from the Servicer's own funds the
difference, if any, between the amount that would have been payable under a
policy complying with the preceding paragraphs of this Section 8.11 and the
amount paid under such blanket policy. Upon the request of the Trustee or the
Certificate Insurer, the Servicer shall cause to be delivered to the Trustee or
the Certificate Insurer a certified true copy of such policy.
Section 8.12. Due-on-Sale Clauses; Assumption and Substitution
------------------------------------------------
Agreements. When a Property has been or is about to be conveyed by the
- ----------
Mortgagor, the Servicer shall, to the extent it has knowledge of such conveyance
or prospective conveyance, exercise its rights to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Note; provided, however, that the Servicer shall not exercise any
-------- -------
such right if (i) the "due-on-sale" clause, in the reasonable belief of the
Servicer, is not enforceable under applicable law
57
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or (ii) the Servicer reasonably believes that to permit an assumption of the
Mortgage Loan would not materially and adversely affect the interest of the
Owners or of the Certificate Insurer. In such event, the Servicer shall enter
into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such Person
becomes liable under the Note and, unless prohibited by applicable law or the
Mortgage Documents, the Mortgagor remains liable thereon. If the foregoing is
not permitted under applicable law, the Servicer is authorized to enter into a
substitution of liability agreement with such person, pursuant to which the
original Mortgagor is released from liability and such person is substituted as
Mortgagor and becomes liable under the Note; provided, however, that to the
-------- -------
extent any such substitution of liability agreement would be delivered by the
Servicer outside of its usual procedures for mortgage loans held in its own
portfolio the Servicer shall, prior to executing and delivering such agreement,
obtain the prior written consent of the Certificate Insurer. The Mortgage Loan,
as assumed, shall conform in all respects to the requirements, representations
and warranties of this Agreement. The Servicer shall notify the Trustee that any
such assumption or substitution agreement has been completed by forwarding to
the Trustee the original copy of such assumption or substitution agreement,
which copy shall be added by the Trustee to the related File and which shall,
for all purposes, be considered a part of such File to the same extent as all
other documents and instruments constituting a part thereof. The Servicer shall
be responsible for recording any such assumption or substitution agreements. In
connection with any such assumption or substitution agreement, the required
monthly payment on the related Mortgage Loan shall not be changed but shall
remain as in effect immediately prior to the assumption or substitution, the
stated maturity or outstanding principal amount of such Mortgage Loan shall not
be changed nor shall any required monthly payments of principal or interest be
deferred or forgiven. Any fee collected by the Servicer or the Sub-Servicer for
consenting to any such conveyance or entering into an assumption or substitution
agreement shall be retained by or paid to the Servicer as additional servicing
compensation.
Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Servicer shall not be deemed to be in default, breach or any
other violation of its obligations hereunder by reason of any assumption of a
Mortgage Loan by operation of law or any assumption which the Servicer may be
restricted by law from preventing, for any reason whatsoever.
Section 8.13. Realization Upon Defaulted Mortgage Loans. (a) The
-----------------------------------------
Servicer shall foreclose upon or otherwise comparably effect the ownership on
behalf of the Trust of Properties relating to defaulted Mortgage Loans as to
which no satisfactory arrangements can be made for collection of Delinquent
payments and which the Servicer has not purchased pursuant to Section 8.10. In
connection with such foreclosure or other conversion, the Servicer shall
exercise such of the rights and powers vested in it hereunder, and use the same
degree of care and skill in its exercise or use as prudent mortgage lenders
would exercise or use under the circumstances in the conduct of their own
affairs, including, but not limited to, advancing funds for the payment of
taxes, amounts due with respect to Senior Liens and insurance premiums. Any
amounts so advanced shall constitute "Servicing Advances" within the meaning of
Section 8.9(c) hereof. The Servicer shall sell any REO Property within 23 months
of its acquisition by the Trust, unless the Servicer obtains for the Trustee and
the Certificate Insurer an opinion of counsel experienced in federal income tax
matters and reasonably acceptable to the Certificate Insurer, addressed to the
Trustee, the Certificate Insurer and the Servicer, to the effect that the
holding by the Trust of such REO Property for any greater period will not result
in the imposition of taxes on "Prohibited Transactions" of the Trust as defined
in Section 860F of the Code or cause the Trust to fail to qualify as a REMIC
under the REMIC Provisions at any time that any Certificates are outstanding, in
which case the Servicer shall sell any REO Property by the end of any extended
period specified in any such opinion.
Notwithstanding the generality of the foregoing provisions, the
Servicer shall manage, conserve, protect and operate each REO Property for the
Owners solely for the purpose of its prompt disposition and sale in a manner
which does not cause such REO Property to fail to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code or result in the
receipt by the Trust of any "income from non-permitted assets" within the
meaning of Section 860F(a)(2)(B) of
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the Code or any "net income from foreclosure property" which is subject to
taxation under the REMIC Provisions. Pursuant to its efforts to sell such REO
Property, the Servicer shall either itself or through an agent selected by the
Servicer protect and conserve such REO Property in the same manner and to such
extent as is customary in the locality where such REO Property is located and
may, incident to its conservation and protection of the interests of the Owners,
rent the same, or any part thereof, as the Servicer deems to be in the best
interest of the Owners for the period prior to the sale of such REO Property.
The Servicer shall take into account the existence of any hazardous substances,
hazardous wastes or solid wastes, as such terms are defined in the Comprehensive
Environmental Response Compensation and Liability Act, the Resource Conservation
and Recovery Act of 1976, or other federal, state or local environmental
legislation, on a Property in determining whether to foreclose upon or otherwise
comparably convert the ownership of such Property.
(b) The Servicer shall determine, with respect to each defaulted
Mortgage Loan, when it has recovered, whether through trustee's sale,
foreclosure sale or otherwise, all amounts it expects to recover from or on
account of such defaulted Mortgage Loan, whereupon such Mortgage Loan shall
become a "Liquidated Loan".
Section 8.14. Trustee to Cooperate; Release of Files. (a) Upon the
--------------------------------------
payment in full of any Mortgage Loan (including the repurchase of any Mortgage
Loan or any liquidation of such Mortgage Loan through foreclosure or otherwise)
or the receipt by the Servicer of a notification that payment in full will be
escrowed in a manner customary for such purposes, the Servicer shall deliver to
the Trustee a Request for Release. Upon receipt of such Request for Release,
the Trustee shall promptly release the related File, in trust to (i) the
Servicer, (ii) an escrow agent or (iii) any employee, agent or attorney of the
Trustee, in each case pending its release by the Servicer, such escrow agent or
such employee, agent or attorney of the Trustee, as the case may be. Upon any
such payment in full or the receipt of such notification that such funds have
been placed in escrow, the Servicer is authorized to give, as attorney-in-fact
for the Trustee and the mortgagee under the Mortgage which secured the Note, an
instrument of satisfaction (or assignment of Mortgage without recourse)
regarding the Property relating to such Mortgage, which instrument of
satisfaction or assignment, as the case may be, shall be delivered to the Person
or Persons entitled thereto against receipt therefor of payment in full, it
being understood and agreed that no expense incurred in connection with such
instrument of satisfaction or assignment, as the case may be, shall be
chargeable to the Principal and Interest Account. In lieu of executing any such
satisfaction or assignment, as the case may be, the Servicer may prepare and
submit to the Trustee a satisfaction (or assignment without recourse, if
requested by the Person or Persons entitled thereto) in form for execution by
the Trustee with all requisite information completed by the Servicer; in such
event, the Trustee shall execute and acknowledge such satisfaction or
assignment, as the case may be, and deliver the same with the related File, as
aforesaid.
(b) From time to time and as appropriate in the servicing of any
Mortgage Loan, including, without limitation, foreclosure or other comparable
conversion of a Mortgage Loan or collection under any applicable Insurance
Policy, the Trustee shall (except in the case of the payment or liquidation
pursuant to which the related File is released to an escrow agent or an
employee, agent or attorney of the Trustee), upon request of the Servicer and
delivery to the Trustee of a Request for Release, release the related File to
the Servicer and shall execute such documents as shall be necessary to the
prosecution of any such proceedings, including, without limitation, an
assignment without recourse of the related Mortgage to the Servicer; provided
that there shall not be released and unreturned at any one time more than 10% of
the entire number of Files. The Trustee shall complete in the name of the
Trustee any endorsement in blank on any Note prior to releasing such Note to the
Servicer. Such receipt shall obligate the Servicer to return the File to the
Trustee when the need therefor by the Servicer no longer exists unless the
Mortgage Loan shall be liquidated in which case, upon receipt of the liquidation
information, in physical or electronic form, the Request for Release shall be
released by the Trustee to the Servicer.
(c) The Servicer shall have the right to approve applications of
Mortgagors for consent to (i) partial releases of Mortgages, (ii) alterations
and (iii) removal, demolition or division of properties subject to Mortgages.
No application for approval shall be considered by the Servicer
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unless: (x) the provisions of the related Note and Mortgage have been complied
with; (y) the Combined Loan-to-Value Ratio (which may, for this purpose, be
determined at the time of any such action in a manner reasonably acceptable to
the Certificate Insurer) after any release does not exceed the Combined Loan-to-
Value Ratio as of the Cut-Off Date and the Mortgagor's debt-to-income ratio
after any release does not exceed the debt-to-income ratio as of the Cut-Off
Date and in no event exceeds the maximum debt-to-income levels under the related
Originator's underwriting guidelines for a similar credit grade borrower and (z)
the lien priority of the related Mortgage is not adversely affected. Upon
receipt by the Trustee of an Officer's Certificate executed on behalf of the
Servicer setting forth the action proposed to be taken in respect of a
particular Mortgage Loan and certifying that the criteria set forth in the
immediately preceding sentence have been satisfied, the Trustee shall execute
and deliver to the Servicer the consent or partial release so requested by the
Servicer. A proposed form of consent or partial release, as the case may be,
shall accompany any Officer's Certificate delivered by the Servicer pursuant to
this paragraph.
(d) No costs associated with the procedures described in this Section
8.14 shall be an expense of the Trust.
Section 8.15. Servicing Compensation. As compensation for its
----------------------
activities hereunder, the Servicer shall be entitled to retain the amount of the
Servicing Fee with respect to each Mortgage Loan. Additional servicing
compensation in the form of prepayment charges, release fees, bad check charges,
assumption fees, late payment charges, prepayment penalties, any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Principal and Interest Account pursuant to Section 8.8(c)(iv) and similar
items shall, to the extent collected from Mortgagors, be retained by the
Servicer.
Section 8.16. Annual Statement as to Compliance. (a) The Servicer,
---------------------------------
at its own expense, will deliver to the Trustee, the Certificate Insurer,
Standard & Poor's and Moody's, on or before the last day of December of each
year, commencing in 1996, an Officer's Certificate stating, as to each signer
thereof, that (i) a review of the activities of the Servicer during such
preceding calendar year and of performance under this Agreement has been made
under such officers' supervision and (ii) to the best of such officers'
knowledge, based on such review, the Servicer has fulfilled all its obligations
under this Agreement for such year, or, if there has been a default in the
fulfillment of all such obligations, specifying each such default known to such
officers and the nature and status thereof including the steps being taken by
the Servicer to remedy such defaults.
(b) The Servicer shall deliver to the Trustee, the Certificate
Insurer, the Owners and the Rating Agencies, promptly after having obtained
knowledge thereof but in no event later than five Business Days thereafter,
written notice by means of an Officer's Certificate of any event which with the
giving of notice or lapse of time, or both, would become an Event of Servicing
Termination.
Section 8.17. Annual Independent Certified Public Accountants'
------------------------------------------------
Reports. On or before the last day of March of each year, commencing in 1997,
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the Servicer, at its own expense, shall cause to be delivered to the Trustee,
the Certificate Insurer, Standard & Poor's and Moody's a letter or letters of a
firm of independent, nationally-recognized certified public accountants
reasonably acceptable to the Certificate Insurer stating that such firm has,
with respect to the Servicer's overall servicing operations during the preceding
calendar year, examined such operations in accordance with the requirements of
the Uniform Single Audit Program for Mortgage Bankers, and in either case
stating such firm's conclusions relating thereto.
Section 8.18. Access to Certain Documentation and Information
-----------------------------------------------
Regarding the Mortgage Loans. The Servicer shall provide to the Trustee, the
- ----------------------------
Certificate Insurer, the FDIC and the supervisory agents and examiners of each
of the foregoing access to the documentation regarding the Mortgage Loans
required by applicable state and federal regulations, such access being afforded
without charge but only upon reasonable request and during normal business hours
at the offices of the Servicer designated by it.
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Upon any change in the format of the computer tape maintained by the
Servicer in respect of the Mortgage Loans, the Servicer shall deliver a copy of
such computer tape to the Trustee and in addition shall provide a copy of such
computer tape to the Trustee, and the Certificate Insurer at such other times as
the Trustee or the Certificate Insurer may reasonably request.
Section 8.19. Assignment of Agreement. The Servicer may not assign
-----------------------
its obligations under this Agreement, in whole or in part, unless it shall have
first obtained the written consent of the Trustee and the Certificate Insurer,
which such consent shall not be unreasonably withheld; provided, however, that
-------- -------
any assignee must meet the eligibility requirements set forth in Section 8.21(f)
hereof for a successor servicer. Notice of any such assignment shall be given
by the Servicer to the Trustee, the Certificate Insurer and the Rating Agencies.
Section 8.20. Events of Servicing Termination. (a) The Trustee or
-------------------------------
the Certificate Insurer (or the Owners pursuant to Section 6.11 hereof) may
remove the Servicer (including any successor entity serving as the Servicer)
upon the occurrence of any of the following events:
(i) The Servicer shall fail to deliver to the Trustee any proceeds or
required payment, which failure continues unremedied for five Business Days
following written notice to an Authorized Officer of the Servicer from the
Trustee or from any Owner;
(ii) The Servicer shall (I) apply for or consent to the appointment of
a receiver, trustee, liquidator or custodian or similar entity with respect to
itself or its property, (II) admit in writing its inability to pay its debts
generally as they become due, (III) make a general assignment for the benefit of
creditors, (IV) be adjudicated a bankrupt or insolvent, (V) commence a voluntary
case under the federal bankruptcy laws of the United States of America or file a
voluntary petition or answer seeking reorganization, an arrangement with
creditors or an order for relief or seeking to take advantage of any insolvency
law or file an answer admitting the material allegations of a petition filed
against it in any bankruptcy, reorganization or insolvency proceeding or (VI)
take corporate action for the purpose of effecting any of the foregoing;
(iii) If without the application, approval or consent of the
Servicer, a proceeding shall be instituted in any court of competent
jurisdiction, under any law relating to bankruptcy, insolvency, reorganization
or relief of debtors, seeking in respect of the Servicer an order for relief or
an adjudication in bankruptcy, reorganization, dissolution, winding up,
liquidation, a composition or arrangement with creditors, a readjustment of
debts, the appointment of a trustee, receiver, liquidator, custodian or similar
entity with respect to the Servicer or of all or any substantial part of its
assets, or other like relief in respect thereof under any bankruptcy or
insolvency law, and, if such proceeding is being contested by the Servicer in
good faith, the same shall (A) result in the entry of an order for relief or any
such adjudication or appointment or (B) continue undismissed or pending and
unstayed for any period of seventy-five (75) consecutive days;
(iv) The Servicer shall fail to perform any one or more of its
obligations hereunder (other than the obligations set out in (i) above) and
shall continue in default thereof for a period of sixty (60) days after the
earlier of (x) notice by the Trustee or the Certificate Insurer of said failure
or (y) actual knowledge of an officer of the Servicer; provided, however, that
-------- -------
if the Servicer can demonstrate to the reasonable satisfaction of the
Certificate Insurer that it is diligently pursuing remedial action, then the
cure period may be extended with the written approval of the Certificate
Insurer; or
(v) The Servicer shall fail to cure any breach of any of its
representations and warranties set forth in Section 3.2 which materially and
adversely affects the interests of the Owners or Certificate Insurer for a
period of sixty (60) days after the Servicer's discovery
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or receipt of notice thereof; provided, however, that if the Servicer can
-------- -------
demonstrate to the reasonable satisfaction of the Certificate Insurer that it is
diligently pursuing remedial action, then the cure period may be extended with
the written approval of the Certificate Insurer.
(b) The Certificate Insurer may remove the Servicer upon the
occurrence of any of the following events:
(i) a Group I Total Available Funds Shortfall or a Group II Total
Available Funds Shortfall; provided, however, that the Certificate Insurer shall
-------- -------
have no right to remove the Servicer under this clause (i) if the Servicer can
demonstrate to the reasonable satisfaction of the Certificate Insurer that such
event was due to circumstances beyond the control of the Servicer;
(ii) the failure by the Servicer to make any required Servicing
Advance;
(iii) the failure by the Servicer to perform any one or more of its
obligations hereunder, which failure materially and adversely affects the
interests of the Certificate Insurer, and the continuance of such failure for a
period of 30 days or such longer period as agreed to in writing by the
Certificate Insurer.
(iv) the failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest;
(v) if on any Payment Date the Pool Rolling Three Month Delinquency
Rate exceeds 7.0%;
(vi) if on any Payment Date occurring in March of any year, commencing
in March 1997, the aggregate Pool Cumulative Realized Losses over the prior
twelve month period exceed 2.0% of the average Pool Principal Balance as of the
close of business on the last day of each of the twelve preceding Remittance
Periods; or
(vii) (a) if on any of the first 60 Payment Dates from the Startup
Day the aggregate Pool Cumulative Expected Losses for all prior Remittance
Periods since the Startup Day exceed 6.625% of the Pool Principal Balance as of
the Cut-Off Date and (b) if on any Payment Date thereafter the aggregate Pool
Cumulative Expected Losses for all prior Remittance Periods from the Startup Day
exceed 9.9375% of the Pool Principal Balance as of the Cut-Off Date, provided,
--------
however, with respect to clauses (v), (vi) and (vii), if the Servicer can
- -------
demonstrate to the reasonable satisfaction of the Certificate Insurer that any
such event was due to circumstances beyond the control of the Servicer, such
event shall not be considered an event of termination of the Servicer.
Upon the Trustee's determination that a required Delinquency Advance or payment
of Compensating Interest has not been made by the Servicer, the Trustee shall so
notify in writing an Authorized Officer of the Servicer and the Certificate
Insurer as soon as is reasonably practical.
(c) In the case of clauses (i), (ii), (iii), (iv) or (v) of Subsection
(b) the Owners of Certificates evidencing not less than 33 1/3% of the aggregate
Class A Certificate Principal Balance (with the consent of the Certificate
Insurer) by notice then given in writing to the Servicer (and a copy to the
Trustee) may terminate all of the rights and obligations of the Servicer under
this Agreement; provided, however, that the responsibilities and duties of the
-------- -------
initial Servicer with respect to the repurchase of Mortgage Loans pursuant to
Section 3.4 shall not terminate. The Trustee shall mail a copy of any notice
given by it hereunder to the Rating Agencies. On or after the receipt by the
Servicer of such written notice, all authority and power of the Servicer under
this Agreement, whether with respect to the Certificates or the Mortgage Loans
or otherwise, shall without further action pass to and be vested in the Trustee
(for this purpose, the term includes an affiliate thereof) or such successor
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Servicer as may be appointed hereunder, and, without limitation, the Trustee is
hereby authorized and empowered (which authority and power are coupled with an
interest and are irrevocable) to execute and deliver, on behalf of the
predecessor Servicer, as attorney-in-fact or otherwise, any and all documents
and other instruments and to do or accomplish all other acts or things necessary
or appropriate to effect the purposes of such notice or termination, whether to
complete the transfer and endorsement of the Mortgage Loans and related
documents or otherwise. The predecessor Servicer shall cooperate with the
successor Servicer or the Trustee in effecting the termination of the
responsibilities and rights of the predecessor Servicer under this Agreement
including the transfer to the successor Servicer or to the Trustee for
administration by it of all cash accounts that shall at the time be held by the
predecessor Servicer for deposit or shall thereafter be received with respect to
a Mortgage Loan. All reasonable costs and expenses (including attorneys' fees)
incurred in connection with transferring the Files to the successor Servicer and
amending this Agreement to reflect such succession as Servicer pursuant to this
Section 8.20 shall be paid by the predecessor Servicer upon presentation of
reasonable documentation of such costs and expenses.
(d) If any event described in subsections (a) or (b) above occurs and
is continuing, during the 30 day period following receipt of notice, the Trustee
and the Certificate Insurer shall cooperate with each other to determine if the
occurrence of such event is more likely than not the result of the acts or
omissions of the Servicer or more likely than not the result of events beyond
the control of the Servicer. If the Trustee and the Certificate Insurer
conclude that the event is the result of the latter, the Servicer may not be
terminated, unless and until some other event set forth in subsection (a) or (b)
has occurred and is continuing. If the Trustee and the Certificate Insurer
conclude that the event is the result of the former, the Certificate Insurer may
terminate the Servicer in accordance with this Section, and the Trustee shall
act as successor Servicer, provided that the Trustee shall have until the 30th
day following the date of receipt of notice of the event to appoint a successor
Servicer pursuant to this Section.
If the Trustee and the Certificate Insurer cannot agree, and the basis
for such disagreement is not arbitrary or unreasonable, as to the cause of the
event, the decision of the Certificate Insurer shall control; provided, however,
-------- -------
that if the Certificate Insurer decides to terminate the Servicer, the Trustee
shall be relieved of its obligation to assume the servicing or to appoint a
successor, which shall be the exclusive obligation of the Certificate Insurer.
The Certificate Insurer agrees to use its best efforts to inform the
Trustee of any materially adverse information regarding the Servicer's servicing
activities that comes to the attention of the Certificate Insurer from time to
time.
Section 8.21. Resignation of Servicer and Appointment of Successor.
----------------------------------------------------
(a) Upon the Servicer's receipt of notice of termination pursuant to Section
8.20 or the Servicer's resignation in accordance with the terms of this Section
8.21, the predecessor Servicer shall continue to perform its functions as
Servicer under this Agreement, in the case of termination, only until the date
specified in such termination notice or, if no such date is specified in a
notice of termination, until receipt of such notice and, in the case of
resignation, until the earlier of (x) the date 45 days from the delivery to the
Certificate Insurer and the Trustee of written notice of such resignation (or
written confirmation of such notice) in accordance with the terms of this
Agreement and (y) the date upon which the predecessor Servicer shall become
unable to act as Servicer, as specified in the notice of resignation and
accompanying Opinion of Counsel. All collections then being held by the
predecessor Servicer prior to its removal and any collections received by the
Servicer after removal or resignation shall be endorsed by it to the Trustee and
remitted directly and immediately to the Trustee or the successor Servicer. In
the event of the Servicer's resignation or termination hereunder, the Trustee
shall appoint a successor Servicer and the successor Servicer shall accept its
appointment by a written assumption in form acceptable to the Trustee and the
Certificate Insurer, with copies to the Certificate Insurer and the Rating
Agencies.
(b) The Servicer shall not resign from the obligations and duties
hereby imposed on it,
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except (i) upon determination that its duties hereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it, the other activities
of the Servicer so causing such a conflict being of a type and nature carried on
by the Servicer at the date of this Agreement or (ii) upon written consent of
the Certificate Insurer and the Trustee. Any such determination permitting the
resignation of the Servicer shall be evidenced by an opinion of counsel to such
effect which shall be delivered to the Trustee and the Certificate Insurer.
(c) No removal or resignation of the Servicer shall become effective
until the Trustee or a successor Servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with this Section.
(d) Upon removal or resignation of the Servicer, the Servicer also
shall promptly deliver or cause to be delivered to a successor Servicer or the
Trustee all the books and records (including, without limitation, records kept
in electronic form) that the Servicer has maintained for the Mortgage Loans,
including all tax bills, assessment notices, insurance premium notices and all
other documents as well as all original documents then in the Servicer's
possession.
(e) Any collections received by the Servicer after removal or
resignation shall be endorsed by it to the Trustee and remitted directly and
immediately to the Trustee, or the successor Servicer.
(f) Upon removal or resignation of the Servicer, the Trustee (x)
shall solicit bids for a successor Servicer as described below and (y) pending
the appointment of a successor Servicer as a result of soliciting such bids,
shall serve as Servicer. The Trustee shall, if it is unable to obtain a
qualifying bid and is prevented by law from acting as Servicer, (I) appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution which has been
designated as an approved seller-servicer by FNMA or FHLMC for second mortgage
loans and having equity of not less than $15,000,000 or such lower level as may
be acceptable to the Certificate Insurer as determined in accordance with
generally accepted accounting principles as the successor to the Servicer
hereunder in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer hereunder and (II) give notice thereof to the
Certificate Insurer and Rating Agencies. The compensation of any successor
Servicer (including, without limitation, the Trustee) so appointed shall be the
Servicing Fee, together with the other servicing compensation in the form of
assumption fees, late payment charges or otherwise as provided in Sections 8.8
and 8.15; provided, however, that if the Trustee acts as successor Servicer,
-------- -------
then the former Servicer agrees to pay to the Trustee at such time that the
Trustee becomes such successor Servicer a set-up fee of twenty-five dollars
($25.00) for each Mortgage Loan then included in the Trust Estate. The Trustee
shall be obligated to serve as successor Servicer whether or not the fee
described in the preceding sentence is paid by the Company, but shall in any
event be entitled to receive, and to enforce payment of, such fee from the
former Servicer.
(g) In the event the Trustee solicits bids as provided above, the
Trustee shall solicit, by public announcement, bids from housing and home
finance institutions, banks and mortgage servicing institutions meeting the
qualifications set forth above. Such public announcement shall specify that the
successor Servicer shall be entitled to the full amount of the aggregate
Servicing Fees as servicing compensation, together with the other servicing
compensation in the form of assumption fees, late payment charges or otherwise
as provided in Sections 8.8 and 8.15. Within thirty days after any such public
announcement, the Trustee shall negotiate and effect the sale, transfer and
assignment of the servicing rights and responsibilities hereunder to the
qualified party submitting the highest satisfactory bid as to the price they
will pay to obtain such servicing. The Trustee shall deduct from any sum
received by the Trustee from the successor to the Servicer in respect of such
sale, transfer and assignment all costs and expenses of any public announcement
and of any sale, transfer and assignment of the servicing rights and
responsibilities hereunder. After such deductions, the remainder of such sum
shall be paid by the Trustee to the Servicer at the time of such sale.
(h) The Trustee and such successor shall take such action consistent
with this
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Agreement as shall be necessary to effectuate any such succession, including the
notification to all Mortgagors of the transfer of servicing if such notification
is not done by the Servicer as required by subsection (j) below. The Servicer
agrees to cooperate with the Trustee and any successor Servicer in effecting the
termination of the Servicer's servicing responsibilities and rights hereunder
and shall promptly provide the Trustee or such successor Servicer, as
applicable, all documents and records reasonably requested by it to enable it to
assume the Servicer's functions hereunder and shall promptly also transfer to
the Trustee or such successor Servicer, as applicable, all amounts which then
have been or should have been deposited in the Principal and Interest Account by
the Servicer or which are thereafter received with respect to the Mortgage
Loans. Neither the Trustee nor any other successor Servicer shall be held liable
by reason of any failure to make, or any delay in making, any distribution
hereunder or any portion thereof caused by (i) the failure of the Servicer to
deliver, or any delay in delivery, cash, documents or records to it or (ii)
restrictions imposed by any regulatory authority having jurisdiction over the
Servicer.
(i) The Trustee or any other successor Servicer, upon assuming the
duties of Servicer hereunder, shall immediately make all Delinquency Advances
and pay all Compensating Interest which the Servicer has theretofore failed to
remit with respect to the Mortgage Loans; provided, however, that if the
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Trustee is acting as successor Servicer, the Trustee shall only be required to
make Delinquency Advances (including the Delinquency Advances described in this
clause (e)) if, in the Trustee's reasonable good faith judgment, such
Delinquency Advances will ultimately be recoverable from the Mortgage Loans.
(j) The Servicer which is being removed or is resigning shall give
notice to the Mortgagors and to the Rating Agencies of the transfer of the
servicing to the successor Servicer.
(k) Upon appointment, the successor Servicer shall be the successor in
all respects to the predecessor Servicer and shall be subject to all the
responsibilities, duties and liabilities of the predecessor Servicer including,
but not limited to, the maintenance of the hazard insurance policy(ies), the
fidelity bond and an errors and omissions policy pursuant to Section 8.27 and
shall be entitled to the Monthly Servicing Fee and all of the rights granted to
the predecessor Servicer by the terms and provisions of this Agreement. The
appointment of a successor Servicer shall not affect any liability of the
predecessor Servicer which may have arisen under this Agreement prior to its
termination as Servicer (including, without limitation, any deductible under an
insurance policy) nor shall any successor Servicer be liable for any acts or
omissions of the predecessor Servicer or for any breach by such Servicer of any
of its representations or warranties contained herein or in any related document
or agreement.
(l) The Trustee shall give notice to the Certificate Insurer, Moody's
and Standard & Poor's and the Owners of the occurrence of any event specified in
Section 8.20 of which a Responsible Officer of the Trustee has actual knowledge.
Section 8.22. Waiver of Past Events of Servicing Termination.
----------------------------------------------
Subject to the rights of the Certificate Insurer pursuant to Section 8.20 to
terminate all of the rights and obligations of the Servicer under this
Agreement, the Owners of at least 51% of the Class A Certificate Principal
Balance may, on behalf of all Owners of Certificates, waive any default by the
Servicer in the performance of its obligations hereunder and its consequences,
except a default in making any required deposits to or payments from the
Principal and Interest Account in accordance with this Agreement. Upon any such
waiver of a past default, such default shall cease to exist, and any Event of
Servicing Termination arising therefrom shall be deemed to have been remedied
for every purpose of this Agreement. No such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.
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Section 8.23. Inspections by Certificate Insurer; Errors and
----------------------------------------------
Omissions Insurance. (a) At any reasonable time and from time to time upon
- -------------------
reasonable notice, the Certificate Insurer, the Trustee, or any agents or
representatives thereof may inspect the Servicer's servicing operations and
discuss the servicing operations of the Servicer with any of its officers or
directors. The costs and expenses incurred by the Servicer or its agents or
representatives in connection with any such examinations or discussions shall be
paid by the Servicer.
(b) The Servicer agrees to maintain errors and omissions coverage and
a fidelity bond, each at least to the extent generally maintained by prudent
mortgage loan servicers having servicing portfolios of a similar size.
Section 8.24. Merger, Conversion, Consolidation or Succession to
--------------------------------------------------
Business of Servicer. Any corporation into which the Servicer may be merged or
- --------------------
converted or with which it may be consolidated, or corporation resulting from
any merger, conversion or consolidation to which the Servicer shall be a party
or any corporation succeeding to all or substantially all of the business of the
Servicer shall be the successor of the Servicer hereunder, without the execution
or filing of any paper or any further act on the part of any of the parties
hereto provided that such corporation meets the qualifications set forth in
Section 8.21(f).
Section 8.25. Notices of Material Events. The Servicer shall give
--------------------------
prompt notice to the Certificate Insurer, the Trustee, Moody's and Standard &
Poor's of the occurrence of any of the following events:
(a) Any default or any fact or event which results, or which with
notice or the passage of time, or both, would result in the occurrence of a
default by the Company, any Originator or the Servicer under any Transaction
Document or would constitute a material breach of a representation, warranty or
covenant under any Transaction Document;
(b) The submission of any claim or the initiation of any legal
process, litigation or administrative or judicial investigation against the
Company or the Servicer in any federal, state or local court or before any
governmental body or agency or before any arbitration board or any such
proceedings threatened by any governmental agency, which, if adversely
determined, would have a material adverse effect upon any the Company's or the
Servicer's ability to perform its obligations under any Transaction Document;
(c) The commencement of any proceedings by or against the Company or
the Servicer under any applicable bankruptcy, reorganization, liquidation,
insolvency or other similar law now or hereafter in effect or of any proceeding
in which a receiver, liquidator, trustee or other similar official shall have
been, or may be, appointed or requested for the Company or the Servicer; and
(d) The receipt of notice from any agency or governmental body having
authority over the conduct of any of the Company's or the Servicer's business
that the Company or the Servicer is to cease and desist, or to undertake any
practice, program, procedure or policy employed by the Company or the Servicer
in the conduct of the business of any of them, and such cessation or undertaking
will materially and adversely affect the conduct of the Company's or the
Servicer's business or its ability to perform under the Transaction Documents or
materially and adversely affect the financial affairs of the Company or the
Servicer.
Section 8.26. Monthly Servicing Report and Servicing Certificate.
--------------------------------------------------
(a) The Servicer shall, not later than the related Determination Date, deliver
to the Depositor, the Trustee and the Certificate Insurer a Monthly Servicing
Report relating to the Group I Mortgage Loans and a Monthly Servicing Report
relating to the Group II Mortgage Loans in computer readable format stating the
following:
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(i) As to the related Due Period, the Interest Remittance Amount (in both
cases specifying the (a) scheduled interest collected; (b) Delinquency Advances
relating to interest; (c) Compensating Interest paid; and (d) the Principal
Remittance Amount (in both cases specifying the (a) scheduled principal
collected; (b) Delinquency Advance relating to Mortgage principal; (c)
Prepayments; (d) Loan Balance of Loans repurchased; (e) Substitution Amounts;
and (f) Net Liquidation Proceeds (related to principal);
(ii) With respect to the related Remittance period, the Servicing Fee
payable to the Servicer;
(iii) With respect to the related Remittance period, the net scheduled
principal and interest payments remitted by the Servicer to the Principal and
Interest Account;
(iv) The scheduled principal and interest payments on the Mortgage Loans
that were not made by the related Mortgagors as of the last day of the related
Remittance Period;
(v) The number and aggregate Loan Balances (computed in accordance with the
terms of the Mortgage Loans) and the percentage of the total number of Mortgage
Loans and of the Loan Balance which they represent of Mortgage Loans delinquent,
if any, (i) 31-60 days, (ii) 61-90 days and (iii) 91 days or more, respectively,
as of the last day of the related Remittance Period;
(vi) The number and aggregate Loan Balances of Mortgage Loans, if any, in
foreclosure and the book value (within the meaning of 12 Code of Federal
Regulations Section 571.13 or any comparable provision) of any real estate
acquired through foreclosure or deed in lieu of foreclosure, including REO
Properties as of the last day of the related Remittance Period;
(vii) The Loan Balances (immediately prior to being classified as
Liquidated Mortgage Loans) of Liquidated Mortgage Loans as of the last day of
the related Remittance Period;
(viii) Liquidation Proceeds received during the related Remittance Period;
(ix) The amount of any Liquidation Expenses being deducted from Liquidation
Proceeds or otherwise being charged to the Principal and Interest Account with
respect to such Determination Date;
(x) Liquidation Expenses incurred during the related Remittance Period
which are not being deducted from Liquidation Proceeds or otherwise being
charged to the Principal and Interest Account with respect to such Determination
Date;
(xi) Net Liquidation Proceeds as of the last day of the related Remittance
Period;
(xii) Insurance payments received from Insurance Policies during the
related Remittance Period;
(xiii) The number of Mortgage Loans and the aggregate scheduled Loan
Balances as of the last day of the Due Period relating to the Payment Date;
(xiv) The Group I Total Available Funds and the Group II Total Available
Funds for each Remittance Date;
(xv) The number and aggregate Loan Balances and Loan Purchase Prices of
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Mortgage Loans required to be repurchased by the Company or purchased by the
Servicer as of the Replacement Cut-Off Date occurring during the Remittance
Period preceding such Date;
(xvi) The number and aggregate Loan Balances of Mortgage Loans (at the
time they became Defaulted Mortgage Loans) which are being carried as REO
Properties;
(xvii) The amount of any Delinquency Advances made by the Servicer during
the related Remittance Period and any unreimbursed Delinquency Advances as of
such Payment Date;
(xviii) The weighted average Coupon Rates of the Group I and Group II
Mortgage Loans, respectively;
(xix) The Monthly Exception Report;
(xx) The amount of any Substitution Amounts delivered by the Company;
(xxi) The number and aggregate Loan Balances of Mortgage Loans, if any, in
bankruptcy proceedings as of the last day of related Remittance Period;
(xxii) The amount of unreimbursed Delinquency Advances made by the
Servicer;
(xxiii) The amount of unreimbursed Servicing Advances made by the
Servicer;
(xxiv) Unpaid Servicing Fees;
(xxv) The amount of Compensating Interest to be paid by the Servicer
during the related Remittance Period;
(xxvi) The weighted average net Coupon Rate of the Mortgage Loans; and
(xxvii) Any other information reasonably requested by the Certificate
Insurer.
(b) On each Payment Date, the Trustee shall provide to the Depositor,
the Certificate Insurer, the Underwriter, the Company, Standard & Poor's and
Moody's a written report in substantially the form set forth as Exhibit J hereto
(the "Servicing Certificate") with respect to each Mortgage Loan Group, as such
form may be revised by the Trustee, the Servicer, Moody's and Standard & Poor's
from time to time, but in every case setting forth the information required
under Section 7.8 hereof, based solely on information contained in the Monthly
Servicing Report.
Section 8.27. Indemnification by the Company. The Company agrees to
------------------------------
indemnify and hold the Trustee, the Certificate Insurer, the Depositor and each
Owner harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the Trustee, the Certificate Insurer and any Owner may sustain
in any way related to the failure of the Company to perform its duties under
this Agreement. A party against whom a claim is brought shall immediately
notify the other parties and the Rating Agencies if a claim is made by a third
party with respect to this Agreement, and the Company shall assume (with the
consent of the Certificate Insurer and the Trustee) the defense of any such
claim and pay all expenses in connection therewith, including reasonable counsel
fees, and promptly pay, discharge and satisfy any judgment or decree which may
be entered against the Certificate Insurer, the Servicer, the Company, the
Trustee and/or Owner in respect of such claim.
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Section 8.28. Indemnification by the Servicer. The Servicer agrees
-------------------------------
to indemnify and hold the Trustee, the Certificate Insurer, the Depositor and
each Owner harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the Trustee, the Certificate Insurer and any Owner may sustain
in any way related to the failure of the Servicer to perform its duties and
service the Mortgage Loans in compliance with the terms of this Agreement. A
party against whom a claim is brought shall immediately notify the other parties
and the Rating Agencies if a claim is made by a third party with respect to this
Agreement, and the Servicer shall assume (with the consent of the Trustee) the
defense of any such claim and pay all expenses in connection therewith,
including reasonable counsel fees, and promptly pay, discharge and satisfy any
judgment or decree which may be entered against the Certificate Insurer, the
Servicer, the Trustee and/or Owner in respect of such claim.
ARTICLE IX
TERMINATION OF TRUST
Section 9.1. Termination of Trust. The Trust created hereunder and
--------------------
all obligations created by this Agreement will terminate upon the earlier of (i)
the payment to the Owners of all Certificates from amounts other than those
available under the Certificate Insurance Policies of all amounts held by the
Trustee and required to be paid to such Owners pursuant to this Agreement upon
the later to occur of (a) the final payment or other liquidation (or any advance
made with respect thereto) of the last Mortgage Loan in the Trust Estate or (b)
the disposition of all property acquired in respect of any Mortgage Loan
remaining in the Trust Estate, (ii) at any time when a Qualified Liquidation of
both Mortgage Loan Groups included within the Trust is effected as described
below or (iii) as described in Section 9.2, 9.3 and 9.4 hereof. To effect a
termination of this Agreement pursuant to clause (ii) above, the Owners of all
Certificates then Outstanding shall (x) unanimously direct the Trustee on behalf
of the Trust to adopt a plan of complete liquidation for both Mortgage Loan
Groups, as contemplated by Section 860F(a)(4) of the Code and (y) provide to the
Trustee an opinion of counsel experienced in federal income tax matters to the
effect that such liquidation constitutes a Qualified Liquidation, and the
Trustee either shall sell the Mortgage Loans and distribute the proceeds of the
liquidation of the Trust Estate, or shall distribute equitably in kind all of
the assets of the Trust Estate to the remaining Owners of the Certificates based
on their interests in the Trust, each in accordance with such plan, so that the
liquidation or distribution of the Trust Estate, the distribution of any
proceeds of the liquidation and the termination of this Agreement occur no later
than the close of the 90th day after the date of adoption of the plan of
liquidation and such liquidation qualifies as a Qualified Liquidation. In no
event, however, will the Trust created by this Agreement continue beyond the
expiration of twenty-one (21) years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late Ambassador of the United States to
the United Kingdom, living on the date hereof. The Trustee shall give written
notice of termination of the Agreement to each Owner in the manner set forth in
Section 11.5 hereof.
Section 9.2. Termination Upon Option of Servicer. (a) On any
-----------------------------------
Remittance Date on or after the Remittance Date on which the then-outstanding
aggregate Loan Balances of the Mortgage Loans in the Trust Estate is less than
or equal to ten percent of the Original Aggregate Loan Balance, the Servicer
acting directly or through one or more affiliates may determine to purchase and
may cause the purchase from the Trust of all (but not fewer than all) Mortgage
Loans in the Trust Estate and all property theretofore acquired in respect of
any such Mortgage Loan by foreclosure, deed in lieu of foreclosure, or otherwise
then remaining in the Trust Estate at a price equal to the sum of (w) the
greater of (i) 100% of the aggregate Loan Balances of the related Mortgage Loans
as of the Due Date which immediately follows the last day of the related
Remittance Period immediately preceding the day of purchase minus the amount
actually remitted by the Servicer representing collections of principal on the
Mortgage Loans during the related Remittance Period and Due Period and (ii) the
greater of (A) the fair market value of such Mortgage Loans (disregarding
accrued interest) and (B) the aggregate outstanding Certificate Principal
Balance, (x) one month's interest on the purchase price computed at the weighted
average Pass-Through Rate for the Class A Certificates, (y) the related
Reimbursement Amount, if any, as of such Remittance Date and (z) the aggregate
amount of any Delinquency
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Advances and Servicing Advances remaining unreimbursed, together with any
accrued and unpaid Servicing Fees, as of such Remittance Date (such amount, the
"Termination Price"). In connection with such purchase, the Servicer shall remit
to the Trustee all amounts then on deposit in the Principal and Interest Account
for deposit to the Certificate Account, which deposit shall be deemed to have
occurred immediately preceding such purchase.
(b) In connection with any such purchase, the Servicer shall provide
to the Trustee an opinion of counsel experienced in federal income tax matters
and reasonably acceptable to the Certificate Insurer to the effect that such
purchase constitutes a Qualified Liquidation of the Trust Estate.
(c) Promptly following any such purchase, the Trustee will release
the Files to the Servicer, or otherwise upon their order, in a manner similar to
that described in Section 8.14 hereof.
(d) If the Servicer does not exercise its option pursuant to this
Section 9.2 with respect to the Trust Estate, then the Certificate Insurer may
do so on the same terms.
Section 9.3. Termination Upon Loss of REMIC Status. (a) Following a
-------------------------------------
final determination by the Internal Revenue Service, or by a court of competent
jurisdiction, in either case from which no appeal is taken within the permitted
time for such appeal, or if any appeal is taken, following a final determination
of such appeal from which no further appeal can be taken, to the effect that the
Trust does not and will no longer qualify as a "REMIC" pursuant to Section 860D
of the Code (the "Final Determination"), at any time on or after the date which
is 30 calendar days following such Final Determination, (i) the Certificate
Insurer or the Owners of a majority in Percentage Interest represented by the
Class A Certificates then Outstanding with the consent of the Certificate
Insurer (which consent shall not be unreasonably withheld) may direct the
Trustee on behalf of the Trust to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code and (ii) the Certificate Insurer
may notify the Trustee of the Certificate Insurer's determination to purchase
from the Trust all (but not fewer than all) Mortgage Loans in the Trust Estate
and all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the
Trust Estate at a price equal to the Termination Price. In connection with such
purchase, the Servicer shall remit to the Trustee all amounts then on deposit in
the Principal and Interest Account for deposit in the Certificate Account, which
deposit shall be deemed to have occurred immediately preceding such purchase.
(b) Upon receipt of such direction from the Certificate Insurer, the
Trustee shall notify the holders of the Class R Certificates of such election to
liquidate or such determination to purchase, as the case may be (the
"Termination Notice"). The Owner of a majority of the Percentage Interest of the
Class R Certificates then Outstanding may, on any Remittance Date, within 60
days from the date of receipt of the Termination Notice (the "Purchase Option
Period"), at their option, purchase from the Trust all (but not fewer than all)
Mortgage Loans in the Trust Estate, and all property theretofore acquired by
foreclosure, deed in lieu of foreclosure, or otherwise in respect of any
Mortgage Loan then remaining in the Trust Estate at a purchase price equal to
the Termination Price.
(c) If, during the Purchase Option Period, the Owners of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Certificate Insurer or the Owners of the Class A
Certificates, with the consent of the Certificate Insurer have given the Trustee
the direction described in clause (a)(i) above, the Trustee shall sell the
Mortgage Loans and distribute the proceeds of the liquidation of the Trust
Estate, each in accordance with the plan of complete liquidation, such that, if
so directed, the liquidation of the Trust Estate, the distribution of the
proceeds of such liquidation and the termination of this Agreement occur no
later than the close of the 60th day, or such later day as the Certificate
Insurer or the Owners of the Class A Certificates, with the consent of the
Certificate Insurer shall permit or direct in writing, after the expiration of
the Purchase Option Period and (ii) in the event that the Certificate Insurer
has given the Trustee notice of the Certificate Insurer's determination to
purchase the Mortgage Loans in the Trust Estate described in clause (a)(ii)
preceding,
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the Certificate Insurer shall, on any Remittance Date within 60 days,
purchase all (but not fewer than all) Mortgage Loans in the Trust Estate, and
all property theretofore acquired by foreclosure, deed in lieu of foreclosure or
otherwise in respect of any Mortgage Loan then remaining in the Trust Estate.
In connection with such purchase, the Servicer shall remit to the Trustee all
amounts then on deposit in the Principal and Interest Account for deposit to the
Certificate Account, which deposit shall be deemed to have occurred immediately
preceding such purchase.
(d) Following a Final Determination, the Owners of a majority of the
Percentage Interest of the Class R Certificates then Outstanding may, at their
option on any Remittance Date and upon delivery to the Owners of the Class A
Certificates and the Certificate Insurer of an opinion of counsel experienced in
federal income tax matters acceptable to the Certificate Insurer selected by the
Owners of such Class R Certificates which opinion shall be reasonably
satisfactory in form and substance to the Certificate Insurer, to the effect
that the effect of the Final Determination is to increase substantially the
probability that the gross income of the Trust will be subject to federal
taxation, purchase from the Trust all (but not fewer than all) Mortgage Loans in
the Trust Estate, and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Mortgage Loan then remaining
in the Trust Estate at a purchase price equal to the Termination Price. In
connection with such purchase, the Servicer shall remit to the Trustee all
amounts then on deposit in the Principal and Interest Account for deposit to the
Certificate Account, which deposit shall be deemed to have occurred immediately
preceding such purchase. The foregoing opinion shall be deemed satisfactory
unless the Certificate Insurer gives the Owners of a majority of the Percentage
Interest of the Class R Certificates notice that such opinion is not
satisfactory within thirty days after receipt of such opinion.
In connection with any such purchase, such Owners shall direct the
Trustee to adopt a plan of complete liquidation as contemplated by Section
860F(a)(4) of the Code and shall provide to the Trustee an opinion of counsel
experienced in federal income tax matters to the effect that such purchase
constitutes a Qualified Liquidation.
Section 9.4. Disposition of Proceeds. The Trustee shall, upon
-----------------------
receipt thereof, deposit the proceeds of any liquidation of the Trust Estate
pursuant to this Article IX to the Certificate Account; provided, however, that
-------- -------
any amounts representing Servicing Fees, unreimbursed Delinquency Advances or
unreimbursed Servicing Advances theretofore funded by the Servicer from the
Servicer's own funds shall be paid by the Trustee to the Servicer from the
proceeds of the Trust Estate.
Section 9.5. Netting of Amounts. If any Person paying the
------------------
Termination Price would receive a portion of the amount so paid, such Person may
net any such amount against the Termination Price otherwise payable.
ARTICLE X
THE TRUSTEE
Section 10.1. Certain Duties and Responsibilities. (a) The Trustee
-----------------------------------
(i) undertakes to perform such duties and only such duties as are specifically
set forth in this Agreement, and no implied covenants or obligations shall be
read into this Agreement against the Trustee and (ii) in the absence of bad
faith on its part, may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon certificates or opinions
furnished pursuant to and conforming to the requirements of this Agreement; but
in the case of any such certificates or opinions which by any provision hereof
are specifically required to be furnished to the Trustee, shall be under a duty
to examine the same to determine whether or not they conform to the requirements
of this Agreement.
(b) Following the termination of the Servicer hereunder and pending
the appointment of any other Person as successor Servicer, the Trustee (for this
purpose, the term includes
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an affiliate thereof) is hereby empowered to perform the duties of the Servicer
hereunder and shall, for such period, have all of the rights of the Servicer; it
being expressly understood, however, by all parties hereto, and the Owners,
agree, prior to any termination of the Servicer pursuant to Section 8.21, the
Servicer shall perform such duties. Specifically, and not in limitation of the
foregoing, the Trustee shall upon termination or resignation of the Servicer,
and pending the appointment of any other Person as successor Servicer, have the
power and duty during its performance as successor Servicer:
(i) to collect Mortgage payments;
(ii) to foreclose on defaulted Mortgage Loans;
(iii) to enforce due-on-sale clauses and to enter into
assumption and substitution agreements as permitted by Section 8.12 hereof;
(iv) to deliver instruments of satisfaction pursuant to
Section 8.14 hereof;
(v) to make Delinquency Advances and Servicing Advances and to
pay Compensating Interest, and
(vi) to enforce the Mortgage Loans.
(c) No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that:
(i) this subsection shall not be construed to limit the effect of
subsection (a) of this Section;
(ii) the Trustee shall not be liable for any error of judgment made in
good faith by an Authorized Officer, unless it shall be proved that the Trustee
was negligent in ascertaining the pertinent facts;
(iii) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Certificate Insurer or of the Owners of a majority in
Percentage Interest of the Certificates of the affected Class or Classes and the
Certificate Insurer relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred upon the Trustee, under this Agreement relating to such
Certificates;
(iv) The Trustee shall not be required to expend or risk its own funds
or otherwise incur financial liability for the performance of any of its duties
hereunder or the exercise of any of its rights or powers if there is reasonable
ground for believing that the repayment of such funds or adequate indemnity
against such risk or liability is not reasonably assured to it, and none of the
provisions contained in this Agreement shall in any event require the Trustee to
perform, or be responsible for the manner of performance of, any of the
obligations of the Servicer under this Agreement except during such time, if
any, as the Trustee shall be the successor to, and be vested with the rights,
duties, powers and privileges of, the Servicer in accordance with the terms of
this Agreement;
(v) Subject to the other provisions of this Agreement and without
limiting the generality of this Section 10.1, the Trustee shall have no duty (A)
to see any recording, filing, or depositing of this Agreement or any agreement
referred to herein or any financing statement or continuation statement
evidencing a
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security interest, or to see to the maintenance of any such recording or filing
or depositing or to any rerecording, refiling or redepositing of any thereof,
(B) to see to any insurance (C) to see to the payment or discharge of any tax,
assessment, or other governmental charge or any lien or encumbrance of any kind
owing with respect to, assessed or levied against, any part of the Trust Estate
from funds available in the Certificate Account, (D) to confirm or verify the
contents of any reports or certificates of the Servicer delivered to the Trustee
pursuant to this Agreement believed by the Trustee to be genuine and to have
been signed or presented by the proper party or parties;
(vi) The Trustee shall not be accountable for the use or application
of any funds paid to the Company or the Servicer in respect of the Mortgage
Loans or withdrawn from the Principal and Interest Account or the Certificate
Account by the Company or the Servicer; and
(vii) The Trustee shall not be required to take notice or be
deemed to have notice or knowledge of any default or any of the events described
in Section 8.20 unless a Responsible Officer of the Trustee shall have received
written notice thereof or a Responsible Officer has actual knowledge thereof.
In the absence of receipt of such notice, the Trustee may conclusively assume
that no default or event described in Section 8.20 has occurred.
(d) Whether or not therein expressly so provided, every provision of
this Agreement relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
(e) No provision of this Agreement shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(f) The permissive right of the Trustee to take actions enumerated in
this Agreement shall not be construed as a duty and the Trustee shall not be
answerable for other than its own negligence or willful misconduct.
(g) The Trustee shall be under no obligation to institute any suit,
or to take any remedial proceeding under this Agreement, or to take any steps in
the execution of the trusts hereby created or in the enforcement of any rights
and powers hereunder until it shall be indemnified to its satisfaction against
any and all costs and expenses, outlays, counsel fees and other reasonable
disbursements and against all liability, except liability which is adjudicated
to have resulted from its negligence or willful misconduct, in connection with
any action so taken.
Section 10.2. Removal of Trustee for Cause. (a) The Trustee may be
----------------------------
removed pursuant to paragraph (b) hereof upon the occurrence of any of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) the Trustee shall fail to distribute to the Owners entitled thereto on
any Payment Date amounts available for distribution in accordance with the terms
hereof; or
(2) the Trustee shall fail in the performance of, or breach, any covenant
or agreement of the Trustee in this Agreement, or if any representation or
warranty of the Trustee made in this Agreement or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall prove to be
incorrect in any material respect as of the time
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when the same shall have been made, and such failure or breach shall continue or
not be cured for a period of 30 days after there shall have been given, by
registered or certified mail, to the Trustee by the Company, the Certificate
Insurer or by the Owners of at least 25% of the aggregate Percentage Interests
represented by the Class A Certificates then Outstanding, or, if there are no
Class A Certificates then Outstanding, by such Percentage Interests represented
by the Class R Certificates, a written notice specifying such failure or breach
and requiring it to be remedied; or
(3) a decree or order of a court or agency or supervisory authority having
jurisdiction for the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of its affairs, shall
have been entered against the Trustee, and such decree or order shall have
remained in force undischarged or unstayed for a period of 75 days; or
(4) a conservator or receiver or liquidator or sequestrator or custodian of
the property of the Trustee is appointed in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings of or
relating to the Trustee or relating to all or substantially all of its property;
or
(5) the Trustee shall become insolvent (however insolvency is evidenced),
generally fail to pay its debts as they come due, file or consent to the filing
of a petition to take advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors, voluntarily
suspend payment of its obligations or take corporate action for the purpose of
any of the foregoing.
The Company shall give to Moody's and Standard & Poor's notice of the
occurrence of any such event of which the Company is aware.
(b) If any event described in Paragraph (a) occurs and is continuing,
then and in every such case (i) the Certificate Insurer or (ii) with the prior
written consent (which shall not be unreasonably withheld) of the Certificate
Insurer (x) the Company or (y) the Owners of a majority of the Percentage
Interests represented by the Class A Certificates may, whether or not the
Trustee resigns pursuant to Section 10.9 hereof, immediately, concurrently with
the giving of notice to the Trustee, and without delaying the 30 days required
for notice therein, appoint a successor Trustee pursuant to the terms of Section
10.9 hereof.
Section 10.3. Certain Rights of the Trustee. Except as
-----------------------------
otherwise provided in Section 10.1 hereof:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, note or other paper or
document believed by it to be genuine and to have been signed or presented by
the proper party or parties;
(b) any request or direction of the Depositor, the Company, the
Certificate Insurer or the Owners of any Class of Certificates mentioned herein
shall be sufficiently evidenced in writing;
(c) whenever in the administration of this Agreement the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officer's Certificate;
(d) the Trustee may consult with counsel, and the written advice of such
counsel shall be full and complete authorization and protection in respect of
any action taken, suffered or
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omitted by it hereunder in good faith and in reasonable reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Agreement at the request or direction of any of
the Owners pursuant to this Agreement, unless such Owners shall have offered to
the Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, note or other
paper or document, but the Trustee in its discretion may make such further
inquiry or investigation into such facts or matters as it may see fit; provided,
--------
however, that if the payment within a reasonable time to the Trustee of the
- -------
costs, expenses or liabilities likely to be incurred by it in the making of such
investigation is, in the opinion of the Trustee, not reasonably assured to the
Trustee by the security afforded to it by the terms of this Agreement, the
Trustee may require reasonable indemnity against such cost, expense or liability
as a condition to taking any such action. The reasonable expense of every such
examination shall be paid by the Servicer or, if paid by the Trustee, shall be
repaid by the Servicer upon demand by the Trustee from the Servicer's own funds;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys, and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed and supervised with
due care by it hereunder;
(h) the Trustee shall not be personally liable for any action it takes or
omits to take in good faith which it reasonably believes to be authorized by the
Authorized Officer of any Person or within its rights or powers under this
Agreement;
(i) the right of the Trustee to perform any discretionary act enumerated in
this Agreement shall not be construed as a duty, and the Trustee shall not be
answerable for other than its negligence or willful misconduct in the
performance of such act;
(j) the Trustee shall not be required to give any bond or surety in respect
of the execution of the Trust Estate created hereby or the powers granted
hereunder; and
Section 10.4. Not Responsible for Recitals or Issuance of
-------------------------------------------
Certificates. The recitals and representations contained herein and in the
- ------------
Certificates, except any such recitals relating to the Trustee, shall be taken
as the statements of the Company, and the Trustee assumes no responsibility for
their correctness. The Trustee makes no representation as to the validity or
sufficiency of this Agreement, of the Certificates, of the Mortgage Loans or any
document relating thereto other than as to validity and sufficiency of its
authentication of the Certificates.
Section 10.5. May Hold Certificates. The Trustee or any agent of the
---------------------
Trust, in its individual or any other capacity, may become an Owner or pledgee
of Certificates and may otherwise deal with the Trust with the same rights it
would have if it were not Trustee or such agent.
Section 10.6. Money Held in Trust. Money held by the Trustee in
-------------------
trust hereunder need not be segregated from other trust funds except to the
extent required herein or required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed with the Company and except to the extent of income or other gain on
investments which are deposits in or certificates of deposit of the Trustee in
its commercial capacity and income or other gain actually received by the
Trustee on Eligible Investments.
Section 10.7. No Lien for Fees. The Trustee shall have no lien on
----------------
the Trust Estate
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for the payment of any fees and expenses.
Section 10.8. Corporate Trustee Required; Eligibility. There shall
---------------------------------------
at all times be a Trustee hereunder which shall be a corporation or association
organized and doing business under the laws of the United States of America or
of any State authorized under such laws to exercise corporate trust powers,
having a combined capital and surplus of at least $100,000,000, subject to
supervision or examination by the United States of America or any such State
having a rating or ratings acceptable to the Certificate Insurer and having a
long-term deposit rating of at least BBB from Standard & Poor's (or such lower
rating as may be acceptable to Standard & Poor's) and at least Baa2 from Moody's
(or such lower rating as may be acceptable to Moody's). If such Trustee
publishes reports of condition at least annually, pursuant to law or to the
requirements of the aforesaid supervising or examining authority, then for the
purposes of this Section, the combined capital and surplus of such corporation
or association shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. If at any time the
Trustee shall cease to be eligible in accordance with the provisions of this
Section, it shall, upon the request of the Company with the consent of the
Certificate Insurer (which consent shall not be unreasonably withheld) or of the
Certificate Insurer, resign immediately in the manner and with the effect
hereinafter specified in this Article X.
Section 10.9. Resignation and Removal; Appointment of Successor. (a)
-------------------------------------------------
No resignation or removal of the Trustee and no appointment of a successor
trustee pursuant to this Article X shall become effective until the acceptance
of appointment by the successor trustee under Section 10.10 hereof.
(b) The Trustee, or any trustee or trustees hereafter appointed, may
resign at any time by giving written notice of resignation to the Company and by
mailing notice of resignation by registered mail, postage prepaid, to the
Certificate Insurer and the Owners at their addresses appearing on the Register.
A copy of such notice shall be sent by the resigning Trustee to Moody's and
Standard & Poor's. Upon receiving notice of resignation, the Company shall
promptly appoint a successor trustee or trustees reasonably acceptable to the
Certificate Insurer evidenced by its written consent by written instrument, in
duplicate, executed on behalf of the Trust by an Authorized Officer of the
Company, one copy of which instrument shall be delivered to the Trustee so
resigning and one copy to the successor trustee or trustees. If no successor
trustee shall have been appointed by the Company and have accepted appointment
within 30 days after the giving of such notice of resignation, the Trustee shall
give notice to the Certificate Insurer of such failure and the Certificate
Insurer shall have an additional 30 days to appoint a successor trustee. If
after such time no successor has been appointed and accepted then the resigning
trustee may petition any court of competent jurisdiction for the appointment of
a successor trustee, or any Owner may, on behalf of himself and all others
similarly situated, petition any such court for the appointment of a successor
trustee. Such court may thereupon, after such notice, if any, as it may deem
proper and prescribe, appoint a successor trustee.
(c) If at any time the Trustee shall cease to be eligible under
Section 10.8 hereof and shall fail to resign after written request therefor by
the Company or by the Certificate Insurer, the Certificate Insurer or the
Company with the written consent of the Certificate Insurer may remove the
Trustee and appoint a successor trustee by written instrument, in duplicate,
executed on behalf of the Trust by an Authorized Officer of the Company, one
copy of which instrument shall be delivered to the Trustee so removed and one
copy to the successor trustee.
(d) The Owners of a majority of the Percentage Interests represented
by the Class A Certificates, or, if there are no Class A Certificates then
Outstanding, by such majority of the Percentage Interests represented by the
Class R Certificates, may at any time remove the Trustee and appoint a successor
trustee by delivering to the Trustee to be removed, to the successor trustee so
appointed, to the Company and to the Certificate Insurer, copies of the record
of the act taken by the Owners, as provided for in Section 11.3 hereof.
(e) If the Trustee fails to perform its duties in accordance with the
terms of this
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Agreement or becomes ineligible to serve as Trustee, the Certificate Insurer may
remove the Trustee and appoint a successor trustee by written instrument, in
triplicate, signed by the Certificate Insurer duly authorized, one complete set
of which instruments shall be delivered to the Company, one complete set to the
Trustee so removed and one complete set to the successor Trustee so appointed.
(f) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of the Trustee for any cause,
the Company shall promptly appoint a successor Trustee. If within one year
after such resignation, removal or incapability or the occurrence of such
vacancy, a successor Trustee shall be appointed by act of the Owners of a
majority of the Percentage Interests represented by the Class A Certificates
then Outstanding or, if there are no Class A Certificates then Outstanding, by
such majority of the Percentage Interest of the Class R Certificates delivered
to the Company and the retiring Trustee, the successor Trustee so appointed
shall forthwith upon its acceptance of such appointment become the successor
Trustee and supersede the successor Trustee appointed by the Company. If no
successor Trustee shall have been so appointed by the Company or the Owners and
shall have accepted appointment in the manner hereinafter provided, any Owner
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, appoint a successor Trustee.
(g) The Company shall give notice of any removal of the Trustee by
mailing notice of such event by registered mail, postage prepaid, to the
Certificate Insurer and to the Owners as their names and addresses appear in the
Register. Each notice shall include the name of the successor Trustee and the
address of its corporate trust office.
Section 10.10. Acceptance of Appointment by Successor Trustee. Every
----------------------------------------------
successor Trustee appointed hereunder shall execute, acknowledge and deliver to
the Company on behalf of the Trust, to the Certificate Insurer and to its
predecessor Trustee an instrument accepting such appointment hereunder and
stating its eligibility to serve as Trustee hereunder, and thereupon the
resignation or removal of the predecessor Trustee shall become effective and
such successor Trustee, without any further act, deed or conveyance, shall
become vested with all the rights, powers, trusts, duties and obligations of its
predecessor hereunder; but, on request of the Company, the Certificate Insurer
or the successor Trustee, such predecessor Trustee shall, upon payment of its
charges then unpaid, execute and deliver an instrument transferring to such
successor Trustee all of the rights, powers and trusts of the Trustee so ceasing
to act, and shall duly assign, transfer and deliver to such successor Trustee
all property and money held by such Trustee so ceasing to act hereunder. Upon
request of any such successor Trustee, the Company on behalf of the Trust shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts.
Upon acceptance of appointment by a successor Trustee as provided in
this Section, the Company shall mail notice thereof by first-class mail, postage
prepaid, to the Owners at their last addresses appearing upon the Register and
to the Certificate Insurer. The Company shall send a copy of such notice to
Moody's and Standard & Poor's. If the Company fails to mail such notice within
ten days after acceptance of appointment by the successor Trustee, the successor
Trustee shall cause such notice to be mailed at the expense of the Trust.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor shall be qualified and eligible under this
Article X.
Section 10.11. Merger, Conversion, Consolidation or Succession to
--------------------------------------------------
Business of the Trustee. Any corporation or association into which the Trustee
- -----------------------
may be merged or converted or with which it may be consolidated, any corporation
or association resulting from any merger, conversion or consolidation to which
the Trustee shall be a party or any corporation or association succeeding to all
or substantially all of the corporate trust business of the Trustee shall be the
successor of the Trustee hereunder, without the execution or filing of any paper
or any further act on the part of any of the
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parties hereto; provided, however, that such corporation or association shall be
-------- -------
otherwise qualified and eligible under this Article X. In case any Certificates
have been executed, but not delivered, by the Trustee then in office, any
successor by merger, conversion or consolidation to such Trustee may adopt such
execution and deliver the Certificates so executed with the same effect as if
such successor Trustee had itself executed such Certificates.
Section 10.12. Reporting; Withholding. The Trustee shall timely
----------------------
provide to the Owners the Internal Revenue Service's Form 1099 and any other
statement required by applicable Treasury regulations as determined by the
Company and shall withhold, as required by applicable law, federal, state or
local taxes, if any, applicable to distributions to the Owners, including but
not limited to backup withholding under Section 3406 of the Code and the
withholding tax on distributions to foreign investors under Sections 1441 and
1442 of the Code.
Section 10.13. Liability of the Trustee. The Trustee shall be liable
------------------------
in accordance herewith only to the extent of the obligations specifically
imposed upon and undertaken by the Trustee herein. Neither the Trustee nor any
of the directors, officers, employees or agents of the Trustee shall be under
any liability on any Certificate or otherwise to any Account, the Company, the
Servicer or any Owner for any action taken or for refraining from the taking of
any action in good faith pursuant to this Agreement, or for errors in judgment;
provided, however, that this provision shall not protect the Trustee or any such
- -------- -------
Person against any liability which would otherwise be imposed by reason of
negligent action, negligent failure to act or bad faith in the performance of
duties or by reason of reckless disregard of obligations and duties hereunder.
Subject to the foregoing sentence, the Trustee shall not be liable for losses on
investments of amounts in any Account (except for any losses on obligations on
which the bank serving as Trustee is the obligor). In addition, the Company and
Servicer covenant and agree to indemnify the Trustee and the Certificate
Insurer, and when the Trustee is acting as Servicer, the Servicer, from, and
hold it harmless against, any and all losses, liabilities, damages, claims or
expenses (including legal fees and expenses) other than those resulting from the
negligence or bad faith of the Trustee. The Trustee and the Certificate Insurer
and any director, officer, employee or agent thereof may rely and shall be
protected in acting or refraining from acting in good faith on any certificate,
notice or other document of any kind prima facie properly executed and submitted
----- -----
by the Authorized Officer of any Person respecting any matters arising
hereunder. Provisions of this Section 10.13 shall survive the termination of
this Agreement.
Section 10.14. Appointment of Co-Trustee or Separate Trustee.
---------------------------------------------
Notwithstanding any other provisions of this Agreement, at any time, for the
purpose of meeting any legal requirements of any jurisdiction in which any part
of the Trust Estate or Property may at the time be located, the Servicer and the
Trustee acting jointly shall have the power and shall execute and deliver all
instruments to appoint one or more Persons approved by the Trustee and the
Certificate Insurer to act as co-Trustee or co-Trustees, jointly with the
Trustee, of all or any part of the Trust Estate or separate Trustee or separate
Trustees of any part of the Trust Estate and to vest in such Person or Persons,
in such capacity and for the benefit of the Owners, such title to the Trust
Estate, or any part thereof, and, subject to the other provisions of this
Section 10.14, such powers, duties, obligations, rights and trusts as the
Servicer and the Trustee may consider necessary or desirable. If the Servicer
shall not have joined in such appointment within 15 days after the receipt by it
of a request so to do, or in the case any event indicated in Sections 8.20(a) or
8.20(b) shall have occurred and be continuing, the Trustee alone shall have the
power to make such appointment (with the written consent of the Certificate
Insurer). No co-Trustee or separate Trustee hereunder shall be required to meet
the terms of eligibility as a successor Trustee under Section 10.8 and no notice
to Owner of the appointment of any co-Trustee or separate Trustee shall be
required under Section 10.8.
Every separate Trustee and co-Trustee shall, to the extent permitted,
be appointed and act subject to the following provisions and conditions:
(i) All rights, powers, duties and obligations conferred or imposed upon
the Trustee shall be conferred or imposed upon and exercised or performed by the
Trustee and such
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separate Trustee or co-Trustee jointly (it being understood that such separate
Trustee or co-Trustee is not authorized to act separately without the Trustee
joining in such act), except to the extent that under any law of any
jurisdiction in which any particular act or acts are to be performed (whether as
Trustee hereunder or as successor to the Servicer hereunder), the Trustee shall
be incompetent or unqualified to perform such act or acts, in which event such
rights, powers, duties and obligations (including the holding of title to the
Trust Estate or any portion thereof in any such jurisdiction) shall be exercised
and performed singly by such separate Trustee or co-Trustee, but solely at the
direction of the Trustee;
(ii) No co-Trustee hereunder shall be held personally liable by reason of
any act or omission of any other co-Trustee hereunder; and
(iii) The Servicer and the Trustee acting jointly may at any time accept
the resignation of or remove any separate Trustee or co-Trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate Trustees and co-Trustees,
as effectively as if given to each of them. Every instrument appointing any
separate Trustee or co-Trustee shall refer to this Agreement and the conditions
of this Section 10.14. Each separate Trustee and co-Trustee, upon its
acceptance of the trusts conferred, shall be vested with the estates or property
specified in its instrument of appointment, either jointly with the Trustee or
separately, as may be provided therein, subject to all the provisions of this
Agreement, specifically including every provision of this Agreement relating to
the conduct of, affecting the liability of or affording protection to the
Trustee. Every such instrument shall be filed with the Trustee and a copy
thereof given to the Servicer.
Any separate Trustee or co-Trustee may, at any time, constitute the
Trustee, its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate Trustee or co-Trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor Trustee.
The Trustee shall give to Moody's, the Company and the Certificate
Insurer notice of the appointment of any Co-Trustee or separate Trustee.
ARTICLE XI
MISCELLANEOUS
Section 11.1. Compliance Certificates and Opinions. Upon any
------------------------------------
application or request by the Company, the Certificate Insurer or the Owners to
the Trustee to take any action under any provision of this Agreement, the
Company, the Certificate Insurer or the Owners, as the case may be, shall
furnish to the Trustee a certificate stating that all conditions precedent, if
any, provided for in this Agreement relating to the proposed action have been
complied with, except that in the case of any such application or request as to
which the furnishing of any documents is specifically required by any provision
of this Agreement relating to such particular application or request, no
additional certificate need be furnished.
Except as otherwise specifically provided herein, each certificate or
opinion with respect to compliance with a condition or covenant provided for in
this Agreement shall include:
(a) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating thereto;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based; and
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(c) a statement as to whether, in the opinion of each such individual, such
condition or covenant has been complied with.
Section 11.2. Form of Documents Delivered to the Trustee. In any
------------------------------------------
case where several matters are required to be certified by, or covered by an
opinion of, any specified Person, it is not necessary that all such matters be
certified by, or covered by the opinion of, only one such Person or that they be
so certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such Persons
as to other matters, and any such Person may certify or give an opinion as to
such matters in one or several documents.
Any certificate of an Authorized Officer of the Trustee may be based,
insofar as it relates to legal matters, upon an opinion of counsel, unless such
Authorized Officer knows, or in the exercise of reasonable care should know,
that the opinion is erroneous. Any such certificate of an Authorized Officer of
the Trustee or any opinion of counsel may be based, insofar as it relates to
factual matter upon a certificate or opinion of, or representations by, one or
more Authorized Officers of the Company or of the Servicer, stating that the
information with respect to such factual matters is in the possession of the
Company or of the Servicer, unless such Authorized Officer or counsel knows, or
in the exercise of reasonable care should know, that the certificate or opinion
or representations with respect to such matters are erroneous. Any opinion of
counsel may also be based, insofar as it relates to factual matters, upon a
certificate or opinion of, or representations by, an Authorized Officer of the
Trustee, stating that the information with respect to such matters is in the
possession of the Trustee, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous. Any opinion of counsel may be based
on the written opinion of other counsel, in which event such opinion of counsel
shall be accompanied by a copy of such other counsel's opinion and shall include
a statement to the effect that such counsel believes that such counsel and the
Trustee may reasonably rely upon the opinion of such other counsel.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Agreement, they may, but need not, be consolidated and
form one instrument.
Section 11.3. Acts of Owners. (a) Any request, demand,
--------------
authorization, direction, notice, consent, waiver or other action provided by
this Agreement to be given or taken by the Owners may be embodied in and
evidenced by one or more instruments of substantially similar tenor signed by
such Owners in person or by an agent duly appointed in writing; and, except as
herein otherwise expressly provided, such action shall become effective when
such instrument or instruments are delivered to the Trustee, and, where it is
hereby expressly required, to the Company. Such instrument or instruments (and
the action embodied therein and evidenced thereby) are herein sometimes referred
to as the "act" of the Owners signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Agreement and conclusive in favor of the
Trustee and the Trust, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of any notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Whenever
such execution is by an officer of a corporation or a member of a partnership on
behalf of such corporation or partnership, such certificate or affidavit shall
also constitute sufficient proof of his authority.
(c) The ownership of Certificates shall be proved by the
Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other
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action by the Owner of any Certificate shall bind the Owner of every Certificate
issued upon the registration of transfer thereof or in exchange therefor or in
lieu thereof, in respect of anything done, omitted or suffered to be done by the
Trustee or the Trust in reliance thereon, whether or not notation of such action
is made upon such Certificates.
Section 11.4. Notices, etc. to Trustee. Any request, demand,
------------------------
authorization, direction, notice, consent, waiver or act of the Owners or other
documents provided or permitted by this Agreement to be made upon, given or
furnished to or filed with the Trustee by any Owner, the Certificate Insurer or
by the Company shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with and received by the Trustee at its
corporate trust office as set forth in Section 2.2 hereof.
Section 11.5. Notices and Reports to Owners; Waiver of Notices.
------------------------------------------------
Where this Agreement provides for notice to Owners of any event or the mailing
of any report to Owners, such notice or report shall be sufficiently given
(unless otherwise herein expressly provided) if mailed, first-class postage
prepaid, to each Owner affected by such event or to whom such report is required
to be mailed, at the address of such Owner as it appears on the Register, not
later than the latest date, and not earlier than the earliest date, prescribed
for the giving of such notice or the mailing of such report. In any case where
a notice or report to Owners is mailed in the manner provided above, neither the
failure to mail such notice or report nor any defect in any notice or report so
mailed to any particular Owner shall affect the sufficiency of such notice or
report with respect to other Owners, and any notice or report which is mailed in
the manner herein provided shall be conclusively presumed to have been duly
given or provided.
Where this Agreement provides for notice in any manner, such notice
may be waived in writing by any Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Owners shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case, by reason of the suspension of regular mail service as a
result of a strike, work stoppage or similar activity, it shall be impractical
to mail notice of any event to Owners when such notice is required to be given
pursuant to any provision of this Agreement, then any manner of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Where this Agreement provides for notice to any rating agency that
rated any Certificates, failure to give such notice shall not affect any other
rights or obligations created hereunder.
Section 11.6. Rules by Trustee and the Company. The Trustee may make
--------------------------------
reasonable rules for any meeting of Owners. The Company may make reasonable
rules and set reasonable requirements for its functions.
Section 11.7. Successors and Assigns. All covenants and agreements
----------------------
in this Agreement by any party hereto shall bind its successors and assigns,
whether so expressed or not.
Section 11.8. Severability. In case any provision in this Agreement
------------
or in the Certificates shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
Section 11.9. Benefits of Agreement. Nothing in this Agreement or in
---------------------
the Certificates, expressed or implied, shall give to any Person, other than the
Owners, the Certificate Insurer and the parties hereto and their successors
hereunder, any benefit or any legal or equitable right, remedy or claim under
this Agreement.
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Section 11.10. Legal Holidays. In any case where the date of any
--------------
Remittance Date, any Payment Date, any other date on which any distribution to
any Owner is proposed to be paid or any date on which a notice is required to be
sent to any Person pursuant to the terms of this Agreement shall not be a
Business Day, then (notwithstanding any other provision of the Certificates or
this Agreement) payment or mailing need not be made on such date but may be made
on the next succeeding Business Day with the same force and effect as if made or
mailed on the nominal date of any such Remittance Date, such Payment Date or
such other date for the payment of any distribution to any Owner or the mailing
of such notice, as the case may be, and no interest shall accrue for the period
from and after any such nominal date, provided such payment is made in full on
such next succeeding Business Day.
Section 11.11. Governing Law. In view of the fact that Owners are
-------------
expected to reside in many states and outside the United States and the desire
to establish with certainty that this Agreement will be governed by and
construed and interpreted in accordance with the law of a state having a well-
developed body of commercial and financial law relevant to transactions of the
type contemplated herein, this Agreement and each Certificate shall be construed
in accordance with and governed by the laws of the State of New York applicable
to agreements made and to be performed therein.
Section 11.12. Counterparts. This instrument may be executed in any
------------
number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
Section 11.13. Usury. The amount of interest payable or paid on any
-----
Certificate under the terms of this Agreement shall be limited to an amount
which shall not exceed the maximum nonusurious rate of interest allowed by the
applicable laws of the State of New York or any applicable law of the United
States permitting a higher maximum nonusurious rate that preempts such
applicable New York laws, which could lawfully be contracted for, charged or
received (the "Highest Lawful Rate"). In the event any payment of interest on
any Certificate exceeds the Highest Lawful Rate, the Trust stipulates that such
excess amount will be deemed to have been paid to the Owner of such Certificate
as a result of an error on the part of the Trustee acting on behalf of the Trust
and the Owner receiving such excess payment shall promptly, upon discovery of
such error or upon notice thereof from the Trustee on behalf of the Trust,
refund the amount of such excess or, at the option of such Owner, apply the
excess to the payment of principal of such Certificate, if any, remaining
unpaid. In addition, all sums paid or agreed to be paid to the Trustee for the
benefit of Owners of Certificates for the use, forbearance or detention of money
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of such Certificates.
Section 11.14. Amendment. (a) The Trustee, the Depositor, the
---------
Company and the Servicer, may at any time and from time to time, with the prior
approval of the Certificate Insurer but without the giving of notice to or the
receipt of the consent of the Owners, amend this Agreement for the purposes of
(i) removing the restriction against the transfer of a Class R Certificate to a
Disqualified Organization (as such term is defined in the Code) if accompanied
by an approving opinion of counsel experienced in federal income tax matters
addressed to the Certificate Insurer and the Trustee, (ii) complying with the
requirements of the Code including any amendments necessary to maintain REMIC
status of the assets of the Trust treated as a REMIC hereunder, (iii) curing any
ambiguity and (iv) correcting or supplementing any provisions of this Agreement
which are inconsistent with any other provisions of this Agreement; provided
that prior to the effectiveness of such amendment, the Company either (A)
delivers an opinion of counsel acceptable to the Trustee and the Certificate
Insurer that such amendment will not adversely affect in any material respect
the interest of the Owners and the Certificate Insurer or (B) delivers a letter
from each Rating Agency stating that such amendment will not result in a
withdrawal or reduction of the rating of the Class A Certificates without regard
to the Certificate Insurance Policy. Notwithstanding anything to the contrary,
no such amendment shall (a) change in any manner the amount of, or delay the
timing of, payments which are
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required to be distributed to any Owner without the consent of the Owner of such
Certificate, (b) change the percentages of Percentage Interest which are
required to consent to any such amendments, without the consent of the Owners of
all Certificates of the Class or Classes affected then outstanding or (c) which
affects in any manner the terms or provisions of the Certificate Insurance
Policy.
(b) This Agreement may be amended from time to time by the Servicer,
the Company, the Depositor and the Trustee with the consent of the Certificate
Insurer (which consent shall not be withheld if, in an opinion of counsel
addressed to the Trustee and the Certificate Insurer, failure to amend would
adversely affect the interests of the Owners) and the Owners of a 66 2/3% of the
Class A Certificates for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Agreement or of
modifying in any manner the rights of the Owners; provided, however, that no
such amendment shall be made that no such amendment shall reduce in any manner
the amount of, or delay the timing of, payments received on Mortgage Loans which
are required to be distributed on any Certificate without the consent of the
Owner of such Certificate or reduce the percentage for each Class the Owners of
which are required to consent to any such amendment without the consent of the
Owners of 100% of each Class of Certificates affected thereby.
(c) Each proposed amendment to this Agreement shall be accompanied by
an opinion of counsel nationally recognized in federal income tax matters and
reasonably acceptable to the Certificate Insurer addressed to the Trustee and to
the Certificate Insurer to the effect that such amendment would not adversely
affect the status of the Trust as a REMIC.
(d) The Certificate Insurer, the Owners, Moody's and Standard &
Poor's shall be provided with copies of any amendments to this Agreement,
together with copies of any opinions or other documents or instruments executed
in connection therewith.
Section 11.15. REMIC Status; Taxes. (a) The Tax Matters Person
-------------------
shall prepare and file or cause to be filed with the Internal Revenue Service
federal tax or information returns with respect to the Trust and the
Certificates containing such information and at the times and in such manner as
may be required by the Code or applicable Treasury regulations and shall furnish
to Owners such statements or information at the times and in such manner as may
be required thereby. For this purpose, the Tax Matters Person may, but need
not, rely on any proposed regulations of the United States Department of the
Treasury. The Tax Matters Person shall indicate the election to treat the Trust
as a REMIC (which election shall apply to the taxable period ending December 31,
1996 and each calendar year thereafter) in such manner as the Code or applicable
Treasury regulations may prescribe. The Company, as Tax Matters Person
appointed pursuant to Section 11.17 hereof, shall sign all tax information
returns filed pursuant to this Section 11.15. The Tax Matters Person shall
provide information necessary for the computation of tax imposed on the transfer
of a Class R Certificate to a Disqualified Organization, an agent of a
Disqualified Organization or a pass-through entity in which a Disqualified
Organization is the record holder of an interest. The Tax Matters Person shall
provide the Trustee with copies of any Federal tax or information returns filed,
or caused to be filed, by the Tax Matters Person with respect to the Trust or
the Certificates.
(b) The Tax Matters Person shall timely file all reports required to
be filed by the Trust with any federal, state or local governmental authority
having jurisdiction over the Trust, including other reports that must be filed
with the Owners, such as the Internal Revenue Service's Form 1066 and Schedule Q
and the form required under Section 6050K of the Code, if applicable to REMICs.
Furthermore, the Tax Matters Person shall report to Owners, if required, with
respect to the allocation of expenses pursuant to Section 212 of the Code in
accordance with the specific instructions to the Tax Matters Person by the
Company with respect to such allocation of expenses. The Tax Matters Person
shall collect any forms or reports from the Owners determined by the Company to
be required under applicable federal, state and local tax laws.
(c) The Tax Matters Person shall provide to the Internal Revenue
Service and to persons described in Section 860E(e)(3) and (6) of the Code the
information described in Proposed
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Treasury Regulation Section 1.860D-1(b)(5)(ii), or any successor regulation
thereto. Such information will be provided in the manner described in Proposed
Treasury Regulation Section 1.860E(2)(a)(5), or any successor regulation
thereto.
(d) The Company covenants and agrees that within ten Business Days
after the Startup Day it shall provide to the Tax Matters Person any information
necessary to enable the Tax Matters Person to meet its obligations under
subsections (b) and (c) above.
(e) The Trustee, the Depositor, the Company and the Servicer each
covenants and agrees for the benefit of the Owners (i) to take no action which
would result in the termination of "REMIC" status for the Trust (ii) not to
engage in any "prohibited transaction", as such term is defined in Section
860F(a)(2) of the Code and (iii) not to engage in any other action which may
result in the imposition on the Trust of any other taxes under the Code.
(f) The Trust shall, for federal income tax purposes, maintain books
on a calendar year basis and report income on an accrual basis.
(g) Except as otherwise permitted by Section 7.6(b) hereof, no
Eligible Investment shall be sold prior to its stated maturity (unless sold
pursuant to a plan of liquidation in accordance with Article IX hereof).
(h) Neither the Company nor the Trustee shall enter into any
arrangement by which the Trustee will receive a fee or other compensation for
services rendered pursuant to this Agreement, which fee or other compensation is
paid from the Trust Estate, other than as expressly contemplated by this
Agreement.
(i) Notwithstanding the foregoing clauses (g) and (h), the Trustee or
the Company may engage in any of the transactions prohibited by such clauses,
provided that the Trustee shall have received an opinion of counsel experienced
in federal income tax matters and reasonably acceptable to the Certificate
Insurer, which opinion shall not be at the expense of the Trustee, to the effect
that such transaction does not result in a tax imposed on the Trustee or cause a
termination of REMIC status for the Trust; provided, however, that such
-------- -------
transaction is otherwise permitted under this Agreement.
Section 11.16. Additional Limitation on Action and Imposition of Tax.
-----------------------------------------------------
(a) Any provision of this Agreement to the contrary notwithstanding, the
Trustee shall not, without having obtained an opinion of counsel experienced in
federal income tax matters and reasonably acceptable to the Certificate Insurer,
which opinion shall not be at the expense of the Trustee, to the effect that
such transaction does not result in a tax imposed on the Trust or cause a
termination of REMIC status for the Trust, (i) sell any assets in the Trust
Estate, (ii) accept any contribution of assets after the Startup Day or (iii)
agree to any modification of this Agreement.
(b) In the event that any tax is imposed on "prohibited transactions"
of the Trust as defined in Section 860F(a)(2) of the Code, on the "net income
from foreclosure property" as defined in Section 860G(c) of the Code, on any
contribution to the Trust after the Startup Day pursuant to Section 860G(d) of
the Code or any other tax (other than any minimum tax imposed by Sections
23151(a) or 23153(a) of the California Revenue and Taxation Code) is imposed,
such tax shall be paid by (i) the Trustee, if such tax arises out of or results
from a breach by the Trustee of any of its obligations under this Agreement,
(ii) the Servicer, if such tax arises out of or results from a breach by the
Servicer of any of its obligations under this Agreement or (iii) the Owners of
the Class R Certificates in proportion to their Percentage Interests. To the
extent such tax is chargeable against the Owners of the Class R Certificates,
notwithstanding anything to the contrary contained herein, the Trustee is hereby
authorized to retain from amounts otherwise distributable to the Owners of the
Class R Certificates on any Payment Date sufficient funds to reimburse the
Trustee for the payment of such tax (to the extent that the Trustee has not been
previously reimbursed or indemnified therefor). The Trustee agrees to first
seek indemnification for any such tax payment from any indemnifying parties
before reimbursing
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<PAGE>
itself from amounts otherwise distributable to the Owners of the Class R
Certificates.
Section 11.17. Appointment of Tax Matters Person. A Tax Matters
---------------------------------
Person will be appointed for the Trust for all purposes of the Code, and such
Tax Matters Person will perform, or cause to be performed through agents, such
duties and take, or cause to be taken, such actions as are required to be
performed or taken by the Tax Matters Person under the Code. The Tax Matters
Person for the Trust shall be the Company as long as it owns a Class R
Certificate or, if the Company does not own a Class R Certificate, may be any
other entity selected by the Company that owns a Class R Certificate.
Section 11.18. The Certificate Insurer. The Certificate Insurer is a
-----------------------
third-party beneficiary of this Agreement. Any right conferred to the
Certificate Insurer shall be suspended during any period in which the
Certificate Insurer is in default in its payment obligations under the
Certificate Insurance Policies. During any period of suspension the Certificate
Insurer's rights hereunder shall vest in the Owners of the Class A Certificates
and shall be exercisable by the Owners of at least a majority in Percentage
Interest of the Class A Certificates then Outstanding. At such time as the
Class A Certificates are no longer Outstanding hereunder and the Certificate
Insurer has been reimbursed for all Insured Payments to which it is entitled
hereunder, the Certificate Insurer's rights hereunder shall terminate.
Section 11.19. Maintenance of Records. Each Originator and Owner of
----------------------
a Class R Certificate shall each continuously keep an original executed
counterpart of this Agreement in its official records.
Section 11.20. Notices. All notices hereunder shall be given as
-------
follows, until any superseding instructions are given to all other Persons
listed below:
The Trustee: Bankers Trust Company of California, N.A.
----------- 3 Park Plaza, 16th Floor
Irvine, California 92714
Attention: First Alliance Mortgage
Loan Trust, Series 1996-1
Tel: (714) 253-7575
Fax: (714) 253-7577
The Company: First Alliance Mortgage Company
----------- 17305 Von Karman Avenue
Irvine, California 92714-6203
Attention: Director: Secondary Marketing
Tel: (714) 224-8357
Fax: (714) 224-8366
The Servicer: First Alliance Mortgage Company
------------ 17305 Von Karman Avenue
Irvine, California 92714-6203
Attention: Cassandra Fraulino
Tel: (714) 224-8357
Fax: (714) 224-8366
The Depositor: Prudential Securities Secured Financing Corporation
------------- 199 Water Street
26th Floor
New York, NY 10292
Attention: Director - Mortgage Finance Group
Tel: (212)
84
<PAGE>
Fax: (212)
The Certificate
Insurer : MBIA Insurance Corporation
--------------- 113 King Street
Armonk, New York 10504
Attention: Surveillance Dept.:
Structured Finance Group (First Alliance 96-1)
Tel: (914) 765-3111
Fax: (914) 765-3919
Moody's: Moody's Investors Service
------- 99 Church Street
New York, New York 10007
Attention: The Home Equity Monitoring Department
Standard & Poor's: Standard & Poor's, A Division of The McGraw-Hill
----------------- Companies
26 Broadway
15th Floor
New York, New York 10004
Attention: Residential Mortgage
Surveillance Dept.
Underwriter: Prudential Securities Incorporated
----------- One New York Plaza, 15th Floor
New York, New York 10292-2015
Attention: Director, Mortgage Finance Group
Tel: (212) 778-1000
Fax: (212) 778-5099
85
<PAGE>
IN WITNESS WHEREOF, the Depositor, the Company, the Servicer and the
Trustee have caused this Agreement to be duly executed by their respective
officers thereunto duly authorized, all as of the day and year first above
written.
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
By:
----------------------------------
Name:
------------------------------
Title:
-----------------------------
FIRST ALLIANCE MORTGAGE COMPANY
By:
----------------------------------
Name:
------------------------------
Title:
-----------------------------
FIRST ALLIANCE MORTGAGE COMPANY,
as Servicer
By:
----------------------------------
Name:
------------------------------
Title:
-----------------------------
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Trustee
By:
----------------------------------
Name:
------------------------------
Title:
-----------------------------
86
<PAGE>
CERTIFICATE OF ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss.:
COUNTY OF ORANGE )
On the ___ day of March, 1996, before me, a Notary Public, personally
appeared ____________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument the person, or
the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
[NOTARIAL SEAL]
________________________________
Notary Public
87
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the ____ day of March, 1996, before me, a Notary Public, personally
appeared ____________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person whose name is subscribed to the
within instrument and acknowledged to me that she executed the same in her
authorized capacity, and that by her signature on the instrument the person, or
the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
[NOTARIAL SEAL]
________________________________
Notary Public
88
<PAGE>
EXHIBIT 10.3
LEASE
-----
1. Parties. This Lease, dated, for reference purposes only,
-------
_________________, is made by and between MJB Associates, a California Limited
Partnership ("Landlord") and First Alliance Mortgage Company, a California
Corporation ("Tenant").
2. Premises. Landlord hereby leases to Tenant and Tenant leases from
--------
Landlord for the term, at the rent and upon all the conditions set forth herein,
real property commonly known as 17305 Von Karman, Irvine, California 92715.
3. Term.
----
3.a. The term of this Lease shall be for eighty-four (84) months,
commencing on the 1st day of February, 1996, and ending on the 31st day of
January, 2003, (the "term").
3.b. Tenant is hereby granted and shall, if not at the time in default
under this Lease, have an option to extend the terms of this Lease for one (1)
additional period of five (5) years only from the expiration date hereof, but
otherwise on the same terms, covenants and subject to the same exceptions and
reservations herein contained, except that the Rent adjustment or cap to be paid
by Tenant to Landlord shall be at such rental as may be agreed on by Landlord
and Tenant.
If the parties agree on the Rent for the extended term during that
period, they shall immediately execute an amendment to this Lease stating the
Rent.
If the parties are unable to agree on the Rent for the extended term
within that period, the option notice shall be of no effect and this Lease shall
expire at the end of the term. Neither party to this Lease shall have the right
to have a court or other third party set the monthly Rent.
Tenant shall have no other right to extend the term beyond the extended
term.
(1) This option shall be exercised only by Ten ant's delivering to
Landlord in person or by United States mail on
1
<PAGE>
or before six (6) months prior to expiration of the Lease written notice of its
election to extend the term of this Lease as herein provided.
(2) In the event that Lessee does not renew or extend the term of this
Lease as herein provided, and hold over beyond the expiration of the term
hereof, such holding over shall be deemed a month to month tenancy at 125% of
the then prevailing rental rate until the tenancy is terminated in a manner
provided by law.
3.c. The option to extend the term shall be personal to Tenant and shall
not be assignable by Tenant. It shall be a condition of the option notice and
of the commencement of the extended term that Tenant, at that particular time,
be the actual occupant of the Premises.
4. Possession.
----------
4.a. If the Landlord, for any reason whatsoever, cannot deliver possession
of the Premises to the Tenant at the commence-ment of the term, this Lease shall
not be void or voidable, nor shall Landlord be liable to Tenant for any loss or
damage resulting therefrom, nor shall the expiration date of the term be in any
way extended, but in that event, all rent shall be abated during the period
between the commencement of the term and the time when Landlord delivers
possession.
4.b. In the event that Landlord shall permit Tenant to occupy the Premises
prior to the commencement date of the term, such occupancy shall be subject to
all the provisions of this Lease. Said early possession shall not advance the
termination date herein above provided.
5. Rent.
----
5.a. Tenant agrees to pay to Landlord as rental, without prior notice or
demand, for the Premises the sum of Forty Two Thousand Two Hundred Nineteen
Dollars and Forty-Five Cents ($42,219.45) on or before the first day of the
first full calendar month of the term and a like sum on or before the first day
of each and every successive calendar month thereafter during the term, except
that the first month's rent shall be paid upon the execution hereof. Rent for
any period during the term which is
2
<PAGE>
for less than one (1) month shall be a prorated portion of the monthly install-
ment herein, based upon a thirty (30) day month. Said rental shall be paid to
Landlord, without deduction or offset in lawful money of the United States of
America, which shall be legal tender at the time of payment at Landlord's
address indicated on the signature page of this Lease, or to such other person
or at such other place as Landlord may from time to time designate in writing.
5.b. The monthly rent shall be adjusted upward or downward as of the first
day of the thirteenth (13th) full calendar month of the term and on the first
day of each twelfth (12th) full calendar month thereafter (the adjustment date),
including the extended term, according to the following computation:
The base for computing the adjustment is the index figure for the second
month next preceding the month in which the term commences (the index date), as
shown in the Consumer Price Index for All Urban Consumers for Los Angeles-Long
Beach-Anaheim based on the period 1967=100 as published by the U.S. Department
of Labor's Bureau of Labor Statistics. The index for the second month next
preceding the adjustment date shall be computed as a percent-age of the base
figure on the index date and that percentage shall be applied to the initial
monthly rental provided in 5.a., the result of which shall be the monthly rental
for the period beginning on the adjustment date and continuing until the next
adjustment date.
The index for the adjustment date shall be the one reported in the U.S.
Department of Labor's most comprehensive official index then in use and most
nearly answering the foregoing description of the index to be used. If it is
calculated from a base different from the base period 1967=100 used for the base
figure above, the base figure used for calculating the adjustment percentage
shall be first converted under a formula supplied by the Bureau.
5.c. The adjustment of the Rent upward shall annually be a minimum of the
three (3%) percent and a maximum of six (6%) percent.
6. Security Deposit. Tenant has deposited with Landlord the sum of
----------------
Eighty Four Thousand Four Hundred Thirty Eight Dollars
3
<PAGE>
and Ninety Cents ($84,438.90). Said sum shall be held by Landlord as security
for the faithful performance by Tenant of all the terms, covenants, and
conditions of this Lease to be kept and performed by Tenant during the term. If
Tenant defaults with respect to any provision of this Lease, including, but not
limited to, the provisions relating to the payment of rent, Landlord may (but
shall not be required to) use, apply or retain all or any part of this security
deposit for the payment of any rent or any other sum in default, or for the
payment of any amount which Landlord may spend or become obligated to spend by
reason of Tenant's default, or to compensate Landlord for any other loss or
damage which Landlord may suffer by reason of Tenant's default. If any portion
of said deposit is so used or applied, Tenant shall within five (5) days after
written demand therefor, deposit cash with Landlord in an amount sufficient to
restore the security deposit to its original amount and Tenant's failure to do
so shall be a material breach of this Lease. Landlord shall not be required to
keep this security deposit separate from its general funds, sand Tenant shall
not be entitled to interest on such deposit. If Tenant shall fully and
faithfully perform every provision of this Lease to be performed by it, the
security deposit or any balance thereof shall be returned to Tenant (or at
Landlord's option, to the last assignee of Tenant's interest hereunder) at the
expiration of the lease term. In the event of termination of Landlord's interest
in this Lease, Landlord shall transfer said deposit to Landlord's successor in
interest.
7. Use. Tenant shall use the Premises for general commercial or office
---
purposes and shall not use or permit the Premises to be used for any other
purpose without the prior written consent of Landlord.
Tenant shall not do or permit anything to be done in or about the
Premises nor bring or keep anything therein which will in any way increase the
existing rate of or affect any fire or other insurance upon the Building or any
of its contents, or cause cancellation of any insurance policy covering the
Center, or any part thereof, or any of its contents. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
obstruct or interfere with the rights of other tenants, occupants of the Center
or injure or annoy them or use or allow the Premises to be used for any
improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance in, on or about the Premises. Tenant shall not
4
<PAGE>
commit or suffer to be committed any waste in or upon the Premises.
Tenant shall not use, produce, or store any hazardous waste or substance
in or upon the Premises except in the normal course of Tenant's business. Any
hazardous waste or substance used or produced by Tenant shall be stored and
disposed of in strict compliance with all applicable laws, rules and regulations
from time to time existing.
8. Compliance with Law. Tenant shall not use the premises or permit anything
-------------------
to be done in or about the Premises which will in any way conflict with any law,
statute, ordinance or governmental rule or regulation now in force or which may
hereafter be enacted or promulgated. Tenant shall, at its sole cost and
expense, promptly comply with all laws, statutes, ordinances and govern-mental
rules, regulations or requirements now in force or which may hereafter be in
force, and with the requirements of any board of fire insurance underwriters or
other similar bodies now or hereafter constituted, relating to, or affecting the
condition, use or occupancy of the Premises, excluding structural changes not
related to or affected by Tenant's improvements or acts. The judgment of any
court of competent jurisdiction or the admission of Tenant in any action against
Tenant, shall be conclusive of that fact as between the Landlord and Tenant.
9. Alterations and Additions. Tenant shall not make any structural or
-------------------------
exterior alterations to the Premises without Landlord's consent. Tenant, at its
cost, shall have the right to make, without Landlord's consent, nonstructural
alterations to the interior of the premises that Tenant requires in order to
conduct its business on the Premises. In making any alterations that Tenant has
a right to make, Tenant shall comply with the following:
9.a. Tenant shall submit reasonably detailed final plans and
specifications and working drawings of the proposed alterations and the name of
its contractor at least fifteen (15) days before the date it intends to commence
the alterations.
9.b. The alterations shall not be commenced until five (5) days after
Landlord has received notice from Tenant stating the date the installation of
the alterations is to
5
<PAGE>
commence so that Landlord can post and record an appropriate notice of
nonresponsibility.
9.c. The alterations shall be approved by all appro-priate government
agencies, and all applicable permits and authorizations shall be obtained before
commencement of the alterations.
9.d. All alterations shall be completed with due diligence in compliance
with the plans and specifications and working drawings and all applicable laws.
9.e. Before commencing the alterations and at all times during
construction, Tenant's contractor shall maintain insurance at least equal to
that required of Tenant hereunder and shall cause Landlord to be named an
additional insured thereunder.
9.f. If the estimated cost of the alterations exceeds $100,000, before the
commencement of the alterations, Tenant at its cost shall furnish to Landlord a
performance and completion bond issued by an insurance company qualified to do
business in Califor- nia in a sum equal to the cost of the alterations (as
determined by the construction contract between Tenant and its contractor)
guaranteeing the completion of the alterations free and clear of all liens and
other charges, and in accordance with the plans and specifications.
9.g. The alterations shall be performed in a manner so as not to interfere
with the quiet enjoyment of Landlord's tenants in the Building or in adjacent
property. Tenant's contractor shall not use any portion of Landlord's adjacent
property for the parking of vehicles or the storage of materials.
Any alterations made shall remain on and be surrendered with the
Premises on expiration or termination of the term, except that Landlord can
elect within thirty (30) days before the expiration of the term, or within five
(5) days after termination of the term, to require Tenant to remove any
alterations that Tenant has made to the Premises. If Landlord so elects,
Tenant, at its cost, shall restore the premises to the condition designated by
Landlord in its election, before the last day of the term, or within thirty (30)
days after notice of election is given, whichever is later.
6
<PAGE>
10. Repairs.
-------
10.a. Tenant shall, at Tenant's sole cost and expense, keep the Premises
and every part thereof in good condition and repair, including, without
limitation, all Tenant's personal property; signs, storefronts; plate glass;
show windows; doors; heating, ventilating, and air-conditioning system;
electrical, plumbing, and sewage systems; and all equipment serving the
Premises. Tenant shall upon the expiration or sooner termination of this Lease
surrender the Premises to the Landlord in good condition and repair. Landlord
shall have no obligation whatsoever to alter, remodel, improve, repair, decorate
or paint the Premises or any part thereof and the parties hereto affirm that
Landlord has made no representations to Tenant respecting the condition of the
Premises or the Building except as specifically herein set forth.
10.b. Notwithstanding the provisions of Article 10.a., Landlord shall
repair and maintain the structural portions of the Building, which structural
portions include only the foundations, bearing and exterior walls (excluding
glass and doors), subflooring, and roof (excluding skylights, if any), unless
such maintenance and repairs are caused in part or in whole by the act, neglect,
fault or omission of any duty by the Tenant, its agents, servants, employees or
invitees, in which case Tenant shall pay to Landlord the reason able cost of
such maintenance and repairs. Landlord shall not be liable for any failure to
make any such repairs or to perform any maintenance unless such failure shall
persist for an unreasonable time after written notice of the need of such
repairs or maintenance is given to Landlord by Tenant. Except as provided in
Article 21 hereof, there shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or to any
portion of the Building or the Premises or in or to fixtures, appurtenances and
equipment therein. Tenant waives the right to make repairs at Landlord's
expense under any law, statute or ordinance now or hereafter in effect.
11. Liens. Tenant shall keep the Premises and the property in which the
-----
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. Landlord may require, at
Landlord's sole option, that Tenant shall provide to Landlord, at Tenant's sole
cost and
7
<PAGE>
expense, a lien and completion bond in an amount equal to any and all
estimated cost of any improvements, additions, or alterations in the Premises,
to insure Landlord against any liability for mechanics' and materialmen's liens
and to insure completion of the work.
12. Assignment and Subletting.
-------------------------
12.a. Tenant shall not voluntarily assign or encumber its interest in this
Lease or in the Premises, or sublease all or any part of the premises, or allow
any other person or entity (except Tenant's authorized representatives) to
occupy or use all or any part of the Premises, without first obtaining
Landlord's consent, which consent shall not be unreasonably withheld. Landlord
and Tenant have specifically bargained for and hereby confirm that a condition
to Landlord's consent shall be Tenant's written surrender and relinquishment of
any and all options to extend the term with respect to any extended term which
has not yet commenced at the time of Tenant's request for Landlord's consent
whether or not an option notice has been given by Tenant. Any assignment,
encumbrance, or sublease without Landlord's consent shall be voidable and at
Landlord's election, shall constitute a default. No consent to any assignment,
encumbrance, or sublease, shall constitute a further waiver of the provisions of
this paragraph.
12.b. If Tenant consists of more than one person, or is a partnership, or
is a corporation, whenever shares or other ownership interests representing
cumulatively more than fifty (50%) percent of the total interests of those
persons or in the entity are transferred in one or more transactions or
instances, voluntary or involuntary or by operation of law, an assignment within
the provisions of 12.a. shall have occurred.
12.c. Tenant shall immediately and irrevocably assign to Landlord, as
security for Tenant's obligations under this Lease, all rent from any subletting
of all or a part of the premises as permitted by this Lease, and Landlord, as
assignee and as attorney- in-fact for Tenant, or a receiver for Tenant appointed
on Landlord's application, may collect such rent and apply it toward Tenant's
obligations under this Lease; except that, until the occurrence of an act of
default by Tenant, Tenant shall have the right to collect such rent.
8
<PAGE>
12.d. All rent received by Tenant from its subtenants in excess of the
rent payable by Tenant to Landlord under this Lease shall be paid to Landlord,
or any sums to be paid by an assignee to Tenant in consideration of the
assignment of this Lease shall be paid to Landlord.
12.e. If Tenant requests Landlord to consent to a pro posed assignment or
subletting, Tenant shall pay to Landlord, whether or not consent is ultimately
given, Landlord's reasonable attorneys' fees incurred in connection with each
such request.
12.f. No interest of Tenant in this Lease shall be assignable by operation
of law (including, without limitation, the transfer of this Lease by testacy or
intestacy). Each of the following acts shall be considered an involuntary
assignment:
(i) If Tenant is or becomes bankrupt or insolvent, makes an assignment
for the benefit of creditors, or institutes a proceeding under the Bankruptcy
Act in which Tenant is the bankrupt; or, if Tenant is a partnership or consists
of more than one person or entity, if any partner of the partnership or other
person or entity is or becomes bankrupt or insolvent, or makes an assignment for
the benefit of creditors;
(ii) If, in any proceeding or action to which Tenant is a party, a
receiver is appointed with authority to take possession of the Premises.
An involuntary assignment shall constitute a default by Tenant and Landlord
shall have the right to elect to terminate this Lease, in which case this Lease
shall not be treated as an asset of Tenant.
If a writ of attachment or execution is levied on this Lease, Tenant shall
have ten (10) days in which to cause the attachment or execution to be removed.
If any involuntary proceed-ing in bankruptcy is brought against Tenant, or if a
receiver is appointed, Tenant shall have sixty (60) days in which to have the
involuntary proceeding dismissed or the receiver removed.
13. Hold Harmless. Tenant shall indemnify and hold harmless Landlord against
-------------
and from any and all claims arising from Tenant's use of the Premises for the
conduct of its business or from any
9
<PAGE>
activity, work, or other thing done, permitted or suffered by the Tenant in or
about the Center, and shall further indemnify and hold harmless Landlord against
and from any and all claims arising from any breach or default in the
performance of any obligation on Tenant's part to be performed under the terms
of this Lease, or arising from any act or negligence of the Tenant, or any
officer, agent, employee, guest, or invitee of Tenant, and from and against all
cost, attorney's fees, expenses and liabilities incurred in or about any such
claim or any action or proceeding brought thereon, and, if any case, action or
proceeding be brought against Landlord by reason of any such claim, Tenant upon
notice from Landlord shall defend the same at Tenant's expense by counsel
reasonably satis-factory to Landlord. Tenant, as material part of the
consideration to Landlord, hereby assumes all risk of damage to property or
injury to persons, in, upon or about the Premises, from any cause other than
Landlord's negligence, and Tenant hereby waives all claims in respect thereof
against Landlord.
Landlord or its agents shall not be liable for any damage to property
entrusted to employees of the Center, nor for loss or damage to any property by
theft or otherwise, nor for any injury to or damage to persons or property
resulting from fire, explosion, falling plaster, steam, gas, electricity, water
or rain which may leak from any part of the Building or from the pipes,
appliances or plumbing works therein or from the roof, street or subsurface or
from any other place resulting from dampness or any other cause whatsoever,
unless caused by or due to the negligence of Landlord, its agents, servants or
employees. Landlord or its agents shall not be liable for interference with the
light or other incorporeal hereditaments, loss of business by Tenant, nor shall
Landlord be liable for any latent defect in the Premises or in the Building.
Tenant shall give prompt notice to Landlord in case of fire or accidents in the
Premises or in the Building or of defects therein or in the fixtures or
equipment.
14. Subrogation. As long as their respective insurers so permit, Landlord
-----------
and Tenant hereby mutually waive their respective rights of recovery against
each other for any loss insured by fire, extended coverage and other property
insurance policies existing for the benefit of the respective parties. Each
party shall obtain any special endorsements, if required by their insurer to
evidence compliance with the aforementioned waiver.
15. Tenant's Insurance.
------------------
10
<PAGE>
15.a. Tenant shall, at Tenant's expense, obtain and keep in force during
the term of this Lease a policy of comprehensive public liability insurance
insuring Landlord, Landlord's lender, if any, and Tenant against any liability
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto, with a single combined liability limit of not
less than $1,000,000 and property damage limits of not less than $3,000,000.
Not more frequently than each 24 months, if, in the opinion of Landlord's lender
or of the insurance broker retained by Landlord, the amount of public liability
and property damage insurance coverage at that time is not adequate, Tenant
shall increase the insurance coverage as required by either Landlord's lender or
Landlord's insurance broker. The limit of said insurance shall not, however,
limit the liability of the Tenant hereunder. Tenant may carry said insurance
under a blanket policy, provided, however, said insurance by Tenant shall have a
Landlord's protec-tive liability endorsement attached thereto. If Tenant shall
fail to procure and maintain said insurance, Landlord may, but shall not be
required to, procure and maintain same, but at the expense of Tenant. Insurance
required hereunder, shall be in companies rated A+AAA or better in "Best's
Insurance Guide." Tenant shall deliver to Landlord prior to occupancy of the
Premises copies of policies of liability insurance required herein or
certificates evidencing the existence and amounts of such insurance with loss
payable clauses satisfactory to Landlord. No policy shall be cancelable or
subject to reduction of coverage except after ten (10) days' prior written
notice to Landlord.
16. Services and Utilities. Tenant shall pay for gas, water and sewer
----------------------
charges. Tenant shall make all arrangements for and pay for all electrical and
telephone services furnished to or used by it, and for all connection charges.
All other utility and services not otherwise specifically enumerated above shall
be the responsi-bility and obligation of Tenant.
17. Property Taxes. Tenant shall pay, or cause to be paid, before
--------------
delinquency, any and all taxes levied or assessed and which become payable
during the term hereof upon the real property including, but not limited to, the
real property taxes, as well as all Tenant's leasehold improvements, equipment,
furniture, fixtures and personal property located in or on the Premises. Tenant
shall pay to Landlord its share of such taxes within ten
(10) days after delivery to Tenant by Landlord of a statement in
11
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writing setting forth the amount of such taxes.
18. Rules and Regulations. Tenant shall faithfully observe and comply with
---------------------
the rules and regulations that Landlord shall from time to time promulgate.
Landlord reserves the right from time to time to make all reasonable
modifications to said rules. The additions and modifications to those rules
shall be binding upon Tenant upon delivery of a copy of them to Tenant.
Landlord shall not be responsible to Tenant for the nonperformance of any said
rules by any other tenants or occupants.
19. Holding Over. If Tenant remains in possession of the Premises or any
------------
part thereof after the expiration of the term hereof, with the express written
consent of Landlord, such occupancy shall be a tenancy from month to month at a
rental in the amount of 125% of the last monthly rental,plus all other charges
payable hereunder, and upon all the terms hereof applicable to a month to month
tenancy.
20. Entry by Landlord. Landlord reserves and shall at any and all times have
-----------------
the right to enter the Premises, to inspect the same, to supply any service to
be provided by Landlord to Tenant hereunder, to submit the Premises to
prospective lenders, purchasers or tenants, to post notices of non-
responsibility, and to alter, improve or repair the Premises and any portion of
the Building or of the Center that Landlord may deem necessary or desirable,
without abatement of rent and may for that purpose erect scaffolding and other
necessary structures where reasonably required by the character of the work to
be performed, always providing that the entrance to the Premises shall not be
blocked thereby, and further providing that the business of the Tenant shall not
be interfered with unreasonably. Tenant hereby waives any claim for damages or
for any injury or inconvenience to or interference with Tenant's business, and
loss of occupancy or quiet enjoyment of the Premises, and any other loss
occasioned thereby. For each of the aforesaid purposes, Landlord shall at all
times have and retain a key with which to unlock all of the doors, in, upon and
about the Premises, excluding Tenant's vaults, safes and files, and Landlord
shall have the right to use any and all means which Landlord may deem proper to
open said doors in an emergency, in order to obtain entry to the Premises
without liability to Tenant except for any failure to exercise due care for
Tenant's property. Any entry to the Premises obtained by
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Landlord by any of said means, or otherwise, shall not under any circumstances
be construed or deemed to be a forcible or unlawful entry into, or a detainer
of, the Premises, or an eviction of Tenant from the Premises, or any portion
thereof.
21. Reconstruction. In the event the Premises or the Building are damaged by
--------------
fire or other perils covered by extended coverage insurance, Landlord agrees to
forthwith repair the same; and this Lease shall remain in full force and effect,
except that Tenant shall be entitled to a proportionate reduction of the rent
while such repairs are being made, such proportionate reduction to be based upon
the extent to which the making of such repairs shall materially interfere with
the business carried on by the Tenant in the Premises. If the damage is due to
the fault or neglect of Tenant or its employees, there shall be no abatement of
rent.
In the event the Premises or the Building are damaged as a result of any
cause other than the perils covered by fire and extended coverage insurance,
then Landlord shall forthwith repair the same, provided the extent of the
destruction be less than ten (10%) percent of the then full replacement cost of
the Building. In the event the destruction of the Premises or the Building is
to an extent greater than ten (10%) percent of such full replacement cost, then
Landlord shall have the option, (1) to repair or restore such damage, this Lease
continuing in full force and effect, but the rent to be proportionately reduced
as above provided; or (2) give notice to Tenant at any time within one hundred
twenty (120) days after such damage terminating this Lease as of the date
specified in such notice, which date shall be no less than thirty (30) and no
more than sixty (60) days after the giving of such notice. In the event of
giving such notice, this Lease shall expire and all interest of the Tenant in
the Premises shall terminate on the date so specified in such notice and the
rent, reduced by a proportionate amount, based upon the extent, if any, to which
such damage materially interfered with the business carried on by the Tenant in
the Premises, shall be paid up to date of such termination.
Notwithstanding anything to the contrary contained in this Article, Landlord
shall not have any obligation whatsoever to repair, reconstruct or restore the
Premises when the damage result ing from any casualty covered under this Article
occurs during the last twelve (12) months of the term of this Lease or any
extension thereof.
13
<PAGE>
Landlord shall not be required to repair or to make any replacements of any
property installed in the premises by Tenant.
The Tenant shall not be entitled to any compensation or damages from
Landlord for loss of the use of the whole or any part of the premises, Tenant's
personal property or any inconvenience or annoyance occasioned by such damage,
repair, reconstruction or restoration.
22. Default. The occurrence of any one or more of the following events shall
-------
constitute a default and breach of this Lease by Tenant.
22.a. The vacating or abandonment of the Premises by Tenant (failure to
occupy and operate the Premises for thirty (30) consecutive days shall be deemed
a vacation and abandonment).
22.b. The failure by Tenant to make any payment of rent or any other
payment required to be made by Tenant hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof by Landlord to Tenant.
22.c. The failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by the
Tenant, other than described in Article 22.b. above, where such failure shall
continue for a period of thirty (30) days after written notice thereof by
Landlord to Tenant; provided, however, that if the nature of Tenant's default is
such that more than thirty (30) days are reasonably required for its cure, then
Tenant shall not be deemed to be in default if Tenant commences such cure within
said thirty (30) day period and thereafter diligently prosecutes such cure to
completion.
22.d. The assignment, encumbrance or sublease of the Premises by Tenant in
a manner not permitted in Article 12.
23. Remedies in Default. Landlord shall have the following remedies if
-------------------
Tenant commits a default. These remedies are not exclusive; they are cumulative
in addition to any remedies now or later allowed by law.
23.a. Landlord can continue this Lease in full force
14
<PAGE>
and effect, and the Lease will continue in effect as long as Landlord does not
terminate Tenant's right to possession, and Landlord shall have the right to
collect rent when due. During the period Tenant is in default, Landlord can
enter the Premises and relet them, or any part of them, to third parties for Ten
ant's account. Tenant shall be liable immediately to Landlord for all costs
Landlord incurs in reletting the Premises, including, without limitation,
brokers' commissions, expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or longer than
the remaining term of this Lease. Tenant shall pay to Landlord the rent due
under this Lease on the dates the rent is due, less the rent Landlord received
from any reletting. No act by Landlord allowed by this paragraph shall terminate
this Lease unless Landlord notifies Tenant that Landlord elects to terminate
this Lease. After Tenant's default and for as long as Landlord does not
terminate Tenant's right to possession of the Premises, if Tenant obtains
Landlord's consent Tenant shall have the right to assign or sublet its interest
in this Lease, but Tenant shall not be released from liability. Landlord's
consent to a proposed assignment or subletting shall not be unreasonably
withheld.
If Landlord elects to relet the Premises as provided in this paragraph, rent
that Landlord receives from reletting shall be applied to the payment of:
First, any indebtedness from Tenant to Landlord other than rent due from
Tenant;
Second, all costs, including for maintenance, incurred by Landlord in
reletting;
Third, rent due and unpaid under this Lease. After deducting the payments
referred to in this paragraph, any sum remaining from the rent Landlord receives
from reletting shall be held by Landlord and applied in payment of future rent
as rent becomes due under this Lease. In no event shall Tenant be entitled to
any excess rent received by Landlord. If, on the date rent is due under this
Lease, the rent received from the reletting is less than the rent due on that
date, Tenant shall pay to Landlord, in addition to the remaining rent due, all
costs, including for maintenance, Landlord incurred in reletting that remain
after applying the rent received from the reletting as provided in this
paragraph.
15
<PAGE>
23.b. Landlord can terminate Tenant's right to possession of the Premises
at any time. No act by Landlord other than giving notice to Tenant shall
terminate this Lease. Acts of maintenance, efforts to relet the Premises or the
appointment of a receiver on Landlord's initiative to protect Landlord's
interest under this Lease shall not constitute a termination of Tenant's right
to possession. On termination, Landlord has the right to recover from Tenant:
(i) The worth, at the time of the award, of the unpaid rent that had
been earned at the time of termination of this Lease;
(ii) The worth, at the time of the award, of the amount by which the
unpaid rent that would have been earned after the date of termination of this
Lease until the time of award exceeds the amount of the loss of rent that Tenant
proves could have been reasonably avoided;
(iii) The worth, at the time of the award, of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of the loss of rent that Tenant proves could be reasonably avoided; and
(iv) Any other amount, and court costs, necessary to compensate
Landlord for all detriment proximately caused by Tenant's default.
"The worth, at the time of the award," as used in (i) and (ii) of this
paragraph, is to be computed by allowing interest at the maximum rate
an individual is permitted by law to charge. "The worth, at the time
of the award," as referred to in (iii) of this para graph, is to be
computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of the award, plus 1%.
23.c. Landlord, at any time after Tenant commits a default, can cure the
default at Tenant's cost. If Landlord at any time, by reason of Tenant's
default, pays any sum or does any act that requires the payment of any sum, the
sum paid by Landlord shall be due immediately from Tenant to Landlord at the
time the
16
<PAGE>
sum is paid, and if paid at a later date shall bear interest at the
maximum rate an individual is permitted by law to charge from the date the sum
is paid by Landlord until Landlord is reimbursed by Tenant. The sum, together
with interest on it, shall be additional rent.
24. Eminent Domain. If more than twenty-five (25%) percent of the Premises
--------------
shall be taken or appropriated by any public or quasi-public authority under the
power of eminent domain, either party hereto shall have the right, at its
option, to terminate this Lease, and Landlord shall be entitled to any and all
income, rent, award, or any interest therein whatsoever which may be paid or
made in connection with such public or quasi-public use or purpose, and Tenant
shall have no claim against Landlord for the value of any unexpired term of this
Lease. If either less than or more than twenty-five (25%) percent of the
Premises is taken, and neither party elects to terminate as herein provided, the
rental thereafter to be paid shall be equitably reduced. If any part of the
Building other than the Premises may be so taken or appropriated, Landlord shall
have the right at its option to terminate this Lease and shall be entitled to
the entire award as above provided.
25. Estoppel Certificate.
--------------------
25.a. Tenant shall at any time and from time to time upon not less than ten
(10) days' prior written notice from Landlord execute, acknowledge and deliver
to Landlord a statement in writing, (a) certifying that this Lease is unmodified
and in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease as so modified is in full force and
effect), and the date to which the rental and other charges are paid in advance,
if any, and (b) acknowledging that there are not, to Tenant's knowledge, any
uncured defaults on the part of the Landlord hereunder, or specifying such
defaults if any are claimed. Any such statement may be relied upon by any
prospective purchaser or encumbrancer of all or any portion of the real property
of which the Premises are a part.
25.b. At Landlord's option, Tenant's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be conclusive
upon Tenant,
(i) that this Lease is in full force and
17
<PAGE>
effect, without modification except as may be represented by Landlord,
(ii) that there are no uncured defaults in Landlord's performance, and
(iii) that not more than one (1) month's rent has been paid in advance, and
(iii) that not more than one (1) month's rent has been paid in advance.
25.c. If Landlord desires to finance, refinance, or sell the Premises,
Tenant hereby agrees to deliver to any lender or purchaser designated by
Landlord such financial statements of Tenant as may be reasonably required by
such lender or purchaser. Such statements shall include the past three year's
financial statements of Tenant. All such financial statements shall be received
by Landlord and such lender or purchaser in confidence and shall be used only
for the purposes herein set forth.
26. Authority of Parties.
--------------------
26.a. Corporate Authority. If Tenant is a corporation, each individual
-------------------
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation, in accordance with a duly adopted resolution of the board of
directors of said corpora tion or in accordance with the by-laws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
26.b. Partnerships. If the Landlord herein is a part-nership, it is
------------
understood and agreed that any claims by Tenant on Landlord shall be limited to
the assets of the partnership, and furthermore, Tenant expressly waives any and
all rights to proceed against the individual partners or the officers, directors
or shareholders of any corporate partner, except to the extent of their interest
in said partnership.
27. General Provisions.
------------------
(1) Plats and Riders. Clauses, plats and riders, if any, signed or
----------------
initialed by the Landlord and the Tenant and endorsed on or affixed to this
Lease are a part hereof.
18
<PAGE>
(2) Waiver. The waiver by Landlord of any term, covenant or condition
------
herein contained shall not be deemed to be a waiver of such term, covenant or
condition on any subsequent breach of the same or any other term, covenant or
condition herein contained. The subsequent acceptance of rent hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of
any term, covenant or condition of this Lease,other than the failure of the
Tenant to pay the particular rental so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of the acceptance of such rent.
(3) Notices. All notices and demands which may or are to be given by
-------
either party to the other hereunder shall be in writing. All notices and
demands by the Landlord to the Tenant shall be sent by United States Mail,
postage prepaid, addressed to the Tenant at the Premises, or to such other place
as Tenant may from time to time designate in a notice to the Landlord. All
notices and demands by the Tenant to the Landlord shall be sent by United States
Mail, postage prepaid, addressed to the Landlord at Landlord's address indicated
on the signature page of this Lease, or to such other person or place as the
Landlord may from time to time designate in a notice to the Tenant.
(4) Joint Obligation. If there be more than one Tenant, the obligations
----------------
hereunder imposed upon Tenants shall be jointly and several.
(5) Marginal Headings. The marginal headings and Article title to the
-----------------
Articles of this Lease are not a part of this Lease and shall have no effect
upon the construction or interpre-tation of any part hereof.
(6) Time. Time is of the essence of this Lease and each and all of its
----
provisions in which performance is a factor.
(7) Successors and Assigns. The covenants and condi-tions herein
----------------------
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
(8) Recordation. Neither Landlord nor Tenant shall record this Lease or a
-----------
short form memorandum hereof without the prior written consent of the other
party.
19
<PAGE>
(9) Quiet Possession. Upon Tenant paying the rent reserved hereunder and
----------------
observing and performing all of the covenants, conditions and provisions on
Tenant's part to be observe and performed hereunder, Tenant shall have quiet
possession of the Premises for the entire term hereof, subject to all the
provisions of this Lease.
(10) Late Charges. Tenant hereby acknowledges that late payment by Tenant
------------
to Landlord of rent or other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and account ing charges, and late charges which may be imposed upon
Landlord by terms of any mortgage or trust deed covering the premises. Accord-
ingly, if any installment of rent or of a sum due from Tenant shall not be
received by Landlord or Landlord's designee within ten (10) days of the due
date, then Tenant shall pay to Landlord a late charge equal to seven and one-
half (7.5%) percent of such overdue amount. The parties hereby agree that such
late charges represent a fair and reasonable estimate of the internal cost that
Landlord will incur by reason of the late payment by Tenant. Acceptance of such
late charges by the Landlord shall in no event constitute a waiver of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted hereunder.
(11) Prior Agreements. This Lease contains all of the agreements of the
----------------
parties hereto with respect to any matter covered or mentioned in this Lease,
and no prior agreements or understand-ing pertaining to any such matters shall
be effective for any purpose. No provision of this Lease may be amended or
added to except by an agreement in writing signed by the parties hereto or their
respective successors in interest. This Lease shall not be effective or binding
on any party until fully executed by both parties hereto.
(12) Inability to Perform. This Lease and the obliga- tions of the Tenant
--------------------
hereunder shall not be affected or impaired because the Landlord is unable to
fulfill any of its obligations hereunder or is delayed in doing so, if such
inability or delay is caused by reason of strike, labor troubles, acts of God,
or any other cause beyond the reasonable control of the Landlord.
20
<PAGE>
(13) Attorney's Fees. In the event of any action or proceeding brought by
---------------
either party against the other under this Lease the prevailing party shall be
entitled to recover all costs and expenses including the fees of its attorneys
in such action or proceeding in such amount as the Court may adjudge reasonable
as attorney's fees.
(14) Sale of Premises by Landlord. In the event of any sale of the
----------------------------
Building, Landlord shall be and is hereby entirely freed and relieved of all
liability under any and all of its covenants and obligations contained in or
derived from this Lease arising out of any act, occurrence or omission occurring
after the consummation of such sale; and the purchaser, at such sale or any
subsequent sale of the Building shall be deemed, without any further agreement
between the parties of their successors in interest or between the parties and
any such purchaser, to have assumed and agreed to carry out any and all of the
covenants and obligations of the Landlord under this Lease.
(15) Subordination, Attornment. Upon request of the Landlord, Tenant will
-------------------------
in writing subordinate its rights hereunder to the lien of any mortgage, or deed
of trust to any bank, insur-ance company or other lending institution, nor or
hereafter in force against the Building, and upon any buildings hereafter placed
upon the land of which the premises are a part, and to all advances made or
hereafter to be made upon the security thereof.
In the event any proceedings are brought for foreclosure, or in the event of
the exercise of the power of sale under any mortgage or deed of trust made by
the Landlord covering the Premises, the Tenant shall attorn to the purchaser
upon any such foreclosure or sale and recognize such purchaser as the Landlord
under this Lease.
The provisions of this Article to the contrary notwith- standing, and so
long as Tenant is not in default hereunder, this Lease shall remain in full
force and effect for the full term hereof.
(16) Separability. Any provision of this Lease which shall prove to be
------------
invalid, void or illegal shall in no way affect, impair or invalidate any other
provision hereof and such other provision shall remain in full force and effect.
21
<PAGE>
(17) Cumulative Remedies. No remedy or election here under shall be
-------------------
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
(18) Choice of Law. This Lease shall be governed by the laws of the State
-------------
of California.
(19) Signs and Auctions. Tenant shall not place any sign upon the
------------------
Premises or Building or conduct any auction thereon without Landlord's prior
written consent.
(20) Provisions are Covenants and Conditions. All provisions, whether
---------------------------------------
covenants or conditions, on the part of Tenant shall be deemed to be both
covenants and conditions.
28. Broker. The parties hereto warrant that they have had no dealings with
------
any real estate broker or agents in connection with the negotiation of this
Lease. They know of no other real estate broker or agent who is entitled to a
commission in connection with this Lease. Each party shall hold harmless the
other party from all damages resulting from any claims which may be asserted
against the other party by any broker, binder, or other person, with whom the
indemnifying party has dealt.
The parties hereto have executed this Lease at the place and on the dates
specified immediately adjacent to their respective signatures.
"LANDLORD"
MJB ASSOCIATES,
a California Limited Partnership
ADDRESS_______________________ By____________________________
Borgi-Hesis, Inc.
______________________________ a California Corporation,
General Partner
By Brian Chisick,
President
DATE__________________________ Borgi-Hesis, Inc.
22
<PAGE>
"TENANT"
FIRST ALLIANCE MORTGAGE
COMPANY
ADDRESS_______________________ By____________________________
______________________________
DATE__________________________
23
<PAGE>
EXHIBIT 10.7
FORM OF
FIRST ALLIANCE CORPORATION
INDEMNIFICATION AGREEMENT
This Indemnification Agreement, dated as of ______________, 1996, is
made by and between First Alliance Corporation, a Delaware corporation (the
"Corporation"), and (Indemnitee), (Title) of the Corporation ("Indemnitee").
RECITALS
A. Indemnitee is currently serving as, or is assuming the position
of, a director and/or officer of the Corporation and/or, at the Corporation's
request, a director, officer, employee and/or agent of another corporation,
partnership, joint venture, trust or other enterprise, and the Corporation
wishes Indemnitee to continue in such capacity(ies);
B. The Corporation and Indemnitee recognize that the present state of
the law is too uncertain to provide the Corporation's directors and officers
with adequate and reliable advance knowledge or guidance with respect to the
legal risks and potential liabilities to which they may become personally
exposed as a result of performing their duties for the Corporation;
C. The Certificate of Incorporation (the "Articles") and the Bylaws
(the "Bylaws") of the Corporation each provide that the Corporation may
indemnify, to the fullest extent permitted by law, certain persons, including
directors, officers, employees or agents of the Corporation, against specified
expenses and losses arising out of certain threatened, pending or completed
actions, suits or proceedings;
D. Section 317(f) of the Delaware General Corporation Law (the
"DGCL") expressly recognizes that the indemnification provided by Section 145 of
the DGCL shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in an official capacity and as to action in another capacity
while holding such office;
E. Indemnitee has indicated that he may not be willing to serve, or
continue to serve, as a director and/or officer of the Corporation and/or, at
the Corporation's request, as a director, officer, employee and/or agent of
another corporation, partnership, joint venture, trust or other enterprise in
the absence of an indemnification agreement of the Corporation;
F. The Board of Directors of the Corporation has concluded that, to
retain and attract talented and experienced individuals to serve as directors
and officers of the Corporation and to encourage such individuals to take the
business risks necessary for the success of the Corporation, it is necessary for
the Corporation to contractually indemnify them, and to assume for itself
liability for expenses and damages in connection with claims against them in
connection with their service to the Corporation, and has further concluded that
the failure to provide such contractual indemnification could result in great
harm to the Corporation and its stockholders.
<PAGE>
AGREEMENT
NOW, THEREFORE, the Corporation and Indemnitee agree as follows:
1. Definitions.
-----------
(a) "Expenses" means, for the purposes of this Agreement, all direct
and indirect costs of any type or nature whatsoever (including, without
limitation, any fees and disbursements of Indemnitee's counsel, accountants and
other experts and other out-of-pocket costs) actually and reasonably incurred by
Indemnitee in connection with the investigation, preparation, defense or appeal
of a Proceeding; provided, however, that Expenses shall not include judgments,
-------- -------
fines, penalties or amounts paid in settlement of a Proceeding unless such
matters may be indemnified under applicable provisions of the DGCL.
(b) "Proceeding" means, for the purposes of this Agreement, any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative (including actions, suits or
proceedings brought by or in the right of the Corporation) in which Indemnitee
may be or may have been involved as a party or otherwise, by reason of the fact
that Indemnitee is or was a director or officer of the Corporation, by reason of
any action taken by him or of any inaction on his part while acting as such
director or officer or by reason of the fact that he is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director and/or officer of the foreign or domestic
corporation which was a predecessor corporation to the Corporation or of another
enterprise at the request of such predecessor corporation, whether or not he is
serving in such capacity at the time any liability or expense is incurred for
which indemnification or reimbursement can be provided under this Agreement.
2. Indemnification.
---------------
(a) Third Party Proceedings. To the fullest extent permitted by law,
-----------------------
the Corporation shall indemnify Indemnitee against Expenses or liabilities of
any type whatsoever (including, but not limited to, judgments, fines, penalties,
and amounts paid in settlement (if the settlement is approved in advance by the
Corporation)) actually and reasonably incurred by Indemnitee in connection with
a Proceeding (other than a Proceeding by or in the right of the Corporation) if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
Indemnitee's conduct was unlawful. The termination of any Proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that Indemnitee did
not act in good faith and in a manner that Indemnitee reasonably believed to be
in, or not opposed to, the best interests of the Corporation, or, with respect
to any criminal Proceeding, had reasonable cause to believe that Indemnitee's
conduct was unlawful. Notwithstanding the foregoing, no indemnification shall
be made in any criminal proceeding where Indemnitee has been adjudged guilty
unless a disinterested majority of the directors determines that Indemnitee did
not receive, participate in or share in any pecuniary benefit to the detriment
of the Corporation and, in view of all the circumstances of the case, Indemnitee
is fairly and reasonably entitled to indemnity for Expenses or liabilities.
(b) Proceedings by or in the Right of the Corporation. To the fullest
-------------------------------------------------
extent permitted by law, the Corporation shall indemnify Indemnitee against
Expenses actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of a
2
<PAGE>
Proceeding by or in the right of the Corporation to procure a judgment in its
favor if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in, or not opposed to, the best interests of the Corporation.
Notwithstanding the foregoing, no indemnification shall be made in respect of
any claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Corporation in the performance of Indemnitee's duty to the
Corporation unless and only to the extent that the court in which such
Proceeding is or was pending shall determine upon application that, in view of
all the circumstances of the case, Indemnitee is fairly and reasonably entitled
to indemnity for Expenses and then only to the extent that the court shall
determine.
(c) Scope. Notwithstanding any other provision of this Agreement
-----
other than Sections 3 and 13, the Corporation shall indemnify Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by other provisions of this Agreement, the Articles,
the Bylaws or statute.
3. Limitations on Indemnification. Any other provision herein to the
------------------------------
contrary notwithstanding, the Corporation shall not be obligated pursuant to the
terms of this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions
-------------
or transactions from which a director and officer may not be relieved of
liability under Section 102(b)(7) of the DGCL; or
(b) Claims Initiated by Indemnitee. To indemnify or advance Expenses
------------------------------
to Indemnitee with respect to Proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the DGCL, but such indemnification or advancement of Expenses may
be provided by the Corporation in specific cases if a majority of the
disinterested directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for Expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines or penalties, and amounts paid in settlement) which have been paid
directly to or on behalf of Indemnitee by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Corporation or
any other policy of insurance maintained by the Corporation or Indemnitee; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for Expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
4. Determination of Right to Indemnification. Upon receipt of a
-----------------------------------------
written claim addressed to the Board of Directors for indemnification pursuant
to Section 2 of this Agreement, the Corporation shall determine by any of the
methods set forth in Section 145(d) of the DGCL whether Indemnitee has met the
applicable standards of conduct that make it
3
<PAGE>
permissible under applicable law to indemnify Indemnitee. If a claim under
Section 2 of this Agreement is not paid in full by the Corporation within ninety
days after such written claim has been received by the Corporation, Indemnitee
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim and, unless such action is dismissed by the court as
frivolous or brought in bad faith, Indemnitee shall be entitled to be paid also
the expense of prosecuting such claim. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to make a determination prior to the commencement of such action
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct under applicable law, nor
an actual determination by the Corporation (including its Board of Directors,
independent legal counsel or its stockholders) that Indemnitee has not met such
applicable standard of conduct, shall create a presumption that Indemnitee has
not met the applicable standard of conduct. The court in which such action is
brought shall determine whether Indemnitee or the Corporation shall have the
burden of proof concerning whether Indemnitee has or has not met the applicable
standard of conduct.
5. Advancement and Repayment of Expenses. The Expenses incurred by
-------------------------------------
Indemnitee in defending and investigating any Proceeding shall be paid by the
Corporation prior to the final disposition of such Proceeding within thirty days
after receiving from Indemnitee copies of invoices presented to Indemnitee for
such Expenses and an undertaking by or on behalf of Indemnitee to the
Corporation to repay such amount to the extent it is ultimately determined that
Indemnitee is not entitled to indemnification. In determining whether or not to
make an advance hereunder, the ability of Indemnitee to repay shall not be a
factor. Notwithstanding the foregoing, in a proceeding brought by the
Corporation directly, in its own right (as distinguished from an action brought
derivatively or by any receiver or trustee), the Corporation shall not be
required to make the advances called for hereby if a majority of the
disinterested directors determine that it does not appear that Indemnitee has
met the standards of conduct that made it permissible under applicable law to
indemnify Indemnitee and that the advancement of Expenses would not be in the
best interests of the Corporation and its stockholders.
6. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification or advancement by the Corporation
of some or a portion of any Expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, penalties, and amounts paid in
settlement) incurred by him in the investigation, defense, settlement or appeal
of a Proceeding, but is not entitled to indemnification or advancement of the
total amount thereof, the Corporation shall nevertheless indemnify or pay
advancements to Indemnitee for the portion of such Expenses or liabilities to
which Indemnitee is entitled.
7. Notice to Corporation by Indemnitee. Indemnitee shall notify the
-----------------------------------
Corporation in writing of any matter with respect to which Indemnitee intends to
seek indemnification hereunder as soon as reasonably practicable following the
receipt by Indemnitee of written notice thereof; provided that any delay in so
notifying Corporation shall not constitute a waiver by Indemnitee of his rights
hereunder. The written notification to the Corporation shall be addressed to
the Board of Directors and shall include a description of the nature of the
Proceeding and the facts underlying the Proceeding and be accompanied by copies
of any documents filed with the court, if any, in which the Proceeding is
pending. In addition, Indemnitee shall give the Corporation such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
8. Defense of Claim. In the event that the Corporation shall be
----------------
obligated under Section 5 hereof to pay the Expenses of any Proceeding against
Indemnitee, the
4
<PAGE>
Corporation, if appropriate, shall be entitled to assume the defense of such
Proceeding, with counsel approved by Indemnitee, which approval shall not be
unreasonably withheld, upon the delivery to Indemnitee of written notice of its
election to do so. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Corporation, the Corporation
will not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same Proceeding;
provided that (i) Indemnitee shall have the right to employ his own counsel in
any such Proceeding at Indemnitee's expense, and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Corporation, or (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Corporation and Indemnitee in the conduct of such defense
or (C) the Corporation shall not, in fact, have employed counsel to assume the
defense of such Proceeding, then the fees and expenses of Indemnitee's counsel
shall be paid by the Corporation.
9. Attorneys' Fees. If any legal action is necessary to enforce the
---------------
terms of this Agreement, the prevailing party shall be entitled to recover, in
addition to other amounts to which the prevailing party may be entitled, actual
attorneys' fees and court costs as may be awarded by the court.
10. Continuation of Obligations. All agreements and obligations of
---------------------------
the Corporation contained herein shall continue during the period Indemnitee is
a director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, fiduciary, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and shall
continue thereafter so long as Indemnitee shall be subject to any possible
Proceeding by reason of the fact that Indemnitee served in any capacity referred
to herein.
11. Successors and Assigns. This Agreement establishes contract
----------------------
rights that shall be binding upon, and shall inure to the benefit of, the
successors, assigns, heirs and legal representatives of the parties hereto.
12. Non-exclusivity.
---------------
(a) The provisions for indemnification and advancement of expenses set
forth in this Agreement shall not be deemed to be exclusive of any other rights
that Indemnitee may have under any provision of law, the Corporation's
Certificate of Incorporation or Bylaws, the vote of the Corporation's
stockholders or disinterested directors, other agreements or otherwise, both as
to action in his official capacity and action in another capacity while
occupying his position as a director or officer of the Corporation.
(b) In the event of any changes, after the date of this Agreement, in
any applicable law, statute, or rule that expand the right of a Delaware
corporation to indemnify its directors and officers, Indemnitee's rights and the
Corporation's obligations under this Agreement shall be expanded to the fullest
extent permitted by such changes. In the event of any changes in any applicable
law, statute or rule, that narrow the right of a Delaware corporation to
indemnify a director and officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
13. Effectiveness of Agreement. This Agreement shall be effective as
--------------------------
of the date set forth on the first page and may apply to acts of omissions of
Indemnitee that occurred prior to such date if Indemnitee was a director or
officer of the Corporation or its
5
<PAGE>
predecessor, or was serving at the request of the Corporation or its predecessor
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, at the time such act or omission
occurred.
14. Severability. Nothing in this Agreement is intended to require
------------
or shall be construed as requiring the Corporation to do or fail to do any act
in violation of applicable law. The Corporation's inability, pursuant to court
order, to perform its obligations under this Agreement shall not constitute a
breach of this Agreement. The provisions of this Agreement shall be severable
as provided in this Section 14. If this Agreement or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify Indemnitee to the fullest extent
permitted by any applicable portion of this Agreement that shall not have been
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
15. Governing Law. This Agreement shall be interpreted and enforced
-------------
in accordance with the laws of the State of Delaware. To the extent permitted
by applicable law, the parties hereby waive any provisions of law that render
any provision of this Agreement unenforceable in any respect.
16. Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressed, on the date of such
receipt, or (ii) if delivered by facsimile transmission to the recipient
followed by a copy sent by mail on the same date as the facsimile transmission,
on the date of receipt of such facsimile transmission, or (iii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
17. Mutual Acknowledgment. Both the Corporation and Indemnitee
---------------------
acknowledge that in certain instances, federal law or applicable public policy
may prohibit the Corporation from indemnifying its directors and officers under
this Agreement or otherwise. Indemnitee understands and acknowledges that the
Corporation has undertaken or may be required in the future to undertake with
the Securities and Exchange Commission to submit the question of indemnification
to a court in certain circumstances for a determination of the Corporation's
right under public policy to indemnify Indemnitee.
18. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall constitute an original.
19. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year set forth above.
FIRST ALLIANCE CORPORATION,
a Delaware corporation
By:
-----------------------------
Title:
--------------------------
17305 Von Karman Avenue
Irvine, California 92714
Attention: President
INDEMNITEE:
- ------------------------
(Indemnitee)
- ------------------------
- ------------------------
(Address)
7
<PAGE>
EXHIBIT 10.8
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MORTGAGE LOAN MASTER TRANSFER AGREEMENT
Dated as of June 30, 1995
by and between
NATIONSCAPITAL MORTGAGE CORPORATION
as Originator
and
FIRST ALLIANCE MORTGAGE COMPANY,
the Company
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 1. Definitions....................................................................... 1
Section 3. Interest Calculations............................................................. 5
Section 4. Premium Payment; Bulk Sales....................................................... 5
Section 5. Representations, Warranties and Covenants Regarding the Originator and the
Company........................................................................... 6
Section 6. Representations and Warranties of the Originator Regarding the Mortgage Loans..... 9
Section 8. Term of Agreement................................................................. 15
Section 9. Authorized Representatives........................................................ 15
Section 10. Notices........................................................................... 15
Section 11. Governing Law..................................................................... 15
Section 12. Assignment........................................................................ 16
Section 13. Counterparts...................................................................... 16
Section 14. Amendment......................................................................... 16
Section 15. Severability of Provisions........................................................ 16
Section 16. No Agency: No Partnership or Joint Venture........................................ 16
Section 17. Further Assurances................................................................ 16
Section 18. Maintenance of Records............................................................ 16
</TABLE>
i
<PAGE>
THIS MORTGAGE LOAN MASTER TRANSFER AGREEMENT, dated as of June 30,
1995, between FIRST ALLIANCE MORTGAGE COMPANY (the "Company") and NATIONSCAPITAL
MORTGAGE CORPORATION (the "Originator").
A. Each Originator is an originator of mortgage loans which it may, from
time to time, sell to the Company;
B. The Company may, from time to time, purchase such mortgage loans from
the Originator;
C. The Company in its capacity as a purchaser of Mortgage Loans desires to
sell such Mortgage Loans to unaffiliated third parties for the purpose of either
selling such mortgage loans in bulk transfers or securitizing such loans in
public or private transactions; and
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements herein contained, the parties hereto hereby agree as follows:
Section 1. Definitions. Whenever used in this Agreement, the following
-----------
words and phrases, unless the context otherwise requires, shall have the
meanings specified in this Article.
Agreement: This Mortgage Loan Master Transfer Agreement as it may be
---------
amended from time to time, including the exhibits and supplements hereto.
Bulk Sale: The sale by the Company of mortgage loans including the
---------
Mortgage Loans to Bulk Sale Purchasers.
Bulk Sale Purchaser: The third party purchaser of Mortgage Loans
-------------------
originated by the Originator, as well as Mortgage Loans originated by the
Company in a bulk sale transaction.
Code: The Internal Revenue Code of 1986 as amended, and any successor
----
statute.
Coupon Rate: The rate of interest borne by each Note.
-----------
FDIC: The Federal Deposit Insurance Corporation, or any successor
----
thereto.
FHLMC: The Federal Home Loan Mortgage Corporation, or any successor
-----
thereto.
First Mortgage Loan: A Mortgage Loan which constitutes a first priority
-------------------
mortgage lien with respect to any Mortgaged Property.
FNMA: The Federal National Mortgage Association, a federally-chartered
----
and privately-owned corporation existing under the Federal National Mortgage
Association Charter Act, as amended, or any successor thereof.
Loan Balance: With respect to each Mortgage Loan, the outstanding
------------
principal balance thereof on the Transfer Date.
Mortgage: The mortgage, deed of trust or other instrument creating a
--------
first, second or third lien on an estate in fee simple in real property, in
accordance with applicable law, securing a Note.
1
<PAGE>
Mortgage File: The file containing those Mortgage Loan Documents
-------------
pertaining to a particular Mortgage Loan.
Mortgage Loan Documents: With respect to each Mortgage Loan, the
-----------------------
following documents:
(a) The original Mortgage Note, endorsed "Pay to the order of First
Alliance Mortgage Company without recourse" and signed, by manual
signature, in the name of the Originator.
(b) Either: (i) the original Mortgage, with evidence of recording
thereon, (ii) a copy of the Mortgage certified as a true copy by the
Originator or by the closing attorney, or by an officer of the title
insurer or agent of the title insurer which issued the related title
insurance policy, or commitment therefor, if the original has been
transmitted for recording until such time as the original is returned
by the public recording officer or (iii) a copy of the Mortgage
certified by the public recording officer in those instances where the
original recorded Mortgage has been lost;
(c) The original Assignment of Mortgage from the Originator to the Company
without recourse provided that, if the related Mortgage has not been
returned from the applicable public recording office, such Assignment
of Mortgage may exclude the information to be provided by the
recording office;
(d) The original policy of title insurance or a certified copy thereof
certified by the Originator or, if such policy has not yet been
delivered by the insurer, the commitment or binder to issue same;
(e) Either: (i) originals of all intervening assignments, if any, showing
a complete chain of assignment from the originator of such Mortgage
Loan to the Originator including any recorded warehousing assignments,
with evidence of recording thereon, or, (ii) if the original
intervening assignments have not yet been returned from the recording
office, a copy of the originals of such intervening assignments
together with a certificate of the Originator or the closing attorney
or an officer of the title insurer which issued the related title
insurance policy, or commitment therefor, or its duly authorized agent
certifying that the copy is a true copy of the original of such
intervening assignment which shall be held until such time as the
original is returned from the public recording office or (iii) a copy
of the intervening assignment certified by the public recording office
in those instances where the original recorded intervening assignment
has been lost; and
(f) Originals of all assumption, modification and substitution agreements,
if any.
Mortgage Loans: The Mortgage Loans identified in the Schedule of Loans
--------------
Delivered as from time to time are subject to this Agreement.
Mortgaged Property: The residential real property subject to a Mortgage
------------------
which secures the Mortgage Loan.
Mortgagor or Borrower: The obligor under a Mortgage Loan.
---------------------
2
<PAGE>
Note: The original note or bond or other evidence of indebtedness
----
evidencing the indebtedness of the Borrower/Mortgagor under a Mortgage Loan.
Person: Any individual, corporation, partnership, joint venture,
------
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
Purchase Price: With respect to any Mortgage Loan, a price equal to the
--------------
outstanding principal balance of the Mortgage Loan as of the related Transfer
Date.
Repurchase Price: With respect to any Mortgage Loan, a price equal to
----------------
the sum of (x) the outstanding principal balance of the Mortgage Loan and (y)
the amortized portion of the premium, if any, for such Mortgage Loan paid by the
Company to the Originator upon the completion of the Bulk Sale.
Qualified Mortgage: "Qualified Mortgage" shall have the meaning set
------------------ ------------------
forth from time to time in the definition thereof at Section 860G(a)(3) of the
Code (or any successor statute thereto).
Schedule of Loans Delivered: The Mortgage Loans set forth on a schedule
---------------------------
in the form of Exhibit A hereto that the Company has offered to purchase from
the Originator.
Second Mortgage Loan: A Mortgage Loan which constitutes a second
--------------------
priority mortgage lien with respect to the related Mortgaged Property.
Senior Lien: With respect to any Second Mortgage Loan, the mortgage loan
-----------
relating to the corresponding Mortgaged Property having a first priority lien.
Servicer: First Alliance Mortgage Company, a California corporation, and
--------
its permitted successors and assigns.
Transfer Date: The date of the funding or payment of Purchase Price by
-------------
the Company for Mortgage Loans purchased pursuant to this Agreement. Each
settlement shall be held at the offices of the Company, 701 S. Parker Street,
5th Floor, Orange, California 92668.
Underwriting Guidelines/Purchasing Guidelines: Exhibit "B" attached
---------------------------------------------
hereto and made a part hereof as may from time to time be amended by the
Company.
Warehouse Facility: Bankers Trust Company, as collateral agent and
------------------
custodian for a warehousing line of credit established for the purpose of
funding Mortgage Loans purchased by the Company.
Section 2. Purchase and Sale of Mortgage Loans.
-----------------------------------
(a) On or before the business day immediately preceding each Transfer
Date, the Originator shall deliver to the Company or to the Company's
Warehousing Facility the following for each Mortgage Loan purchased as
the Company may direct:
(i) Those Mortgage Loans described by the Company on each Schedule of
3
<PAGE>
Loans Delivered which are purchased by the Company pursuant to
this Agreement;
(ii) The agreed upon priority liens and/or mortgages on Mortgaged
Property;
(iii) The Note(s) and the Mortgage(s) endorsed by an authorized
officer of the Originator to the Company together with an
individual assignment to the Company (certified copy of the
assignment submitted for recording) and originals of all
intervening assignments, if any, of the Originator's beneficial
interest in the Mortgage, showing a complete chain of title from
origination to the Originator, including warehousing assignment,
if any, with evidence of recording thereon.
(iv) Any and all documents, instruments, collateral agreements, and
assignments and endorsements for all documents, instruments and
collateral agreements, referred to in the Notes and/or Mortgages
or related thereto, including, without limitation, insurance
policies (private mortgage insurance, if applicable; flood
insurance, if applicable; hazard insurance; title insurance; and
other applicable insurance policies) covering the Mortgaged
Property or relating to the Notes and all files, books, papers,
ledger cards, reports and records including, without limitation,
loan applications, borrower financial statements, separate
assignments of rents, if any, credit reports and appraisals,
relating to the Mortgage Loans (the "Related Assets"). In all
cases, the Related Assets shall be the original documents.
(v) The list of Mortgage Loan Documents, including all writings
evidencing the Mortgage Loan(s) purchased by the Company. In all
cases, these documents shall be the original documents.
(vi) In the event that the Originator cannot deliver to the Company a
duly recorded assignment of Mortgage or any other document
required to be recorded under this Agreement on the Transfer Date
solely because of a delay caused by the public recording office
when such document(s) has/have been delivered for recordation.
The Originator shall deliver to the Company a certified copy of
each such document(s) with a statement thereon signed by an
officer of the Originator or an officer of a title insurer
acceptable to the Company certifying each to be a true and
correct copy of document(s) delivered to the appropriate public
recording official for recordation. The Originator shall deliver
to the Company such recorded document(s) with evidence of
recording indicated thereon no later than 15 days after the
Originator receives such document, but in any event, no later
than 90 days from the Transfer Date.
(vii) A full copy file of the original Mortgage Loan Documents.
(b) On each Transfer Date hereunder, the Originator shall sell, assign,
transfer, convey and deliver to the Company, or the Company's
Warehousing Facility all of its rights, title and interest in and to
the Mortgage Loans, assets and documents as more fully enumerated and
set forth in Section 2(a)(i) through (vi) inclusive, which is
incorporated herein by reference.
4
<PAGE>
(c) The Purchase Price for the Mortgage Loans paid on the Transfer Date by
wire transfer to the Originator's bank or such title insurer's offices
and/or public escrow offices as the Company, the Originator and the
Company's Warehouse Facility shall agree.
Section 3. Interest Calculations. All calculations of interest
---------------------
hereunder, including, without limitation, calculations of interest at the Coupon
Rate, which are made in respect of the Loan Balance of a Mortgage Loan shall be
made on the basis of a 360-day year comprised of twelve 30-day months.
Section 4. Premium Payment; Bulk Sales.
---------------------------
(a) In connection with each transfer under this Agreement the Company will
pay or will have paid to the Originator (i) its pro rata portion of the premium
--------
received by the Company (after the deduction of the Company's costs and
expenses) in connection with the sale by the Company of such Mortgage Loans in a
Bulk Sale or (ii) its pro rata portion of the premium negotiated by the Company
--------
and the Originator if the Company includes Mortgage Loans in a securitization
transaction.
(b) From time to time in connection with Bulk Sales, the Company intends to
transfer to a Bulk Sale Purchaser the Company's right, title and interest to
certain mortgage loans originated by the Company or acquired by the Company
pursuant to other agreements. The Company shall retain 100% of the premium
received in such Bulk Sales with respect to loans originated by the Company or
acquired by the Company pursuant to such other Agreement.
Section 5. Representations, Warranties and Covenants Regarding the
-------------------------------------------------------
Originator and the Company. (a) The Originator hereby represents and warrants to
- --------------------------
the Company and its successors and assigns that, as of the date hereof:
I. The Originator is a corporation, duly organized, validly existing
and in good standing under the laws of the State of California and is in
good standing as a foreign corporation, in each jurisdiction in which the
nature of its business, or the properties owned or leased by it make such
qualification necessary. The Originator has all requisite organizational
power and authority to own and operate its properties, to carry out its
business as presently conducted and as proposed to be conducted, to enter
into and discharge its obligations under this Agreement.
(ii) The execution and delivery of this Agreement by the Originator and
its performance and compliance with the terms of this Agreement to which it
is a party have been duly authorized by all necessary action on the part of
the Originator and will not violate the Originator's Articles of
Incorporation or Bylaws or constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, or
result in a breach of, any material contract, agreement or other instrument
to which the Originator is a party or by which the Originator is bound or
violate any statute or any order, rule or regulation of any court,
governmental agency or body or other tribunal having jurisdiction over the
Originator or any of its properties.
(iii) This Agreement, assuming due authorization, execution and delivery
by the other parties hereto and thereto, constitutes a valid, legal and
binding obligation of the Originator, enforceable against it in accordance
with the terms hereof, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization,
5
<PAGE>
moratorium or other similar laws affecting creditors' rights generally and
by general principles of equity (whether considered in a proceeding or
action in equity or at law).
(iv) The Originator is not in default with respect to any order or
decree of any court or any order, regulation or demand of any federal,
state, municipal or governmental agency, which might have consequences that
would materially and adversely affect the condition (financial or other) or
operations of the Originator or its properties or might have consequences
that would materially and adversely affect its performance hereunder.
(v) Except as disclosed in writing to the Company, no litigation is
pending or, to the best of the Originator's knowledge, threatened against
the Originator which litigation might have consequences that would prohibit
its entering into this Agreement or that would materially and adversely
affect the condition (financial or otherwise) or operations of the
Originator or its properties or might have consequences that would
materially and adversely affect its performance hereunder.
(vi) No certificate of an officer, statement furnished in writing or
report delivered pursuant to the terms hereof by the Originator contains
any untrue statement of a material fact or omits to state any material fact
necessary to make the certificate, statement or report not misleading.
(vii) Upon the receipt of each Mortgage Loan and other items of the
Mortgage File, including the Note and Mortgage by the Bulk Sale Purchaser,
such Bulk Sale Purchaser will have good and marketable title to such
Mortgage Loan free and clear of any lien (other than liens which will be
simultaneously released).
(viii) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required
to be taken, given or obtained, as the case may be, by or from any federal,
state or other governmental authority or agency (other than any such
actions, approvals, etc. under any state securities laws, real estate
syndication or "Blue Sky" statutes, as to which the Originator makes no
such representation or warranty) that are necessary or advisable in
connection with the sale of the Mortgage Loans and the execution and
delivery by the Originator of this Agreement, have been duly taken, given
or obtained, as the case may be, are in full force and effect on the date
hereof, are not subject to any pending proceedings or appeals
(administrative, judicial or otherwise), either the time within which any
appeal therefrom may be taken or review thereof may be obtained has expired
or no review thereof may be obtained or appeal therefrom taken and are
adequate to authorize the consummation of the transactions contemplated by
this Agreement on the part of the Originator and the performance by the
Originator of its obligations under this Agreement.
(ix) The origination practices used by the Originator with respect to
the Mortgage Loans have been and are, in all material respects, legal,
proper, prudent and customary in the mortgage loan lending business.
(x) The transactions contemplated by this Agreement are in the ordinary
course of business of the Originator.
(xi) The Originator received fair consideration and reasonably
equivalent value in exchange for the sale of the interests in the Mortgage
Loans.
6
<PAGE>
(xii) The Originator did not transfer or sell any interest in any Mortgage
Loan with any intent to hinder, delay or defraud any of its respective
creditors.
(xiii) The Originator is solvent and will not be rendered insolvent as a
result of the sale of the Mortgage Loans to the Bulk Sale Purchaser.
The representations and warranties set forth in this paragraph (a) shall survive
the sale and assignment by the Originator of the Mortgage Loans to the Company
and by the Company to the related Bulk Sales Purchaser. Upon discovery of a
breach of any of the foregoing representations and warranties which materially
and adversely affects the interests of the Company, the Company shall give
prompt written notice to the Originator within 30 days of its receipt of notice
of breach, the Originator shall cure such breach in all material respects.
(b) The Company hereby represents and warrants to the Originator, that, as
of the date hereof:
(i) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all licenses
and qualifications necessary to carry on its business as now being conducted
and to perform its obligations hereunder; the Company has the power and
authority to execute and deliver this Agreement and to perform its obligations
in accordance herewith; the execution, delivery and performance of this
Agreement (including any other instruments of transfer to be delivered
pursuant to this Agreement) by the Company and the consummation of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action and do not violate the organization documents of
the Company, contravene or violate any law or regulation applicable to the
Company or contravene, violate or result in any breach of any provision of, or
constitute a default under, or result in the imposition of any lien on any
assets of the Company pursuant to the provisions of any mortgage indenture,
contract, agreement or other undertaking to which the Company is a party or
which purports to be binding upon the Company or any of the Company's assets;
this Agreement evidences the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, subject to the
effect of bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditor's rights generally or the application
of equitable principles in any proceeding, whether at law or in equity;
(ii) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required to
be taken, given or obtained, as the case may be, by or from any federal, state
or other governmental authority or agency, that are necessary in connection
with the execution and delivery by the Company of this Agreement, have been
duly taken, given or obtained, as the case may be, are in full force and
effect, are not subject to any pending proceedings or appeals (administrative,
judicial or otherwise), either the time within which any appeal therefrom may
be taken or review thereof may be obtained has expired or no review thereof
may be obtained or appeal therefrom taken and are adequate to authorize the
consummation of the transactions contemplated by this Agreement on the part of
the Company and the performance by the Company of its obligations under this
Agreement; and
(iii) Except as disclosed in writing to the Originator, there is no action,
suit, proceeding or investigation pending or, to the best of the Company's
knowledge, threatened against the Company which, either in any one instance or
in the aggregate, may result in
7
<PAGE>
any material adverse change in the business, operations, financial condition,
properties or assets of the Company or in any material impairment of the right
or ability of the Company to carry on its business substantially as now
conducted or in any material liability on the part of the Company or which
would draw into question the validity of this Agreement or the Mortgage Loans
or of any action taken or to be taken in connection with the obligations of
the Company contemplated herein or which would be likely to impair the ability
of the Company to perform under the terms of this Agreement or to collect on
the Mortgage Loans.
The representations and warranties set forth in this paragraph (b) shall survive
the sale and assignment of the Mortgage Loans to the Company. Upon discovery of
a breach of any of the foregoing representations and warranties which materially
and adversely affects the interests of the Originator, the Originator shall give
prompt written notice to the Company. Within 30 days of its receipt of notice of
breach, the Company shall cure such breach in all material respects.
Section 6. Representations and Warranties of the Originator Regarding the
--------------------------------------------------------------
Mortgage Loans. (a) Set forth in paragraph (b) below is a listing of
- ---------------
representations and warranties which will be deemed to have been made by the
Originator to the Company in connection with each Mortgage Loan.
(b) With respect to each Mortgage Loan as of the related Transfer Date, the
Originator hereby represents, warrants and covenants to the Company as follows:
(i) Such Mortgage Loan was originated by the Originator and as of the
such Transfer Date the related Mortgage is a valid lien on the related Mortgaged
Property securing the amount owed by the Mortgagor under the related Note
subject only to (i) the lien of current real property taxes and assessments,
(ii) the lien of any related first mortgage (as to any Mortgage Loan that is not
secured by a first priority lien), (iii) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
recording of such Mortgage, such exceptions appearing of record being acceptable
to mortgage lending institutions generally in the area wherein the related
Mortgaged Property is located or specifically reflected in the appraisal or
title policy obtained in connection with the origination of the related Mortgage
Loan by the Originator and (iv) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by such Mortgage.
(ii) Each Mortgaged Property consists of one- to four-family residential
real property, a condominium or townhouse located in California, Oregon,
Washington, Illinois, Florida, Georgia or any other state in which the Company
and the Originator are duly licensed and in which they have agreed in writing to
include on this list. No Mortgaged Property consists solely of raw land, an
apartment building having more than four units, a cooperative apartment or a
manufactured or mobile home.
(iii) Immediately prior to the sale, transfer, assignment and conveyance
by the Originator to the Company, the Originator had good title to such Mortgage
Loan, free of any interest of any other Person, and the Originator has sold,
transferred, assigned and conveyed all of its right, title and interest in and
to such Mortgage Loan to the Company.
(iv) The Originator was properly licensed or otherwise authorized, to
the extent required by applicable law, to originate or acquire such Mortgage
Loan. Such Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws and regulations, including,
without limitation, the federal Truth in-Lending Act, the Real Estate
8
<PAGE>
Settlement Procedure Act and other federal, state and local consumer protection,
usury, equal credit opportunity, disclosure and recording laws. The consummation
of the transactions herein contemplated, including, without limitation, the
transfer of the Mortgage Loans to the Bulk Sale Purchaser, will not violate any
such state or federal law or regulation.
(v) With respect to each Mortgage Loan, a lender's title insurance
policy, issued in standard California Land Title Association form or American
Land Title Association form by a title insurance company authorized to transact
business in California or jurisdiction in which the subject Mortgaged Property
is located, in an amount at least equal to the original Loan Balance of such
Mortgage Loan together, in the case of a Mortgage Loan that is not a first
priority lien, with the original principal amount of the note relating to any
senior liens, insuring the Company's interest under the related Mortgage Loan as
the holder of a valid first or second lien of record on the real property
described in the related Mortgage, as the case may be, subject only to
exceptions of the character referred to in paragraph 6(b)(i) above, was
effective on the date of the origination of such Mortgage Loan, and, as of the
related Transfer Date, such policy will be valid and thereafter such policy
shall continue in full force and effect.
(vi) The information set forth on each Schedule of Loans Delivered is
true and correct in all material respects.
(vii) The Originator has not received a notice of default on any senior
loan secured by the related Mortgaged Property which has not been cured.
(viii) Each Note and Mortgage is in substantially the form provided to
the Company on the related Transfer Date.
(ix) As of its date of origination, no Mortgage Loan had a Combined
Loan-to-Value Ratio in excess of 85%.
(x) No senior loan secured by the related Mortgaged Property provides
for negative amortization of the principal balance thereof. Each Mortgage Loan
is a closed-end Mortgage Loan, all amounts due under the related Note have been
advanced and no future advances are required to be made.
(xi) Each original Mortgage was recorded, or is in the process of being
recorded and will be recorded no later than 75 days after the Transfer Date, and
all subsequent assignments of the original Mortgage have been recorded, or are
in the process of being recorded, in the appropriate jurisdictions wherein such
recordation is necessary to perfect the lien thereof as against creditors of the
Company and the Originator or as against creditors of the Company's and the
Originator's predecessors in title.
(xii) The related Note is not and has not been secured by any
collateral, pledged account or other security except the lien of the related
Mortgage. Each senior loan on a Mortgaged Property permits the granting of a
junior lien similar to the related Mortgage Loan without consent.
(xiii) As of the related Transfer Date, there is no mechanics' lien or
claim for work, labor or material affecting the premises subject to the related
Mortgage which is or may be a lien prior to, or equal to, the lien of such
Mortgage, except those which are insured against by the title insurance policy
referred to in (v) above.
9
<PAGE>
(xiv) As of the related Transfer Date, there is no delinquent tax or
delinquent assessment lien against any Mortgaged Property. As of the related
Transfer Date, there is no valid offset, defense or counterclaim to the related
Note or Mortgage.
(xv) As of the related Transfer Date, to the best knowledge of the
Originator, the physical property subject to the related Mortgage is free of
material damage and is in good repair.
(xvi) The sale, transfer, assignment and conveyance of such Mortgage
Loan and the Mortgage Files by the Originator to the Company pursuant to this
Agreement, are not subject to the bulk transfer laws or any similar statutory
provisions in effect in any applicable jurisdiction.
(xvii) Such Mortgage Loan is being serviced by the Servicer or by a
subservicer appointed by the Servicer (the "Sub-Servicer").
(xviii) At the related Transfer Date, the improvements upon the related
Mortgaged Property are covered by a valid and existing hazard insurance policy
with a generally acceptable carrier that provides for fire and extended
coverage.
(xix) The related Mortgage and Note are the legal, valid and binding
obligations of the Mortgagor thereof and are enforceable in accordance with
their terms, except only as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity
(whether considered in a proceeding or action in equity or at law), and all
parties to such Mortgage Loan had full legal capacity to execute all documents
relating to such Mortgage Loan and to convey the estate therein purported to be
conveyed.
(xx) The Originator has caused to be performed any and all acts required
to be performed to preserve the rights and remedies of the Company in any
insurance policies applicable to such Mortgage Loan delivered by the Originator
including, without limitation, any necessary notifications of insurers,
assignments of policies or interests therein, and establishments of co-insured,
joint loss payee and mortgagee rights.
(xxi) The terms of the related Note and Mortgage have not been impaired,
altered or modified in any respect, except by a written instrument which has
been recorded, if necessary, to protect the interest of the Originator or the
Company. The substance of any such alteration or modification is reflected on
the Schedule of Loans Delivered.
(xxii) None of the Mortgage Loans have a shared appreciation feature or
other contingent interest feature.
(xxiii) To the best knowledge of the Originator, no improvement located
on or being part of the related Mortgaged Property is in violation of any
applicable zoning law or regulation. To the best knowledge of the Originator,
all inspections, licenses and certificates required to be made or issued with
respect to all occupied portions of the related Mortgaged Property and, with
respect to the use and occupancy of the same, including, but not limited to,
certificates of occupancy and fire underwriting certificates, have been made or
obtained from the appropriate authorities, and such Mortgaged Property is
lawfully occupied under the applicable law.
(xxiv) With respect to each deed of trust, a trustee, duly qualified
under
10
<PAGE>
applicable law to serve as such, has been properly designated and currently so
serves and is named in such deed of trust, and no fees or expenses (except in
connection with a trustee's sale after default by the related Mortgagor) are or
will become payable to the trustee under the deed of trust.
(xxv) The related Note and Mortgage contains customary and enforceable
provisions which render the rights and remedies of the holder thereof adequate
for the realization against the related Mortgaged Property of the benefits of
the security, including by trustee's sale. There is no homestead or other
exemption available to the related Mortgagor which would materially interfere
with the right to sell the related Mortgaged Property at a trustee's sale or the
right to foreclose the related Mortgaged Property.
(xxvi) None of the Mortgage Loans were selected from among the
Originator's assets in a manner which would cause them to be adversely selected
as to credit risk from the pool of mortgage loans owned by the such Originator.
(xxvii) The Mortgage Loan is not subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury, nor will the
operation of any of the terms of the Mortgage Note or the Mortgage, or the
exercise of any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto.
(xxviii) As of the Transfer Date, no Mortgage Loan is 31 or more days
contractually delinquent.
(xxix) If any Mortgaged Property is in an area identified in the Federal
Register by the Federal Emergency Management Agency as having special flood
hazards, a flood insurance policy in a form meeting the requirements of the
current guidelines of the Federal Insurance Administration is in effect with
respect to such Mortgaged Property with a generally acceptable carrier in an
amount representing coverage not less than the least of (A) the outstanding
principal balance of the related Mortgage Loan (together, in the case of a
Mortgage Loan that is not a first priority lien, with the outstanding principal
balance of any liens that are prior to the related Mortgage Loan lien), (B) the
minimum amount required to compensate for damage or loss on a replacement cost
basis or (C) the maximum amount of insurance that is available under the Flood
Disaster Protection Act of 1973.
(xxx) The proceeds of each Mortgage Loan have been fully disbursed,
there is no obligation on the part of the Originator to make future advances
thereunder and any and all requirements as to completion of any on-site or off-
site improvements and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making or closing or
recording such Mortgage Loans were paid.
(xxxi) Each Mortgage Loan contains a provision for the acceleration of
the payment of the unpaid principal balance of the related Mortgage Loan in the
event the related Mortgaged Property is sold without the prior consent of the
holder of the Mortgage subject to limitations under applicable law.
(xxxii) There is no proceeding pending or threatened for the total or
partial condemnation of any Mortgaged Property, nor is such a proceeding
currently occurring, and, to the best of the Originator's knowledge, each
Mortgaged Property is undamaged by waste, fire, flood, water, earthquake or
earth movement.
11
<PAGE>
(xxxiii) All of the improvements which were included for the purposes of
determining the value of any Mortgaged Property lie wholly within the boundaries
and building restriction lines of such Mortgaged Property, and no improvements
on adjoining properties encroach upon such Mortgaged Property, and are stated in
the title insurance policy and are affirmatively insured.
(xxxiv) There is no default, breach, violation or event of acceleration
existing under any Mortgage Loan or the related Note and no event which, after
the expiration of any grace or cure period, would constitute a default, breach,
violation or event of acceleration; and neither the Servicer, the Sub-Servicer
nor the Company nor any Originator has waived any default, breach, violation or
event of acceleration.
(xxxv) No instrument of release or waiver has been executed in connection
with any Mortgage Loan, and no Mortgagor has been released, in whole or in part,
from his or her obligations thereunder.
(xxxvi) As of the Transfer Date, each Mortgage is a valid and subsisting
first or second lien on the Mortgaged Property subject in the case of any second
Mortgage only to senior liens on such Mortgaged Property and subject in all
cases to the exemptions to title set forth in the title insurance policy with
respect to the related Mortgage Loan, which exceptions are generally acceptable
to banking institutions in connection with their regular mortgage lending
activities and such other exceptions to which similar properties are commonly
subject and which do not individually, or in the aggregate, materially and
adversely affect the benefits of the security intended to be provided by the
related Mortgage.
(xxxvii) Any advances made after the date of origination of a Mortgage
Loan but prior to the Transfer Date have been consolidated with the outstanding
principal amount secured by the related Mortgage, and the secured principal
amount, as consolidated, bears a single interest rate and a single repayment
term reflected on the Schedule of Mortgage Loans. The consolidated principal
amount does not exceed the original principal amount of the related Mortgage
Loan. No Note permits or obligates the Servicer, the Originator or the Sub-
Servicer to make future advances to the related Mortgagor at the option of the
Mortgagor.
(xxxviii) As of the Transfer Date, the Originator has no actual knowledge
that there exist any hazardous substances, hazardous wastes or solid wastes, as
such terms are defined in the Comprehensive Environmental Response Compensation
and Liability Act, the Resource Conservation and Recovery Act of 1976 or other
federal, state or local environmental legislation on any Mortgaged Property.
(xxxix) All parties to the Mortgage Note and the Mortgage had legal
capacity to execute the Mortgage Note and the Mortgage and each Mortgage Note
and Mortgage has been duly and properly executed by such parties.
(xl) Each Mortgage Note provides for level monthly payments sufficient to
fully amortize the principal balance of such Mortgage Note on its maturity date
or provides for level monthly payments and a single balloon payment of
unamortized principal on its maturity date sufficient to fully amortize the
principal balance of such Mortgage Note on such date.
(xli) No Mortgaged Property consists solely of raw land, an apartment
building having more than four units, a cooperative apartment or a manufactured
or
12
<PAGE>
mobile home.
(xlii) There is no homestead or other exemption available to the related
Obligor which would materially interfere with the right to sell the related
Mortgaged Property at a trustee's sale or the right to foreclose the related
Mortgaged Property.
(xliii) Each Mortgage Loan conforms to the Underwriting
Guidelines/Purchasing Guidelines.
The Representations and Warranties shall survive the transfer and assignment of
the Mortgage Loans to the Company. The Representations and Warranties shall
survive the transfer and assignment of the Mortgage Loans by the Company to the
Bulk Sale Purchaser. Upon discovery by the Originator, the Company or the Bulk
Sale Purchaser, of a breach of any of the Representations and Warranties,
without regard to any limitation set forth in such Representation or Warranty
concerning the knowledge of the Originator as to the facts stated therein, which
breach, in the opinion of the Company, materially and adversely affects the
interests of the Company or the Bulk Sale Purchaser in the related Mortgage Loan
or Mortgage Loans, the party discovering such breach shall give prompt written
notice to the other parties, and the Originator shall be required to take the
remedial actions set out in Section 6 hereof.
Section 7. Remedies.
--------
(a) Upon receipt of the notice set out in the last paragraph of Section 6
hereof, the Originator shall repurchase each affected Mortgage Loan at a price
equal to the Repurchase Price for such Mortgage Loan.
(b) It is understood and agreed that in the event that the Company is unable to
sell the Mortgage Loans hereunder as a Bulk Sale and does not intend to include
such Mortgage Loans in a securitization transaction the Originator shall
repurchase such Mortgage Loans at the Repurchase Price. If the Company is unable
to accomplish such a Bulk Sale, the Company shall notify the Originator in
writing of such event and shall indicate a date for such repurchase.
(c) Any repurchase pursuant to this Section 7 shall be accomplished by the
Originator by wire transfer of immediately available federal funds to the
account designated by the Company.
Section 8. Term of Agreement. This Agreement shall terminate upon (i) the
------------------
final payment or other liquidation of the last Mortgage Loan required pursuant
to this Agreement or (ii) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure of any Mortgage Loan.
Section 9. Authorized Representatives. The names of the officers of the
--------------------------
Originator and of the Company who are authorized to give and receive notices,
requests and instructions and to deliver certificates and documents in
connection with this Agreement on behalf of the Originator and of the Company
("Authorized Representatives") are set forth on Exhibit C, along with the
specimen signature of each such officer. From time to time, the Originator and
the Company may, change the information previously given, but each party shall
be entitled to rely conclusively on the last exhibit until receipt of a
superseding exhibit.
Section 10. Notices. All demands, notices and communications relating to
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when received by the other party or parties at the address shown below, or such
other address as may hereafter be
13
<PAGE>
furnished to the other party or parties by like notice. Any such demand, notice
or communication hereunder shall be deemed to have been received on the date
delivered to or received at the premises of the addressee.
If to the Originator:
Nationscapital Mortgage Corporation
2922 E. Chapman Avenue #202
Orange, CA 92669
Attention: Jamie Chisick
Telecopy: (714) 516-4567
Telephone: (714) 639-2700
If to the Company:
First Alliance Mortgage Company
701 S. Parker Street
Suite 5000
Orange, CA 92668
Attention: Cassandra Fraulino
Telecopy: (714) 550-6993
Telephone: (714) 550-6902
14
<PAGE>
Section 11. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of California, without
regard to conflict of laws rules applied in the State of California.
Section 12. Assignment. No party to this Agreement may assign its
----------
rights or delegate its obligations under this Agreement without the express
written consent of the other parties, except as otherwise set forth in this
Agreement.
Section 13. Counterparts. For the purpose of facilitating the execution of
------------
this Agreement and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed to
be an original, and together shall constitute and be one and the same
instrument.
Section 14. Amendment. This Agreement may be amended from time to time
---------
by the Originator and the Company only by a written instrument executed by such
parties.
Section 15. Severability of Provisions. If any one or more of the
--------------------------
covenants, agreements, provisions or terms of this Agreement shall be for any
reason whatsoever held invalid, then such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
Section 16. No Agency: No Partnership or Joint Venture. Neither the
------------------------------------------
Originator nor the Company is the agent or representative of the other, and
nothing in this Agreement shall be construed to make either the Originator nor
the Company liable to any third party for services performed by it or for debts
or claims accruing to it against the other party. Nothing contained herein nor
the acts of the parties hereto shall be construed to create a partnership or
joint venture between the Company and the Originator.
Section 17. Further Assurances. The Originator and the Company agree to
------------------
cooperate reasonably and in good faith with one another in the performance of
this Agreement.
Section 18. Maintenance of Records. The Originator shall continuously
----------------------
keep an original executed counterpart of this Agreement in its official records.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective officers all as of the day and year first above
written.
FIRST ALLIANCE MORTGAGE COMPANY,
as Company
By:
------------------------------
Name: Brian Chisick
Title: President
NATIONSCAPITAL MORTGAGE CORPORATION
By:
-------------------------------
Name: Jamie Chisick
Title: President
16
<PAGE>
EXHIBIT A
Schedule of Loans Delivered
---------------------------
17
<PAGE>
EXHIBIT B
Underwriting Guidelines/Purchasing Guidelines
---------------------------------------------
18
<PAGE>
EXHIBIT C
AUTHORIZED REPRESENTATIVES
Reference is hereby made to the Mortgage Loan Master Transfer
Agreement, dated as of _______________, 199__ (the "Agreement"), among First
Alliance Mortgage Company (the "Company") and Nationscapital Mortgage
Corporation, as Originator.
The following are the Originator's Authorized Representatives for
purposes of the Agreement:
Specimen
Name Title Signature
- ---- ----- ---------
Jamie Chisick President
--------------------------
Ben Medina Accounting Manager
--------------------------
DeeAnn Wilson Loan Operations Manager
--------------------------
The following are the Company's Authorized Representatives for
purposes of the Agreement:
Specimen
Name Title Signature
- ---- ----- ---------
Brian Chisick President
--------------------------
Cassandra L. Fraulino Manager
--------------------------
Laura Yamasaki Manager
--------------------------
IN WITNESS WHEREOF, I, , hereby certify that the above signatures are
true and correct as of this _____ day of __________.
--------------------------
Name:
19
<PAGE>
EXHIBIT 10.9
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MORTGAGE LOAN MASTER TRANSFER AGREEMENT
Dated as of June 30, 1995
by and between
COAST SECURITY MORTGAGE INC.
as Originator
and
FIRST ALLIANCE MORTGAGE COMPANY,
the Company
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 1. Definitions....................................................................... 1
Section 3. Interest Calculations............................................................. 5
Section 4. Premium Payment; Bulk Sales....................................................... 5
Section 5. Representations, Warranties and Covenants Regarding the Originator and the
Company........................................................................... 6
Section 6. Representations and Warranties of the Originator Regarding the Mortgage Loans..... 9
Section 8. Term of Agreement................................................................. 15
Section 9. Authorized Representatives........................................................ 15
Section 10. Notices........................................................................... 15
Section 11. Governing Law..................................................................... 15
Section 12. Assignment........................................................................ 16
Section 13. Counterparts...................................................................... 16
Section 14. Amendment......................................................................... 16
Section 15. Severability of Provisions........................................................ 16
Section 16. No Agency: No Partnership or Joint Venture........................................ 16
Section 17. Further Assurances................................................................ 16
Section 18. Maintenance of Records............................................................ 16
</TABLE>
i
<PAGE>
THIS MORTGAGE LOAN MASTER TRANSFER AGREEMENT, dated as of June 30, 1995,
between FIRST ALLIANCE MORTGAGE COMPANY (the "Company") and COAST SECURITY
MORTGAGE INC. (the "Originator").
A. Each Originator is an originator of mortgage loans which it may, from
time to time, sell to the Company;
B. The Company may, from time to time, purchase such mortgage loans from
the Originator;
C. The Company in its capacity as a purchaser of Mortgage Loans desires to
sell such Mortgage Loans to unaffiliated third parties for the purpose of either
selling such mortgage loans in bulk transfers or securitizing such loans in
public or private transactions; and
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements herein contained, the parties hereto hereby agree as follows:
Section 1. Definitions. Whenever used in this Agreement, the following
-----------
words and phrases, unless the context otherwise requires, shall have the
meanings specified in this Article.
Agreement: This Mortgage Loan Master Transfer Agreement as it may be
---------
amended from time to time, including the exhibits and supplements hereto.
Bulk Sale: The sale by the Company of mortgage loans including the
---------
Mortgage Loans to Bulk Sale Purchasers.
Bulk Sale Purchaser: The third party purchaser of Mortgage Loans
-------------------
originated by the Originator, as well as Mortgage Loans originated by the
Company in a bulk sale transaction.
Code: The Internal Revenue Code of 1986 as amended, and any successor
----
statute.
Coupon Rate: The rate of interest borne by each Note.
-----------
FDIC: The Federal Deposit Insurance Corporation, or any successor
----
thereto.
FHLMC: The Federal Home Loan Mortgage Corporation, or any successor
-----
thereto.
First Mortgage Loan: A Mortgage Loan which constitutes a first priority
-------------------
mortgage lien with respect to any Mortgaged Property.
FNMA: The Federal National Mortgage Association, a federally-chartered
----
and privately-owned corporation existing under the Federal National Mortgage
Association Charter Act, as amended, or any successor thereof.
Loan Balance: With respect to each Mortgage Loan, the outstanding
------------
principal balance thereof on the Transfer Date.
Mortgage: The mortgage, deed of trust or other instrument creating a
--------
first, second or third lien on an estate in fee simple in real property, in
accordance with applicable law, securing a Note.
1
<PAGE>
Mortgage File: The file containing those Mortgage Loan Documents
-------------
pertaining to a particular Mortgage Loan.
Mortgage Loan Documents: With respect to each Mortgage Loan, the
-----------------------
following documents:
(a) The original Mortgage Note, endorsed "Pay to the order of First
Alliance Mortgage Company without recourse" and signed, by manual
signature, in the name of the Originator.
(b) Either: (i) the original Mortgage, with evidence of recording
thereon, (ii) a copy of the Mortgage certified as a true copy by the
Originator or by the closing attorney, or by an officer of the title
insurer or agent of the title insurer which issued the related title
insurance policy, or commitment therefor, if the original has been
transmitted for recording until such time as the original is returned
by the public recording officer or (iii) a copy of the Mortgage
certified by the public recording officer in those instances where the
original recorded Mortgage has been lost;
(c) The original Assignment of Mortgage from the Originator to the Company
without recourse provided that, if the related Mortgage has not been
returned from the applicable public recording office, such Assignment
of Mortgage may exclude the information to be provided by the
recording office;
(d) The original policy of title insurance or a certified copy thereof
certified by the Originator or, if such policy has not yet been
delivered by the insurer, the commitment or binder to issue same;
(e) Either: (i) originals of all intervening assignments, if any, showing
a complete chain of assignment from the originator of such Mortgage
Loan to the Originator including any recorded warehousing assignments,
with evidence of recording thereon, or, (ii) if the original
intervening assignments have not yet been returned from the recording
office, a copy of the originals of such intervening assignments
together with a certificate of the Originator or the closing attorney
or an officer of the title insurer which issued the related title
insurance policy, or commitment therefor, or its duly authorized agent
certifying that the copy is a true copy of the original of such
intervening assignment which shall be held until such time as the
original is returned from the public recording office or (iii) a copy
of the intervening assignment certified by the public recording office
in those instances where the original recorded intervening assignment
has been lost; and
(f) Originals of all assumption, modification and substitution agreements,
if any.
Mortgage Loans: The Mortgage Loans identified in the Schedule of Loans
--------------
Delivered as from time to time are subject to this Agreement.
Mortgaged Property: The residential real property subject to a Mortgage
------------------
which secures the Mortgage Loan.
Mortgagor or Borrower: The obligor under a Mortgage Loan.
---------------------
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Note: The original note or bond or other evidence of indebtedness
----
evidencing the indebtedness of the Borrower/Mortgagor under a Mortgage Loan.
Person: Any individual, corporation, partnership, joint venture,
------
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
Purchase Price: With respect to any Mortgage Loan, a price equal to the
--------------
outstanding principal balance of the Mortgage Loan as of the related Transfer
Date.
Repurchase Price: With respect to any Mortgage Loan, a price equal to
----------------
the sum of (x) the outstanding principal balance of the Mortgage Loan and (y)
the amortized portion of the premium, if any, for such Mortgage Loan paid by the
Company to the Originator upon the completion of the Bulk Sale.
Qualified Mortgage: "Qualified Mortgage" shall have the meaning set
------------------
forth from time to time in the definition thereof at Section 860G(a)(3) of the
Code (or any successor statute thereto).
Schedule of Loans Delivered: The Mortgage Loans set forth on a schedule
---------------------------
in the form of Exhibit A hereto that the Company has offered to purchase from
the Originator.
Second Mortgage Loan: A Mortgage Loan which constitutes a second
--------------------
priority mortgage lien with respect to the related Mortgaged Property.
Senior Lien: With respect to any Second Mortgage Loan, the mortgage loan
-----------
relating to the corresponding Mortgaged Property having a first priority lien.
Servicer: First Alliance Mortgage Company, a California corporation, and
--------
its permitted successors and assigns.
Transfer Date: The date of the funding or payment of Purchase Price by
-------------
the Company for Mortgage Loans purchased pursuant to this Agreement. Each
settlement shall be held at the offices of the Company, 701 S. Parker Street,
5th Floor, Orange, California 92668.
Underwriting Guidelines/Purchasing Guidelines: Exhibit "B" attached
---------------------------------------------
hereto and made a part hereof as may from time to time be amended by the
Company.
Warehouse Facility: Bankers Trust Company, as collateral agent and
------------------
custodian for a warehousing line of credit established for the purpose of
funding Mortgage Loans purchased by the Company.
Section 2. Purchase and Sale of Mortgage Loans.
-----------------------------------
(a) On or before the business day immediately preceding each Transfer Date,
the Originator shall deliver to the Company or to the Company's
Warehousing Facility the following for each Mortgage Loan purchased as
the Company may direct:
(i) Those Mortgage Loans described by the Company on each Schedule of
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Loans Delivered which are purchased by the Company pursuant to
this Agreement;
(ii) The agreed upon priority liens and/or mortgages on Mortgaged
Property;
(iii) The Note(s) and the Mortgage(s) endorsed by an authorized officer
of the Originator to the Company together with an individual
assignment to the Company (certified copy of the assignment
submitted for recording) and originals of all intervening
assignments, if any, of the Originator's beneficial interest in
the Mortgage, showing a complete chain of title from origination
to the Originator, including warehousing assignment, if any, with
evidence of recording thereon.
(iv) Any and all documents, instruments, collateral agreements, and
assignments and endorsements for all documents, instruments and
collateral agreements, referred to in the Notes and/or Mortgages
or related thereto, including, without limitation, insurance
policies (private mortgage insurance, if applicable; flood
insurance, if applicable; hazard insurance; title insurance; and
other applicable insurance policies) covering the Mortgaged
Property or relating to the Notes and all files, books, papers,
ledger cards, reports and records including, without limitation,
loan applications, borrower financial statements, separate
assignments of rents, if any, credit reports and appraisals,
relating to the Mortgage Loans (the "Related Assets"). In all
cases, the Related Assets shall be the original documents.
(v) The list of Mortgage Loan Documents, including all writings
evidencing the Mortgage Loan(s) purchased by the Company. In all
cases, these documents shall be the original documents.
(vi) In the event that the Originator cannot deliver to the Company a
duly recorded assignment of Mortgage or any other document
required to be recorded under this Agreement on the Transfer Date
solely because of a delay caused by the public recording office
when such document(s) has/have been delivered for recordation.
The Originator shall deliver to the Company a certified copy of
each such document(s) with a statement thereon signed by an
officer of the Originator or an officer of a title insurer
acceptable to the Company certifying each to be a true and
correct copy of document(s) delivered to the appropriate public
recording official for recordation. The Originator shall deliver
to the Company such recorded document(s) with evidence of
recording indicated thereon no later than 15 days after the
Originator receives such document, but in any event, no later
than 90 days from the Transfer Date.
(vii) A full copy file of the original Mortgage Loan Documents.
(b) On each Transfer Date hereunder, the Originator shall sell, assign,
transfer, convey and deliver to the Company, or the Company's
Warehousing Facility all of its rights, title and interest in and to the
Mortgage Loans, assets and documents as more fully enumerated and set
forth in Section 2(a)(i) through (vi) inclusive, which is incorporated
herein by reference.
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(c) The Purchase Price for the Mortgage Loans paid on the Transfer Date by
wire transfer to the Originator's bank or such title insurer's offices
and/or public escrow offices as the Company, the Originator and the
Company's Warehouse Facility shall agree.
Section 3. Interest Calculations. All calculations of interest
---------------------
hereunder, including, without limitation, calculations of interest at the Coupon
Rate, which are made in respect of the Loan Balance of a Mortgage Loan shall be
made on the basis of a 360-day year comprised of twelve 30-day months.
Section 4. Premium Payment; Bulk Sales.
---------------------------
(a) In connection with each transfer under this Agreement the Company will
pay or will have paid to the Originator (i) its pro rata portion of the premium
received by the Company (after the deduction of the Company's costs and
expenses) in connection with the sale by the Company of such Mortgage Loans in a
Bulk Sale or (ii) its pro rata portion of the premium negotiated by the Company
and the Originator if the Company includes Mortgage Loans in a securitization
transaction.
(b) From time to time in connection with Bulk Sales, the Company intends to
transfer to a Bulk Sale Purchaser the Company's right, title and interest to
certain mortgage loans originated by the Company or acquired by the Company
pursuant to other agreements. The Company shall retain 100% of the premium
received in such Bulk Sales with respect to loans originated by the Company or
acquired by the Company pursuant to such other Agreement.
Section 5. Representations, Warranties and Covenants Regarding the
-------------------------------------------------------
Originator and the Company. (a) The Originator hereby represents and warrants to
- --------------------------
the Company and its successors and assigns that, as of the date hereof:
I. The Originator is a corporation, duly organized, validly existing and
in good standing under the laws of the State of California and is in good
standing as a foreign corporation, in each jurisdiction in which the nature
of its business, or the properties owned or leased by it make such
qualification necessary. The Originator has all requisite organizational
power and authority to own and operate its properties, to carry out its
business as presently conducted and as proposed to be conducted, to enter
into and discharge its obligations under this Agreement.
(ii) The execution and delivery of this Agreement by the Originator and
its performance and compliance with the terms of this Agreement to which it
is a party have been duly authorized by all necessary action on the part of
the Originator and will not violate the Originator's Articles of
Incorporation or Bylaws or constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, or
result in a breach of, any material contract, agreement or other instrument
to which the Originator is a party or by which the Originator is bound or
violate any statute or any order, rule or regulation of any court,
governmental agency or body or other tribunal having jurisdiction over the
Originator or any of its properties.
(iii) This Agreement, assuming due authorization, execution and delivery
by the other parties hereto and thereto, constitutes a valid, legal and
binding obligation of the Originator, enforceable against it in accordance
with the terms hereof, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization,
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<PAGE>
moratorium or other similar laws affecting creditors' rights generally and
by general principles of equity (whether considered in a proceeding or
action in equity or at law).
(iv) The Originator is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state,
municipal or governmental agency, which might have consequences that would
materially and adversely affect the condition (financial or other) or
operations of the Originator or its properties or might have consequences
that would materially and adversely affect its performance hereunder.
(v) Except as disclosed in writing to the Company, no litigation is
pending or, to the best of the Originator's knowledge, threatened against
the Originator which litigation might have consequences that would prohibit
its entering into this Agreement or that would materially and adversely
affect the condition (financial or otherwise) or operations of the
Originator or its properties or might have consequences that would
materially and adversely affect its performance hereunder.
(vi) No certificate of an officer, statement furnished in writing or
report delivered pursuant to the terms hereof by the Originator contains
any untrue statement of a material fact or omits to state any material fact
necessary to make the certificate, statement or report not misleading.
(vii) Upon the receipt of each Mortgage Loan and other items of the
Mortgage File, including the Note and Mortgage by the Bulk Sale Purchaser,
such Bulk Sale Purchaser will have good and marketable title to such
Mortgage Loan free and clear of any lien (other than liens which will be
simultaneously released).
(viii) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required
to be taken, given or obtained, as the case may be, by or from any federal,
state or other governmental authority or agency (other than any such
actions, approvals, etc. under any state securities laws, real estate
syndication or "Blue Sky" statutes, as to which the Originator makes no
such representation or warranty) that are necessary or advisable in
connection with the sale of the Mortgage Loans and the execution and
delivery by the Originator of this Agreement, have been duly taken, given
or obtained, as the case may be, are in full force and effect on the date
hereof, are not subject to any pending proceedings or appeals
(administrative, judicial or otherwise), either the time within which any
appeal therefrom may be taken or review thereof may be obtained has expired
or no review thereof may be obtained or appeal therefrom taken and are
adequate to authorize the consummation of the transactions contemplated by
this Agreement on the part of the Originator and the performance by the
Originator of its obligations under this Agreement.
(ix) The origination practices used by the Originator with respect to the
Mortgage Loans have been and are, in all material respects, legal, proper,
prudent and customary in the mortgage loan lending business.
(x) The transactions contemplated by this Agreement are in the ordinary
course of business of the Originator.
(xi) The Originator received fair consideration and reasonably equivalent
value in exchange for the sale of the interests in the Mortgage Loans.
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<PAGE>
(xii) The Originator did not transfer or sell any interest in any
Mortgage Loan with any intent to hinder, delay or defraud any of its
respective creditors.
(xiii) The Originator is solvent and will not be rendered insolvent as a
result of the sale of the Mortgage Loans to the Bulk Sale Purchaser.
The representations and warranties set forth in this paragraph (a) shall survive
the sale and assignment by the Originator of the Mortgage Loans to the Company
and by the Company to the related Bulk Sales Purchaser. Upon discovery of a
breach of any of the foregoing representations and warranties which materially
and adversely affects the interests of the Company, the Company shall give
prompt written notice to the Originator within 30 days of its receipt of notice
of breach, the Originator shall cure such breach in all material respects.
(b) The Company hereby represents and warrants to the Originator, that,
as of the date hereof:
(i) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has all
licenses and qualifications necessary to carry on its business as now being
conducted and to perform its obligations hereunder; the Company has the
power and authority to execute and deliver this Agreement and to perform
its obligations in accordance herewith; the execution, delivery and
performance of this Agreement (including any other instruments of transfer
to be delivered pursuant to this Agreement) by the Company and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action and do not violate the
organization documents of the Company, contravene or violate any law or
regulation applicable to the Company or contravene, violate or result in
any breach of any provision of, or constitute a default under, or result in
the imposition of any lien on any assets of the Company pursuant to the
provisions of any mortgage indenture, contract, agreement or other
undertaking to which the Company is a party or which purports to be binding
upon the Company or any of the Company's assets; this Agreement evidences
the valid and binding obligation of the Company enforceable against the
Company in accordance with its terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to
or affecting creditor's rights generally or the application of equitable
principles in any proceeding, whether at law or in equity;
(ii) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required
to be taken, given or obtained, as the case may be, by or from any federal,
state or other governmental authority or agency, that are necessary in
connection with the execution and delivery by the Company of this
Agreement, have been duly taken, given or obtained, as the case may be, are
in full force and effect, are not subject to any pending proceedings or
appeals (administrative, judicial or otherwise), either the time within
which any appeal therefrom may be taken or review thereof may be obtained
has expired or no review thereof may be obtained or appeal therefrom taken
and are adequate to authorize the consummation of the transactions
contemplated by this Agreement on the part of the Company and the
performance by the Company of its obligations under this Agreement; and
(iii) Except as disclosed in writing to the Originator, there is no
action, suit, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against the Company which, either in any
one instance or in the aggregate, may result in
7
<PAGE>
any material adverse change in the business, operations, financial
condition, properties or assets of the Company or in any material
impairment of the right or ability of the Company to carry on its business
substantially as now conducted or in any material liability on the part of
the Company or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Company contemplated herein or which
would be likely to impair the ability of the Company to perform under the
terms of this Agreement or to collect on the Mortgage Loans.
The representations and warranties set forth in this paragraph (b) shall survive
the sale and assignment of the Mortgage Loans to the Company. Upon discovery of
a breach of any of the foregoing representations and warranties which materially
and adversely affects the interests of the Originator, the Originator shall give
prompt written notice to the Company. Within 30 days of its receipt of notice of
breach, the Company shall cure such breach in all material respects.
Section 6. Representations and Warranties of the Originator Regarding the
--------------------------------------------------------------
Mortgage Loans. (a) Set forth in paragraph (b) below is a listing of
- --------------
representations and warranties which will be deemed to have been made by the
Originator to the Company in connection with each Mortgage Loan.
(b) With respect to each Mortgage Loan as of the related Transfer Date,
the Originator hereby represents, warrants and covenants to the Company as
follows:
(i) Such Mortgage Loan was originated by the Originator and as of the
such Transfer Date the related Mortgage is a valid lien on the related Mortgaged
Property securing the amount owed by the Mortgagor under the related Note
subject only to (i) the lien of current real property taxes and assessments,
(ii) the lien of any related first mortgage (as to any Mortgage Loan that is not
secured by a first priority lien), (iii) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
recording of such Mortgage, such exceptions appearing of record being acceptable
to mortgage lending institutions generally in the area wherein the related
Mortgaged Property is located or specifically reflected in the appraisal or
title policy obtained in connection with the origination of the related Mortgage
Loan by the Originator and (iv) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by such Mortgage.
(ii) Each Mortgaged Property consists of one- to four-family
residential real property, a condominium or townhouse located in California,
Oregon, Washington, Illinois, Florida, Georgia or any other state in which the
Company and the Originator are duly licensed and in which they have agreed in
writing to include on this list. No Mortgaged Property consists solely of raw
land, an apartment building having more than four units, a cooperative apartment
or a manufactured or mobile home.
(iii) Immediately prior to the sale, transfer, assignment and
conveyance by the Originator to the Company, the Originator had good title to
such Mortgage Loan, free of any interest of any other Person, and the Originator
has sold, transferred, assigned and conveyed all of its right, title and
interest in and to such Mortgage Loan to the Company.
(iv) The Originator was properly licensed or otherwise authorized, to
the extent required by applicable law, to originate or acquire such Mortgage
Loan. Such Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws and regulations, including,
without limitation, the federal Truth in-Lending Act, the Real Estate
8
<PAGE>
Settlement Procedure Act and other federal, state and local consumer protection,
usury, equal credit opportunity, disclosure and recording laws. The consummation
of the transactions herein contemplated, including, without limitation, the
transfer of the Mortgage Loans to the Bulk Sale Purchaser, will not violate any
such state or federal law or regulation.
(v) With respect to each Mortgage Loan, a lender's title insurance
policy, issued in standard California Land Title Association form or American
Land Title Association form by a title insurance company authorized to transact
business in California or jurisdiction in which the subject Mortgaged Property
is located, in an amount at least equal to the original Loan Balance of such
Mortgage Loan together, in the case of a Mortgage Loan that is not a first
priority lien, with the original principal amount of the note relating to any
senior liens, insuring the Company's interest under the related Mortgage Loan as
the holder of a valid first or second lien of record on the real property
described in the related Mortgage, as the case may be, subject only to
exceptions of the character referred to in paragraph 6(b)(i) above, was
effective on the date of the origination of such Mortgage Loan, and, as of the
related Transfer Date, such policy will be valid and thereafter such policy
shall continue in full force and effect.
(vi) The information set forth on each Schedule of Loans Delivered is
true and correct in all material respects.
(vii) The Originator has not received a notice of default on any
senior loan secured by the related Mortgaged Property which has not been cured.
(viii) Each Note and Mortgage is in substantially the form provided
to the Company on the related Transfer Date.
(ix) As of its date of origination, no Mortgage Loan had a Combined
Loan-to-Value Ratio in excess of 85%.
(x) No senior loan secured by the related Mortgaged Property provides
for negative amortization of the principal balance thereof. Each Mortgage Loan
is a closed-end Mortgage Loan, all amounts due under the related Note have been
advanced and no future advances are required to be made.
(xi) Each original Mortgage was recorded, or is in the process of
being recorded and will be recorded no later than 75 days after the Transfer
Date, and all subsequent assignments of the original Mortgage have been
recorded, or are in the process of being recorded, in the appropriate
jurisdictions wherein such recordation is necessary to perfect the lien thereof
as against creditors of the Company and the Originator or as against creditors
of the Company's and the Originator's predecessors in title.
(xii) The related Note is not and has not been secured by any
collateral, pledged account or other security except the lien of the related
Mortgage. Each senior loan on a Mortgaged Property permits the granting of a
junior lien similar to the related Mortgage Loan without consent.
(xiii) As of the related Transfer Date, there is no mechanics' lien
or claim for work, labor or material affecting the premises subject to the
related Mortgage which is or may be a lien prior to, or equal to, the lien of
such Mortgage, except those which are insured against by the title insurance
policy referred to in (v) above.
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<PAGE>
(xiv) As of the related Transfer Date, there is no delinquent tax or
delinquent assessment lien against any Mortgaged Property. As of the related
Transfer Date, there is no valid offset, defense or counterclaim to the related
Note or Mortgage.
(xv) As of the related Transfer Date, to the best knowledge of the
Originator, the physical property subject to the related Mortgage is free of
material damage and is in good repair.
(xvi) The sale, transfer, assignment and conveyance of such Mortgage
Loan and the Mortgage Files by the Originator to the Company pursuant to this
Agreement, are not subject to the bulk transfer laws or any similar statutory
provisions in effect in any applicable jurisdiction.
(xvii) Such Mortgage Loan is being serviced by the Servicer or by a
subservicer appointed by the Servicer (the "Sub-Servicer").
(xviii) At the related Transfer Date, the improvements upon the
related Mortgaged Property are covered by a valid and existing hazard insurance
policy with a generally acceptable carrier that provides for fire and extended
coverage.
(xix) The related Mortgage and Note are the legal, valid and binding
obligations of the Mortgagor thereof and are enforceable in accordance with
their terms, except only as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity
(whether considered in a proceeding or action in equity or at law), and all
parties to such Mortgage Loan had full legal capacity to execute all documents
relating to such Mortgage Loan and to convey the estate therein purported to be
conveyed.
(xx) The Originator has caused to be performed any and all acts
required to be performed to preserve the rights and remedies of the Company in
any insurance policies applicable to such Mortgage Loan delivered by the
Originator including, without limitation, any necessary notifications of
insurers, assignments of policies or interests therein, and establishments of
co-insured, joint loss payee and mortgagee rights.
(xxi) The terms of the related Note and Mortgage have not been
impaired, altered or modified in any respect, except by a written instrument
which has been recorded, if necessary, to protect the interest of the Originator
or the Company. The substance of any such alteration or modification is
reflected on the Schedule of Loans Delivered.
(xxii) None of the Mortgage Loans have a shared appreciation feature
or other contingent interest feature.
(xxiii) To the best knowledge of the Originator, no improvement
located on or being part of the related Mortgaged Property is in violation of
any applicable zoning law or regulation. To the best knowledge of the
Originator, all inspections, licenses and certificates required to be made or
issued with respect to all occupied portions of the related Mortgaged Property
and, with respect to the use and occupancy of the same, including, but not
limited to, certificates of occupancy and fire underwriting certificates, have
been made or obtained from the appropriate authorities, and such Mortgaged
Property is lawfully occupied under the applicable law.
(xxiv) With respect to each deed of trust, a trustee, duly
qualified under
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applicable law to serve as such, has been properly designated and currently so
serves and is named in such deed of trust, and no fees or expenses (except in
connection with a trustee's sale after default by the related Mortgagor) are or
will become payable to the trustee under the deed of trust.
(xxv) The related Note and Mortgage contains customary and
enforceable provisions which render the rights and remedies of the holder
thereof adequate for the realization against the related Mortgaged Property of
the benefits of the security, including by trustee's sale. There is no homestead
or other exemption available to the related Mortgagor which would materially
interfere with the right to sell the related Mortgaged Property at a trustee's
sale or the right to foreclose the related Mortgaged Property.
(xxvi) None of the Mortgage Loans were selected from among the
Originator's assets in a manner which would cause them to be adversely selected
as to credit risk from the pool of mortgage loans owned by the such Originator.
(xxvii) The Mortgage Loan is not subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury, nor will the
operation of any of the terms of the Mortgage Note or the Mortgage, or the
exercise of any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto.
(xxviii) As of the Transfer Date, no Mortgage Loan is 31 or more days
contractually delinquent.
(xxix) If any Mortgaged Property is in an area identified in the
Federal Register by the Federal Emergency Management Agency as having special
flood hazards, a flood insurance policy in a form meeting the requirements of
the current guidelines of the Federal Insurance Administration is in effect with
respect to such Mortgaged Property with a generally acceptable carrier in an
amount representing coverage not less than the least of (A) the outstanding
principal balance of the related Mortgage Loan (together, in the case of a
Mortgage Loan that is not a first priority lien, with the outstanding principal
balance of any liens that are prior to the related Mortgage Loan lien), (B) the
minimum amount required to compensate for damage or loss on a replacement cost
basis or (C) the maximum amount of insurance that is available under the Flood
Disaster Protection Act of 1973.
(xxx) The proceeds of each Mortgage Loan have been fully disbursed,
there is no obligation on the part of the Originator to make future advances
thereunder and any and all requirements as to completion of any on-site or off-
site improvements and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making or closing or
recording such Mortgage Loans were paid.
(xxxi) Each Mortgage Loan contains a provision for the acceleration
of the payment of the unpaid principal balance of the related Mortgage Loan in
the event the related Mortgaged Property is sold without the prior consent of
the holder of the Mortgage subject to limitations under applicable law.
(xxxii) There is no proceeding pending or threatened for the total or
partial condemnation of any Mortgaged Property, nor is such a proceeding
currently occurring, and, to the best of the Originator's knowledge, each
Mortgaged Property is undamaged by waste, fire, flood, water, earthquake or
earth movement.
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(xxxiii) All of the improvements which were included for the purposes
of determining the value of any Mortgaged Property lie wholly within the
boundaries and building restriction lines of such Mortgaged Property, and no
improvements on adjoining properties encroach upon such Mortgaged Property, and
are stated in the title insurance policy and are affirmatively insured.
(xxxiv) There is no default, breach, violation or event of
acceleration existing under any Mortgage Loan or the related Note and no event
which, after the expiration of any grace or cure period, would constitute a
default, breach, violation or event of acceleration; and neither the Servicer,
the Sub-Servicer nor the Company nor any Originator has waived any default,
breach, violation or event of acceleration.
(xxxv) No instrument of release or waiver has been executed in
connection with any Mortgage Loan, and no Mortgagor has been released, in whole
or in part, from his or her obligations thereunder.
(xxxvi) As of the Transfer Date, each Mortgage is a valid and
subsisting first or second lien on the Mortgaged Property subject in the case of
any second Mortgage only to senior liens on such Mortgaged Property and subject
in all cases to the exemptions to title set forth in the title insurance policy
with respect to the related Mortgage Loan, which exceptions are generally
acceptable to banking institutions in connection with their regular mortgage
lending activities and such other exceptions to which similar properties are
commonly subject and which do not individually, or in the aggregate, materially
and adversely affect the benefits of the security intended to be provided by the
related Mortgage.
(xxxvii) Any advances made after the date of origination of a
Mortgage Loan but prior to the Transfer Date have been consolidated with the
outstanding principal amount secured by the related Mortgage, and the secured
principal amount, as consolidated, bears a single interest rate and a single
repayment term reflected on the Schedule of Mortgage Loans. The consolidated
principal amount does not exceed the original principal amount of the related
Mortgage Loan. No Note permits or obligates the Servicer, the Originator or the
Sub-Servicer to make future advances to the related Mortgagor at the option of
the Mortgagor.
(xxxviii) As of the Transfer Date, the Originator has no actual
knowledge that there exist any hazardous substances, hazardous wastes or solid
wastes, as such terms are defined in the Comprehensive Environmental Response
Compensation and Liability Act, the Resource Conservation and Recovery Act of
1976 or other federal, state or local environmental legislation on any Mortgaged
Property.
(xxxix) All parties to the Mortgage Note and the Mortgage had legal
capacity to execute the Mortgage Note and the Mortgage and each Mortgage Note
and Mortgage has been duly and properly executed by such parties.
(xl) Each Mortgage Note provides for level monthly payments
sufficient to fully amortize the principal balance of such Mortgage Note on its
maturity date or provides for level monthly payments and a single balloon
payment of unamortized principal on its maturity date sufficient to fully
amortize the principal balance of such Mortgage Note on such date.
(xli) No Mortgaged Property consists solely of raw land, an apartment
building having more than four units, a cooperative apartment or a manufactured
or
12
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mobile home.
(xlii) There is no homestead or other exemption available to the
related Obligor which would materially interfere with the right to sell the
related Mortgaged Property at a trustee's sale or the right to foreclose the
related Mortgaged Property.
(xliii) Each Mortgage Loan conforms to the Underwriting
Guidelines/Purchasing Guidelines.
The Representations and Warranties shall survive the transfer and assignment of
the Mortgage Loans to the Company. The Representations and Warranties shall
survive the transfer and assignment of the Mortgage Loans by the Company to the
Bulk Sale Purchaser. Upon discovery by the Originator, the Company or the Bulk
Sale Purchaser, of a breach of any of the Representations and Warranties,
without regard to any limitation set forth in such Representation or Warranty
concerning the knowledge of the Originator as to the facts stated therein, which
breach, in the opinion of the Company, materially and adversely affects the
interests of the Company or the Bulk Sale Purchaser in the related Mortgage Loan
or Mortgage Loans, the party discovering such breach shall give prompt written
notice to the other parties, and the Originator shall be required to take the
remedial actions set out in Section 6 hereof.
Section 7. Remedies.
--------
(a) Upon receipt of the notice set out in the last paragraph of Section 6
hereof, the Originator shall repurchase each affected Mortgage Loan at a price
equal to the Repurchase Price for such Mortgage Loan.
(b) It is understood and agreed that in the event that the Company is unable
to sell the Mortgage Loans hereunder as a Bulk Sale and does not intend to
include such Mortgage Loans in a securitization transaction the Originator shall
repurchase such Mortgage Loans at the Repurchase Price. If the Company is unable
to accomplish such a Bulk Sale, the Company shall notify the Originator in
writing of such event and shall indicate a date for such repurchase.
(c) Any repurchase pursuant to this Section 7 shall be accomplished by the
Originator by wire transfer of immediately available federal funds to the
account designated by the Company.
Section 8. Term of Agreement. This Agreement shall terminate upon (i) the
-----------------
final payment or other liquidation of the last Mortgage Loan required pursuant
to this Agreement or (ii) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure of any Mortgage Loan.
Section 9. Authorized Representatives. The names of the officers of the
--------------------------
Originator and of the Company who are authorized to give and receive notices,
requests and instructions and to deliver certificates and documents in
connection with this Agreement on behalf of the Originator and of the Company
("Authorized Representatives") are set forth on Exhibit C, along with the
specimen signature of each such officer. From time to time, the Originator and
the Company may, change the information previously given, but each party shall
be entitled to rely conclusively on the last exhibit until receipt of a
superseding exhibit.
Section 10. Notices. All demands, notices and communications relating
-------
to this Agreement shall be in writing and shall be deemed to have been duly
given when received by the other party or parties at the address shown below, or
such other address as may hereafter be
13
<PAGE>
furnished to the other party or parties by like notice. Any such demand, notice
or communication hereunder shall be deemed to have been received on the date
delivered to or received at the premises of the addressee.
If to the Originator:
Coast Security Mortgage Inc.
500 N. State College Boulevard, #800
Orange, California 92668
Attention: Mark Chisick
Telecopy: (714) 978-2334
Telephone: (714) 978-7770
If to the Company:
First Alliance Mortgage Company
701 S. Parker Street
Suite 5000
Orange, CA 92668
Attention: Cassandra Fraulino
Telecopy: (714) 550-6993
Telephone: (714) 550-6902
Section 11. Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of California, without
regard to conflict of laws rules applied in the State of California.
Section 12. Assignment. No party to this Agreement may assign its rights
----------
or delegate its obligations under this Agreement without the express written
consent of the other parties, except as otherwise set forth in this Agreement.
Section 13. Counterparts. For the purpose of facilitating the execution
------------
of this Agreement and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed to
be an original, and together shall constitute and be one and the same
instrument.
Section 14. Amendment. This Agreement may be amended from time to time by
---------
the Originator and the Company only by a written instrument executed by such
parties .
Section 15. Severability of Provisions. If any one or more of the
--------------------------
covenants, agreements, provisions or terms of this Agreement shall be for any
reason whatsoever held invalid, then such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
Section 16. No Agency: No Partnership or Joint Venture. Neither the
------------------------------------------
Originator nor the Company is the agent or representative of the other, and
nothing in this Agreement shall be construed to make either the Originator nor
the Company liable to any third party for services performed by it or for debts
or claims accruing to it against the other party. Nothing contained herein nor
the acts of the parties hereto shall be construed to create a partnership or
joint venture between the Company and the Originator.
14
<PAGE>
Section 17. Further Assurances. The Originator and the Company agree to
------------------
cooperate reasonably and in good faith with one another in the performance of
this Agreement.
Section 18. Maintenance of Records. The Originator shall continuously
----------------------
keep an original executed counterpart of this Agreement in its official records.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective officers all as of the day and year first above
written.
FIRST ALLIANCE MORTGAGE COMPANY,
as Company
By:
-------------------------------
Name: Brian Chisick
Title: President
COAST SECURITY MORTGAGE INC
By:
-------------------------------
Name: Mark Chisick
Title: President
16
<PAGE>
EXHIBIT A
Schedule of Loans Delivered
---------------------------
17
<PAGE>
EXHIBIT B
Underwriting Guidelines/Purchasing Guidelines
---------------------------------------------
18
<PAGE>
EXHIBIT C
AUTHORIZED REPRESENTATIVES
Reference is hereby made to the Mortgage Loan Master Transfer
Agreement, dated as of _______________, 199_ (the "Agreement"), among First
Alliance Mortgage Company (the "Company") and Coast Security Mortgage Inc., as
Originator.
The following are the Originator's Authorized Representatives for
purposes of the Agreement:
Specimen
Name Title Signature
- ---- ----- ---------
Mark Chisick President -----------------------
Brad Chisick Vice President -----------------------
Stephanie Sarver Loan Operations Manager -----------------------
The following are the Company's Authorized Representatives for
purposes of the Agreement:
Specimen
Name Title Signature
- ---- ----- ---------
Brian Chisick President ----------------------
Cassandra L. Fraulino Manager ----------------------
Laura Yamasaki Manager ----------------------
IN WITNESS WHEREOF, I, , hereby certify that the above
signatures are true and correct as of this _____ day of __________.
--------------------
Name:
19
<PAGE>
EXHIBIT 10.10
EMPLOYMENT CONTRACT
FOR
BRIAN CHISICK
First Alliance Mortgage Company is a California corporation located at
17305 Von Karman Avenue, Irvine, California 92714, hereinafter referred to as
"Employer," and Brian Chisick, 17305 Von Karman Avenue, Irvine, California
92714, hereinafter referred to as "Employee," in consideration of the mutual
promises made herein, agree as follows:
ARTICLE 1. TERM OF EMPLOYMENT
Specified Period
Section 1.01. Employer hereby employs Employee and Employee hereby accepts
employment with Employer for a period of three (3) years beginning on the date
upon which this Agreement is executed as written hereinafter, and terminating
upon the three (3) year anniversary thereof, subject to extension, renewal or
earlier termination as provided herein.
Automatic Renewal
Section 1.02. This Agreement shall be renewed automatically for succeeding
terms of three (3) years, unless either party gives notice to the other at least
one hundred eighty (180) days prior to the expiration of any term of his
intention not to renew.
"Employment Term" Defined
Section 1.03. As used herein, the phrase "employment term" refers to the
entire period of employment of Employee by Employer hereunder, whether for the
periods provided above, or whether terminated earlier as hereinafter provided or
extended by mutual
1
<PAGE>
agreement between Employer and Employee.
ARTICLE 2. DUTIES AND OBLIGATIONS OF EMPLOYEE
General Duties
Section 2.01. Employee shall serve as the President and Chief Executive
Officer of First Alliance Mortgage Company. In his capacity as President and
Chief Executive Officer of First Alliance Mortgage Company, Employee shall do
and perform all services, acts, or things necessary or advisable to manage,
change, enter into new products, businesses, programs and conduct the business
of Employer, including the hiring and firing of all employees, subject at all
times to the policies set by Employer's Board of Directors, and to the consent
of the Board when required by the terms of this contract.
Devotion to Employer's Business
Section 2.02. (a) Employee shall devote his entire productive time,
ability, and attention to the business of Employer during the term of this
contract.
(b) Employee shall not engage in any other business duties or pursuits
whatsoever, or directly or indirectly render any services of a business,
commercial, or professional nature to any other person or organization, whether
for compensation or other-wise, without the prior written consent of Employer's
Board of Directors.
(c) This Agreement shall not be interpreted to prohibit Employee from
making passive personal investments or conducting private business affairs if
those activities do not interfere with the services required under this
Agreement. However, Employee
2
<PAGE>
shall not directly or indirectly acquire, hold, or retain any interest exceeding
5% of the equity or voting power of any business competing with or similar in
nature to the business of Employer, unless any such activity benefits Employer
and is approved by the Board of Directors of Employer.
Services as Consultant
Section 2.03. Following the employment term, including any renewal
thereof, and if the employment term has not been terminated for cause, death or
disability, Employee shall make his advice and counsel available to Employer and
Employer, at its option and subject to the approval of the Board of Directors of
the Employer, shall employ Employee for a period of three (3) years at the rate
of $248,500.00 per annum. The parties agree that this advice and counsel shall
not entail full time service.
Use of Employee's Name
Section 2.04. Employer shall have the right to use the name of Employee as
part of the trade name or trademark of Employer if it should be deemed advisable
to do so. Any trade name or trademark of which the name of Employee is a part
that is adopted by Employer during the employment of Employee may be used
thereafter by Employer for as long as Employer deems advisable.
(b) Employee shall not, either during the term of this Agreement or at any
time thereafter, use or permit the use of his name in the trade name or
trademark of any other enterprise if that other enterprise is engaged in a
business similar in any respect to that conducted by Employer, unless that trade
name or trademark clearly indicates that the other enterprise is a separate
entity
3
<PAGE>
entirely distinct from and not to be confused with Employer and unless that
trade name or trademark excludes any words or symbols stating or suggesting
prior or current affiliation or connection by that other enterprise or its
employees with Employer.
Confidentiality
Section 2.05. Employee hereby warrants, covenants and agrees that, during
such time as Employee remains employed by Employer (and, if Employee provides
consulting services pursuant to Section 2.03, during the period of such
consultancy) Employee shall hold in the strictest confidence and shall not,
without the prior express written approval of the Board of Directors of
Employer, disclose to any person, firm, corporation or other entity, Employer's
proprietary or confidential data, including but not limited to (i) information
or other documents concerning Employer's or Employer's Affiliates' businesses,
customers or suppliers, (ii) Employer's or Employer's Affiliates' marketing
methods, files and credit and collection techniques and files, and (iii)
Employer's or Employer's Affiliates' trade secrets and other "know-how" or
information not of a public nature, regardless of how such information came into
the possession of Employee; provided, however, that the foregoing shall not
prohibit Employee either from (A) providing testimony or other evidence under
subpoena or governmental or court order in connection with pending legal or
administrative proceedings, or (B) discussing with banks, rating agencies,
financial analysts or other aspects of Employer's business, the disclosure of
which will not in Employee's good faith judgment materially and adversely affect
Employer's business.
4
<PAGE>
ARTICLE 3. OBLIGATIONS OF EMPLOYER
General Description
Section 3.01. Employer shall provide Employee with the compensation,
incentives, benefits, and business expense reimbursement specified elsewhere in
this Agreement.
Office and Staff
Section 3.02. Employer shall provide Employee with a private office,
a personal secretary, stenographic help, office equipment, supplies, and other
facilities and services consistent with current practices of Employer, and
suitable to Employee's position and adequate for the performance of his duties.
Indemnification
Section 3.03. Employee shall enter into a written agreement with
Employer concerning indemnification of Employee by Employer, and of Employer by
Employee, similar in form and substance to indemnification agreements between
Employer and other of its executive officers and directors.
ARTICLE 4. COMPENSATION OF EMPLOYEE
Annual Salary
Section 4.01. (a) As compensation for the services to be performed
hereunder, Employee shall receive a salary at the rate of $395,000 per annum,
payable not less than twice a month during the employment term.
(b) Employee shall receive such annual increases in salary as may be
determined by Employer's Board of Directors in its sole discretion.
(c) Employee shall in addition to the sums set forth
5
<PAGE>
above be entitled to annual bonuses as determined in the discretion of the Board
of Directors of Employer.
Salary Continuation After Death or Disability
Section 4.02. If Employee for any reason whatsoever during the term
of his employment hereunder dies, or becomes permanently disabled so that he is
unable to perform the duties prescribed herein, Employer shall continue to pay
to Employee or his estate, as the case may be, his salary at the then current
rate of compensation for the unexpired portion of his employment term hereunder.
Said payments shall not be diminished or reduced by reason of any payment or
payments to Employee or his estate pursuant to insurance or other benefits to
which Employee may otherwise be entitled.
Tax Withholding
Section 4.03. Employer shall have the right to deduct or withhold
from the compensation due to Employee hereunder any and all sums required for
federal income and Social Security taxes and all state or local taxes now
applicable or that may be enacted and become applicable in the future.
ARTICLE 5. EMPLOYEE INCENTIVES
Stock Bonuses
Section 5.01. (a) Any stock bonuses, stock options or profit sharing
bonuses shall be at the discretion of the Board of Directors of Employer.
ARTICLE 6. EMPLOYEE BENEFITS
Annual Vacation
Section 6.01. (a) Employee shall be entitled to not to
6
<PAGE>
exceed six (6) weeks of vacation time each year with full pay.
(b) Employee shall advise Employer's Board of Directors of the time
and duration of his vacations. If Employee is unable for any reason to take the
total amount of authorized vacation time during any year, he may with the
approval of the Board of Directors of Employer either (i) accrue that time and
add it to vacation time for any following year, or (ii) receive a cash payment
in an amount equal to the amount of annual salary attributable to that period.
Illness
Section 6.02. Employee shall be entitled to ten (10) days per year
as sick leave with full pay. Sick leave may be accumulated up to a total of ten
(10) days.
Use of Automobile
Section 6.03. (a) Employer shall provide Employee with the use of an
automobile of Employee's choice with optional equipment of Employee's selection.
(b) Employer shall pay or reimburse Employee for all reasonable
operating expenses of the automobile, consistent with Employer's executive
automobile program policy.
(c) Employer shall procure and maintain an automobile liability
insurance policy on the automobile indemnifying Employer, with coverage
including Employee and Employee's spouse and those of his children who qualify
as Employee's dependents under Section 152 of the Internal Revenue Code in the
minimum amounts of $1,000,000 for bodily injury or death to any one person in
any one accident, and $100,000 for property damages in any one accident.
7
<PAGE>
Medical Coverage
Section 6.04. Employer agrees to include Employee in the coverage of
its medical, major medical, hospital, dental, and eye care insurance. Employer
further agrees to reimburse Employee for all medical and dental expenses
incurred by Employee his spouse, and those of his children who qualify as his
dependents under Section 152 of the Internal Revenue Code of 1986; provided,
however, that those reimbursements shall be limited to the expenses, or portions
thereof, not covered by insurance; provided further, that Employer shall not be
obligated to reimburse Employee for any uncovered elective cosmetic procedure.
Life Insurance
Section 6.05. Employer shall make available to Employee such life
insurance policies on the life of Employee as may be determined from time to
time by the Board of Directors of Employer.
ARTICLE 7. BUSINESS EXPENSES
Use of Credit Card
Section 7.01. All business expenses reasonably incurred by Employee in
promoting the business of Employer, including expenditures for entertainment,
gifts, and travel, are to be paid for, insofar as possible, by the use of credit
cards in the name of Employer which will be furnished to Employee.
Reimbursement of Other Business Expenses
Section 7.02. (a) Employer shall promptly reimburse Employee for all
other reasonable business expenses incurred by Employee in connection with the
business of Employer, including, but not limited to, entertainment and travel.
8
<PAGE>
(b) Each such expenditure shall be reimbursable only if it is of a
nature qualifying it as a proper deduction on the federal and state income tax
return of Employer.
(c) Each such expenditure shall be reimbursable only if Employee
furnishes to Employer adequate records and other documentary evidence required
by federal and state statutes and regulations issued by the appropriate taxing
authorities for the substantiation of each such expenditure as an income tax
deduction.
Repayment of Disallowed Expenses
Section 7.03. In the event that any expenses paid for Employee or any
reimbursement of expenses paid to employee shall, on audit or other examination
of Employer's income tax returns, be determined not to be allowable deductions
from Employer's gross income, and in the further event that this determination
shall be acceded to by the Employer or made final by the appropriate federal or
state taxing authority or a final judgment of a court of competent jurisdiction,
and no appeal is taken from the judgment or the applicable period for filing
notice of appeal has expired, Employee shall repay to Employer the full amount
of the disallowed expenses.
ARTICLE 8. TERMINATION OF EMPLOYMENT
Termination for Cause
Section 8.01. (a) Employer reserves the right to terminate this Agreement
for cause.
(b) "Cause" means any of the following:
1. the conviction of Employee by a court of competent jurisdiction
of a felony or any other offense involving moral turpitude or dishonesty;
2. the indictment of Employee by a state or
9
<PAGE>
federal grand jury of competent jurisdiction for embezzlement or
misappropriation of funds or for any act of dishonesty or lack of fidelity;
3. a decree of a court of competent jurisdiction that Employee is
not mentally competent or is unable to handle his own affairs;
4. the written confession by Employee of any embezzlement or
misappropriation of funds;
5. the payment (or, by the operation solely of the effect of a
deductible, the failure of payment) by a surety or insurer of a claim under any
fidelity bond issued for the benefit of Employer or Employer's Affiliates
reimbursing Employer or Employer's Affiliates for a loss due to the wrongful act
or wrongful omission to act of Employee; and
6. Employee's material breach of any of his obligations under this
Agreement, as determined by a court of competent jurisdiction.
(c) Employer may at its option terminate this Agreement for the
reasons stated in this Section by giving written notice of termination to
Employee without prejudice to any other remedy to which Employer may be entitled
either at law, in equity, or under this Agreement.
(d) The notice of termination required by this Section shall specify
the ground for the termination and shall be supported by a statement of all
relevant facts.
(e) Termination under this Section shall be considered "for cause" for
the purposes of this Agreement.
10
<PAGE>
Termination Without Cause
Section 8.02. (a) This Agreement shall be terminated upon the death of
Employee.
(b) Employer reserves the right to terminate this Agreement after
Employee suffers any physical or mental disability that would prevent the
performance of his duties under this Agreement. Employer shall determine
according to the facts then available whether a disability has occurred. Such
determination shall not be arbitrary or unreasonable and Employer shall take
into consideration the opinion of Employee's physician if reasonably available
but such determination by Employer shall be final and binding on the parties
hereto. Such a termination shall be effected by giving one hundred eighty (180)
days' written notice of termination to Employee and shall be effective upon the
expiration of the one-hundred eightieth day. Termination pursuant to this
provision shall not prejudice Employee's right to continued compensation
pursuant to Section 4.02 of this Agreement and Employee's rights pursuant to
Section 8.04.
(c) Termination under this Section shall not be considered "for cause"
for the purposes of this Agreement.
Effect of Merger, Transfer of Assets, or Dissolution
Section 8.03. (a) This Agreement may be terminated by Employee or
Employer, or Employer's successor in interest, upon the voluntary or involuntary
dissolution of Employer resulting from either a merger or consolidation in which
Employer is not the consolidated or surviving corporation, or the transfer of
all or substantially all of the assets of Employer.
11
<PAGE>
(b) In the event of any such merger or consolidation or transfer of
assets, Employer's rights, benefits, and obligations hereunder shall or may be
assigned to the surviving or resulting corporation or the transferee of
Employer's assets.
Payment on Termination
Section 8.04. Notwithstanding any provision of this Agreement, if
Employer terminates this Agreement for any reason, other than for "cause", it
shall pay Employee the remaining sums due under the remainder of the initial
term or any renewal term of this Agreement, as and when the same shall become
due.
ARTICLE 9. GENERAL PROVISIONS
Notices
Section 9.01. Any notices to be given hereunder by either party to
the other shall be in writing and may be transmitted by personal delivery,
facsimile, or by registered or certified mail, postage prepaid, with return
receipt requested to the parties at the addresses listed below. Each party may
change that address by notice in accordance with this Section. Notices
delivered personally or by facsimile shall be deemed communicated as of the date
of actual receipt; mailed notices shall be deemed communicated as of five (5)
days from date of deposit.
Employer/First Alliance Mortgage Company
17305 Von Karman Ave. Phone: (714) 224-8500
Irvine, CA 92714 Fax: (714) 224-8596
Employee/Brian Chisick
17305 Von Karman Ave. Phone: (714) 224-8400
Irvine, CA 92714 Fax: (714) 224-8408
12
<PAGE>
Meet and Confer
Section 9.03. Prior to the commencement of any litigation, claims or
disputes concerning this Agreement, the parties shall meet and confer with
regards to any claims.
Attorneys' Fees and Costs
Section 9.03. If any legal action is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs, and necessary disbursements in addition to
any other relief to which that party may be entitled. This provision shall be
construed as applicable to the entire contract.
Entire Agreement
Section 9.04. This Agreement supersedes any and all other agreements,
either oral or in writing, between the parties hereto with respect to the
employment of Employee by Employer and contains all of the covenants and
agreements between the parties with respect to that employment in any manner
whatsoever. Each party to this Agreement acknowledges that no representation,
inducements, promises, or agreements, orally or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not embodied herein,
and that no other agreement, statement, or promise not contained in this
Agreement shall be valid or binding on either party.
Modifications
Section 9.05. Any modification of this Agreement will be effective
only if it is in writing and signed by the party to be charged.
13
<PAGE>
Effect of Waiver
Section 9.06. The failure of either party to insist on strict compliance
with any of the terms, covenants, or conditions of this agreement by the other
party shall not be deemed a waiver of that term, covenant, or condition, nor
shall any waiver or relinquishment of any right or power at any one time or
times be deemed a waiver or relinquishment of that right or power for all or any
other times.
Partial Invalidity
Section 9.07. If any provision in this Agreement is held by a court
of competent jurisdiction to be invalid, void, or unenforceable, the remaining
provisions shall nevertheless continue in full force without being impaired or
invalidated in any way.
Law Governing Agreement
Section 9.08. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
Sums Due Deceased Employee
Section 9.09. If Employee dies prior to the expiration of the term of
his employment, any sums that may be due him from Employer under this Agreement
as of the date of death shall be paid to Employee's executors, administrators,
heirs, personal representatives, successors, and assigns.
Succession
Section 9.10. This Agreement shall be binding upon and inure to the
benefit of Employer and Employee and their respective permitted successors and
assigns.
///
14
<PAGE>
Further Assurances
Section 9.11. The parties hereto shall each perform such acts, execute and
deliver such instruments and documents, and do all such other things as may be
reasonably necessary to accomplish the purposes of this Agreement.
Executed on July 1, 1996, at Irvine, California.
"EMPLOYER"
FIRST ALLIANCE MORTGAGE COMPANY
By_____________________________
, ___________
"EMPLOYEE"
/s/ Brian Chisick
-------------------------------
BRIAN CHISICK
15
<PAGE>
EXHIBIT 10.12
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated
, 1996 by and between First Alliance Mortgage Company, a California
corporation ("FAMCO"), FAM Acquisition Corporation, a California corporation
(the "Merger Subsidiary"), and First Alliance Corporation, a Delaware
corporation (the "Holding Company").
WHEREAS, the respective Boards of Directors and the stockholders of
each of FAMCO, Merger Subsidiary and Holding Company have determined that it is
advisable and in the best interests of such corporations and their stockholders
that Merger Subsidiary merge with and into FAMCO upon the terms and conditions
provided herein (the "Merger"), and have approved and adopted this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual agreements herein contained and of the mutual benefits provided hereby,
the parties hereto hereby agree as follows:
1. Merger. The effective date of the Merger shall mean the date of
------
the filing of the Articles of Merger with the Secretary of State of the State of
California (the "Effective Date"). On the Effective Date, Merger Subsidiary
shall be merged with and into FAMCO and the separate existence of Merger
Subsidiary shall thereupon cease. FAMCO shall survive the Merger and continue
its corporate existence in the State of California after the Effective Date of
the Merger.
2. Certificate of Incorporation. The Certificate of Incorporation of
----------------------------
FAMCO, as in effect immediately prior to the Effective Date, shall continue to
be the Certificate of Incorporation of FAMCO without change or amendment until
duly amended in accordance with the provisions thereof and applicable law.
3. Directors and Officers. The persons who are directors and
----------------------
officers of FAMCO immediately prior to the Effective Date shall continue in
their same positions as the directors and officers, respectively, of FAMCO on
and after the Effective Date, and shall hold office until their successors are
duly elected and qualified in accordance with applicable law.
4. Conversion of Shares. On the Effective Date, by virtue of the
--------------------
Merger and without any action on the part of any holder thereof:
(i) each share and each certificate representing shares of the common
stock of FAMCO outstanding immediately prior thereto shall
automatically be changed and converted into and shall thereafter
represent, with respect to each such share, one (1)
<PAGE>
validly issued, fully paid and nonassessable share of the Class B
common stock, no par value per share, of Holding Company;
(ii) each share and each certificate representing shares of the
Class A common stock, no par value, of Holding Company outstanding
immediately prior thereto shall automatically be cancelled for no
consideration; and
(iii) each share and each certificate representing shares of the
common stock of Merger Subsidiary outstanding immediately prior
thereto shall automatically be changed and converted into and shall
thereafter represent, with respect to each such share, one (1) validly
issued, fully paid and nonassessable share of the common stock, no par
value per share, of FAMCO.
5. Subsequent Action. If at any time after the Effective Date it
-----------------
shall be necessary or desirable to take any action or execute, deliver or file
any instrument or document in order to vest, perfect or confirm of record in
FAMCO the title to any property or any rights of Merger Subsidiary, or otherwise
to carry out the provisions of this Agreement, the directors and officers of
FAMCO are hereby authorized and empowered on behalf of Merger Subsidiary and in
its name to take such action and execute, deliver and file such instruments and
documents.
6. Undertaking to Furnish Copies of Agreement and Plan of Merger.
-------------------------------------------------------------
FAMCO shall furnish a copy of this Agreement to any of its stock shareholders
or to any person who was a stockholder or shareholder of Merger Subsidiary or
FAMCO upon written request and without charge.
7. Rights and Duties of FAMCO. On the Effective Date, FAMCO shall
--------------------------
thereupon and thereafter possess all rights, privileges, immunities, licenses,
and permits (whether of a public or private nature) of Merger Subsidiary; and
all property (real, personal and mixed), all debts due on whatever account, all
chooses in action, and all and every other interest of or belonging to or due to
Merger Subsidiary shall continue and be taken and deemed to be transferred to
and vested in FAMCO, without further act or deed; and FAMCO shall thenceforth be
responsible and liable for all the liabilities and obligations of Merger
Subsidiary.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
2
<PAGE>
FIRST ALLIANCE CORPORATION,
a Delaware Corporation
By:
------------------------
Brian Chisick
President
Attest:
By:
---------------------
Secretary
FIRST ALLIANCE MORTGAGE COMPANY,
a California corporation
By:
----------------------------
Brian Chisick
President
Attest:
By:
---------------------
Secretary
3
<PAGE>
FAM ACQUISITION CORPORATION,
a California corporation
By:
------------------------
Brian Chisick
President
Attest:
By:
---------------------
Secretary
4
<PAGE>
CERTIFICATE OF APPROVAL OF MERGER AGREEMENT
Brian Chisick and certify that:
---------------
1. They are the President and Secretary, respectively, of First
Alliance Mortgage Company, a California corporation.
2. The Agreement of Merger in the form attached hereto was duly
approved by the Board of Directors of the corporation.
3. The corporation has only one class of shares and the total number
of outstanding shares is . The principal terms of the Agreement of
--------
Merger were approved by the vote of the holders of all of the outstanding
shares, which exceeded the vote required.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated:
------------
----------------------------------------
Brian Chisick
President
----------------------------------------
Secretary
5
<PAGE>
CERTIFICATE OF APPROVAL OF MERGER AGREEMENT
Brian Chisick and certify that:
---------------
1. They are the President and Secretary, respectively, of FAM
Acquisition Corporation, a California corporation.
2. The Agreement of Merger in the form attached hereto was duly
approved by the Board of Directors of the corporation.
3. The corporation has only one class of shares and the total number
of outstanding shares is One Thousand (1,000). The principal terms of the
Agreement of Merger were approved by the vote of the holders of all of the
outstanding shares, which exceeded the vote required.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated:
----------------
-------------------------------
Brian Chisick
President
-------------------------------
Secretary
6
<PAGE>
CERTIFICATE OF APPROVAL OF MERGER AGREEMENT
Brian Chisick and certify that:
---------------------
1. They are the President and Secretary, respectively, of First
Alliance Corporation, a Delaware corporation.
2. The Agreement of Merger in the form attached hereto was duly
approved by the Board of Directors of the corporation.
3. The corporation has only one class of shares outstanding and the
total number of outstanding shares is One Thousand (1,000). The principal terms
of the Agreement of Merger were approved by the vote of the holders of all of
the outstanding shares, which exceeded the vote required.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated:
------------
----------------------------------
Brian Chisick
President
----------------------------------
Secretary
7
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-3633 of First Alliance Corporation on Form S-1 of our report dated June
30, 1996 appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Costa Mesa, California
July 3, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-3633 of First Alliance Corporation on Form S-1 of our report on the
financial statements of First Alliance Mortgage Company dated March 18, 1996
(June 24, 1996 as to Note 2), appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Costa Mesa, California
July 3, 1996
<PAGE>
EXHIBIT 99.5
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.
Date 5-13-96 /s/ Mark K. Mason
------------------- -------------------------------
Mark K. Mason
