<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- ------------
Commission File Number 1-12889
LONG BEACH FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0739843
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 TOWN & COUNTRY ROAD, SUITE 1650, ORANGE, CALIFORNIA 92868
- -------------------------------------------------------------------------------
(Address of principal executive offices including ZIP Code)
(714) 835-5743
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
As of November 12, 1997, registrant had outstanding 25,000,000 shares
of Common Stock.
1
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LONG BEACH FINANCIAL CORPORATION
TABLE OF CONTENTS
TO FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
PART I - FINANCIAL INFORMATION
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PAGE
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<S> <C> <C>
Item 1. Financial Statements
Combined Statements of Financial Condition as of September 30, 1997 (Unaudited)
and December 31, 1996............................................................................... 3
Combined Statements of Operations for the Three Months and Nine Months Ended
September 30, 1997 and 1996 (Unaudited)............................................................. 4
Combined Statements of Stockholders' Equity and Divisional Equity for the Three
Months and Nine Months Ended September 30, 1997 (Unaudited)......................................... 5
Combined Statements of Cash flows for the Nine Months Ended September 30, 1997
and 1996 (Unaudited)................................................................................ 6
Notes to the Combined Financial Statements for the Three Months and Nine Months Ended
September 30, 1997(Unaudited)....................................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations,
Liquidity and Capital Resources..................................................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 29
Item 2. Changes in Securities............................................................................... 29
Item 3. Defaults Upon Senior Securities..................................................................... 29
Item 4. Submission of Matters to a Vote of Securities Holders............................................... 29
Item 5. Other Information................................................................................... 29
Item 6. Exhibits and Reports on Form 8-K.................................................................... 30
(a) Exhibits .................................................................................. 30
(b) Reports on Form 8-K............................................................................ 30
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LONG BEACH FINANCIAL CORPORATION
COMBINED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
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WHOLESALE
DIVISION
OF AMC
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ..................................... $ 40,076,000 $ --
Investments available for sale ................................ 9,359,000 --
Loans held for sale ........................................... 14,953,000 49,580,000
Receivable from the sales of loans ............................ 82,901,000 25,103,000
Premises and equipment ........................................ 2,418,000 2,033,000
Deferred income taxes (Note 4) ................................ 35,000,000 2,120,000
Prepaid expenses and other assets ............................. 5,487,000 914,000
------------ ------------
Total assets ........................................... $190,194,000 $ 79,750,000
============ ============
LIABILITIES AND STOCKHOLDERS' AND DIVISIONAL EQUITY
Liabilities:
Warehouse financing facility ............................... $ 87,913,000 $ 72,829,000
Accounts payable and accrued liabilities ................... 8,801,000 5,784,000
Accrued taxes payable ..................................... 6,796,000 --
------------ ------------
Total liabilities ...................................... 103,510,000 78,613,000
Stockholders' and divisional equity:
Common stock, $.001 par value; 150,000,000 shares
authorized; 25,000,000 shares issued and outstanding ... 25,000 --
Additional paid-in capital ................................. 75,307,000 --
Divisional equity .......................................... -- 1,137,000
Retained earnings .......................................... 11,352,000 --
------------ ------------
Total stockholders' and divisional equity ..................... 86,684,000 1,137,000
------------ ------------
Total liabilities and stockholders' and divisional equity $190,194,000 $ 79,750,000
============ ============
</TABLE>
See accompanying notes to the combined financial statements.
3
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LONG BEACH FINANCIAL CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of loans ................... $ 24,829,000 $ 15,158,000 $ 62,008,000 $ 36,741,000
Fees on loans ........................... 49,000 -- 49,000 --
Amortization of servicing rights ........ (69,000) -- (88,000) --
Interest income ......................... 2,899,000 659,000 6,420,000 2,115,000
Interest expense ........................ 1,748,000 585,000 4,633,000 1,819,000
------------ ------------ ------------ ------------
Net interest income ..................... 1,151,000 74,000 1,787,000 296,000
------------ ------------ ------------ ------------
Net operating income .................... 25,960,000 15,232,000 63,756,000 37,037,000
EXPENSES:
Compensation expense .................... 8,957,000 4,236,000 21,941,000 12,242,000
Premises and equipment expenses ......... 1,020,000 1,228,000 2,625,000 2,475,000
Other general and administrative expenses 2,024,000 1,295,000 4,389,000 2,998,000
Corporate administrative charges ........ -- 2,269,000 2,294,000 6,368,000
Provision for losses .................... 500,000 150,000 3,428,000 150,000
------------ ------------ ------------ ------------
Total expenses .......................... 12,501,000 9,178,000 34,677,000 24,233,000
------------ ------------ ------------ ------------
Earnings before income taxes ............ 13,459,000 6,054,000 29,079,000 12,804,000
Provision for income taxes .............. 5,600,000 2,494,000 11,780,000 5,275,000
------------ ------------ ------------ ------------
Net earnings (Note 2) ................... $ 7,859,000 $ 3,560,000 $ 17,299,000 $ 7,529,000
============ ============ ============ ============
Not Not
Combined earnings per share (Note 7)..... $0.30 Applicable $0.67 Applicable
===== =====
</TABLE>
See accompanying notes to the combined financial statements.
4
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LONG BEACH FINANCIAL CORPORATION
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND DIVISIONAL EQUITY
(UNAUDITED)
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ADDITIONAL DIVISIONAL
COMMON PAID-IN (DEFICIT) RETAINED
STOCK CAPITAL EQUITY EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1997:
Balance, July 1, 1997 ................. $ 25,000 $ 75,307,000 $ -- $ 3,493,000 $ 78,825,000
Net earnings (Note 2) ................. -- -- -- 7,859,000 7,859,000
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1997 ........... $ 25,000 $ 75,307,000 $ -- $ 11,352,000 $ 86,684,000
============ ============ ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30, 1997:
Balance, January 1, 1997 .............. $ -- $ --- $ 1,137,000 $ -- $ 1,137,000
Net earnings (Note 2) ................. -- -- 5,947,000 11,352,000 17,299,000
Net change in divisional equity arising
from intracompany transactions ...... -- -- (3,852,000) -- (3,852,000)
Reorganization of Long Beach Financial
Corporation ......................... 25,000 75,307,000 (3,232,000) -- 72,100,000
------------ ------------ ------------ ------------ ------------
Balance, September 30, 1997 ........... $ 25,000 $ 75,307,000 $ -- $ 11,352,000 $ 86,684,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to the combined financial statements.
5
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LONG BEACH FINANCIAL CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings (Note 2) ............................... $ 17,299,000 $ 7,529,000
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization ..................... 550,000 882,000
Loans originated and purchased for sale ........... (1,157,111,000) (757,454,000)
Proceeds from sales of loans held for sale ........ 1,154,145,000 737,100,000
Noncash gain recognized on capitalization of
mortgage servicing rights ....................... (7,290,000) (6,662,000)
Amortization of capitalized mortgage servicing ....
rights .......................................... 88,000 --
Changes in:
Receivable from the sales of loans (Note 3) ... (83,685,000) --
Accounts payable and accrued liabilities ...... 6,816,000 3,739,000
Accrued taxes payable ......................... 6,796,000 --
Other ......................................... (2,380,000) (252,000)
--------------- ---------------
Net cash used in operating activities .......... (64,772,000) (15,118,000)
Cash Flows from Investing Activities:
Purchases of premises and equipment ............... (820,000) (1,102,000)
Purchase of investment securities available
for sale ........................................ (76,120,000) --
Maturities of investment securities available
for sale ........................................ 66,864,000 --
--------------- ---------------
Net cash used in investing activities .......... (10,076,000) (1,102,000)
Cash Flows from Financing Activites:
Net change in warehouse financing facility
(Note 3) ........................................ 76,802,000 20,401,000
Cash provided (to)/by AMC ......................... (3,852,000) (10,843,000)
Proceeds from mortgage servicing rights transferred
to AMC .......................................... 3,974,000 6,662,000
Reorganization and capitalization of LBFC ......... 38,000,000 --
--------------- ---------------
Net cash provided by financing activities ...... 114,924,000 16,220,000
Net Increase in Cash ................................ 40,076,000 --
Cash, beginning of the period ..................... -- --
--------------- ---------------
Cash, end of the period ......................... 40,076,000 $ --
=============== ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest on
warehouse financing ............................. $ 4,205,000 $ 1,848,000
Supplemental Schedule of Non-Cash Activities:
Deferred tax asset (Note 4) ..................... $ 36,000,000 $ --
</TABLE>
See accompanying notes to the combined financial statements.
6
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LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. DESCRIPTION OF THE BUSINESS, INITIAL PUBLIC OFFERING AND BASIS OF
PRESENTATION
DESCRIPTION OF THE BUSINESS
Long Beach Financial Corporation ("LBFC"), through its subsidiary, Long
Beach Mortgage Company (collectively, the "Company"), is currently engaged in
the business of originating, purchasing and selling subprime residential
mortgage loans secured by one- to four-unit family residences. The Company
originates loans primarily through independent mortgage loan brokers. The
Company's core borrower base consists of individuals who do not qualify as
traditional "A" credit borrowers because their credit history, income or other
factors do not conform to standard agency lending criteria.
The Company follows a strategy of selling substantially all of its loan
originations in the secondary market through whole loan sales for cash. Prior to
each fiscal quarter, the Company generally obtains a purchase commitment from
one or more loan purchasers for the volume of loans expected to be originated
during such quarter. As a result, the Company endeavors to have a buyer for each
loan at the time it is funded and, therefore, can deliver loans and receive
payments for the loans shortly after funding.
LBFC was incorporated in January 1997. At the time of incorporation,
LBFC was a wholly-owned subsidiary of a company now known as Ameriquest Mortgage
Company ("AMC"). AMC conducted its mortgage lending business through four
divisions: (i) the direct-sourced lending division, (ii) the broker-sourced
lending division, (iii) the loan sales division, and (iv) the loan servicing
division. LBFC was formed to facilitate the public sale of AMC's broker-sourced
lending division. All references to the "Wholesale Division" herein shall be
deemed to include the operations of the broker-sourced lending division of AMC
prior to the Reorganization (defined below).
INITIAL PUBLIC OFFERING
On April 28, 1997, LBFC's Registration Statement (No. 333-22013) on
Form S-1 under the Securities Act of 1933, as amended (the "Registration
Statement"), relating to the initial public offering of its common stock, was
declared effective. The initial public offering of 22,504,000 shares of common
stock closed at a price of $6.50 per share on May 2, 1997. On May 14, 1997, the
underwriters purchased an additional 2,496,000 shares of common stock at a price
of $6.50 per share following their exercise of the overallotment option,
resulting in a total of 25,000,000 shares sold in the initial public offering
(the "Offering").
On May 2, 1997, immediately prior to the closing of the initial public
sale of LBFC's common stock, AMC reorganized its business operations (the
"Reorganization") by transferring certain assets (including furniture, leasehold
improvements and equipment) and personnel relating to the broker-sourced lending
division and the loan sales division and approximately $40.0 million in cash
(less approximately $2.0 million in related expenses) to the Company in exchange
for 24,999,999 shares of common stock. The assets transferred to the Company
included loans in process as of May 2, 1997, but did not include loans
funded or servicing rights with respect to loans funded prior to
May 2, 1997. Additionally, the Company acquired a listing of independent
brokers and the sole right to the "Long Beach Mortgage Company" name. The
7
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LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. DESCRIPTION OF THE BUSINESS, INITIAL PUBLIC OFFERING AND BASIS OF
PRESENTATION (CONTINUED)
Company did not assume any liabilities of AMC other than certain liabilities
associated with equipment and property leases acquired by the Company and
accrued vacation and other employee benefits for personnel transferred to the
Company. The Reorganization has been accounted for in a manner similar to a
pooling of interests; therefore, the historical cost basis of the assets and
liabilities transferred to the Company was carried over from the Wholesale
Division of AMC.
The transfer of the assets and personnel described above by AMC to the
Company was treated for federal income tax purposes as a taxable sale of assets.
As a result, the tax basis of the assets transferred from AMC to the Company in
the Reorganization was increased to their fair market value determined by
reference to the Offering. As discussed more fully in Note 4 to the Combined
Financial Statements, such tax basis is generally expected to produce a tax
benefit to the Company in future tax years. Accordingly, the Company recorded a
deferred tax asset of $36.0 million (with a corresponding credit to additional
paid-in capital) for the tax effect of the excess of the tax basis of the
Company's assets following the Reorganization and the Offering, over their net
book value.
BASIS OF PRESENTATION
The Company had no operations through the date of the Reorganization
and all rights, benefits and obligations relating to the operations and net
earnings of the Wholesale Division of AMC, up to the date of the Reorganization,
remained with AMC. However, because the Reorganization has been accounted for in
a manner similar to a pooling of interests, the results of operations reported
for the nine months ended September 30, 1997 include: (i) the Results of
Operations of the Wholesale Division of AMC from January 1, 1997 through May 1,
1997 (the "1997 Operating Results of the Wholesale Division of AMC"), and (ii)
the operating results of the Company from May 2, 1997 to September 30, 1997 (the
"Company's Results of Operations"). Collectively, the combination of the 1997
Operating Results of the Wholesale Division of AMC and the Company's Results of
Operations represent the "Combined Results of Operations for the Nine Months
Ended September 30, 1997."
Cash flows for the nine months ended September 30, 1997 include: (i)
cash flows of the Wholesale Division of AMC from January 1, 1997 through May 1,
1997 (the "1997 Cash Flows of the Wholesale Division of AMC"), and (ii) the
Company's cash flows from May 2, 1997 through September 30, 1997 (the "Company's
Cash Flows"). Collectively, the combination of the 1997 Cash Flows of the
Wholesale Division of AMC and the Company's Cash Flows represent the "Combined
Cash Flows for the Nine Months Ended September 30, 1997."
Also included in this report on Form 10-Q are: (i) the results of
operations for the Wholesale Division of AMC for the three months and nine
months ended September 30, 1996, (ii) the financial condition of the Wholesale
Division of AMC as of December 31, 1996, and (iii) the cash flows of the
Wholesale Division of AMC for the nine months ended September 30, 1996. All such
information included or used in the preparation of this report has been prepared
from records maintained by AMC and provided to the Company by AMC.
8
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LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. DESCRIPTION OF THE BUSINESS, INITIAL PUBLIC OFFERING AND BASIS OF
PRESENTATION (CONTINUED)
In the normal course of business, the Wholesale Division had various
transactions with other divisions of AMC that are material in amount. The
financial statements and financial data of the Wholesale Division of AMC
included in this report on Form 10-Q reflect key assumptions regarding the
allocation of certain revenue and expense items and certain balance sheet
accounts, many of which could be material. The financial data of the Wholesale
Division of AMC included in this report on Form 10-Q may not necessarily be
indicative of the conditions that would have existed if the Wholesale Division
of AMC had operated as an independent entity.
The accompanying financial statements include financial data of the
Wholesale Division of AMC and reflect the assets, liabilities, revenues and
expenses that were directly related to the continuing operations of the
Wholesale Division as they were operated by AMC. In cases involving assets,
liabilities, revenues and expenses not specifically identifiable to any
particular division of AMC, certain allocations were made to reflect the
operations of the Wholesale Division. Allocations have been made for, among
other things, accounting, information services, legal, compliance, and other
executive and administrative services. The accompanying financial statements are
also based on the following assumptions:
1. No cash balances were recorded as part of these historical
financial statements as it was the practice of AMC not to
maintain separate cash balances for the various divisions.
2. The net change in divisional equity arising from intracompany
transactions, as reflected in the combined statements of
stockholders' equity and divisional equity, includes: (i) the
aggregate intracompany allocations of costs and expenses
incurred by the Wholesale Division and paid by AMC, (ii) cash
generated by the Wholesale Division and collected by AMC
during the periods presented, and (iii) cash advanced by AMC
on behalf of the Wholesale Division. The net change in
divisional equity arising from intracompany transactions also
includes all liabilities of the Wholesale Division, such as
income taxes payable, that are not separate legal obligations
of the Wholesale Division but have been charged to the
Wholesale Division.
The Company's combined financial statements have been prepared in
conformity with the instructions to Form 10-Q and on a consistent basis with the
Company's Registration Statement. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect reported amounts of
9
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LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. DESCRIPTION OF THE BUSINESS, INITIAL PUBLIC OFFERING AND BASIS OF
PRESENTATION (CONTINUED)
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 materially
from those estimated. The Company's combined financial statements and notes to
the financial statements, along with management's discussion and analysis of
financial condition, results of operations, liquidity and capital resources
should be read in conjunction with the Company's Registration Statement.
NOTE 2. STATEMENT OF OPERATIONS, PRESENTATION AND ANALYSIS OF PRO FORMA
OPERATIONS
The statements of operations for the nine months ended September 30,
1997, presented in this report on Form 10-Q include the 1997 Operating Results
of the Wholesale Division of AMC and the Company's Results of Operations. All
rights, benefits and obligations relating to the 1997 Operating Results of the
Wholesale Division of AMC up to the time of the Reorganization remain with AMC.
The rights to loans which were originated by the Wholesale Division but
remained unsold at May 2, 1997 were retained by AMC (the "Retained Loans"). The
costs relating to the production of these loans were incurred and recorded by
the Wholesale Division of AMC and are included in the 1997 Operating Results of
the Wholesale Division of AMC. These loans are included in loan production
amounts reported for the Company for the nine months ended September 30, 1997.
Subsequent to the Reorganization, the Company purchased the Retained Loans from
AMC at the same price and at the same time that the Company sold these loans to
independent, third-party purchasers. Because the gain from the sale of the
Retained Loans was recorded after the Reorganization, and because the Company's
stockholders did not receive any of the benefit of this gain, the Company did
not include the gain from the sale of the Retained Loans as part of the
Company's Results of Operations. The principal amount of the Retained Loans was
approximately $33.8 million and the after-tax gain from the sale of these loans
was approximately $807,000. The gains from the sale of the Retained Loans are
not reflected either as income from the Wholesale Division of AMC or as income
from the Company.
The following table presents separately the operations of the Wholesale
Division of AMC and the Company, and the combined effect of their results for
each respective period. Additionally, the gain from the sale of the Retained
Loans is presented for informational purposes, with corresponding earnings and
per share data presented on a pro forma basis.
10
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LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 2. STATEMENT OF OPERATIONS, PRESENTATION AND ANALYSIS OF PRO FORMA
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------------------------------------- ---------------------------------------
WHOLESALE WHOLESALE
DIVISION OF THE DIVISION OF THE
AMC COMPANY COMBINED AMC COMPANY COMBINED
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Gain on sale of loans....................... $ -- $24,829,000 $24,829,000 $25,604,000 $36,404,000 $62,008,000
Fees on loans............................... -- 49,000 49,000 -- 49,000 49,000
Amortization of servicing rights............ -- (69,000) (69,000) -- (88,000) (88,000)
Interest income............................. -- 2,899,000 2,899,000 2,306,000 4,114,000 6,420,000
Interest expense............................ -- 1,748,000 1,748,000 2,138,000 2,495,000 4,633,000
------- ----------- ----------- ----------- ----------- -----------
Net interest income......................... -- 1,151,000 1,151,000 168,000 1,619,000 1,787,000
------- ----------- ----------- ----------- ----------- -----------
Net operating income........................ -- 25,960,000 25,960,000 25,772,000 37,984,000 63,756,000
EXPENSES:
Compensation expense........................ -- 8,957,000 8,957,000 8,242,000 13,699,000 21,941,000
Premises and equipment expenses............. -- 1,020,000 1,020,000 1,106,000 1,519,000 2,625,000
Other general and administrative expenses... -- 2,024,000 2,024,000 1,391,000 2,998,000 4,389,000
Corporate administrative charges............ -- -- -- 2,294,000 -- 2,294,000
Provision for losses........................ -- 500,000 500,000 2,808,000 620,000 3,428,000
------- ----------- ----------- ----------- ----------- -----------
Total expenses.............................. -- 12,501,000 12,501,000 15,841,000 18,836,000 34,677,000
------- ----------- ----------- ----------- ----------- -----------
Earnings before income taxes................ -- 13,459,000 13,459,000 9,931,000 19,148,000 29,079,000
Provision for income taxes.................. -- 5,600,000 5,600,000 3,984,000 7,796,000 11,780,000
------- ----------- ----------- ----------- ----------- -----------
Net earnings................................ $ -- $ 7,859,000 $ 7,859,000 $ 5,947,000 $11,352,000 $17,299,000
======= =========== =========== =========== =========== ===========
Pro forma net gain from sale of Retained
Loans, net of taxes....................... -- -- -- 807,000 -- 807,000
------- ----------- ----------- ----------- ----------- -----------
Pro forma net earnings inclusive of gain
from Retained Loans....................... $ -- $ 7,859,000 $ 7,859,000 $ 6,754,000 $11,352,000 $18,106,000
======= =========== =========== =========== =========== ===========
Net earnings per share...................... $ -- $ 0.30 $ 0.30 $ 0.24 $ 0.43 $ 0.67
======= =========== =========== =========== =========== ===========
Pro forma net earnings per share inclusive
of gain from Retained Loans............... $ -- $ 0.30 $ 0.30 $ 0.27 $ 0.43 $ 0.70
======= =========== =========== =========== =========== ===========
</TABLE>
11
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LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 3. BASIS OF PRESENTING THE COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND
DIVISIONAL EQUITY AND CASH FLOWS
In connection with the Reorganization described in Note 1, AMC
transferred to the Company certain assets and liabilities relating to the
Wholesale Division. AMC, however, retained certain assets and liabilities
reflected on the books of the Wholesale Division as of May 1, 1997 including:
(i) loans held for sale totaling $39.3 million, (ii) receivables from the sales
of loans totaling $25.9 million, (iii) servicing rights and (iv) borrowings
under the warehouse financing facility totaling $62.0 million. Accordingly, the
balances of these assets and liabilities at May 1, 1997 are not reflected in the
beginning balances of the Company as of May 2, 1997. The Combined Statements of
Stockholders' Equity and Divisional Equity and Cash Flows reflect a non-cash
adjustment to eliminate these assets and liabilities retained by AMC. The
Combined Statements of Cash Flows include changes in balances from January 1,
1997 through May 1, 1997 combined with changes in balances from May 2, 1997
through September 30, 1997.
NOTE 4. DEFERRED TAX ASSET
In connection with the Reorganization, AMC transferred certain tangible
and intangible assets to the Company, and immediately thereafter sold shares of
the Company's common stock in the Offering. The transfer of these assets and
personnel was treated, for federal income tax purposes, as a taxable sale of
assets. As a result, the tax basis of the assets transferred from AMC to the
Company in the Reorganization was increased to their fair market value by
reference to the Offering. In general, Section 197 of the Internal Revenue Code
("IRC") allows for the amortization over a 15-year period of intangible assets
(including goodwill and going concern value) acquired in a transaction such as
the Reorganization. The so-called "anti-churning" rules set forth in Section
197(f)(9) of the IRC, however, prohibit the amortization of goodwill, going
concern value and intangible assets, the useful lives of which cannot be
determined with reasonable accuracy where such assets are transferred between
related parties and the transferor held or used such intangible assets at any
time on or after July 25, 1991, and on or before August 10, 1993.
The Company believes that the anti-churning rules should not apply to
any intangible assets (whether goodwill, going concern value or otherwise)
transferred from AMC to the Company in the Reorganization. Because the Internal
Revenue Service ("IRS") could assert that the anti-churning rules apply to the
Reorganization, the Company will limit the value of the deferred tax asset that
is recorded, solely for financial accounting and reporting purposes, to the
amount that would be recorded assuming the application of the anti-churning
rules. The Company has appraised the value of certain intangible assets
transferred in the Reorganization that are of a type not subject to the
anti-churning rules - i.e., assets that can be valued and to which the Company
can reasonably ascertain useful lives ("Amortizable Intangibles"). Based in part
upon such valuation, the Company recorded a $36.0 million net deferred tax asset
solely for financial accounting and reporting purposes. No assurance can be
given, however, that the IRS will not challenge the value of the Amortizable
Intangibles. If such a challenge were successful, the Company may be prevented
from realizing all or a portion of the future tax benefits reflected by the
12
<PAGE> 13
LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 4. DEFERRED TAX ASSET (CONTINUED)
net deferred tax asset. Any adjustment to the net deferred tax asset, arising
from IRS challenge or other ruling concerning the deductibility of the deferred
tax asset or the valuation of the Amortizable Intangibles, will be charged or
credited to additional paid-in capital and will have no impact on earnings.
Based upon the Offering of $6.50 per share, the excess of the tax basis
of the Company's net assets over their net book value was approximately $117.5
million, resulting in a gross deferred tax asset of $47.0 million. The Company
recorded a net deferred tax asset of $36.0 million to take into account the
potential that the IRS may disallow some portion of the resulting deduction. For
income tax purposes, the Company is amortizing over a 15-year period the
intangible assets acquired from AMC in the Reorganization. The Company believes
that based upon historical earnings levels it is probable that the Company will
generate sufficient taxable income to realize the benefits associated with the
net deferred tax asset through future tax deductions. As the Company realizes
the benefits associated with the deferred tax asset, there will be a
corresponding reduction in income taxes payable by the Company. As the deferred
tax benefit is realized through a reduction in the current tax payable, the
statement of operations will reflect an offsetting charge to the amount of the
deferred tax benefit, resulting in no effect on net income. If the Company
determines that estimated future earnings are not sufficient to realize the
deferred tax benefit, the Company will establish a valuation allowance for the
impairment of the deferred tax assets, through a charge to the income tax
provision, which will result in a reduction of net earnings.
NOTE 5. CORPORATE ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENSES
Prior to the Reorganization, the Wholesale Division of AMC was charged
for certain corporate expenses incurred by AMC on behalf of the Wholesale
Division. These charges included, among other items, information services,
accounting, legal, compliance, and other executive and administrative services.
These allocations were prepared by AMC and according to AMC were based upon a
variety of factors, including loan origination volume, employee headcount and
historical ratios of expenses incurred by the various divisions to total direct
expenses. There can be no assurance that future expenses incurred by the
Company, as an independent entity, will be comparable to the historical levels
allocated by AMC to the Wholesale Division.
NOTE 6. AGREEMENTS WITH RELATED PARTIES
Administrative Services Agreements - On April 28, 1997, the Company and
AMC entered into an administrative services agreement under which AMC agreed to
provide various services to the Company, including certain employee benefits
administration services, information services and data processing functions and,
through August 1997, mail room services. The agreement has a one year term from
the effective date of the Reorganization unless earlier terminated by the
Company upon 30 days written notice. The Company has incurred charges of
$422,000 for the three months ended September 30, 1997 and $706,000 since the
Reorganization, pursuant to this agreement. Any failure by AMC to provide such
administrative services to the Company during the term of the administrative
services agreement could have a material adverse effect on the Company's
results of operations and financial condition.
13
<PAGE> 14
LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 6. AGREEMENTS WITH RELATED PARTIES (CONTINUED)
In addition, on April 28, 1997, the Company and AMC entered into a
second administrative services agreement pursuant to which the Company will
assist AMC in selling the mortgage loans originated by AMC and provide investor
coordination and information for the existing loan portfolio as well as new loan
originations. The agreement will have a one-year term from the effective date of
the Reorganization, unless earlier terminated by AMC upon 30 days written
notice. The Company has received $165,000 during the three months ended
September 30, 1997 and $275,000 since the Reorganization, pursuant to this
agreement. Once AMC develops internal capability to perform these functions, it
is anticipated that AMC will terminate the second administrative services
agreement.
Loan Sub-servicing Agreement - On April 28, 1997, the Company and AMC
entered into a three year loan sub-servicing agreement pursuant to which AMC
agreed to sub-service mortgage loans originated or purchased by the Company
after the Reorganization. Sub-servicing activities include collecting and
remitting loan payments, accounting for principal and interest, holding escrow
or impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent borrowers,
and supervising foreclosures and property dispositions. The agreement provides
that either party has the right to terminate the agreement effective at any time
after 18 months, upon six months prior written notice to the other party. The
Company has agreed to pay AMC a 45 basis points annual servicing fee on the
outstanding principal balance of each loan sub-serviced. The balance of the
sub-serviced loan portfolio at September 30, 1997 totaled $613.1 million.
Income Taxes - In connection with the Reorganization, AMC agreed to
indemnify and hold the Company harmless from any tax liability attributable to
periods ending on or before the Reorganization. For periods ending after the
Reorganization, the Company will pay its tax liability directly to the
appropriate taxing authorities.
The agreements between the Company and AMC were developed in the
context of a related party relationship and, therefore, may not necessarily
reflect the same business terms as might have been obtained in arm's length
negotiations between independent parties.
NOTE 7. COMBINED NET EARNINGS PER SHARE
The Company did not have any independent operations through the date of
the Reorganization, and all rights, benefits and obligations relating to the net
earnings of the Wholesale Division up to the date of the Reorganization remained
with AMC. Additionally, only one share of LBFC's common stock was issued and
outstanding until the Reorganization and no shares were issued or outstanding at
any time during 1996. The earnings per share data presented in the following
table was prepared under the assumption that the Company's 25,000,000 shares of
14
<PAGE> 15
LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 7. COMBINED NET EARNINGS PER SHARE (CONTINUED)
common stock were issued and outstanding as of January 1, 1997 through September
30, 1997, and by using the common stock equivalents for all stock options issued
by the Company from the Reorganization through September 30, 1997.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------------------------------------------- --------------------------------------------
WHOLESALE
WHOLESALE DIVISION
DIVISION OF AMC
OF AMC THE COMPANY COMBINED JANUARY 1 THE COMPANY COMBINED
JULY 1 THROUGH JULY 1 THROUGH RESULTS OF THROUGH MAY 2 THROUGH RESULTS OF
SEPT. 30, 1997 SEPT. 30, 1997 OPERATIONS MAY 1, 1997(A) SEPT. 30, 1997 OPERATIONS
-------------- -------------- ----------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net earnings...................... $ -- $ 7,859,000 $ 7,859,000 $ 5,947,000 $11,352,000 $17,299,000
======= =========== =========== =========== =========== ===========
Common stock outstanding.......... -- 25,000,000 25,000,000 25,000,000 25,000,000 25,000,000
Common stock equivalents--employee
stock options(C)................ -- 1,380,605 1,380,605 -- 1,342,766 764,666
------- ----------- ----------- ----------- ----------- -----------
Total common stock equivalents.... -- 26,380,605 26,380,605 25,000,000 26,342,766 25,764,666
======= =========== =========== =========== =========== ===========
Combined net earnings per
share(B)........................ $ -- $ 0.30 $ 0.30 $ 0.24 $ 0.43 $ 0.67
======= =========== =========== =========== =========== ===========
</TABLE>
(A) Represents per share data on the assumption that the Company's 25,000,000
shares of common stock were issued and outstanding during the entire period
from January 1, 1997 through May 1, 1997.
(B) Combined net earnings per share on both a primary and fully diluted basis
resulted in the same effective earnings per share amount for all periods
presented. The net gain from the sale of the Retained Loans is not included
in the net earnings of the Wholesale Division of AMC or the Company for any
period presented above. Please refer to Note 2 of the Combined Financial
Statements for further information.
(C) At September 30, 1997, the total amount of stock options issued to directors
and employees of the Company totaled 2,768,000. These options vest 20% per
year over a five year period. The average exercise price of the options was
$6.79 per share at September 30, 1997.
NOTE 8. SUBSEQUENT EVENT
Common Stock Repurchase Plan - In October 1997, the Board of Directors
authorized a stock repurchase plan which permits the repurchase on the open
market of up to 2.5 million shares of the Company's common stock, or 10% of the
current shares outstanding, over the next 24 months.
15
<PAGE> 16
LONG BEACH FINANCIAL CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 8. SUBSEQUENT EVENT (CONTINUED)
Stockholder Rights Plan - In October 1997, the Board of Directors
authorized a stockholder rights plan, which provides for the distribution to the
Company's stockholders of one preferred stock purchase "right" for each
outstanding share of common stock owned. The rights will trade with the
Company's common stock and will not be exercisable until the occurrence of
certain takeover related events. The rights can be redeemed by the Company at
any time, and will otherwise expire on November 9, 2007.
16
<PAGE> 17
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
ITEM 2. OVERVIEW
The Company is a specialty finance company engaged in the business of
originating, purchasing and selling subprime residential mortgage loans secured
by one- to four-unit family residences. The Company's core borrower base
consists of individuals who do not qualify as traditional "A" credit borrowers
because their credit history, income or other factors do not conform to standard
agency lending criteria. The Company originates loans through independent
mortgage brokers and, to a lesser extent, purchases loans from mortgage
companies and commercial banks. Substantially all of the Company's loan
originations and purchases are sold in the secondary market through whole loan
sales in which the Company disposes of its economic interest in the loans for
cash, except for the related servicing rights, which it has generally retained.
There may be some instances when all servicing rights are sold. As a result of
this overall strategy, the Company receives cash revenue, rather than
recognizing non-cash revenue attributable to residual interests in future
payments on the loans, as is the case with securitizations.
Management's discussion and analysis of financial condition, results of
operations, liquidity and capital resources contained within this report on Form
10-Q is more clearly understood when read in conjunction with the Notes to the
Combined Financial Statements. The Notes to the Combined Financial Statements
define certain terms that are used throughout this discussion and provide
information on the Company's initial public offering and the basis of
presentation used in this report on Form 10-Q.
The Company's operations for the three months and nine months ended
September 30, 1997 have two components:
1. Operations as a division of AMC for the period January 1, 1997
through May 1, 1997; and
2. Operations as an independent company for the period May 2, 1997
through September 30, 1997.
Because the Reorganization was accounted for in a manner similar to a
pooling of interests, this report on Form 10-Q presents the combined results of
operations for the three months and nine months ended September 30, 1997.
Comparatively, the results of operations of the Wholesale Division of AMC are
presented for the three months and nine months ended September 30, 1996. It is
important to note that all of the benefits, rights and obligations relating to
the operations and net earnings of the Wholesale Division of AMC, up to the date
of the Reorganization, remained with AMC.
A summary of the combined net earnings for the three months and nine
months ended September 30, 1997 are presented below:
17
<PAGE> 18
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET EARNINGS:
As the Wholesale Division of AMC $ -- $ 3,560,000 $ 5,947,000 $ 7,529,000
As an independent company ...... 7,859,000 -- 11,352,000 --
----------- ----------- ----------- -----------
Combined net earnings .......... $ 7,859,000 $ 3,560,000 $17,299,000 $ 7,529,000
=========== =========== =========== ===========
</TABLE>
Combined net earnings for the three months ended September 30, 1997
totaled $7.9 million, or $0.30 per share, and represent an increase of $4.3
million or 120.8% over net earnings of the Wholesale Division for the same
period of 1996. Combined net earnings for the nine months ended September 30,
1997 totaled $17.3 million, an increase of $9.8 million or 129.8% over net
earnings of the Wholesale Division for the same period of 1996. The combined net
earnings for the nine months ended September 30, 1997 exclude $807,000 or $0.03
per share of net after tax gains from the sale of the Retained Loans (see Note 2
to the Combined Financial Statements).
The primary factors that led to the improvement in net earnings
recorded during 1997 as compared to 1996 include:
o Increased loan production. Loan production increased by $138.9 million
or 45.3% to $445.8 million during the three months ended September 30,
1997 as compared to the same period of 1996. During the nine months
ended September 30, 1997, loan production increased by $399.7 million
or 52.8% to $1.2 billion as compared to the same period of 1996.
o Increased loan sales. Loans sold during the three months ended
September 30, 1997 totaled $465.5 million, an increase of $162.8
million or 53.8% over the same period of 1996. During the nine months
ended September 30, 1997, loan sales totaled $1.2 billion, an increase
of $417.0 million or 56.6% over loan sales of $737.1 million for the
same period of 1996.
o Higher premiums received on the sale of loans. Net premiums on the
sale of loans during the three months ended September 30, 1997 totaled
5.33% as compared to 5.01% for the same period of 1996. During the nine
months ended September 30, 1997, net premiums on the sale of loans
totaled 5.37% as compared to 4.98% for the same period of 1996.
o Improved operational efficiencies. General and administrative expenses
as a percent of loan production declined to 2.69% during the three
months ended September 30, 1997, from 2.94% during the same period in
1996. During the nine months ended September 30, 1997, general and
administrative expenses as a percent of loan production declined to
2.70% from 3.18% during the same period in 1996.
18
<PAGE> 19
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
1997 AND 1996
Revenue is derived primarily from gain on sale of loans and net
interest income from loans held for sale in excess of the cost of funding such
loans. The key factors that affect the Company's revenue are: (i) the volume of
loans originated and purchased, (ii) the premium over principal amount received
in loan sales, (iii) origination points received or paid, (iv) origination fees
received, and (v) the differential between the interest rate on borrowings under
the revolving warehouse credit facility and the interest rate of loans held for
sale and on the Company's investments. Loan sales premium is affected by, among
other things, the interest rate and/or margin of the loans sold.
Expenses are incurred for, among other things, compensation and
employee benefits, rent and other occupancy costs, office supplies, courier
service, depreciation, legal and professional services, and provisions for
losses.
LOAN PRODUCTION AND SALES
The following table shows the Company's loan originations and purchases
and loans sales for the three months and nine months ended September 30, 1997
and 1996:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------- -------------------------------------
1997 1996 1997 1996
--------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Loan originations and purchases....... $445,764,000 $306,864,000 $ 1,157,111,000 $ 757,454,000
Loan sales............................ 465,458,000 302,646,000 1,154,145,000 737,100,000
</TABLE>
The Company's primary channel of loan production is through its
relationship with a network of approved independent mortgage brokers. The
Company has established a sales force ("Account Executives") to serve as the
principal contact between the Company and the independent mortgage brokers. The
Company offers a variety of loan programs and products; however, substantially
all loans originated by the Company are secured by first-lien mortgages on
residential properties consisting of one- to four-unit family residences. In
addition to originating loans through independent mortgage brokers, the Company
purchases loans on a correspondent basis from other lenders. Loan purchases
totaled $44.3 million or 9.94% of production for the three months ended
September 30, 1997, as compared to $28.9 million or 7.52% for the second quarter
of 1997.
For the three months ended September 30, 1997, loan production totaled
$445.8 million, an increase of $138.9 million or 45.3% as compared to the same
period of 1996. Loan production for the nine months ended September 30, 1997,
totaled $1.2 billion, an increase of $399.7 million or 52.8% as compared to the
same period of 1996. The increase in loan production is primarily the result of
an increase in the number of Account Executives during 1997, as compared to
1996, along with an expansion in the number of approved independent mortgage
brokers. At September 30, 1997, approved independent mortgage brokers numbered
approximately 9,500 as compared to approximately 6,700 at September 30, 1996.
19
<PAGE> 20
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, the Company originated loans in 48 states.
Loan originations in California represented 34.9% of total loan production. The
following table presents loan production by state for the five highest states
and all others for the three months and nine months ended September 30, 1997:
<TABLE>
<CAPTION>
LOAN PRODUCTION BY STATE
---------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
-------------------------------- --------------------------------
% TO % TO
STATE AMOUNT TOTAL AMOUNT TOTAL
------------------- --------------------- ---------- -------------------- ---------
<S> <C> <C> <C> <C>
California $151,910,000 34.08% $404,236,000 34.93%
Colorado 38,683,000 8.68% 100,615,000 8.70%
Michigan 29,287,000 6.57% 69,157,000 5.98%
Oregon 26,135,000 5.86% 61,914,000 5.35%
Florida 23,954,000 5.37% 59,330,000 5.13%
All others 175,795,000 39.44% 461,859,000 39.91%
------------ ------ -------------- ------
$445,764,000 100.00% $1,157,111,000 100.00%
============ ====== ============== ======
</TABLE>
The Company's geographic markets are divided into various regions, with
a self-contained origination processing team assigned to each region. When a
regional processing team is first established, the team is physically located at
the Company's headquarters in Orange, California. Once the Company determines
that the level of current and projected business from a region warrants creation
of a local presence, the Company establishes a regional processing center in or
near the region and relocates the regional processing team to the new center.
The Company opened one new regional processing center during the three months
ended September 30, 1997.
The increase in loan production during the three months and nine months
ended September 30, 1997, as compared to the same periods of 1996, contributed
to an increase in loan sales during the same comparative periods. For the three
months ended September 30, 1997, loans sales increased by 53.8% to $465.5
million, as compared to $302.6 million for the same period of 1996. Loans sales
totaled $1.2 billion for the nine months ended September 30, 1997, an increase
of 56.6% as compared to $737.1 million recorded for the same period in 1996.
The Company follows the practice of entering into forward commitments
to sell its production. These forward commitments are typically made for the
next 30 to 90 days of production. Prior to entering into a forward commitment,
the Company evaluates prospective purchasers in order to assess their ability to
fulfill the terms of the agreement. In the event that the coupon rate,
loan-to-value ratio, margins and other factors of the loans originated and
delivered to the purchaser are materially different from the terms of the
forward commitment, the sales price of the loans will be adjusted accordingly.
20
<PAGE> 21
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Although the Company has generally retained the servicing rights
related to a majority of its whole loan sales, certain loans are sold on a
servicing released basis. During the three months ended September 30, 1997,
servicing released loan sales totaled $118.0 million, representing 25.4% of
total loan sales during the quarter.
Loan sales are made on a nonrecourse basis pursuant to a purchase
agreement containing customary representations and warranties regarding
underwriting criteria and the origination process. In the event of a breach of a
representation or a warranty, the Company may be required to repurchase or
substitute a new loan. Additionally, the Company may be required to repurchase
or substitute a loan if the borrower defaults on the first payment due after the
loan is funded or if the loan documentation contains fraudulent
misrepresentations made by the borrower. Such repurchase or substitution may
result in the Company recording a reduction in the gain on sale that it
previously recognized and/or a loss.
The primary components of the net gain on sale of loans are: (i) the
excess of the cash selling price over the outstanding principal balance of the
loan (the "Gross sales premium"), (ii) the fees and other compensation paid to
independent mortgage brokers and other lenders (the "Broker & correspondent
fees"), (iii) capitalized servicing rights, and (iv) points and fees received
from the borrower, offset by direct loan origination costs. Gross sales premiums
are affected by loan type, credit quality, interest rate and other factors as
negotiated between the Company and an independent purchaser. The recorded net
gain on sale of loans, as expressed as a percentage of loans sold, is the "Net
premium" realized for that period.
Gain on sale of loans totaled $24.8 million, including $2.3 million in
capitalized servicing rights, for the three months ended September 30, 1997,
compared to $15.2 million, including $2.6 million in capitalized servicing
rights, for the same period in 1996. Such gains equate to a Net premium of 5.33%
for the three months ended September 30, 1997 compared to 5.01% for the same
period in 1996. During the nine months ended September 30, 1997, gain on sale of
loans totaled $62.0 million, including $7.3 million in capitalized servicing
rights, as compared to $36.7 million, including $6.7 million in capitalized
servicing rights, during the same period in 1996. Such gains equate to a Net
premium of 5.37% for the nine months ended September 30, 1997 compared to 4.98%
for the same period in 1996. The increase in gain on sale of loans during 1997
is the result of the increase in the volume of loan sales during 1997 combined
with a higher level of Gross sales premiums received on those sales.
At September 30, 1997, the Company had recorded $3.2 million of
capitalized servicing rights, net of amortization. The Company, in its capacity
as a master servicer, has contracted with a sub-servicer, AMC, to provide loan
servicing in exchange for an annual fee of 45 basis points on the outstanding
principal balance of each loan sub-serviced. When the Company sells its loans,
it typically retains approximately 50 basis points of servicing. Additionally,
the Company generally retains the right to receive late fees and other charges
in connection with the servicing of the loans. The Company anticipates that it
will develop an internal capacity to service its loans in the future. Its
current arrangement with AMC may be terminated at any time after 18 months, upon
six months prior written notice or in the event AMC defaults on its obligation
as a sub-servicer. Capitalized servicing rights are included as a component of
prepaid expenses and other assets on the Company's Statement of Financial
21
<PAGE> 22
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Condition. Capitalized servicing rights are subject to downward valuation in the
event that the market value of the servicing is lower than the recorded amounts,
which typically occurs when the related loans have higher ratios of loss
(charge-offs) and/or rates of prepayment than had been predicted at the time of
sale.
NET INTEREST INCOME
Net interest income is the difference between the interest that is
earned on loans and other interest earning assets over the interest that is paid
under the revolving warehouse credit facility. Net interest income can be
affected by the volatility of interest rates, the level of interest earned on
interest earning assets, the cost of interest on the revolving warehouse credit
facility, the average amount of interest earning assets outstanding, and the
average amount of borrowings outstanding. The Company received approximately
$38.0 million of cash as part of the Reorganization. The Company has adopted an
investment policy which limits its investment activities to high-quality,
short-term investments.
During the three months ended September 30, 1997, the Company recorded
$1.2 million of net interest income as compared to $74,000 during the same
period in 1996. The increase in net interest income is the result of the Company
holding a higher level of investments and loans held for sale during the three
months ended September 30, 1997, as compared to the same period of 1996. AMC's
allocation of interest income and interest expense ceased as of the date of the
Reorganization; as such, there is no allocation of interest income or expense
from AMC included during the three months ended September 30, 1997.
Net interest income totaled $1.8 million during the nine months ended
September 30, 1997, an increase of $1.5 million over the same period of 1996.
The increase in net interest income resulted from a higher level of loans held
for sale during the period, coupled with investment returns from the Company's
short-term investments.
EXPENSES
Expenses include general and administrative expenses, provisions for
losses and income tax expense. Prior to the Reorganization, certain expenses,
not specifically identifiable to any particular division of AMC, were allocated
to AMC's various divisions, including the Wholesale Division. These allocations
were prepared by AMC and according to AMC, were based on a variety of factors
which took into consideration loan origination volume, employee headcount, and
historical ratios of direct expenses incurred by the divisions to total direct
expenses. No assurance can be provided that future expenses incurred by the
Company, as an independent entity, will be comparable to the historical levels
allocated by AMC to the Wholesale Division. The following table reports general
and administrative expenses for the periods presented:
22
<PAGE> 23
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Compensation expense $ 8,957,000 $ 4,236,000 $21,941,000 $12,242,000
Premises and equipment expenses 1,020,000 1,228,000 2,625,000 2,475,000
Other general and administrative expenses 2,024,000 1,295,000 4,389,000 2,998,000
----------- ----------- ----------- -----------
Total direct expenses 12,001,000 6,759,000 28,955,000 17,715,000
Allocated expenses from AMC -- 2,269,000 2,294,000 6,368,000
----------- ----------- ----------- -----------
Total general and administrative $12,001,000 $ 9,028,000 $31,249,000 $24,083,000
=========== =========== =========== ===========
</TABLE>
Compensation expense increased 111.4% or $4.7 million during the three
months ended September 30, 1997, as compared to the same period of 1996. The
increased level of compensation expense represents 90.1% of the total increase
in direct general and administrative expenses between the three months ended
September 30, 1997 and 1996. During the nine months ended September 30, 1997,
compensation expense increased 79.2% or $9.7 million, as compared to the same
period of 1996, representing 86.3% of the total increase in direct general and
administrative expenses between 1997 and 1996. The primary reason for such
increase is growth in the number of employees resulting from the Company's
expansion of its loan production capabilities. The number of employees totaled
497 at September 30, 1997, up from 299 at September 30, 1996. The increase in
compensation expense is also attributable to increases in commissions paid to
production employees. Both the growth in the employee base and the increased
commissions are directly related to increased loan production during 1997 as
compared to 1996. Although total general and administrative expenses increased
during the three months and nine months ended September 30, 1997, as compared to
the same periods in 1996, such expenses declined as a percentage of loan
production: (i) to 2.69% for the three months ended September 30, 1997, as
compared to 2.94% for the same period in 1996, and (ii) to 2.70% for the nine
months ended September 30, 1997, as compared to 3.18% for the same period in
1996.
Premises and equipment expenses decreased by $208,000 during the three
months ended September 30, 1997, as compared to the same period in 1996,
reflecting the accelerated depreciation, beginning in August 1996, of an
internally developed software system to track divisional profitability that AMC
determined would have no useful life after December 1996. During the nine months
ended September 30, 1997, premises and equipment expenses increased by $150,000,
as compared to the same period in 1996, reflecting an increase in occupancy
costs related to growth in personnel forces to support the increased loan
production as well as an increase in headquarter's space to support the Company
as an independent entity since the Reorganization.
Other general and administrative expenses increased by $729,000 or
56.3% and by $1.4 million or 46.4%, respectively, during the three months and
nine months ended September 30, 1997, as compared to the same periods of 1996.
The increase in other general and administrative expenses is primarily the
result of increased infrastructure and indirect costs incurred in support of the
Company's loan production. As more fully discussed in Note 6 to the Combined
23
<PAGE> 24
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Financial Statements, since the Reorganization, the Company has entered into
several agreements with AMC, pursuant to which AMC provides data processing,
human resources and, through August 1997, mail room services to the Company. The
Company has paid $422,000 to AMC for such services during the three months ended
September 30, 1997 and $706,000 to AMC for such services since the
Reorganization. The Company intends to develop an internal capacity for these
functions in the near future and is currently evaluating various alternatives
before committing its capital resources to these initiatives. Expenses as a
percent of production may increase due to the development of independent
capabilities to replace contracted services currently being provided by AMC. In
addition, the Company provides certain services to AMC, as described in Note 6
to the Combined Financial Statements. The Company has received $165,000 from AMC
for such services during the three months ended September 30, 1997 and $275,000
from AMC for such services since the Reorganization.
Prior to the Reorganization, the Wholesale Division received an
allocation of expenses from AMC, as detailed in Note 5 to the Combined Financial
Statements. Subsequent to the Reorganization, the Company is no longer allocated
such costs, but instead incurs all of its expenses directly. As such, there were
no allocated expenses from AMC during the three months ended September 30, 1997,
compared to allocated expenses from AMC totaling $2.3 million during the same
period of 1996. During the nine months ended September 30, 1997, allocated
expenses from AMC declined to $2.3 million from $6.4 million allocated during
the same period in 1996.
PROVISIONS FOR LOSSES
The Company sells its loans to institutional purchasers and does not
retain residual interests in the loans that it sells other than the servicing
rights that it retains. The Company offers customary representations and
warranties with respect to the loans that it sells. In the event that a
purchaser can demonstrate that a breach of a representation or a warranty has
occurred, the Company may be required to repurchase the loan and then
subsequently resell it. The Company realizes that such repurchases are inherent
in its operations and that the Company may realize a reduction in the previously
recognized gain on sale or sustain a loss from such repurchases.
During the three months ended September 30, 1997, $500,000 was charged
to provision for losses. As of September 30, 1997, loan delinquencies totaled
$1.9 million or .31% of the total servicing portfolio, with $1.2 million or .19%
delinquent 31 to 60 days and $0.7 million or .12% delinquent 61 to 90 days.
There were no delinquencies greater than 90 days at September 30, 1997.
INCOME TAXES
Prior to the Reorganization, the Wholesale Division was not a separate
legal entity for tax purposes. Because the Wholesale Division was part of AMC
until the Reorganization, AMC is responsible for payment of federal and state
income taxes attributable to income earned by the Wholesale Division of AMC
prior to the Reorganization.
24
<PAGE> 25
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
As discussed in Note 4 to the Combined Financial Statements, the
amortization of the deferred tax asset has no impact on the Company's provision
for income taxes, rather it reduces the amount of income taxes payable to the
IRS. During the three months ended September 30, 1997, the Company recorded
$600,000 of amortization related to the deferred tax asset.
FINANCIAL CONDITION
The Reorganization was accounted for in a manner similar to a pooling
of interests. Therefore, for financial reporting purposes, the Company recorded
the assets transferred from AMC at their historical cost basis. The assets
transferred from AMC to the Company included approximately $38.0 million in cash
and $1.7 million in furniture, equipment and other fixed assets. The Company
assumed certain liabilities relating to lease obligations associated with
equipment and property acquired by the Company and accrued vacation and other
employee benefit obligations associated with personnel transferred to the
Company. The Company did not acquire or assume any of the rights or obligations
relating to: (i) loans funded prior to the Reorganization, (ii) servicing rights
related to loans funded prior to the Reorganization, or (iii) any other
liability arising from operations of the Wholesale Division of AMC prior to the
Reorganization.
Additionally, the Company acquired a number of intangible assets at the
time of the Reorganization. These intangible assets include: (i) the sole right
to the Long Beach Mortgage name, (ii) the listing of independent mortgage
brokers that had been developed by the Wholesale Division of AMC, (iii) the
employees of the Wholesale Division, and (iv) other intangible assets. As
discussed in Note 4 to the Combined Financial Statements, for federal income tax
purposes, the transfer of assets at the time of the Reorganization was treated
as a taxable sale of assets. Based upon the Offering of $6.50 per share, the
excess of the tax basis of the Company's net assets over their book value was
approximately $117.5 million, resulting in a gross deferred tax asset of $47.0
million. The Company recorded a net deferred asset of $36.0 million to take into
account the potential that the IRS may disallow some portion of the resulting
deduction. The Company is amortizing the deferred asset over a 15-year period.
Such amortization will have no impact on the Company's reported net earnings,
but will reduce the amount of taxable liability due to the IRS. The Company
currently believes that it is probable that the Company will generate sufficient
taxable income to realize the benefits associated with the net deferred tax
asset through future tax deductions. However, if the Company determines that
estimated future earnings are not sufficient to realize the deferred tax
benefit, the Company will establish a valuation allowance for the impairment of
the deferred tax assets, through a charge to the income tax provision, which
will result in a reduction of net earnings.
A substantial portion of the Company's cash and cash equivalents are
maintained in an account with its warehouse lender. The Company earns interest
on these funds at a yield that approximates the 30 day reserve adjusted London
Inter-Bank Offered Rate ("LIBOR"). At September 30, 1997, cash and cash
equivalents included $11.7 million in funds which were borrowed from its
warehouse lender for the funding of loans. Such advances were not needed and
were repaid to the warehouse lender the following day.
25
<PAGE> 26
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
As discussed in more detail in Liquidity and Capital Resources, the
Company's investment portfolio consists of high-quality, short-term securities.
At September 30, 1997, the largest component of the Company's investment
portfolio consisted of a money market mutual fund, which limits it holdings to
government securities. These securities are available for sale, and their market
value approximated their historical cost basis at September 30, 1997. Loans held
for sale are valued at the lower of their historical cost basis or market value.
At September 30, 1997, the market value of these loans exceeded their historical
cost basis. Receivable from the sales of loans represents the proceeds from the
sales of loans that have not been received by the Company from the purchaser.
LIQUIDITY AND CAPITAL RESOURCES
Sources of cash flow include loan sales, net interest income and
borrowings. Uses of cash include the funding of loan originations and purchases,
repayment of borrowings and related interest expenses, operating and
administrative expenses, income taxes and capital expenditures.
The Company funds its operations through its cash reserves, loan sales,
net earnings and a revolving warehouse credit facility under which it borrows
money to finance the origination and purchase of loans. Additionally, the
Company may utilize its cash reserves to fund its loan production in order to
maximize the return on its excess liquidity. The Company repays borrowings with
the proceeds of its loan sales. During the nine months ended September 30, 1997,
the Company used cash in the amount of $1.2 billion for new loan originations
and purchases; during the three months ended September 30, 1997, cash in the
amount of $445.8 million was used for new loan originations and purchases. The
Company received cash proceeds from the sale of loans in the amount of $1.2
billion for the nine months ended September 30, 1997; cash proceeds from the
sale of loans in the amount of $465.5 million were received by the Company
during the three months ended September 30, 1997. In addition, the Company
received cash proceeds from the premiums on such loan sales of $67.2 million and
$28.2 million, respectively, during the nine months and three months ended
September 30, 1997.
Prior to the Reorganization, the Wholesale Division funded loans by
borrowing under AMC's revolving warehouse credit facility. Since the date of the
Reorganization, the Company has in place a $200.0 million warehouse financing
facility provided by a syndicate of banks led by Texas Commerce Bank National
Association which expires on March 31, 1999, unless earlier terminated or
extended in accordance with its terms. The Company was in compliance with all of
its covenants surrounding its warehouse financing at September 30, 1997. The
weighted-average interest rate on the warehouse line was 7.11% at September 30,
1997.
Subsequent to the Reorganization, the Company adopted an investment
program for its available liquidity. The objectives of this program are to
preserve the capital of the Company while maintaining flexibility for strategic
opportunities. The Company's investment strategy seeks to maximize its returns
within the policy's objectives. The weighted-average yield on the Company's
investment portfolio at September 30, 1997 was 5.62%.
The Company's desire to retain its flexibility, with respect to its
available liquidity, is due, in part, to certain of the Company's strategic
26
<PAGE> 27
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
plans for the future. The Company is evaluating various strategies for
developing a retail loan production operation as well as a loan servicing
operation. An internal computer data center is currently in process and is
scheduled for completion in December 1997. Additionally, new regional processing
centers will be established to support the Company's capacity for increased
wholesale loan production. Each of these strategies will require substantial
capital investment at the time of implementation.
The Company believes that it will generate sufficient cash from its
operations and borrowings to fund its operations. However, the Company's ability
to continue to originate and purchase loans is dependent in large part upon its
ability to sell the loans at a premium in order to generate cash proceeds to
repay borrowings under the warehouse financing facility, thereby creating
borrowing capacity to fund new originations and purchases. The value of and
market for the Company's loans are dependent upon a number of factors, including
the loan-to-value ratios and interest rates on the loans, 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.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities as of January 1, 1997. The adoption of SFAS No.
125 did not have a material impact on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share. Under SFAS 128, the Company will be required to
disclose basic earnings per share ("EPS") and diluted EPS for all periods for
which income is presented, which will replace disclosure currently being made
for primary EPS and fully-diluted EPS. SFAS No. 128 requires adoption for fiscal
periods ending after December 15, 1997. The Company will adopt the provisions of
SFAS No. 128 within the 1997 year-end consolidated financial statements. EPS, as
computed under SFAS No. 128, is not materially different than EPS presented in
the Combined Statement of Operations for the three months and nine months ended
September 30, 1997 and 1996.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income, which is effective for annual and interim
periods beginning after December 15, 1997. This statement requires that all
items that are required to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other items reported in a financial statement. The
adoption of SFAS No. 130 will not have a material impact on the Company's
financial statements.
27
<PAGE> 28
LONG BEACH FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, which
is effective for annual and interim periods beginning after December 15, 1997.
This statement established standards for the method in which public entities
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about product and services,
geographical areas, and major customers. The adoption of SFAS No. 131 will not
have a material impact on the Company's financial statements.
28
<PAGE> 29
LONG BEACH FINANCIAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
29
<PAGE> 30
LONG BEACH FINANCIAL CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation of Long Beach Financial
Corporation
*3.2 Bylaws of Long Beach Financial Corporation
*4.1 Specimen of the Common Stock of Long Beach Financial Corporation
*10.1 Administrative Services Agreement among Long Beach Mortgage Company, Long
Beach Financial Corporation and Ameriquest Mortgage Corporation
*10.2 Form of Master Sub-Servicing Agreement, between Long Beach Mortgage
Company and Ameriquest Mortgage Corporation
*10.3 4/97 Senior Secured Credit Agreement, among Ameriquest Mortgage
Corporation and Texas Commerce Bank National Association, as Lender and Agent
*10.4 Form of Director/Officer Indemnification Agreement
*10.5 Contribution Agreement, between Ameriquest Capital Corporation, Long Beach
Mortgage Company, Long Beach Financial Corporation and Ameriquest Mortgage
Corporation
*10.6 1997 Stock Incentive Plan
*10.7 Employment Agreement, between Long Beach Financial Corporation, Ameriquest
Mortgage Corporation and M. Jack Mayesh
*10.8 Employment Agreement, between Long Beach Financial Corporation, Ameriquest
Mortgage Corporation and Edward Resendez
*10.9 Employment Agreement, between Long Beach Financial Corporation, Ameriquest
Mortgage Corporation and Frank J. Curry
*10.10 Employment Agreement, between Long Beach Financial Corporation,
Ameriquest Mortgage Corporation and James H. Leonetti
*10.11 Employment Agreement, between Long Beach Financial Corporation,
Ameriquest Mortgage Corporation and James J. Sullivan
*10.12 Department of Justice Settlement Agreement
*10.13 Employment Agreement, between Long Beach Financial Corporation, Long
Beach Mortgage Company and William K. Komperda.
10.14 Form of Amendment to Employment Agreement, among Long Beach Financial
Corporation, Long Beach Mortgage Company and each of M. Jack Mayesh, Edward
Resendez, Frank J. Curry, James H. Leonetti, and James J. Sullivan.
27 Financial Data Schedule
</TABLE>
- --------------
*Previously filed.
(b) Reports on Form 8-K
None.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized, in the City of Orange, State of
California.
LONG BEACH FINANCIAL CORPORATION
(Registrant)
By: /s/ M. JACK MAYESH November 12, 1997
-------------------------------- -----------------
M. Jack Mayesh Date
Chairman and Chief Executive
Officer
By: /s/ JAMES H. LEONETTI November 12, 1997
----------------------------- -----------------
James H. Leonetti Date
Senior Vice President and
Chief Financial Officer
31
<PAGE> 32
EXHIBITS INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
<S> <C> <C>
*3.1 Amended and Restated Certificate of Incorporation of Long Beach
Financial Corporation
*3.2 Bylaws of Long Beach Financial Corporation
*4.1 Specimen of the Common Stock of Long Beach Financial Corporation
*10.1 Administrative Services Agreement among Long Beach Mortgage
Company, Long Beach Financial Corporation and Ameriquest
Mortgage Corporation
*10.2 Form of Master Sub-Servicing Agreement, between Long Beach Mortgage
Company and Ameriquest Mortgage Corporation
*10.3 4/97 Senior Secured Credit Agreement, among Ameriquest Mortgage
Corporation and Texas Commerce Bank National Association, as Lender
and Agent
*10.4 Form of Director/Officer Indemnification Agreement
*10.5 Contribution Agreement, between Ameriquest Capital Corporation,
Long Beach Mortgage Company, Long Beach Financial Corporation and
Ameriquest Mortgage Corporation
*10.6 1997 Stock Incentive Plan
*10.7 Employment Agreement, between Long Beach Financial Corporation,
Ameriquest Mortgage Corporation and M. Jack Mayesh
*10.8 Employment Agreement, between Long Beach Financial Corporation,
Ameriquest Mortgage Corporation and Edward Resendez
*10.9 Employment Agreement, between Long Beach Financial Corporation,
Ameriquest Mortgage Corporation and Frank J. Curry
*10.10 Employment Agreement, between Long Beach Financial Corporation,
Ameriquest Mortgage Corporation and James H. Leonetti
*10.11 Employment Agreement, between Long Beach Financial Corporation,
Ameriquest Mortgage Corporation and James J. Sullivan
*10.12 Department of Justice Settlement Agreement
*10.13 Employment Agreement, between Long Beach Financial Corporation,
Long Beach Mortgage Company and William K. Komperda.
10.14 Form of Amendment to Employment Agreement, among Long Beach Financial
Corporation, Long Beach Mortgage Company and each of M. Jack Mayesh,
Edward Resendez, Frank J. Curry, James H. Leonetti, and James J. Sullivan.
27 Financial Data Schedule
</TABLE>
- ---------------
*Previously filed.
<PAGE> 1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment, entered into this 26th day of August, 1997, amends the
Employment Agreement ("Agreement") made and entered into on April 15, 1997 by
and between Long Beach Financial Corporation ("LBFC") and Long Beach Mortgage
Company ("LBMC") (collectively, the "Company") and ______________ ("Executive").
The purpose of this Amendment is to clarify certain provisions of the Agreement
as set forth below.
1. The phrase "each April 15 following each December 31 during the term
of this Agreement" is deleted from the first sentence of Section 2.2 and
replaced with the phrase "April 15 each year beginning April 15, 1998".
2. The last sentence of Section 2.3(e) is amended in its entirety to
read as follows:
"Executive acknowledges that such option grant is intended to cover
Executive's first three years of employment hereunder and that the
Company has no commitment to issue additional options to Executive
during such three year period or thereafter."
3. The phrase "both during and after the term of this Agreement" is
deleted from Section 3.1 of the Agreement.
4. The phrase "; provided, however, that such severance payments shall
be reduced by 50% of any earnings of Executive subsequent to the termination
that gives rise to the severance payments" is deleted from the end of the second
sentence of Section 3.2(a) of the Agreement.
5. The phrase "during the term of this Agreement" is deleted from the
first sentence of Section 3.5.
6. Article IV of the Agreement, entitled "Term," is deleted from the
Agreement in its entirety.
IN WITNESS WHEREOF, the parties have executed and delivered this
Amendment as of the day and year first above written.
LONG BEACH FINANCIAL CORPORATION LONG BEACH MORTGAGE COMPANY
By: By:
---------------------------- ----------------------------
Name: Name:
Title: Title:
"EXECUTIVE"
By:
----------------------------
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 40,076
<SECURITIES> 9,359
<RECEIVABLES> 97,854
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,760
<DEPRECIATION> 342
<TOTAL-ASSETS> 190,194
<CURRENT-LIABILITIES> 0
<BONDS> 87,913
0
0
<COMMON> 25
<OTHER-SE> 86,684
<TOTAL-LIABILITY-AND-EQUITY> 190,194
<SALES> 0
<TOTAL-REVENUES> 27,708
<CGS> 0
<TOTAL-COSTS> 12,001
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 1,748
<INCOME-PRETAX> 13,459
<INCOME-TAX> 5,600
<INCOME-CONTINUING> 7,859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,859
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
